Patricia Murphy - VP, IR Mark Loughridge - SVP and CFO

Toni Sacconagh - Sanford Bernstein Ben Reitzes - Barclays Steve Milunovich - UBS David Grossman - Stifel Nicolaus Bill Shope - Goldman Sachs Mark Moskowitz - JPMorgan Keith Bachman - Bank of Montreal Katy Huberty - Morgan Stanley Jim Suva - Citigroup Chris Whitmore - Deutsche Bank

Welcome and thank you for standing by. (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 CFO, Finance and Enterprise Transformation. Thank you for joining our third 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.

In the third quarter, we reported $24.7 billion in revenue, expanded gross pretax and net operating margins and increased operating earnings per share by 10% to $3.62. For the year, we're maintaining our full year 2012 expectation for operating EPS of at least $15.10, that's up 12% over last year. Looking at our third quarter revenue by geography, Europe was fairly consistent with last quarter, Japan's revenues stabilized, the BRIC countries in total performed well again, but North America declined. When I look at our skew of business in the quarter, through the first two months, our revenue was fairly consistent with our second quarter performance. The third month of the quarter was more challenging. This quarter we delivered double digit operating earnings per share growth driven by our strength in our solutions offerings, a solid annuity base and our ongoing work on productivity. First, we continue to drive very good results in our solutions offerings across software and services that address key demand areas like Smarter Planet, business analytics and cloud. Second, our annuity businesses which represent about half of our annual revenue and 60% of our profit provided a solid base of revenue and profit. And third, we're continuing to execute on our productivity initiatives on track to deliver $8 billion of productivity over the 2015 roadmap. The benefit from these initiatives together with our mix to more profitable businesses helped to drive our margin expansion. Now before I get into the financial metrics, I want to remind you that this quarter we closed the sale of our Retail Store Solutions point-of-sales business to Toshiba TEC in most countries. The transaction results in a loss of revenue in profit for the divested operations, a gain on the sale and an impact to our tax rate. As we go through the presentation, I will clarify the impact of each of these. In the quarter IBM's revenue was down 5% including a currency headwind of nearly 4 points. At constant currency we were down 2% or down 1% if you normalize for the RSS divestitures. But in spite of this revenue decline we had solid operating profit growth with pretax income up 7% and net income up 5%. Our margin expansion was driven by our productivity initiatives, improving business mix and the overall currency dynamics. This quarter we expanded operating gross margin by 1.2 points with about 60% due to improvements in margins and the balance from mix. With good expense management we improved operating PTI margin by 2.5 points. This quarter our tax rate was up over 1 point year-to-year. The increase was driven by a higher tax rate on the gain from the sale of our RSS business. We now expect an operating effective tax rate excluding one-time items in the range of 24.5% for the year. Bottom-line, we delivered operating EPS of $3.62 which was up 10% year-to-year. When you look at the year-to-year drivers of our operating EPS performance the 5% decline in revenue at constant margin impacted profit growth by $0.17 per share. Margin expansion was the largest contributor to our growth. Within that, the gain on the RSS divestiture contributed $0.23, gross margin expansion added $0.19 and our expense productivity another $0.16. On the other hand, we did have an increase in our workforce rebalancing activity for an impact of $0.24. Our ongoing share repurchase program contributed the balance at a level fairly consistent with the first two quarters of the year. As you can see the dynamics are very similar to first half performance. Now I will get into the third quarter details starting with revenue by geography where I'll discuss the results on a constant currency basis. America's revenue was down 3% with declines in both the U.S. and Canada. In North America, software was up 4%, services was down and we had a double digit decline in hardware. With revenue performance relatively consistent with last quarter, EMEA was stable. Looking at the performance by country, Germany and Spain grew; the U.K. was flat, while France and Italy declined. Turning to Asia Pacific last quarter, I said that I expected our business in Japan to stabilize. This quarter our revenue in Japan was flat year-to-year, so certainly an improvement over the last several quarters. We had good performance in both Europe and Japan given the environment, and our growth market countries, which we refer to as GMU, the BRICs had another good quarter. Combined, they were up 11%. We had double digit growth in Russia, which was up 11%, India up 13% and China up 19%. Brazil, however, was down 3%. Looking beyond the BRICs, Australia and Mexico were down double digits this quarter, while most of the other countries continued to do well. In fact, this quarter 35 of the growth market countries grew at a double digit rate, reflecting ongoing broad-based strength. Looking at IBM revenue and gross margin by segment, our total services revenue was flat as modest revenue growth from our backlog was offset by impacts from shorter-term and volume related activity. Software performance is driven by double digit growth across our solutions area like business analytics, commerce and social business. Our Systems and Technology revenue declined each month though performance in September improved as we introduced our Next Generation System Z. Turning to gross profit, our operating gross margins improved 1.2 points, driven by a combination of margin expansion in both services segments and an improving segment mix due to the relative performance of software. 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 down 10%. The primary driver was currency which drove 8 points from both translation and hedging dynamics. Acquisitions over the last 12 months drove 3 points of expense growth, so consequently our base expense was better by 5 points. Now I'll comment on a few expense items. SG&A includes a pretax charge of over $400 million for workforce rebalancing activity which at IBM's average tax rate impacted net income by about $310 million. Other income and expense had two drivers; first, of pretax gain for the sale of a Retail Store Solutions business, and second, we had a year-to-year impact from our hedging activity. The pretax gain for the RSS sale is almost $450 million with a discrete tax rate on that gain based on the countries closed the transaction contributed about $280 million of net income. Turning to the hedging activity, we hedge our major cross-border cash flows to mitigate the currency volatility in our global cash planning. Last year hedging programs generated losses resulting in an impact to expense of about $175 million, while this year the programs generated gains of about $100 million in expense. Roughly 90% of our hedging activity this quarter was in expense, the balance is in cost. As you know, this hedging activity can't be looked at in isolation, as it mitigates translation impacts throughout the P&L. Looking at how all of this translates into pretax margins by segment, we've provided here a normalized view of the profit and margin dynamics by removing the workforce rebalancing charges in both years to give you a better view of the underlying operational performance of the segments. On this basis, you can see good profit growth and margin expansion in Global Technology Services, Global Business Services and Software. Now let's turn to the segments starting with services. The two services segments delivered $14.5 billion in revenue and excluding workforce rebalancing charges grew pretax profit 9% and expanded pretax margins by just over 2 points. Backlog was $138 billion up 1% year-to-year. We continue to see strong performance in the growth markets with backlog up 15% at constant currency and globally transactional backlog was up 7% at constant currency. Turning to the two segments, in Global Technology Services revenue was $9.9 billion down 4% as reported and up 1% at constant currency. GTS outsourcing revenue was flat at constant currency. As we have previously discussed there are three primary sources of revenue in outsourcing. First, revenue from backlog, which makes up the majority of the revenue in the year. Second, revenue from new client signings within the year; and finally, revenue from base growth, which comes from new business sold into the existing accounts and from volumes generated within the quarter. This quarter we continue to get revenue growth from our backlog. However, we did see a decline in revenue from base growth after growing through the first half. Integrated Technology Services revenue was up 3% at constant currency with the growth markets up 13% at constant currency. Global Technology Services delivered flat pretax profit growth in the quarter though excluding workforce rebalancing charges pretax profit was up 9% with 2 points of margin expansion. This quarter there are a number of drivers of margin expansion. First, increased contribution from the growth markets, which continue to drive higher gross margins than our major markets; second, lift from our continued focus on automation and process primarily through our enterprise productivity initiatives and finally, we continue to benefit from the work GTS has done to improve performance in a select set of lower margin contracts within strategic outsourcing. Turning to Global Business Services, revenue was $4.5 billion, down 6% as reported or down 3% at constant currency. Looking at revenue from a geographic perspective, the growth markets continued to drive the strongest performance. Japan returned to growth this quarter with revenue up 2% at constant currency while North America and Europe are both down 6% at constant currency. Looking at the GBS business by offering, the growth initiatives continued to drive strong growth. We had solid double digit growth in business analytics, Smarter Planet and cloud. Together these initiatives represent about a third of total GBS revenue. So, we continue to get great traction in these growth initiatives and we're seeing the benefits across IBM. The overall growth rate of GBS is being impacted by declines in some of the more traditional package application projects. Turning to profit, GBS pretax income declined 5% year-to-year. However, when adjusting for workforce rebalancing, pretax income grew 9% and pretax margin expanded 2.5 points. Margin expansion benefited from prior year quarters workforce rebalancing, yield from enterprise productivity initiatives and a help from currency. Software revenue of $5.8 billion is down 1% and up 3% at constant currency. Through August, revenue was up 5% at constant currency. However, performance in September was weak particularly in North America and the growth markets. Our portfolio of solutions offerings was up double digits year-to-year while the complementary infrastructure portfolio was essentially flat. Now, let me take you through the drivers for the brands. WebSphere grew 5% at constant currency and continue to extend its market-leading position. We had good growth from our commerce offerings which target not only the CIO, but also the CMO, so we're reaching new buyers. This performance was bolstered our recent acquisitions of Tealeaf which enables clients to analyze interactions on websites and mobile devices. Information management was up 3% at constant currency. Performance was driven by strong growth in our business analytics offerings, led by Algorithmics which together with our deep analytics expertise helps our clients manage risk and better enable faster decision-making. Just last week Software announced new members of PureSystems family, the IBM PureData Systems. These expert integrated systems are optimized to deliver high-performance data services for transactional and analytics applications. Tivoli software was up 9% at constant currency and gained share. Revenue from our storage portfolio was up 14% at constant currency reflecting the value of stored software. Tivoli Security was up 9% at constant currency driven by Q1 Labs which provides next-generation security intelligence. Lotus declined 7% at constant currency in the quarter although Notes declined we had strong performance in our social business offerings. In the third quarter we announced the acquisition of Kenexa which further expand our solution portfolio for social business. We expect Kenexa to close late in the fourth quarter. Software pretax income was $2.4 billion, up 6% from last year. Normalized for the high level of workforce rebalancing, software pretax income was up 10% and pretax margin expanded 3.5 points. Systems and Technology delivered revenue of $3.9 billion down 13%. Adjusting for the divestiture of Retail Store Solutions, revenue was down 11% or 9% at constant currency. System Z revenue declined 19% at constant currency and MIPS declined 2%. Late in the third quarter we started shipping the zEnterprise EC12 server which delivers up to 25% improved application performance and up to 50% enhanced capacity making it the fastest and most capable enterprise system to-date. This new mainframe will be ramping through the fourth quarter. Power revenue was down 1% at constant currency. We had strength again this quarter in Power high-performance computing solutions. We continued our success in competitive take outs. This quarter we had over 260 competitive displacements, which resulted in over $200 million of business which came almost equally from HP and Oracle Sun. This initiative helped drive our 18th consecutive quarter of share gains in Power. Early in October we announced a new POWER7 plus based servers. These new systems offer performance boosts of 30% to 40% compared to prior versions and new capabilities for cloud and security. System x revenue was down 3% at constant currency. Our storage hardware revenue was down 8% at constant currency, while storage software which is reported in Tivoli was up 14% at constant currency. We continue to see value shifting to software. Earlier this month, we announced the new high-end DS8070, which enables clients to take full advantage of the increased performance, in our new high-end enterprise servers. We are expanding our storage software capabilities as well. Last week we announced the Virtual Storage Center, which integrates multiple software solutions that deliver fast backup and restore in a virtualized storage environment. As you look to the fourth quarter we have significantly enhanced our systems portfolio with our new zEnterprise EC12 mainframe, Power systems based on the new POWER7 plus architecture and new storage systems including the high-end DS8870. Across all of our segments, we're continuing the strong performance in our key growth initiatives. In the growth markets, we're expanding into new markets, building out IT infrastructures and focusing on targeted industries. For the year, revenue was up 7% at constant currency and we have gained share. Our Business Analytics Solutions help our clients to identify, manage and predict outcomes by leveraging huge amounts of data. Our broad portfolio of Analytics Solutions was up 14% in the third quarter, led by our GBS consulting practice. Our SmartCloud portfolio addresses the full scope of enterprise client requirements with strong growth across the offerings from private cloud to public cloud to our industry-based solutions. Cloud revenue so far this year has already exceeded our full year revenue for 2011. All of this comes together in our Smarter Planet Solutions. Through the third quarter, we had revenue growth of more than 20% in the Smarter Planet portfolio, with traction and our smarter commerce and industry solutions. When you look at our offerings in our Business Analytics, Cloud and Smarter Planet about half of the revenue was software. So, the success we're having in these areas is improving our business mix and our margin. Turning to cash flow, we generated $3.1 billion of free cash flow in the quarter. Now, let me walk through the year-to-year drivers. Our operating net income was up $200 million year-to-year and GAAP income is flat. One of the non-operating items this quarter is a charge for U.K. pension. On October 12th, the U.K. Court issued a ruling regarding an IBM U.K. pension plan. We took a pretax charge of approximately $160 million or $125 million after tax, though the charge impacted GAAP net income, it did not impact operating income and since it's a non-cash item, it's reversed in a free cash flow analysis. Looking at the items that impacted cash year-to-year, our cash tax payments increased $300 million. We had an increase of almost $100 million for our workforce rebalancing payments and our capital expenditures were also up year-to-year. So, though operating profit was up $200 million, free cash flow was down almost $350 million based on increased tax capital and restructuring payments. Through the first three quarters of the year our free cash flow was up $1 billion year-to-year to $8.7 billion. Our growth in net income was partially offset with increased capital investments. As I mentioned previously, in the first quarter of last year, our free cash flow was impacted by income tax payments driven by audit settlement activity. Looking at the uses of our cash through September, we spent $2.3 billion to acquire 10 companies including Texas Memory Systems which closed in the third quarter. We returned almost $12 billion to shareholders this year. We paid out over $2.8 billion in dividends and spent $9 billion in share repurchase to buyback almost 46 million shares. At end of the third quarter, we had $6.7 billion remaining in our buyback authorization. Turning to the balance sheet, we ended the quarter with a cash balance of $12.3 million. Total debt was $33.7 billion of which $23.3 billion was in support of our financing business which is leveraged at just over 7 to 1. Our non-financing debt was $10.3 billion and our non-financing debt to cap was 36% consistent with June. We continue to have a high degree of financial flexibility and our balance sheet remains strong to support the business over the long-term. Wrapping up our discussion on the quarter, we delivered 10% operating EPS growth and $3.1 billion in free cash flow. Within our operations, we had solid contribution from our annuity businesses and strong performance in our growth initiatives, Smarter Planet, Business Analytics and Cloud. Our productivity initiatives helped to drive margin expansion and our solid balance sheet and cash generation supported shareholder returns. As we move into the fourth quarter we have new product introductions in our Systems portfolio not just in System Z but also in Power and storage. We have just announced PureSystems offerings that leverage our software capabilities and late in the quarter we expect to close the acquisition of Kenexa. Taking all of this into account we are maintaining our full year 2012 expectation for operating EPS of at least $15.10. This keeps us on track to at least $20 of operating EPS in 2015. Now Patricia and I will 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 ask you to refrain from multipart 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 Toni Sacconagh with Sanford Bernstein. You may ask your question. Toni Sacconagh - Sanford Bernstein: I was wondering, if you could provide some color, commentary around the quarter. Relative to your expectations revenues were short, your tone I think sounded a bit more cautious and you made several references to the U.S. being weaker and the third month of the quarter being more challenging. So specifically on those latter two points, can you help us understand what you think happened? Is this being driven by macroeconomic issues? Are these IBM execution issues and if we look forward, are you expecting either the execution of the macro issues to reverse or improve in the fourth quarter?

So, if you look at the third quarter performance, we did start off the first two months to the quarter on a stronger trajectory than we saw for the full quarter as we saw a fall-off in our growth rates in the third month of the quarter. Now, within that, third month phenomena, I would point to look at it from a brand perspective that was really a fall-off that we saw in our GBS business, number one, and our software business, number two, and from a geographic perspective, it was really a fall-off that we saw in North America and our growth markets unit which we refer to as GMU. Now, elementally, as you walk down those, the software content, I would attribute to a handful of deals that fell out of the quarter. Frankly, we thought we had those, right through the end of the quarter. They rolled to the fourth quarter. They would have accounted for about 2 points improved performance, which would have been more consistent with what we saw in the first two months of the quarter and those software deals were also part of the GMU performance. So, just as a software business would have performed better in the quarter, with the rollover of that handful of deals so would our GMU performance. Now, as you look at our growth market performance, in addition, they were impacted really by a couple of very large countries that had disappointing performance on a year-to-year basis. So, that would be Mexico and Australia. They are both down double digit. Our BRIC countries as a whole were up 11% and within that plus 11% positive performance very consistent what we've seen historically. Brazil was in fact down 3% but on the other countries Russia was up 11%, India was up 13% and China was up very strong 19%. Now let's look at the countries in GMU, outside of the BRIC countries. Again if we exclude Australia and Mexico, where we had the double digit decline, the balance of the countries outside of BRIC grew double digit, in fact we had 35 countries with double digit performance. So, I would not attribute some broader trend to either of those perspectives. In our GBS business, GBS once again produced very strong results on a solutions base, but we did have a more challenging environment for the more traditional packet solutions. The other solution content is linked to our key growth initiatives, so it's very important that we do well there. So, now if you take that data forward in the fourth quarter, I think on the software business and the hardware business outside of the impact of the Retail Store Systems divestiture, we should be seeing mid-single digit performance from both of them and driving double digit profitability. I think our services business will have a revenue base similar to what we saw in the third quarter, but let me add you know the services profitability that they each drove at 9% growth was right in midpoint of their model performance, and with that as well as the new announcement content that we're getting out of our hardware business, we have new z. We have a new POWER7 plus entry in our high end of our P Series. We have got new storage content. We feel quite confidence in the at least $0.15 for the year.

Thanks Toni can we go to the next question please.

The next question comes from Ben Reitzes with Barclays. You may ask your question. Ben Reitzes - Barclays: Mark you talked a bit about what could get better in the fourth quarter in terms of revenue. I believe you said the hardware and software revenue growth rates. Can talk about what could get better in the fourth quarter and even next year in costs? You had a very larger well put in perspective, your workforce rebalancing for us and what costs levers you have going into the fourth quarter and beyond please?

Sure. I think the overall opportunity we have in costs really goes back fundamentally to the business model and how we drive that business model over longer periods of time. The workforce rebalancing that we have done this year in total that was about $800 million predominantly outside the U.S. and should have a payback of about 15 months. Now we are constantly driving workforce rebalancing to tune our population to the best growth opportunities that we have. If you look at the overall cost and spending improvement that we saw in the third quarter, the first point I would make is that, in a period of currency headwind that impact that that has in the overall translational effect of currency that's mitigated and partially offset obviously by the hedge. You could kind of see that in the margin performance in our business. Our gross profit margins were up 1.2 points while our PTI was up 2.5 points and that differential a large part of that is the offset of the hedge helping to offset the impact that we saw on the revenue line and this flow through to gross profit margin. The 1.2 points we add in gross profit that had a very solid mix component, about 0.4 points from mix and a very solid spend component, and I think both of those are strong ongoing plays that we should leverage as we go into the fourth quarter and 2013. That mix component is predominantly the mix that we see in the software that we've been driving for a decade and the spend efficiencies are part of that overall $8 billion plan that we have for 2015 roadmap. Obviously, to break that down by year, its $1.6 billion by quarter is about $400 million if we get 30% to 40% to the bottom line, that's an advantage about $150 million. The balance, I'd remind you, that really goes to making our offerings and our products more competitive. On a price basis, it gives the ability to move spend to more aggressive growth opportunities.

Thank you Ben can we please go to the next question.

Our next question comes from Steve Milunovich with UBS. You may ask your question. Steve Milunovich - UBS: Given that the number of month weakness, could you talk a bit more about what customers are telling you in terms of the fourth quarter, I have seen some CIOs. There is some concern about not just the election, but fiscal cliff and questioning whether we're going to see the normal budget flush. Maybe you could tie into that, what you're seeing in verticals. It looks like finance in public slowed a bit, but it actually held in relatively well, so do you think there is much downside risk going forward?

I got to admit this was cutting out a little bit, but I heard the substance to your question. So, let me answer that. I think as I'm not going to kind of comment on the environment as if I were an economist but I can you tell the facts that we saw in the substance of the business will take time to describe so far. When you look at the overall issue of a fiscal cliff and a budget flush, I got to be honest, Steve, I kind of react to the position because I don't think it will be responsible kind of a performance for either public or private sector. I mean if we have spending requirements, I don't think people would rollout and maximize their spend rate this budget period to the expense of the overall spend requirements. I know if it was in my business and one of my controllers, the CFO was 'driving a budget flush' I'd be driving them out of the business. So, certainly the controllers that I have met in government, they are very responsible, they are driving to do exactly the right thing and if they see spending pressure, they are doing their work to help respond to that. To me, on a global basis, we look around the world, governments are under pressure. The spending is under pressure. I don't think this is news to anybody, but I think Steve from my perspective when you look at this proposition that there will be a budget flush to me as I had said earlier, I kind of react to that because it implies I think that they wouldn't be responding to the base economic challenges they have and I don't think that's the case.

Thanks Steve. Can we take the next question please.

The next question comes from David Grossman with Stifel Nicolaus. You may ask your question. David Grossman - Stifel Nicolaus: Mark, I'm wondering, I'm not sure if I heard you right, but I though you said that the outsourcing and the transactional backlog were up this quarter on a constant currency basis. Can you help us reconcile that with the continued loss of revenue momentum within the services unit?

Sure. If you look at the overall backlog, our total backlog for the quarter was up 1% within that our outsourcing backlog was relatively flat. Our transactional backlog if you just do the math was up 7% now. There are some dynamics that are pretty compelling within that. So, when you look at that outsourcing backlog and you break that down by unit you see much more momentum in our growth markets. So, if you take the total backlog for the business and break that down between major markets and growth markets the backlog in our growth markets is up 15% and that's kind of an ongoing momentum that we have seen in our services business in the growth markets. If you break this then down by unit, on the GTS base of business, I think they had a pretty good quarter there and actually the GTS business is up more than 1% as we enter the fourth quarter. I would also analyze the revenue performance in the quarter and remind you that we did take this very specific set of actions on the weak tail of the profitability distribution of our contracts and as we took that action on the weak tail that enhances and improves overall profitability. You saw it in the first nine months of the year of this year with the strong performance that we got out of the GTS business but it does have an impact on the other side to revenue. We knew that and we made that trade-off because our objective is to drive real gross profit and real profitability in those contracts in the backlog. It's not that hard to go through the services business and drive big signings but you have to live with that decision for a number of years in relationship with your customer. Our objective is to establish a strong relationship right up front with a profitable set of contracts that we know we can deliver over the longer term. So, I think I would caution you from looking at that GTS business, you got to recognize there was some revenue impact as we optimized to profitability.

Thanks Mark. Let’s go to the next question.

Your next question comes from Bill Shope with Goldman Sachs. You may ask your question. Bill Shope - Goldman Sachs: I have a question on the services segment as well. We're obviously seeing a pretty big dislocation in restructuring effort at one of your largest services competitors and more than we've certainly seen in a while in this sector. Is that having any noticeable impact on the competitive landscape, in outsourcing in particular, are you expecting to see any competitive tailwind as we go into 2013?

Well, I do think as we look at the capability that we're able to put on the field, we've got a pretty strong hand of very disciplined and experienced managers and executives, employees in the services business and I got to say the services business is not like the software business. It's not like the hardware business. It is a specific skillset. So, to the point that there is an impact on one of our competitor's profile that certainly should provide us opportunity, but when you look at the kind of broader trends that I think are more significant. I think you got to look at the opportunity we're seeing in the growth markets. Again, when we look at an opportunity set in growth markets, where we have about 20% of our backlog to be up 15% that's a pretty strong statement at very strong levels of profitability where we want to see where we can really put talent on the field, differentiated from our competition, there are lot of examples in the growth markets.

Thanks Bill. Let’s go to the next question please.

The next question comes from Mark Moskowitz with JPMorgan. You may ask your question. Mark Moskowitz - JPMorgan: When I come to Software business for a second here if we could, I know IBM has been pretty active hiring a lot more sales force individuals that capacity, does that have any impact on business in terms of visibility or some of these deal push-outs related to the piece on the sales force?

No, I mean, as we hire, we're going to continue hiring as we go through the fourth quarter. We take that resource and we train it and make it more productive and drive it into your overall sales organization, now that period of bringing that sales resource up to speed takes some time, but underneath that if you look at our Software business, the solutions contents underneath it had a very strong quarter, up double digit once again and the solutions contents is both organically generated as well as the implementation of the integration with our acquisition profile and that's been very strong across the portfolio of offerings. It was a little more challenging and new to performance on the infrastructure side, but as we look at the fourth quarter. I think we have opportunities across both and so again adjusting for that handful of deals in Software that fell out of a quarter, we were seeing performance more consistent with what we saw in the first two months of the quarter and I think we have the opportunity to close those deals and get back on a stronger trajectory as we go into the fourth quarter. So I think we have got a good software play here and I would look for them to generate mid-single-digit revenue growth in Q4.

Thank you Mark. Let’s go to the next question please.

The next question comes from Keith Bachman with Bank of Montreal. You may ask your question. Keith Bachman - Bank of Montreal: I wanted to ask you about GBS in particular and how you think growth can proceed as we look out and the context of the question is GBS on a constant currency basis has been down 1% each of the first two quarters, was down 3% this quarter on frankly an easier compare. You mentioned that Japan had stabilized, which is usually a positive impact on GBS. So it continues to disappoint. How does growth improve? What causes improve? Or is this the right kind of run rate for GBS as we look out over the next few quarters?

I don't disagree with your comments. I can provide more of a background. Do think we certainly do have the opportunity to improve. I think the business did what we said we're going to drive in Japan. We did stabilize our business in Japan. I think the team in Japan did a nice job. What we really wrestled with a little here was the challenge that we had in those more traditional packet solutions and they were generally kind of third-party offerings and HR supply chain or ERP. On the flipside of the coin though we did a great job in GBS on those key growth initiatives and the solutions attached to those. So on one hand I would have liked to have seen, I know the team would have liked to seen, better performance in those traditional packet areas and we're going to be rebuilding capability as we go in the fourth quarter and 2013. But I thought they did a very nice job on the solutions business, which is so important because its cuts across our business profile into hardware, software and services business. Let me remind you as you all know, those solutions drive about 50% mix in overall software business. So, we can do better as we work on that, traditional packet solutions. But I think they deserve a lot of credit for the work they have done on the solutions business.

Thanks Keith. Can we go to the next question please.

The next question comes from Katy Huberty with Morgan Stanley. You may ask your question. Katy Huberty - Morgan Stanley: Can you talk a little bit more about what you expect out of the recently announced server and storage product, specifically are you looking for growth across all the server products in the fourth quarter? Do you think growth can carry into next year and is there a structural shift towards better margins just given that your innovation seems to focus on the higher margin categories within there?

Sure. I would break the new announcements into kind of three categories, the first two we are introducing the new high end POWER7 plus and I think that has a lot of key technology offerings. It's only part of the product line, however, but it is the high-end. So, we look at that as real margin opportunity within the mix of their product line. Likewise, in the storage business, we're announcing the new high-end content introducing POWER7 to our architecture and we think that likely has real opportunity in the high-end for not just revenue, but margin contribution within their product line. But clearly the big announcement for the quarter is the new z Series and as we look at the new z Series, now we have a full quarter of opportunity. In the third quarter, we're really only shipping the new z for about 11 days in the very backend of the quarter and in front of that, ship date, we only had about three weeks of selling time, so now is the opportunity for full quarters work, and as I look at it, I think they have a very strong case on a Hardware basis for the new z platform to generate 20% to 30% growth. So, within all that, that gives us confidence within our objectives that the hardware base of business are to be generating about 5% revenue growth, our of the impact of divestiture of the Retail Store Systems content. Now that divestment has about a 4 point impact to the hardware base of business and about 1 point impact to IBM. But I think we do have good hand on that content and will see it improve the overall hardware performance not just in North America but as we go through the global rollout as well.

Thanks Katy. Let’s go to the next question please.

The next question comes from Jim Suva with Citigroup. You may ask your question. Jim Suva - Citigroup: The question I have is on your bookings, they were up very meaningfully here at 8% year-over-year, the constant current up 11%. As you look into that, just curious if there is anything in that number that was one-off that was something it maybe slipped in from Q2 last quarter or pulled in from Q4, any special big one-time special booking and any changes of durations, just that we should be aware of?

No I think that was capitalizing on the opportunities with the advantages that we can bring to the marketplace again. If you look at the backlog contents and I think that's the best metric to use here while backlog was up 1% overall it was up 15% in our growth markets. If you look at the components of total backlog between outsourcing and transactional, outsourcing is relatively flat while transactional is up 7%. I would not say there were some kind of very neat contracts that were inconsistent with our overall rollout contributed to that. I think one of the very powerful trends that we do see is how well our content and our capability plays in new opportunities as we look at growth markets. I think that's the more substantial trend line we see here.

Operator let’s take one more question please.

Thank you. The last question comes from Chris Whitmore with Deutsche Bank. You may ask your question. Chris Whitmore - Deutsche Bank: I wanted to come back to services margins one more time if I could. What I'm really trying to understand here is the dynamic between the pruning of some unprofitable contracts, is that nearing completion? Is there more room to the deal on the pruning side? Then secondarily most of the workforce rebalancing efforts targeted at driving services margins and if so can you frame a medium-term margin target for the services business there in 2013? Do you expect margins to improve further from these levels?

Yes. So let's look at the overall margin dynamics for the Corporation. When you look at it we are driving that very focused piece of work that Linda Sanford took you through at the Analyst Meeting to generate about $8 billion of spend take-out across the business and as I'd said earlier if you just kind of mathematically break it down to about $1.6 billion a year or $400 million a quarter that content is in some respects outside of the business unit purview and it gets applied to those business units based on their kind of metrics in participation. So in other words if we take big spend rate out of the back office support organizations. The business units are the beneficiary of that spend take-out but they didn't have to drive a lot of the content since we manage on a globally integrated enterprise. That's a very structured play that we are driving not only across our back-office content but now into systematic areas that span across our processes and also spend rates within business units that collectively have more opportunities. So, we intend to continue that overall spend dynamic and as I had said earlier our services business will certainly be a beneficiary there. Now in your question about the overall workforce rebalancing that we do just given the fact that the services business have the largest share of our overall population of course they are going to be the beneficiary of that as well. But to me on the longer-term basis, I think that the model base that we provided as part of the 2015 roadmap is the best criteria, the best content that you can see as you look at that long-term run rate. So if you look at how we would attempt to implement those as we go into 2013. I mean believe me, this team is going to look at the actuals that we drive in 2012, we are going to draw a plum line to that 2015 objective and then we are going to base our profitability, our free cash flow all of those content in our budgets to support it as well as our compensation. So that's how we will be driving that. So let me just take a moment now to wrap up the call. Despite facing challenges we did deliver a 7% growth in profit, 10% growth in our operating EPS and I think consistent with the last conversation that performance reflects our disciplined approach to delivering profit growth. For the quarter we had 10% growth in our software profit, 9% from our services businesses, both of which benefit from a large annuity base. We are continuing to move up the value chain shifting our portfolio to more strategic areas. Now we had continued momentum in our growth initiatives both Smarter Planet, Business Analytics as well as our Cloud, were all up strong double digits and this quarter we completed the divestiture of our retail store solutions business. The benefits from our ongoing work on productivity showed through to our margin and we are returning value to our shareholders through share repurchase and dividends. So looking forward as we enter the fourth quarter, as always we need to execute and we need the growth market for the software to close those rollover deals that we discussed and then drive an improved trajectory in the fourth quarter. We need GBS to drive more of that traditional packet transactions content while maintaining the good momentum they have shown in our growth initiatives. I think North America needs to capitalize on the great hardware product lineup we have for the fourth quarter with the new z, the new p and storage to drive transactional sales performance in the fourth quarter. So based on this we are confident in our plans to achieve at least $15.10 of operating EPS for the year. That's up 12% from last year and on track to at least $20 in 2015. So once again thanks for joining us and now as always it's back to work.

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