Mark Loughridge - Chief Financial Officer of Finance & Enterprise Transformation and Senior Vice President Patricia Murphy - IR

Benjamin Reitzes - Barclays Capital Robert Cihra - Caris & Company Richard Gardner - Citigroup Inc Chris Whitmore - Deutsche Bank AG Toni Sacconaghi - Sanford C. Bernstein & Co., Inc. Mark Moskowitz - JP Morgan Chase & Co Scott Craig David Grossman - Stifel, Nicolaus & Co., Inc. Katy Huberty - Morgan Stanley Bill Shope - Goldman Sachs Group Inc.

Welcome, and thank you for standing by. [Operator Instructions] Today's conference is being recorded. [Operator Instructions] Now I will turn the meeting over to Ms. Patricia Murphy, Vice President of Investor Relations. Ma'am, you may begin.

Thank you. This is Patricia Murphy, Vice President of Investor Relations for IBM. I'm here with Mark Loughridge, IBM's Senior Vice President and Chief Financial Officer, Finance and Enterprise Transformation. Thank you for joining our second quarter earnings presentation. The prepared remarks will be available in roughly an hour, and a replay of this webcast will be posted to our Investor Relations website by this time tomorrow. Our presentation includes certain non-GAAP financial measures, in an effort to provide additional information to investors. All non-GAAP measures have been reconciled to their related GAAP measures in accordance with SEC rules. You will find reconciliation charts at the end, and in the Form 8-K submitted to the SEC. Let me remind you that certain comments made in this presentation may be characterized as forward looking under the Private Securities Litigation Reform Act of 1995. Those statements involve a number of factors that could cause actual results to differ materially. Additional information concerning these factors is contained in the company's filings with the SEC. Copies are available from the SEC, from the IBM website, or from us in Investor Relations. Now I'll turn the call over to Mark Loughridge.

Thanks for joining us today. In the second quarter, we delivered revenue growth of 12%, and operating earnings per share of $3.09, up 18% year-to-year. With this performance, we're increasing our full year 2011 expectation for operating earnings per share to at least $13.25, which is up $0.10 from our previous view of at least $13.15, and up $0.25 from the beginning of the year. The 12% revenue growth was driven by our transactional businesses in hardware and software. Software growth was driven by key branded middleware, which was up 21%. Our systems revenue was up 20%, with strong performance in System z, POWER and System x servers. In services, our total backlog increased to $144 billion. That's up almost $15 billion from last year with $13 billion from currency and $2 billion of constant currency performance. Services revenue was up 10%. Within this, growth markets were up 22% or 10% at constant currency. Overall, growth markets performance was strong, and revenue from these countries was up 13% at constant currency, our fourth consecutive quarter of double-digit constant currency performance. In fact, we had continued momentum in all of our growth initiatives, growth markets, business analytics, cloud and Smarter Planet. Turning to profit. We increased operating pretax income by 10%, and operating net income 11%. Bottom line, we delivered operating EPS of $3.09, which was up 18% year-to-year. Our strong earnings performance resulted in $3.4 billion of free cash flow in the quarter, and in the last 12 months we've generated $16 billion of free cash flow. With this strong cash performance, we've delivered significant returns to shareholders, with almost $5 billion in share repurchase and dividends this quarter and almost $19 billion over the last year. Now I'll get into the second quarter details, starting with revenue by geography. Our geographic performance was very consistent with the first quarter, with growth markets and North America, once again, providing the biggest lift. I'll discuss the geographic results on a local currency basis. Major markets revenue was up 3%. The U.S., our largest market, was up 6%, and Canada was up 11%, driven by momentum in our server and software businesses. In Europe, we had a modest improvement in the year-to-year growth rate, with continued growth in U.K., France and Spain. And this quarter, Germany and Italy returned to growth. Rounding out the G7, in Japan our revenue was down 5%, consistent with the first quarter growth rate. Our growth markets continued their very strong performance, outpacing the majors by 10 points. Since we announced our growth markets unit in the beginning of 2008, the revenue growth rate has outpaced the major markets by an average of 9 points, again on a local currency basis. With 13% revenue growth, this is the fourth consecutive quarter of double-digit revenue growth and share gains. We also had double-digit growth and share gains in each of the BRIC countries. The combined revenue in the BRICs was up 21%. But our success goes beyond the BRICs, we had double-digit growth in almost 40 growth market countries. Our growth is broad-based from a segment perspective, as well. This quarter, we had 24% growth in hardware, with great performance in all system brands. These are high value offerings, not low end content. For example, we have 24 new mainframe customers in growth market countries just since the introduction of the zEnterprise last year. Think of it as planting the flag, which provides a great base for future growth. Our software business supports the growth markets build out, with WebSphere providing key underlying infrastructure capabilities. This quarter, WebSphere grew almost 40% in the growth markets. And our services revenue was up 10%, with terrific performance in both GTS and GBS. Our globally integrated business model allows us to rapidly deploy expertise and capabilities. And with our decades of know-how, we can provide a state-of-the-art IT platform that can scale in fast-growing environments. This is showing up in our backlog. The services backlog in growth markets is up about 50% at actual rates over the last 2 years. What's driving this performance? We're continuing to expand into new markets and build out IT infrastructure in support of economic growth. For example, we're expanding our base of business in regions like Africa, where we recently announced the extension of a relationship with Bharti Airtel to provide IT solutions to its employees across 16 African countries; a strategic agreement with Commercial Bank of Ethiopia to modernize core banking systems; and a collaboration agreement with the University of Ghana to foster new entrepreneurial approaches to education and R&D, and to support the adoption of new technologies such as cloud computing and business analytics. There's a lot of opportunity for us to capture, and we remain confident that growth markets will approach 30% of IBM's geographic revenue in 2015, and drive half of IBM's revenue growth with strong margin performance. Turning to revenue and gross margin by segment. The Total Services revenue growth rate was 10% or 2% at constant currency. In services, we had great year-to-year performance in the growth markets, with double-digit constant currency revenue growth and improved gross margin, which was 2 points higher than the services margin in the major markets. Systems and Technology had another great quarter, with 17% revenue growth. System z mainframes were up about 60%; System x, up 15%; and Power Systems were up 12%, as we continue to displace competitive systems. Our Software business also grew 17%. Once again, growth was led by our business analytics portfolio, storage management and business integration. Turning to gross profit. Our operating gross profit margin improved 1.2 points. The largest contribution came from Systems and Technology which was up 5 points, driven by improvements in every system brand and an improving mix. We also expanded gross margins in Software and Global Business Services. Now let's take a look below the gross profit line to our expense and spending profile. Our total operating expense and other income was up 20%, with about half of the growth attributed to currency, from both translation and hedging dynamics. Acquisitions over the last 12 months contributed 4 points of the increase. Because this is a view of our operating expense, it excludes the impact of amortization. Our base expense, excluding currency and acquisitions, was up 6 points. This quarter, our workforce rebalancing charges were up about $160 million year-to-year, predominantly in Europe. Another driver of expense growth is the impact of our hedging programs. We hedge our major cross-border cash flows to mitigate the currency volatility in global cash planning. With the year-to-year change in currencies, hedging programs generated losses this quarter, as compared to gains last year. Of the roughly $300 million year-over-year impact in cost and expense from our hedging programs, approximately $220 million is in expense, including $180 million in other income and expense. Keep in mind that these hedging losses mitigate the translation benefits elsewhere in the P&L. So now let me get into the segments. The 2 services segments delivered $15.1 billion in revenue, up 10% as reported and up 2% at constant currency. Global Technology Services grew 11% or 3% at constant currency, and Global Business Services grew 9% or 1% at constant currency. Total outsourcing revenue was $7.1 billion, up 12% as reported, or 3% at constant currency. This was driven by revenue from backlog, which was up 3%, and growth from sales into our existing base accounts. Our total transactional revenue of $6.1 billion was up 9% or 1% at constant currency. We had outstanding performance this quarter in the growth markets, with constant currency revenue up double digits in both the outsourcing and transactional businesses, driving significant share gains for Total Services in the growth markets. Total backlog was $144 billion, up $15 billion year-to-year, with $13 billion from currency and $2 billion for performance. Now let's move on to the 2 segments. In Global Technology Services, revenue was $10.2 billion. GTS outsourcing revenue was up 12% or 3% at constant currency. Growth was led by our performance in the growth markets, with revenue up 10% year-to-year at constant currency. We gained share this quarter in total GTS outsourcing in both the growth markets and the major markets. Integrated Technology Services revenue grew 11% as reported and 3% at constant currency. Here too, the growth markets were the key driver, with revenue up 14% at constant currency. And revenue for cloud-related services within ITS was up over 200%. Global Technology Services pretax income was up 1% year-to-year. A significant portion of the workforce rebalancing charges this quarter were for services. Normalized for the workforce rebalancing charges, GTS pretax income was up 8%, more in line with revenue. Turning to Global Business Services. Revenue was $4.9 billion. Application outsourcing revenue was up 12% as reported and 4% at constant currency. Consulting and Systems Integration, which includes Consulting, AMS systems integration and the U.S. Federal business, grew 7% as reported and was flat at constant currency. We continued to have strong performance in our growth initiatives in GBS. In the first half, business analytics revenue was up over 25%. From a geographic perspective, GBS revenue was up 10% at constant currency in the growth markets, with balanced performance in both outsourcing and C&SI, while major markets revenue was down 1% year-to-year due to declines in Japan. From a sector perspective, growth was led by distribution, communications and general business. Public sector revenue was down again this quarter, driven by declines in government spending. So although public sector performance had minimal impact on IBM, it did impact the overall GBS growth rate. In fact, excluding public sector, the remainder of GBS grew in the mid-single digit range at constant currency. Global Business Services pretax profit was up 11% year-to-year, with 0.3 point margin expansion. So let me close the services discussion with a final comment on the growth markets. We're making a lot of progress in these markets, as we work with businesses to build out the infrastructure required to support future growth. As I mentioned earlier, the backlog in the growth markets was up almost 50% in the past 2 years. That backlog is now approaching 20% of Total Services backlog, and was a big contributor to services growth and the share gains we are seeing in these markets. We see a lot of opportunity ahead of us in the growth markets, which is a key driver of services performance in the 2015 roadmap. Software had a terrific quarter with revenue of $6.2 billion, which is up 17% year-to-year or 10% at constant currency. Key branded middleware grew 21%, gaining share for the 15th straight quarter and extending our leadership in the middleware market. Key branded middleware accounted for 64% of total software revenue, as we continue to mix into higher growth areas of the business. Segment pretax income was $2.3 billion, up 12% year-to-year. Now let me take you through the drivers by brand. WebSphere had another powerful quarter, growing 55% year-to-year and gaining share. Our growth is driven by our base business, as well as acquisitions. For example, business process management grew 30%, driven by the synergies of our combined Lombardi, ILOG and WebSphere products. Smarter Commerce software, which extends our capabilities in B2B integration, commerce solutions and enterprise marketing management, had an excellent quarter, driven by the combination of Sterling Commerce, Unica and Coremetrics acquisitions with our WebSphere Commerce base business. Information Management grew 18% year-to-year and gained share. Our distributed database had another terrific quarter with strong double-digit growth. Netezza again performed well, transactional volumes were up 70% year-to-year. IBM Netezza has more than a 10x price/performance advantage over Exadata for running analytics workloads. Since its introduction in 2009, when going head-to-head against competition in proof of concepts, the Netezza appliance has an 80% win rate. This quarter, we've expanded the number of proof of concepts by 60% year-to-year. Information Management provides the foundation of IBM's Business Analytics and Optimization capabilities. In the first half, the software component of business analytics grew over 15%, in support of IBM's overall business analytics growth of more than 20%. Tivoli software grew 9% year-to-year, and we held share. Within Tivoli, storage grew nearly 25%. Lotus was up 12% and gained share. This was driven by strong performance from IBM's social business offerings. IDC recently ranked IBM #1 in worldwide market share for social platform software. In summary, software had another very powerful quarter, with revenue up 17% and branded middleware up 21%, gross profit margins up 0.4 point and pretax income up 12%. Systems and Technology revenue was $4.7 billion, up 17% year-to-year or 12% at constant currency. This performance was driven by double-digit growth in System z, POWER, System x and Storage, and continued growth in Retail Store Solutions and Microelectronics. Growth markets grew 24% at constant currency with double-digit growth in all brands, while major markets grew 7% at constant currency. Globally, Systems and Technology gained 3 points of market share in total servers, driven by strong increases in System z and POWER. Gross profit margin expanded 5 points year-to-year to 41%, driven by margin expansion across the server and storage portfolio, and pretax margin increased 3.6 points. Now let me take you through the brands. System z revenue grew 61% year-to-year and MIPS were up 86%. Over the past 4 quarters, revenue was up 49% year-to-year and MIPS up 59%. This has been the best 4-quarter period in the past 5 years. Since the z196 start shipping in the third quarter of 2010, we've added 68 new System z customers, with more than 1/3 in the growth markets. Last week, we announced the zEnterprise 114 mid-range server, which costs 25% less and delivers up to 25% more performance than the previous z10 business class system. It utilizes up to 14 processors running at 3.8 gigahertz and can consolidate workloads from up to 300 competitive servers on a single z114. Power Systems grew 12%, driven by strong growth in both entry and high-end systems. We, again, extended our market leadership this quarter, the 13th consecutive quarter of year-to-year share gain. IBM's strong performance accounted for all of the UNIX industry's 5% growth. We continued our success in competitive take outs. This quarter, we had over 250 competitive displacements, which resulted in over $300 million of business. Roughly 60% of this came from Oracle and 30% from HP. Since the beginning of 2009, IBM drove nearly 2,300 competitive displacements for about $2.3 billion of business. Storage hardware revenue grew 10%, driven by disk, which was up 13%. System x revenue grew 15% year-to-year with high-end growth of 26%. System x revenue in the growth markets was up 27% at constant currency. Retail Store Solutions grew 8% and held share, and Microelectronics OEM revenue was up 4% year-to-year. Overall, Systems and Technology had a great second quarter, with revenue up 17%, with strength across the portfolio, gross profit margin of 5 points, pretax income more than doubled and pretax margin up 3.6 points. Turning to cash flow. We generated $3.4 billion of free cash flow in the quarter, which is up $350 million year-to-year. The year-to-year improvement was in line with our net income growth. Through the first half, our free cash flow of $4.2 billion was down $300 million year-to-year. The decline is driven entirely by an $800 million increase due to income tax settlement payments that I discussed in the first quarter. Excluding this impact, free cash flow would have been up by $0.5 billion year-to-year. Our inventory continues to be well managed and collections remain strong. Looking at the uses of cash in the first half, we returned almost $10 billion to shareholders. We spent $8 billion in share repurchase, where we bought back almost 50 million shares. At the end of the second quarter, we had $8.7 billion remaining in our buyback authorization. We took our dividends up 15% in April, and through June we paid out $1.7 billion in dividends. This is the 16th consecutive year that we raised our dividend, and the eighth year in a row of double-digit increases. Looking at the balance sheet, we ended the quarter with cash balance of $11.8 billion, up $100 million from the end of last year. Total debt was $29.8 billion. $23.4 billion was in support of our financing business, which is leveraged at 7:1. Our non-financing debt was $6.4 billion, and our non-financing debt-to-capital was 24%, consistent with year end and with a year ago. With this amount of leverage, we continue to have a high degree of financial flexibility. Our balance sheet remains strong and positioned to support the business over the long term. So now let me start to wrap up with the drivers of our operating earnings per share performance. Our revenue growth of 12% contribute $0.33 to our earnings growth. The $0.04 deterioration from margin reflects a $0.10 year-to-year impact from higher workforce rebalancing charges. And a lower share count contributed $0.18, fairly consistent with last quarter. So this quarter, revenue led our earnings per share performance. With revenue growth of 12% or 5% at constant currency, this is the fourth consecutive quarter of mid-single digit constant currency revenue growth. This quarter, we had great growth in our transaction businesses and continued success in our 4 key growth initiatives. Our growth markets strategy to expand into new markets, build out IT infrastructure and focus on leadership in specific industries is resulting in solid growth and share gains. Our growth market countries grew 13% at constant currency in the second quarter and the first half, and contributed about half of IBM's geographic revenue growth. In business analytics, we're helping our customers optimize the massive amounts of data they're dealing with. Through the first half, our business analytics revenue was up over 20%, with good contribution from both software and services. In cloud, we had over 2,000 wins year-to-date. In private cloud, our average transaction size has tripled from a year ago. In the first half of 2011, cloud revenue has already exceeded our full year 2010 results, keeping us on track to double our cloud revenue for the year. Our Smarter Planet revenue growth in the first half was over 50%. This quarter, growth was driven by solutions in our telecom, healthcare and retail industries. We're also gaining traction in our Smarter Commerce initiative launched in the first quarter and ramping our key Smarter Planet services contracts. So we have good momentum in our growth plays and are continuing to invest in solutions and the go-to-market capabilities to drive future growth. In the first half of 2011, we've delivered revenue growth of 10% or 5% at constant currency, operating net income growth of 12%, operating EPS growth of 19% and returned $10 billion to shareholders. So midway through the year, we're increasing our full year 2011 expectation for operating earnings per share to at least $13.25 on our way to operating EPS of at least $20 in 2015. Now Patricia and I would take your questions.

Thank you, Mark. Before we begin the Q&A, I'd like to remind you of a couple of items. First, we have supplemental charts at the end of the deck that complement our prepared remarks. And second, I'd ask you to refrain from multi-part questions. When we conclude the Q&A, I'll turn the call back to Mark for final comments. Operator, please open it up for questions.

[Operator Instructions] The first question comes from Bill Shope with Goldman Sachs. Bill Shope - Goldman Sachs Group Inc.: Mark, can you walk us through the current competitive landscape in services and outsourcing in particular? You mentioned that you're gaining share here. Where, specifically, do you think you're seeing the most market share momentum, and are you seeing any signs your competitors are responding to that now?

Well, let's look at some of the dynamics that we have in our services business. First of all, when you look at it from a backlog perspective, a really strong backlog quarter for us. Now at a $144 billion, up $15 billion year-to-year, and if you look at that balance on backlog growth, it was pretty strong on both sides, so 11% backlog growth. Within that, though, I'd like to point out that we really had strong performance in GMU. So if you break down that backlog growth in total, up $15 billion, about $7 billion was in major markets, but $8 billion of that $15 billion was in the growth markets. So growth market backlog is now about 20% of the total and over the last 2 years, it's doubled -- it's up 50%, excuse me. So within that 50%, then you look at the margin content, the margin content for Total Services in GMU was 2 points richer than we see in the major markets. So frankly, underneath those dynamics we're seeing real strength as we move into growth markets with a lot of opportunity that comes at good margins given the capability that we bring to the table. If you look overall in the services business, now looking towards the second half of the year, we expect to see yield off of that workforce rebalancing that we did have in the second quarter. And with the yield off that plus the ongoing momentum, because frankly, without that restructuring, workforce rebalancing charge, we had 10% profit growth in services in the second, balance of the 10% revenue. Now getting the yield off that momentum in the second half, we should see margin expansion and double-digit profit growth from our services business. So I think we've got a pretty strong hand, and I would like to reemphasize how encouraging we've seen the performance in GMU.

The next question comes from Toni Sacconaghi with Sanford Bernstein. Toni Sacconaghi - Sanford C. Bernstein & Co., Inc.: Mark, I was wondering if you could comment on pretax margins. I think this was the first time in 15 quarters that they declined year-over-year. I know that currency and acquisitions were a factor, but you have those benefits on the cost side and on the revenue side. You've also mentioned workforce rebalancing several times. Is that really the driver? And if so, can you dimension the size of the workforce rebalancing this quarter relative to other quarters, and where that impact was felt most in the P&L?

Sure. So if you look at it, as you know, as we detailed the business model going through to 2015, within that roadmap, we're looking for a margin expansion on a net income basis, and we're looking for a kind of magnitude of say, 0.3, 0.4 point. In the second quarter, in fact, if you exclude the workforce rebalancing, and within the quarter it was about $175 million, that's up about 160 year-to-year with the bulk of that in the services part of the business, without that effect in the second quarter, we were, in fact, 0.3 point margin expansion on net income. If you take it to the first half, then the first half was expansion of 0.2 point, and without the second quarter restructuring, alone, we would have been up by 0.5 point. Now, again, going into the back half of the year, we'll see some yield against that restructuring. But I feel pretty confident that the margin performance we're seeing in the business is going to be improved as we go into the second half of the year. And frankly, the run rate underneath our performance, I think, is right on the model. So I think it's simply a matter of the workforce rebalancing charges, Toni.

The next question comes from Benjamin Reitzes with Barclays Capital. Benjamin Reitzes - Barclays Capital: Mark, could you talk a little bit about the financial services vertical? It's 29% of sales the last 2 quarters, still grew 8% at constant currency in the quarter. Obviously, we're all feeling the stock prices and the pressures that are out there in the financial services segment. So could you talk about how IBM is going to continue to grow in that sector maybe throughout the year, what your initiatives are to grow in the financial services and whether you can, and any other detail around that?

Yes. Well, we had really positive performance, as you pointed out, Ben. Financial services, up 17% at actuals. That's the fifth consecutive quarter of positive growth for the financial services sector. And I'd add, when you look at that performance, big placements around the world. The financial services sector is certainly not just deploying by major market participation, some of our biggest banking customers now are, frankly, in the growth markets. Some indicators of that, let's look at the 68 new customers that we brought to the zSeries platform since we introduced zEnterprise, 1/3 of those 68 are in the growth markets. So I think we've got real momentum in the financial services sector. It's a strong play for us. But I would expand that a little bit. We didn't just have strong performance in the financial services sector, up 17%. GB, General Business, was up 16%. Our overall communication sector was up 16%. Those 3 alone account for almost 2/3 of IBM's business. So if you look at the volume of business that we have, exiting the second quarter, we've got real momentum across those largest sectors.

The next question comes from Katy Huberty with Morgan Stanley. Katy Huberty - Morgan Stanley: Mark, given the strong growth in IBM transaction businesses, generally, and strong consulting results at your peers, are you surprised by the downtick in constant currency growth within transactional services? I know you mentioned the impacts from government spending, but can you talk about the other factors that drove that deceleration?

Well, let's -- when you look at it on a Total Services basis, we were about 3% constant currency in the first quarter, 2% constant currency in the second quarter. I don't know if I'd call 1% change in the trajectory a deceleration. But if you look forward, really, I would now go back to where we see our sales competitively in our backlog performance. And the backlog performance, once again, we had strong backlog in total, up $15 billion, that's 11% growth, but the transactional backlog was up 16% and the outsourcing backlog was up 9%. Now all of those have different contract lengths and extend over a multiple time periods, but I think it puts us in a pretty good position as we go forward. Now within that, I want to remind ourselves as we look at that performance, the business model is to drive profitability growth, and the GBS business did a great job on profit growth in the quarter. In fact, if you look at Total Services again, adjusting for workforce rebalancing is up 10%, we see that services engine going forward generating double-digit profit growth in the second half. I would also point out that the real mission that we're looking for from our GBS organization, our consulting organization, is to lead our key growth plays. We've already talked about the growth that we've seen in GMU. But I want to reiterate, a big part of their job is to drive that ongoing momentum in Smarter Planet. Smarter Planet was up 50% in the first half. If you look at business analytics, we're up more than 20% in the first half. Cloud computing, we've done as much work in cloud in the first half of this year as we did all of last year. So they are driving that momentum, that's a big play for the IBM Corporation. GBS is on their model on a profitability basis, and we see that yield from the second quarter restructuring moving into margin expansion in the second half.

The next question comes from Chris Whitmore with Deutsche Bank. Chris Whitmore - Deutsche Bank AG: Mark, the weaker dollar contributed to 7 points of revenue growth in the quarter. You gave us some details around hedging losses, but can you take or quantify the weak dollar impact on earnings? And in addition, can you comment on how IBM would be impacted if the dollar were to materially strengthen from here?

Yes. Well, Chris, that's a really, really good question. Let me give you an answer on it, but I want to start with kind of the operational aspects of movements in currency. So when you see movements in currency, especially when you see sustained movements over longer periods of time, the competition adjusts, the marketplace adjusts. We use some of that advantage, especially in consecutive quarters of a weakening dollar, to improve our position competitively at the table and, essentially, pass some of that currency advantage to our customers. And I want to keep that operational aspect of competing in a global business in mind as we go through this explanation. When we do the calculation of currency, that's a straight mathematical analysis, translational impact netted for the hedge. When we do that analysis, that really kind of defines the theoretical maximum that currency would be. I don't think it's that much. I know in my business work, when I was pricing PCs, we were adjusting special bids for changes in currency every single day. And we're doing that because competition was doing the same at the table and rolling some of that advantage into their price point to win the business. So if you take that simple mathematical calculation and remember that, that's a theoretical maximum netted for the hedge, that's about $300 million. Now within the quarter, we also had a unique event with the amount of restructuring that we had. Again, $175 million. If you net those 2, the difference of that theoretical maximum on currency netted for restructuring, that's about $125 million. So now with that $125 million in mind, let's return to the operational example I gave of how much is really a pass-through to your customer set to win the deal at the competitive table. Is it 20%? How much benefit did we get on the revenue line? It was about $1.7 billion. Did we pass 20% of that through? Did we pass 30%? Would you pass 1/2 through? I mean, we see it not only in transactional businesses, but we see it in annuity business over sustained periods of time as well. Well, frankly, just to kind of bookend the argument, all you'd need is about 5% to 10% at that $1.7 billion theoretical maximum to be pass-through to your customer set, and that adjustment, alone, would mitigate all of that net benefit of currency relative to a restructuring. If it was more than that 5% to 10%, in fact, the net effect would have been a hurt to the P&L within the period. So I think it's -- Chris, a long answer, but it really is the way currency rolls out, and there are real operational aspects of that, that we need to consider as we analyze the effect.

The next question comes from Scott Craig from Bank of America Merrill Lynch.

Mark, I was just wondering if you could go into the software margins and sort of expectations there as you go forward. They were, roughly, flat to slightly down year-over-year, so just curious, you talked about the services margins and the impact from some of the items, what was their impact in there, and sort of your outlook going forward for margin expansion?

Sure. Well, if you look at the software businesses, as you know, as we ran through that business in 2010, we had a lot of acquisition content. In fact, we did 17 deals for well over $6 billion. It was really one of our largest years ever on a dollar amount and on a number of deals. So -- and the bulk of those, the majority of those deals, all flowed into software. So software had a lot of work to integrate these businesses into those key plays that we're running. When we do that integration, we're adding resource, we're adding expense for the integration. We're building those teams to grow those deals. So actually, that acquisition integration process was the biggest element in analyzing the margins for the software business. Now I'd reiterate -- I mean, software grew their profitability at 12%, so that was a very strong case to begin with. But as we look at -- going into the second half and we start to yield the growth rates against the software acquisitions, we expect to see margin expansion in the software business on top of the revenue performance. And one point I would also add is the software acquisition based in the second quarter, they did a great job, a great job.

The next question comes from Richard Gardner with Citigroup. Richard Gardner - Citigroup Inc: Mark, I was hoping that you could provide a little bit more detail on competitive placements in UNIX, and just talk about whether you're actually seeing that rate of competitive placements pick up based on some of the actions of Oracle in the market, or has it been pretty steady here of late?

Well, when you look at it overall, I mean as we've pointed out in the script, it's just quite remarkable, I think, that since beginning of 2009, we're talking about 2,300 customers, $2.3 billion of business that we pulled away from our competition, with 60% of that Oracle and 30% Hewlett-Packard. We've had growth in the UNIX business now for 2 quarters in a row, 8% in the first quarter, 5% in the second quarter, all of that growth was driven by IBM. And if you look underneath it, not only are we gaining very good key pSeries performance, from strong deals with the major markets, but boy, we're getting really strong performance in growth markets. So within the growth markets, we're expanding that platform into new customer sets. So I think the pSeries is going to be an ongoing source of strength. And when you kind of divide it down by the elements, we had more than 20% growth in the high end of pSeries, the entry model pSeries, I mean that more than doubled year-to-year. So it's a pretty strong play. It's going very well in the marketplace. And I think we've done a good job versus competition, but we've also done a good job as we expand that marketplace, especially in growth markets.

The next question comes from Robert Cihra with Caris & Company. Robert Cihra - Caris & Company: Kind of similar, I guess, to the last question but on mainframe, just obviously, you're having a great up cycle here, but the comps get a lot tougher in the second half. I guess, I'm just curious if your thoughts, if you feel this is simply product cycle, how long the product cycle will go for, or do you think there really is kind of structural mainframe strength that maybe there is some growth to this market beyond cycling, any sort of sense you have on that?

Well, we, as you pointed out, I mean, we had a really powerful quarter in our mainframe. I mean, goodness gracious, when you're up 61%, I mean that's a pretty powerful quarter in the mainframe business. And as you look at those mainframe new customers that we've brought to the platform was zEnterprise, I mean 68 new customers. That's 68 new flags we planted that are going to be a source of business on financing and software, services, all down the road, so it is a very good indication. Now it's not that different from a typical mainframe cycle, the front end of the mainframe cycle defined by new placements and new placement growth as we go into the back half of the cycle. It's more defined by microcode upgrades, less revenue, but more profit margin performance. As we go into the second half of the year, we do start to wrap on that substantial performance that we saw out of the mainframe last year. But for the overall momentum that we see in the STG business across pSeries, which grew 12%; xSeries up 15%; Storage up 10%; Total Services up 20%, we see, again, double-digit profitability from our hardware business in the third quarter. And a difficult comparison going on to fourth quarter, albeit, but a very, very strong year from the unit.

The next question comes from Mark Moskowitz with JPMC. Mark Moskowitz - JP Morgan Chase & Co: Mark, I want to come back to the software business. I wonder if you can give us a little more color about what's driving this impressive growth. Clearly, IBM is tracking at or above market now for consecutive quarters with respect to software, which is a good thing. So just trying to get a sense, how much of that could be driven by maybe some transitory benefits, either from competitor displacement or as you talked about earlier, the Oracle-Sun displacement versus just a broader trend where you're just winning new customers in general?

As I look at the momentum that we're seeing across the software business, we do have advantages in the marketplace that I believe are playing out. First of all, we don't go to the marketplace with just the software business. It's a very strong, robust software business, but it has this terrific linkage into our GBS consulting business and terrific linkages into the hardware business. So we now can advance those key strategic themes. And those strategic themes are really important to our ongoing business equation. So what we're really focused on is how we're driving software through those key plays of Smarter Planet, business analytics, cloud computing, acceleration in these new opportunity spaces. Underneath the software, again, the way I would look at this, software now has the opportunity to continue to expand of the new placements, the new flags that we have planted on a global basis in our hardware base of business. So it's not as if the minute you close that hardware deal, all your software rolls into the account. That software rolls in over time, and it has opportunity from those new placements. Our real focus is on driving those key strategic plays consistent with our 2015 roadmap.

The last question comes from David Grossman with Stifel, Nicolaus. David Grossman - Stifel, Nicolaus & Co., Inc.: Mark, you seem more optimistic about Europe, and if, in fact, that's an accurate read, can you help us better understand the need to take another rebalancing action in Europe after a similar action taken in the first quarter?

Well, let's -- I do feel that we're in a more stable position in Europe. The growth rate in Europe went from 2% to 3%. Within that, we returned to growth in Germany. We returned to growth in Italy. We've got some very strong plays in Europe. Our business, though, is a business of resources and capability, and we're constantly refining that mix of capability through workforce rebalancing. That's simply a part of our business model and the ongoing equation, and that will continue through all businesses and all years, I think. So let me take this opportunity now to just make a few comments as we wrap up the call. So this quarter, we continued our strong performance. Revenue growth at 12% was driven by our transaction businesses, with hardware and software, both up 17%. We had fantastic performance across our growth initiatives, Smarter Planet, business analytics and cloud, and, of course, our growth market countries, which were up 13% and grew 10 points faster than the major markets. We delivered 18% growth in operating EPS this quarter and 19% for the first half. We're exiting the second quarter with a lot going for us, a strong systems portfolio, continued momentum in software, growth in services backlog with a lot of opportunity in growth markets, momentum in all of our key growth plays and a very strong balance sheet. We've taken our expectations for operating EPS up to at least $13.25. That's up $0.25 since January. So as IBM enters its second century, we have our eye on delivering performance over the long term. And the first half of 2011 is a good start towards at least $20 of EPS in 2015. So thanks for joining us, and now, as always, it's back to work.

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