Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the meeting over to Ms. Patricia Murphy with IBM. Ma'am, you may begin.

Thank you. This is Patricia Murphy, and I'd like to welcome you to IBM's Third Quarter 2021 Earnings presentation. I'm here with Arvind Krishna, IBM's Chairman and Chief Executive Officer and Jim Kavanaugh, IBMs Senior Vice President and Chief Financial Officer. prepared remarks on the IBM Investor website within a couple of hours and a replay will be available by this time tomorrow. I will remind you the separation of Kyndryl is expected to be completed at the beginning of December and as a result, our third quarter performance reflects IBM, including the managed infrastructure services business and our pre -separation segment structure. Comments made in this presentation may be considered forward-looking under the Private Securities Litigation Reform Act of 1995. These statements involve factors that could cause our actual results to differ materially. Mention about these factors is included in the Company's SEC filings. Presentation also includes non-GAAP measures to provide additional information to investors. Ample. We present revenue in signings growth at constant currency. In addition to provide a view consistent with our go-forward business, we'll focus on constant currency growth, adjusting for the divested businesses for the impact of lines of total revenue, cloud, and our geographic performance. provide a reconciliation chart for these and other non-GAAP measures at the end of the presentation, 8-K submitted to the SEC. With that, I'll turn the call over to Arvind.

Thank you Patricia. And thanks to all of you for joining us today to discuss our third quarter performance. At our recent investor briefing, laid out our Hybrid Cloud and AI strategy, and our approach to delivering strong free cash flow and sustainable mid-single-digit revenue growth starting in 2022. For the last year-and-a-half, we've been taking actions and investing to execute our strategy. This quarter, we reported modest revenue growth and delivered solid free cash flow, generated over $11 billion of adjusted free cash flow over the last year. We also made tangible progress in our key growth areas of software and consulting. With that, I will acknowledge that in other areas of the business, we fell short of our expectations. This was during the end of the cycle and global technology services clients, pausing ahead of the public filing of the Form 10 and separation of Kyndryl, have made further progress in the Kyndryl separation in the last two weeks and announced a distribution date on November 3rd, which is ahead of our original schedule. We've done a lot to prepare Kyndryl for this moment. We took structural actions to improve the private profile, the management team is in place, employee transfers and the vast majority of client contract innovations are complete. We're now even more certain that separating this business creates value through focus. That said, the people of GTS have been a part of IBM for a long time. And it is with mixed emotions that we're reporting on this segment for the last time. And just yesterday, you heard from Martin and his management team strategy and value . The separation is just one of the many actions we are taking to focus our business on hybrid cloud and AI and improve our financial profile. To give you some color of IBM's performance excluding Kyndryl, we delivered 2% revenue growth this quarter. That compares to 1% in the second quarter and minus 1% in the first quarter. These results reflect a strong demand for technology products and services that help our clients advance their digital transformation. Our software revenue growth was led by Red Hat, security, automation and cloud backs across our software. Global Business Services, soon to be IBM Consulting, accelerated revenue growth to a double digit rate. Software and consulting are our 2 main drivers of growth, and this was certainly true this quarter. I will now expand on the progress we made in the third quarter toward our future. As I have described in the past, we have a platform - centric approach. Time to meet clients wherever they are in their journey. The platform we have built is open, secure, and flexible and continues to gain traction in the marketplace. I have more than 3500 clients using our hybrid cloud platform. Not only fueled our Red Hat revenue performance, but also provides a solid base for the multiplier effect across software and services. IBM Consulting is helping to drive this platform adoption. And this quarter had over a 180 new Red Hat engagements. Our teams work alongside our clients to co-create business products and solutions. So far we have done more than 4,000 IBM Garage engagements. In the last quarter, more clients are leveraging our platform capabilities and our expertise to unlock business value. We announced DISH is using IBM software and services to help automate their cloud-native 5G network. Cloud Pak for network automation, which is excused with AI, automation, and orchestration capabilities used by DISH to fine-tune speed levels or coverage areas depending on the needs of our clients. Building on a partnership spanning half a century, we announced Credit Mutuel is creating an IBM technology and skilled hub in France. The new hub will help Credit Mutuel leverage AI, data, cloud, and IBM Z. Also announced a new agreement with CaixaBank, one of the largest banks in Europe to put its digital capabilities with IBM Cloud for financial services and the new IBM Cloud multi zone regions in Spain. CaixaBank will leverage IBM Consulting industry expertise to move to a Hybrid Cloud approach for modernization. This quarter, we continued to leverage our ecosystem to drive what we described at our Investor Briefing as a flywheel of growth. That is, the more we grow, the more our partners grow and vice versa. We’re partnering with select DSI’s to bring joint solutions to market. This quarter, Atos announced the setup of the FS Cloud Center of Excellence to help financial services customers with their digital transformation journey. Also have continued momentum and revenue growth from our partnership with industry-leading ISVs and hyperscalers. Quarter, we're partnering with Adobe to help the British pharmacy chain Boots transform their e-commerce platform and deliver new digital customer experiences. While we invest in partnerships, we also invest organically and inorganically to deliver innovation. We made 16 acquisitions since April 2020, including Boxboat and Bluetab in the third quarter. These will strengthen our Hybrid Cloud consulting capabilities. In the same manner, we are organically developing new innovations that matter to our clients. I'll mention a few new introductions, starting with our innovations in software. In the quarter, Red Hat introduced a new –re-architected version of the Red Hat Ansible Automation Platform. Red Hat also launched a new version of its Advanced Cluster Management for Kubernetes. These two products are now more tightly integrated, which helps drive hybrid cloud automation. In addition, the latest version of Red Hat OpenShift became generally available. IBM Cloud Pak runs anywhere that OpenShift runs. They use common services such as logging, metering, monitoring, and security, and are infused with innovations and capabilities from IBM Research to deliver much more value than containerized code. In this quarter, we launched Cloud Pak for security, SaaS, as well as new versions of Cloud Pak for integration, Cloud Pak for network automation, and the Maximo application suite. Also recently announced, our Environmental Intelligence software suite, a product based on our Cloud Pak for data and leveraging our weather capabilities, it's designed to help companies measure, monitor, and predict environmental outcome, but also to help simplify ESG reporting. As you know, we made a commitment to be net zero greenhouse gas emissions by 2030. We will leverage this solution to inform management as we take action to reach this goal. In our systems business, we recently launched Power 10. Power 10 has unique hardware innovations including a processor specifically optimized for data intensive workloads such as SAP S/4HANA . During the quarter, we also announced the Telum processor. This 7-nanometer microprocessor is engineered to help clients get insights from their data at the speed of the workload. At the same time, we've continued to see quantum computing as a promising area of opportunity that will play out in the longer term. Our teams are hard at work to move this exciting field forward. Investors will have an opportunity to learn more about this within the next month. Let me quickly highlight one ESG announcement we made recently. Help protect the rights and privacy of cloud clients; we have joined other major companies in the tech industry, Amazon, Google, Microsoft, Salesforce, and SAP to establish the trusted cloud principles. This initiative is consistent with our longstanding focus on trust and transparency. Before I transition to Jim, let me reiterate three messages we conveyed during our investor briefing. First, we are optimizing our portfolio to drive mid-single-digit revenue growth starting in 2022. Second, we are increasing our focus and agility to better serve clients. Third, we are generating strong free cash flow that enables our investments while providing attractive shareholder returns. This quarter, we took another step towards the future. While much remains to be done, we are confident we can achieve our midterm objective. Jim, over to you. James J. Kavanaugh: Thanks, Arvind. Over the last year, we have been very clear on the two most important measures of success; revenue growth and free cash flow generation. I'll start with these key metrics. In the third quarter, our revenue of $17.6 billion was up as reported and down modestly at constant currency. Excluding the content that will go to Kyndryl, IBM’s revenue grew 2% with an improving trend over the last 3 quarters. Our cash generation was up for the quarter year to date and trailing 12 months. This excludes the cash charges associated with the separation of Kyndryl and the structural actions initiated at the end of last year. Looking at our revenue from a segment perspective, Global Business Services growth accelerated to 11% and our software revenue was up 2%. Businesses will be our growth drivers into the future, and together represent over 70% of our post separation revenue profile. Systems declined this quarter by 12%, reflecting product cycle dynamics. Across our segments, IBM's cloud revenue was up 11% over last year, and it's up 17% excluding the cloud revenue going to Kyndryl. This is led by global business services in cloud and cognitive software, which are up 27% and 28% respectively over that period. Moving onto the profit dynamics, pre -tax margin is up 10 basis points sequentially, but down a 100 basis points year-to-year. Since we saw the demand environment improving in the fourth quarter of last year, we have been increasing investments in skills, innovation and our ecosystem, organically, and through acquisitions. In the third quarter, we continue to aggressively hire, bringing in technical talent in Red Hat and highly skilled expertise in consulting. We're scaling resources at our Garages to provide a more experiential consulting and sales approach. We're adding client success managers to help clients get the most value out of their IBM solutions, and we're increasing investments in R&D to deliver innovation in our Hybrid Cloud platform, AI, and emerging technologies like Quantum. The structural actions we initiated at the end of last year are funding some of these investments. Roughly two-thirds of the savings from these actions address stranded costs from the separation and create financial flexibility to be reinvested for growth. The other one-third addressed the Global Technology Services profit profile ahead of the separation, and we're seeing improvement in the GTS gross margin. Our third quarter operating tax rate came in about 5%, which is lower than what we talked about last quarter. This was due to discrete tax benefits that occurred earlier than we previously expected as we prepare for the Kyndryl separation. It's important to note that our view of the full-year operating tax rate has not changed since January. I'll comment on our free cash flow and balance sheet position. We generated $5 billion of adjusted free cash flow year to date, and $11.1 billion over the last year. Both exclude cash impacts of about $1.8 billion for the structural actions initiated late last year, and transaction charges associated with the separation of Kyndryl. Our adjusted free cash flow over the last year is up about $300 million, with growth in our underlying business performance mitigated by a cash tax headwind. Our cash balance at the end of September was $8.4 billion, up slightly from June, but down about $6 billion from year end. Over the same period, our debt is down $7 billion. Addition to debt reduction, year to date, we've used $3 billion for acquisitions and over $4 billion for shareholder returns through dividends. Our solid cash generation and disciplined financial management provide the fuel to invest in our business and pay an attractive dividend. Turning to the segments, Cloud and Cognitive Software revenue grew 2%. We have a strong recurring revenue base in Software. Renewal rates for subscription and support were up again this quarter, contributing to the increase in our Software deferred income balance over the last year. By business area, Cloud and Data platforms' revenue was up 9% while cognitive applications declined 1% and transaction processing platforms was down 9%. We recently shared plans to provide new software revenue categories starting in the fourth quarter. We will combine our two Software growth factors, Cloud and Data platforms, and cognitive applications. And within that, provide greater transparency into performance and trends by business area. Looking across these growth factors, Red Hat, security, and automation fueled revenue growth this quarter. Red Hat revenue was up 17% on a historically normalized basis and 23% all-in. Going forward, we will focus on this all-in growth, given these views will converge over the next year as the impact of the deferred revenue impairment dissipate. Red Hat revenue growth was driven by double digit growth in both infrastructure and Application Development and Emerging Technology, and we had more than 40% growth in OpenShift recurring revenue. Growth in Automation was led by key solutions like Cloud Pak for integration and Cloud Pak for business automation, as well as a strong start to our recent Instana and Turbonomic acquisition. Our data and AI revenue was down modestly. We had strengthened Cloud Pak for data, weather and Maximo, and declines in on-premise DataOps portfolio and supply chain, as it wrapped on a strong third quarter last year. Security remains a key strategic focus area as we're helping clients adopt zero trust architecture with Cloud Pak for security and X-Force services. Growth in security revenue continued this quarter, led by threat management software and services as clients respond to the evolving cyber security environment. In the spirit of transparency, I'll provide a couple additional metrics into our performance. Our annual recurring revenue, or ARR, across the software growth factors grew 7%. This is a good indication of the progress in our hybrid cloud and AI client adoption. And we now have over $8 billion in software cloud revenue over the last year, which is up 28%. Turning to our software value vector transaction processing platforms, we provide flexibility to our clients and how they purchase this mission critical software. Over the last 18 months we've seen a preference for OpEx over CapEx. This continues to pressure perpetual licenses in favor of more consumption-like models. But importantly, we again had strong renewal rates in our transaction processing platform software. This is a solid indication that clients see long-term value in these offerings. Looking at profit for the software segment, we expanded pretax margins sequentially while we continue to invest in new innovation and our ecosystem. Moving to Global Business Services, revenue growth accelerated to 11%. Even with this strong revenue performance, our book-to-bill ratio was greater than 1. Our GBS value proposition is aligned to our client's priority. We're helping our clients capture new growth opportunities and increase operational flexibility and productivity with Hybrid Cloud and AI. We leverage our incumbency, IBM technology and strategic partnerships to modernize their applications and digitally transform their businesses at scale. GBS revenue growth is led by our Cloud offering. GBS Cloud revenue now represents more than $7 billion of revenue over the last year and is up 27%. This performance reflects the continued investments we are making in our Red Hat, Microsoft, and AWS practices. As Arvind said, we added over 180 Red Hat client engagements this quarter. This contributes to total Red Hat -related signings of close to $3.5 billion since the acquisition. Within our 11% revenue growth, consulting was up 16%. There's solid demand here. We're leveraging our skills and ecosystem partners to transform our client’s business processes and modernize applications based on OpenShift. Global Processing Services revenue was up 19%. Our offerings in finance, procurement, and talent and transformation all grew at double-digit rates. More and more, we're conducting consulting and BPO to transform client workflows using Hybrid Cloud and AI. Lastly, in Application Management, revenue growth accelerated to 5% off a prior year that was impacted by the pandemic. Growth this quarter was driven by management of applications in a multi-cloud environment. I'll shift to GBS profit profile where our strong revenue performance drove gross and pretax profit dollar growth. Our gross and pretax margins improved sequentially, but were down year-to-year. With the market opportunity we see, we are making conscious decisions to invest ahead of revenue. We are investing in strategic partnerships, new offerings, and practices, and integrating and scaling out our acquisitions. As I mentioned earlier, we are investing in skills for GBS. In the last several months, we have increased our go to market resources and scaled our practices, built around our ecosystem partners in Red Hat. With a competitive labor market, this is putting some pressure on our labor cost, including higher acquisition and retention cost, which is not yet reflected in our current pricing. We expect to capture this value in future engagement, but it will take time to appear in our margin profile. So now turning to the Systems segment, revenue performance was down 12%, driven by product cycles in IBM Z and Power, mitigated by growth in storage. In IBM Z, revenue declined 33% in the ninth quarter of z15 availability, while z15 program to date continues to exceed the strong z14 cycle, the magnitude of that overachievement has come down a couple of points this quarter. IBM Z is an enduring platform, given market needs for scalability, reliability, security, and more recently, cloud-native development. These characteristics, together with our newer flexible consumption offerings, further demonstrate the value of IBM Z platform within our Hybrid Cloud and AI strategy. Our revenue was down. Late in the quarter, we began the roll out of our next generation Power10, starting with high-end system. As always, new Power technology is introduced over time, and the mid-range and low-end Power10 systems will be available during 2022. Storage delivered 11% revenue growth, driven by demand from hyperscalers for our tape products and growth in entry level all-flash storage following our product refresh earlier this year. Looking at profit in this segment, profit margin was down, reflecting where we are in the IBM Z and Power product cycles. Now let me turn to Global Technology Services. Revenue was down 5%, which is a 1 point deceleration from last quarter. The year-to-year trajectory of revenue generated from the backlog has been improving over the last few quarters. In the first half of the year, we also had modest improvements in client based business volumes and project activity, which contributes to in-period revenue. However, this quarter, clients paused on new project activity as the separation was eminent, resulting in the revenue deceleration. At the time we decided to separate our managed infrastructure services business, we undertook a series of actions to improve the margin, profit, and cash-generation profile of the business, including a substantial charge in the fourth quarter of 2020. The results of these actions can be seen in the margin improvement over the last several quarters. In this quarter, we again expanded gross margin up a 120 basis points. Kyndryl will take this improved profit profile into the separation. I'll wrap up with a view of our progress year-to-date, and then talk about some of the fourth quarter dynamics. As we entered 2021, we laid out our expectations for the year, for our two most important measures; revenue and free cash flow. We expected to grow revenue for IBM at actual rates with underlying constant currency performance stronger in the second half than the first, we expected to grow revenue for IBM excluding Kyndryl at constant currency, and we expected to generate $11 billion to $12 billion of adjusted free cash flow. That of course excludes the cash impacts of the Kyndryl transaction costs and the structural actions I'd mentioned earlier. We're now, we're three quarters into the year and we just completed the last full quarter of IBM on a pre-separation basis. It's a good time to take a snapshot against those objectives. Through the first three quarters, our revenue at actual rates is up 2%, our revenue growth trajectory at constant currency has been improving throughout the year. And excluding Kyndryl, our third quarter revenue was up 2% year-to-year, and our adjusted free cash flow over the last 12 months is $11.1 billion. Since the beginning of the year, we have streamlined our go-to-market. We have increased investments and closed ten acquisitions. These actions and investments will help drive revenue growth, but it takes time to fully realize the benefit. Overall, our results over the first three quarters of 2021 reflect progress we've been making toward our midterm model. During the fourth quarter, we will complete the separation of Kyndryl, which is on track for November 3rd. The fourth quarter, therefore, is a major milestone as we transition to the future IBM. Now let me provide some color on three areas for the fourth quarter. First, the revenue trajectory of the new segments. Second, I'll comment on our tax rate. And third, the impact of the separation of Kyndryl to IBM’s consolidated results for November and December on an operating basis. I'll start with the revenue trajectory of our segments, as we report them in the fourth quarter. As always, I'll talk about it on a constant currency basis but I'll remind you the U.S. dollar continues to strengthen and would be a 1 to 2 point headwind to growth based on current spot rate. To provide a better view of trends, I'll focus on the growth rates before the revenue from incremental sales to Kyndryl. We see continual momentum in our growth factors of Software and Consulting. We expect our Software revenue growth rate to improve versus the third quarter and in IBM Consulting, we again expect double digit revenue growth. In infrastructure, given product cycle dynamics, we expect fairly consistent performance with the third quarter, which was a high single-digit decline. Second, tax. I mentioned that timing of discrete tax benefits occurred earlier than we previously anticipated, as we prepared for the Kyndryl separation. We still expect our full-year tax rate to be in the low teen’s range, in line with what we indicated back in January. That's our all-in rate, including discrete tax items and applies a fourth quarter tax rate in the high-teens. And then finally, IBM's fourth-quarter consolidated results will reflect the Kyndryl separation. I'll frame the revenue and earnings per share implications based on the last couple of years. Kyndryl historically represented just under $5 billion of revenue in the fourth quarter, with about $3.5 billion of that in November and December. At the same time, we estimate we'll get about $350 million from incremental sales in those two months from the new commercial relationship. The net impact to IBM consolidated results is a reduction of about $3 billion of revenue for November and December due to the separation. For those two months, we estimate an impact of 20 to $0.25 of earnings per share, including the new commercial relationships. At the time of separation, Kyndryl will be presented in discontinued operation, with the balance of IBM in continuing operation. We will provide a historical restatement of continuing operations before the end of the year. We are on the threshold of the future IBM; we expect to exit the fourth quarter in a position to deliver our midterm model. A mid-single-digit revenue growth and cumulative free cash flow of $35 billion in 2022 to 2024. With that, we'll be happy to take your questions. I'll turn it back to Patricia.

Thank you, Jim. Before we begin the Q&A, I'd like to mention a few items. First, several references were made today to IBM's new segment structure, which will be effective immediately prior to the Kyndryl separation. We've provided information on the new segment, scope, and naming in an article posted to our investor website at the beginning of this month. Second, supplemental information is provided at the end of the presentation with the schedule of the availability of recapped financial information for IBM post-separation. And finally, as always, I ask you to refrain from multi-part questions. Operator, let's please open it up for questions.

Thank you. At this time, we will begin the question and answer session of the conference. Our first question comes from Wamsi Mohan with Bank of America. Sir, your line is open. Q - Wamsi Mohan: Yes, thank you. Arvind, there seems to be a lot of concerns around the actual separation in terms of potential disruptions. You noted on this call that you saw some hesitation or pause in spending. Do you feel, given the changes that you have put in place, also with sales comp, do you feel comfortable about the trajectory of the business once you get past this threshold of near-term disruption that you highlighted? And if I could, Jim, you noted about 2.5 billion one-time bump from Kyndryl in 2022. Can you maybe calibrate that number for 2021 as well? That would be helpful. Thank you.

Hey, Wamsi. Thanks for the question. Look, I'd like to be very clear. I think that any -- and I would not use the word disruption, Wamsi. I would use the word that there may be a slight pause, which is the word that I used in my prepared remarks. I think there's a slight pause and it'll be the end of third quarter, maybe the beginning of fourth quarter. We see that pause mostly in hardware and in Kyndryl itself. By the way, just to add some color, why do you say that? There has been a lot of hardware that actually does flow through Kyndryl and many people -- many of our clients think of that as being an alternate way that they have procured infrastructure in the past. It's not a surprise given the size of the relationship with all those clients that we see a pause in some of them. I think that's the complete nature of it. When I look at our pipeline, I look at our sales compensation, I look at our executive compensation, I am completely confident that this will be well behind us by the beginning of '22, meaning by January. Well behind us. And as we also get into a new product cycle on some of the hardware in the first half of '22, I think that will put it completely behind us. And so my view is that we hold firm to our ready-to and forward projections. And this is actually got no long-term or systemic issues that I see, both in the numbers, in the pipelines, and in the actual behavior of clients . James J. Kavanaugh: Thanks, Wamsi. To your second question, you remember back at -- on October 4th at our Investor Day, we talked about the strong strategic relationship between IBM and Kyndryl going forward.

Of which I think at that time we shared about 2.5 billion of annualized business, predominantly structured around our high-value mission critical recurring revenue of software, and also some in our infrastructure segment around hardware purchases and around our infrastructure support. That was a full-year annualized view. If you look at fourth quarter, we're going to have two months’ worth of that in 2021, and we estimate that that's about $350 million to $400 million overall. If you go back to what I said on October 4th, the 2022 compared to 2021, 12 months versus 2 months, is give or take about a little bit over $2 billion and that translates into the 3 points of incremental growth 1 time above our mid-single-digit model in min terms.

Thanks, Wamsi. Let's go to the next question.

Our next question comes from Toni Sacconaghi with Bernstein. Your line is open.

Yes, thank you. And I think, Arvind, you touched on this in the first question, but perhaps let me ask it a little more directly. So this quarter, IBM grew at 1.9% for RemainCo versus a comparison of constant currency at minus 3.5%. The comparisons get about two or three points more difficult looking into next year, and you have to accelerate your growth rate to get to mid-single digit growth by two or three points. So effectively, adjusting for compares, the growth rate has to improve about five percentage points relative to what you did this quarter to hit that mid-single-digit target. Beyond a product cycle in Mainframe and the UNIX, given you talked about taking time for investments to pay off, what is going to seemingly pretty suddenly change the growth profile, adjusting for comps by potentially four or five or six points over the next few quarters? And do -- how long do you continue to expect to invest, i.e. have pressure on operating margins, particularly in Software and GBS going forward? Thank you.

Okay. Thanks, Toni. I'll take the first part of that and then I'll look at Jim for the second part of the question. Toni, there's three parts of it. First, let me acknowledge, yes, our growth rates have to improve. No question about it. We are not saying we are done. There are three elements that will contribute to the growth rate, and I think a lot of what you were pointing to was towards the software growth rate, I'll say it comes from three things. 1: we are seeing improvements in our organic, meaning the software we already had. We continue to see that. We expect that that will improve the software growth rates by a few points. I won't actually say the upper because I don't expect that the three elements I mentioned, all of them, will all return at the . So let's say 1 or 2 points from the organic growth rate. 2, we will continue to make acquisitions, but not only the ones we have made keep contributing because they are growing well into double digit growth rates, but the new ones we make will also contribute to that. Think of that to be in the same range. The third one, as we're making a lot of changes in our sales compensation as well as in the makeup of our sales team, we talk about the Garages, we talk about client success managers, leading to more experiential and more technical selling. We believe that'll drive greater deployment and hence quicker purchases in that segment. And so all of those together will contribute to a much improved growth rate in the Software segment, up to the mid-single digit. As I think you're pointing out in some of your math. I'm not going to debate is it 3, 4, or 5%. Happy to do that when we have a bit more time. And I'll pass it over to Jim for the second part of the question. James J. Kavanaugh: To that point, I can't resist but go into the numbers. So let's just -- Toni, great question. Thank you very much. Let's talk about this quarter. Again, IBM, ex - Kyndryl, delivered about 2% growth. By the way, that's an accelerating trend as we talked about in prepared remarks from about flat through the first half to now growing 2%. Yes, offer an easier compare -- we acknowledge that, but let's take a look at the revenue contribution analysis of what contributed to that two points. Now I'll tie it back to what we said on October 4th, as our mid-single-digit growth rate model. We set across our 3 segments: First, we have an improving growth profile as we shift to higher value, higher growth markets, over 70% of our business in Software and in Consulting, which, by the way, also carries a higher value recurring revenue stream. That those two segments will contribute all 5 points of IBM's growth by the way, with improving operating margins, which I'll get into at the end. The infrastructure segment, which is high-value mission critical, covering our Mainframe business and infrastructure support business, was projected to be flat over time as it follows innovation cycle. So as we bring out innovation next year, we firmly believe in confidence that we're going to grow there, but over a 3 year period, that's about flat, but a significant cash generator. So you got 2 growth factors, 1 value vector, 2 delivering growth, and 1 delivering cash generation. Now let's look at how the third quarter played out. Against that 70+ % of our 2 growth factors that targeted a 5 point contribution, we delivered 4.5 points of revenue growth to IBM. We fell about a 0.5 short and that's in the software area because we'd overachieved in GBS. We have a strong book of business in GBS, now IBM Consulting, and we see that continuing to play out. We got work to do on Software but we're making underlying business performance because as you all know, you see the data, our deferred revenue tailwind dissipates over time. And we lost about a point of growth in software just due to the deferred revenue tailwind, which means that the underlying business of our proforma IBM Software continues to improve. Why do we feel confident moving forward just adding to some of the points of Arvind? Number 1, we've been 5 quarters in a row now with strong renewal rates. 80% of our software business is recurring revenue, high-value recurring revenue and you see that in our deferred income and deferred revenue balance up 800 million year-over-year. Number 2, we see nice acceleration in ARR and by the way, NRR north of 100% again for the third consecutive quarter, and we're starting to see nice acceleration in Cloud Paks. And most importantly, as we talked about 3 quarters ago, we are now starting to enter the early parts of our ELA cycle that will continue into 2022 and the first half of 2023. We feel pretty confident about the two growth factors.Where we missed is based on being on the back-end of a very successful mainframe cycle. The infrastructure segment took 2.5 points of growth away from IBM, ex - Kyndryl. So plus 4.5 points against the target of 5, we lost 2.5 points in infrastructure and that will moderate out over time as we bring new innovation. And then finally, just wrapping up on your operating margin comment, we said, entering this year, two most important measures: revenue growth, free cash flow generation. We're achieving on both of those. We said that free cash flow generation was going to be important because we needed to fuel investment in innovation and in IBM Consulting because we saw robust demand. We're playing that out consciously. We'll see that improve as we get into 2022, but we're still driving that cash. And I'll wrap up year-to-date through third quarter, growing revenue, and growing revenue ex - Kyndryl at constant currency. We're growing gross and pretax dollars. We're growing pre -tax margin and we're growing trailing 12 months pre -cash flow. So that's the model that we put in place and we feel pretty confident as we enter 2022.

Thank you, Toni. Victor (ph), could we please take the next question?

Our next question comes from Katy Huberty with Morgan Stanley. Your line is open.

Yes, thank you. Arvind, you referenced the pauses in Kyndryl and Hardware in the quarter, but Software performance was also light of expectations, so can you talk about what drove the shortfall in Cloud and Cognitive Software and where you see opportunities for better execution within that Software business?

Thanks, Katy. Totally. Actually even Jim acknowledged that we fell maybe a half-point short of our own expectations and we could've done better. Here is where I see it doing better. First, the one that performed exactly according to what we wanted was Red Hat. Red Hat gave us 17%, which is pretty much what we wanted and expected. If I now look at our transaction processing platform, it was a little bit below what we would like because we have been saying that in a long-term model that should be more mid-single digit decliner but this quarter it was a high single-digit decliner. We think that as we get past, because that is coupled, I won't call it identical, but it is coupled to some of the infrastructure cycles, I expect that to come back starting in early '22 or maybe late in '21. Then on our category that is today called AI applications, we were minus 1%. There I would expect us to get back to mid-single-digit growth. Now you see if I put it all together, do we expect to see a tiny bit of pausing from people because of everything going on? Yes. Two, we are turning our incentive models. I spoke on it on the prior question very briefly. Our incentive models for our sales team are going to be very heavily tuned towards software going forward in '22. That I believe will result in much better performance because the only way that they will get anywhere near the target incentives are to make this up a number. That is probably for the first time that that's been true in a long, long time at IBM. So Katy, that's my view on what, happened there and how we will improve going forward.

Thanks, Katy. Let's go to the next question, please.

Our next question comes from Tien-Tsin Huang with JP Morgan. Your line is open.

Hey, thanks. It's good to speak to you all. I wanted to ask on the GBS side. That did accelerate double-digit revenue growth, sounds like fourth quarter, you expect that too. But it did come at a higher cost, so I'm just curious on the gross margin percentage front. I'm curious on the confidence that you can reprice to offset the higher cost of deliveries or risk that those costs could persist here, given all the demand side that you're seeing. Thank you. James J. Kavanaugh: Yeah. Tien-Tsin, this is Jim. I'll take that as we move forward. As I stated earlier and Arvind commented in the prepared remarks, we do see a very robust demand environment out there. We called it as we were going through fourth quarter; we called a very conscious strategy, GBS. Now, IBM Consulting again plays a very integral role to our Hybrid Cloud platform - centric business model. Why? Because it drives scale and adoption to our platform and it also pools IBM technology, while taking advantage of the ecosystem and partnership and skill and capability. So we started aggressively adding skill, capacity, expertise, ecosystem partnerships, and scaling acquisitions. I think we just announced today our eighth GBS acquisition in the last 12 months overall. So it was a conscious strategy and we believe that that flywheel effect of GBS that turns into the multiplier of driving our platform, pulling our Software, and driving a very robust economic equation for our Ecosystem partners is essential in our long-term strategy. Now, with that said, we saw margins down 310 basis points. We saw pretax margins down a 110 basis points. Within that though, we grew gross profit dollars and we grew pretax dollars. We're about generating growth in top-line at around generating cash contribution, and GBS delivered that today. I would also mention that GBS accelerated their margins quarter-to-quarter tremendously. Pretax margins were up 5 points quarter-to-quarter, and they've been accelerating their gross margins sequentially every single quarter this year. So we delivered over 13 points of pretax margin in the third quarter and our model, as we said on October 4th, was low teens. So we feel pretty comfortable, we see a very good book of business and we continue to see in fourth quarter IBM Consulting delivering double-digit revenue growth and margin dollar and profit dollar and cash dollar contribution, while pulling our Software and Hybrid Cloud platform.

Thanks, Tien-Tsin. Let's go to the next question, please.

Our next question comes from Jim Suva with Citigroup. Your line is open.

Thank you very much. My question, since a lot of them have been answered, there's just one of them, and that is the impact of higher labor costs. No matter where you look, labor costs are going higher, and I do see that in your prepared slides, that you did give -- that your signings were up 3%. So should we think about as time rolls forward, you'll implement more labor costs that escalate and go higher or are they actually material enough that we should be modeling some adjustments into your cash flows or how should we think about that as you work through the business, because it's a pretty dynamic and fluid situation with labor costs? Thank you.

Jim, great question. And by the way, I would tell you that I don't think that this year is unique. Maybe there's a touch more issues going on, but I don't think it's unique. I remember 2001 really well; I remember 2007 just before the financial crisis. This is a continuous movie in the technology industry. Now, you said the 3% signings growth. I wouldn't look at the 3%. I would look at our book-to-bill ratio, which is 1.1. And so book-to-bill gives a much better signal of what the demand is for our forward-looking revenue and demand in our IBM Consulting business. Labor has to be managed. We have a global level model. We've put people everywhere. And as Jim just mentioned in answer to the prior question, that yeah, when you do have inflation in your labor cost, there is an element of it that's going to price through for that side of the business. In all the rest of the business, actually, I'm not so worried about labor cost. I'm worried about getting the right talent, maybe, but that is always a worry that I have, and I've been paranoid that for 30 years, that's not unique. And I think it's similar to many of your businesses, Jim, not just yours, but all of your colleagues here on this call. The right talent is far more important. And while labor cost is important, in the end of the day, its maybe 15%, 20% of the total costs in expense that is critical towards the other businesses, because you can manage the rest. That answer to you is, no, it's not something that needs to be modeled in, I don't believe so. But we always have to worry about it in terms of how do we price, how do we get the labor pools, where do we put the labor pools and all of those elements.

Excellent. Thank you, Jim. Let's go to the next question, please.

Our next question comes from Keith Bachman, Bank of Montreal. Your line is open.

Hi. Many thanks for taking the question. I wanted to ask first on Cloud Paks. You seem to be suggesting that this is going to be a key or one of the many enablers to drive growth. And I was hoping you could explain a little bit why Cloud Paks. Because it sounds very similar to bundling which IBM and many companies have been doing for years. So I wanted to try to understand a little bit why Cloud Paks is different from the historic bundling that IBM has been doing. And then secondly, if I could just ask Jim a question I've asked before is on software maintenance. A good quarter on ESC compares and I just wanted to get your thoughts on the durability of the software maintenance, not whether it's important, but is it, in fact, a growth category as we look out within GBS over the next two years, three years? Many thanks.

Okay. Keith, I'll take the first part of that question on Cloud Paks. So Cloud Paks are not just bundled and they're not just containerizing Software. I'll tell you right away, if all you do is bundled Software, you'll actually get a price deflation. If all you do is containerize Software, there'll be no plus or minus. It's just a different way of delivering it. I'll take one of the Cloud Pak s to maybe use it as a quick exemplar. If I take our Cloud Pak for data, if I now turn around and tell you that whether we take some of our integration Software, whether we take a database Software like DB2, and that's all you provide through that, you're right; there's neither plus nor minus. I think it will stay where it is. However, it's not just putting those in as options. A lot of Cloud Pak for data is actually new innovation. It includes methods around data fabric, it includes methods around how do you federate data, both from public clouds and from other repositories that are probably not IBM's inside the clients on-premise environment. It contains the data catalog; it contains these ways to be able to do some computations without even moving the data. That new content added to some of the existing content, so we take advantage of our incumbency or we get lift because there is more usage overall for these technologies than there was before, is why we're so excited about Cloud Pak and it gives us both. Yes, some of it is just going to be a movement, but a lot of it is actually increased usage. And hopefully that made the example clear on how we're driving innovation into the portfolio with that one example. So Jim, I'll give it to you to address the -- I don't know whether to phrase maintenance as ARR or NRR. James J. Kavanaugh: I think, Keith, and I'm interpreting your question given you applied it to GBS and we've had this discussion many quarters, appropriately so, and you're talking about Application Management Services, AMS. If I'm not answering the right question, please get back to Patricia and we can move forward from there. But AMS, as we've talked about for a handful of quarters, we got back to growth up 5%, accelerated that growth albeit, as we said in the prepared remarks, off were much easier compared during the height of the pandemic last year in third quarter. But it was up this quarter as we had growth in offerings which modernize the client's applications and as we move them to a Hybrid Cloud. We talked about our application management having a tremendous incumbency value in a Hybrid Cloud platform - centric model. Why? Because what we've seen and learned over the last two plus years after the acquisition of Red Hat, is that one, we've built up a $3.5 billion book of business around our Red Hat practice in GBS from a dead start during the acquisition, and we built that up. Of that $3.5 billion over a quart -- the three quarters of that book of business is in AMS accounts. Second, AMS or excuse me, GBS driving that flywheel effect I talked about earlier, is actually delivers over 1/3 of our cloud revenue -- Cloud Pak revenue growth each quarter. And within that, 80% are AMS accounts. So there is causality and a correlation here between our strong incumbency base, us having industry, business process knowledge, and the technical expertise to be the client's trusted partner to move them along their journey to Cloud. AMS is a very integral part. So we saw good growth, and by the way, our penetration of AMS Cloud activity. Remember we talked about in the past, this predominantly being an on - prem enterprise application concentration issue. We continue to make progress, we're about close to 40% of our AMS business is now Cloud and we're capitalizing on Red Hat, we're capitalizing on application modernization, and we're capitalizing on very strong ecosystem partnerships with SAP S/4 Hana, to name one, as we move forward.

Very good. Thank you, Keith. Victor, let's take one last question.

Certainly. Our final question comes from David Grossman with Stifel. Your line is open.

Thank you, and thanks for squeezing me in here. Just two really quick ones. First, how much, if any, of the revenue with Kyndryl is activity-based, which may be dependent on their own execution? And then secondly, Jim, you mentioned the ELA cycle starting up, I think early 2022. Perhaps you could share with us just how much of a headwind that it's been and which segments its impacted most. Thanks. James J. Kavanaugh: David, thank you very much for the question. I think I'll take both and then Arvind can wrap it up here overall. First, around Kyndryl. If you go back to October 4th at the Investor Day, which we were pretty transparent, and we said we're going to continue that transparency into 2022 around the external sales with the strong strategic relationship between IBM and Kyndryl. We said about on a full-year basis, $2.5 billion give or take and in 2022, when you got 12 months versus two months in 2021, it'd be about $2 billion of incremental or about three points. Within that, David, the majority of that is in Software, and a majority of that is annuitize based high-value mission critical base recurring revenue. So if you're thinking about, do we have any deflationary impacts around that 2 plus billion dollars, on the Software side, which carries the majority of it, no. The 2nd component is we have about -- annualized about $0.5 billion with regards to our infrastructure support and hardware. On the infrastructure support, it's again, annuitized based business overall and with regards to Hardware, in our strategic relationship as we set Kyndryl up, we've given them a pretty aggressive and component of an aged inventory refresh program. So we have very little hardware purchases over probably the next 18 months to two years, given we just went through a big asset refresh. So long answer to your question, but I don't think we have a lot of impact moving forward against that. Second, around the ELA cycle. You know this quite well. It's typically a three-plus-year. The dynamics of client buying behaviors change over time but we feel very confident. The good news is here is we have a lot of headroom. We're just starting the early part of that in the fourth quarter. That will predominantly play out in 2022 and then will also extend early into 2023 as we move forward. If we look at our transactional related activity, we've been making strong performance improvement in our annuitized based business with renewal rates and our on-prem transactional business has struggled, especially during the pandemic. This will bolster that as we move forward. And most importantly, we feel confident in the investments in innovation and what we're bringing to market with our modernized and containerized Cloud Pak offerings optimized on top of our Hybrid Cloud Red Hat platform that we're good. So with that, let me turn it over to Arvind.

Thanks, Jim. Look -- First I'd like to thank all of you for your questions. I thought they were really getting into the details and hopefully it helped -- our answers helped you understand our business a lot better. Let me just make a couple of comments to wrap it up. I hope you took away, is that we've continued to make this progress this quarter in the key areas. Both myself and Jim highlighted them in our key areas of growth and in our value vectors as you go forward, especially looking into '23. But we'll also acknowledge that we always have more to do. Importantly, we are on the threshold of the IBM of the future and we expect to exit the year in a position that delivers on our midterm model, starting in 2022. That is the sustainable mid-single-digit revenue growth and the increasing free cash flow that fuels all the investments. With that, I look forward to speaking to all of you again.

Arvind, thanks. Victor, let me turn it back to you to close out the call.

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