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, Vice President of Investor Relations for IBM. And I want to welcome you to our first quarter 2019 earnings presentation. I'm here with Jim Kavanaugh, IBM's Senior Vice President and Chief Financial Officer. We will post today's prepared remarks on the IBM Investor website within a couple of hours, and a replay will be available by this time tomorrow. Some comments made in this presentation may be considered forward-looking under the Private Securities Litigation Reform Act of 1995. Those statements involve factors that could cause our actual results to differ materially. Additional information about these factors is included in the Company’s SEC filings. Our presentation also includes non-GAAP measures to provide additional information to investors. We've provided reconciliation charts at the end of the presentation and in the 8-K submitted to the SEC. Before turning the call over to Jim, I want to remind you we recently made changes to our management system and our organizational structure. Our segment reporting for 2019 has been updated to reflect this business structure. We provided two years of historical financial information by quarter on these segments a couple of weeks ago, and this can be found on our investor website. And today, we will be discussing our first quarter results in this new segment structure. So, with that, I'll turn the call over to Jim.

Thanks Patricia, and thanks to all of you for joining us. In the first quarter, we delivered $18.2 billion of revenue with significant operating leverage. We delivered $2.2 billion of operating pretax income and $2.25 of operating earnings per share. And we have now generated over $12 billion of free cash flow over the last year with realization well over 100%. We had strong performance in offerings that help clients with their digital transformation and journeys to cloud. At the same time, we continue to take actions to optimize our portfolio, while investing to lead in the emerging high-value areas of the IT industry. You saw this play out in our results. Our Cloud growth accelerated to 12% at constant currency. Our Cloud and Cognitive Software was up 2% and our Consulting revenue was up 9%, also both at constant currency. We had significant margin expansion with operating gross margins up 90 basis points, driven by both services segments and we had solid free cash flow. Improving margin has been a focus for us and our performance this quarter is a result of actions we have been taking, not only our focus on higher value and portfolio optimization but also driving productivity and operational efficiency, especially in our services business. With this start to the year, we are maintaining our full year expectations for operating earnings per share and free cash flow. In the first quarter, our revenue was down less than a point year-to-year at constant currency, slightly better than our fourth quarter performance. Our reported revenue as expected includes a significant in currency headwind as always, all focused on constant currency performance. From a geographic perspective, our year-to-year revenue growth in the developed markets improved a couple of points sequentially, consistent with the expectations we discussed last quarter. That said we had weaker performance in the emerging markets in Asia Pacific, which impacted our overall revenue performance. Looking at our results by segment, we had continued revenue growth in global business services and in our Cloud and Cognitive Software. In GBS, as I said, we had another quarter of strong growth in consulting as we help clients with their digital re-invention. And we again expanded our margins in GBS. In our Software segment, growth was driven by our hybrid cloud offerings, security and solution areas like supply chain and Watson Health. In Global Technology Services, we're continuing to help our clients to implement and manage hybrid multi-cloud environments. This is evidenced in the increasing share of our backlog, which is now Cloud. At the same time, consistent with our high-value focus, we're continuing to take actions to optimize our GTS performance by exiting lower-value content. While this contributes to lower GTS revenue, we had higher profits, margins and cash contribution. Our Systems' revenue declined, reflecting the IBM Z product cycle dynamics and weaker performance in storage. Across our segments, clients continue to be focused on solutions that deliver innovation and growth. Though, as we mentioned last quarter, we're seeing an increasing bias towards engagements that provide productivity and predictability of spend. And so our results this quarter reflect our ability to deliver both innovation and productivity, helping our clients transition their business models to hybrid cloud. Our Cloud revenue growth in the first quarter accelerated to 12% with our as-a-service offerings up 15%. With this, our Cloud revenue has grown to $19.5 billion over the last year. Over the last several months, we've talked about the next chapter of Cloud, which focuses on shifting mission critical work to the cloud and optimizing everything from supply chain to core banking systems. To address this opportunity, enterprises need to be able to move and manage data, services and workflows across multiple cloud and on-prem. And they need to be able to address security concerns, data protection and protocols, availability and cloud management. This requires a hybrid multi-cloud open approach. And so we have been reshaping our business to address this opportunity, investing heavily to build capabilities across our business, like IBM cloud, IBM cloud private and IBM cloud private for data, the IBM multi-cloud manager, cloud garages, cloud migration services and cloud optimized systems. These are the innovations that are driving our $19.5 billion of cloud revenue. In the first quarter, we introduced additional capabilities that will accelerate hybrid cloud adoption, including Watson Anywhere, which makes IBM Watson available on premises, as well as on any private or public cloud and IBM cloud integration platform, which provides a standard way to integrate services and applications across multiple cloud environments. More broadly, we have built a framework of offerings to facilitate our clients' journey to the cloud. It is designed to help our clients across the four key stages of their cloud transformation journey, advice, move, build and manage. These offerings span our cloud and cognitive software, global business services and global technology services, leveraging the integrated value of IBM. And so we have a strong foundation for the addition of Red Hat. Together, we will be ideally positioned to help our clients shift their business applications to hybrid cloud, while addressing the issues I just mentioned around portability, management consistency, security, remaining open, which avoids vendor lock-in. This will not only enhance the growth of Red Hat business after closing but with all of IBM, as we saw more of our data and AI software on containers across multiple platforms and more of our services from app modernization to multi-cloud managed services. At IBM, we're investing and building capabilities to be ready to drive these synergies. We're moving through the regulatory process and continue to expect to close in the second half of 2019. Before getting into the financial metrics, I want to lay out the contributors to our year-to-year operating earnings per share performance, especially because there are a couple of larger items in last year's results that impact the dynamics. In fact, these larger items contributed $0.32 benefit to last year's earnings per share, which of course creates a headwind to this year's growth. And so looking at the drivers, as I said, our revenue was down less than 1% at constant currency. But with the stronger dollar, revenue was down 4.7%. At constant margin, revenue was a headwind of profit and earnings per share growth. Last year, we took pretax charges associated with the actions to realign our skills to key opportunities, and better position our systems cost structure. These together with the benefit of the actions and our ongoing operating efficiencies, resulted in strong pretax income growth and pretax margin expansion. Last year, we also had a large discrete tax benefit associated with an audit settlement. With a much smaller discreet benefit this year, tax was a significant headwind to our net income. And finally, a lower share count contributed to growth. Putting this all together, we had solid operating leverage and margin expansion, offset by $0.32 impact of last year's significant items, resulting in an operating EPS of $2.25. So now getting into profit and margin metrics, we continue to drive operating leverage, expanding both gross and pretax margins. Our operating gross margin was up 90 basis points. This was driven by strong performance in both services businesses, together up 160 basis points. We also had a year-over-year benefit from the charge we took last year in Systems, which was offset by the impact of the IBM Z product cycle. Our operating expense was better 11%, which resulted in a 2 point benefit in our expense to revenue ratio. Overall, we've been driving productivity in our business, including implementing new ways of working and leveraging automation and infusing AI into our processes. This drives operating leverage and provides flexibility to increase investment in areas like hybrid cloud, AI and Blockchain. But we have a few other drivers of our expense performance this quarter, including currency and lower workforce rebalancing charges mitigated by a lower level of IP income. Regarding currency, while a stronger dollar hurts the top line, it generally helps expense due both to translation and the benefit of hedging contracts. In the first quarter, currency helped our year-to-year expense by nearly 6 points. Much of this was reflected in other income and expense. In fact, the $200 million year-to-year change in other income and expense was entirely due to hedging benefits. Remember, these hedging gains mitigate the currency impacts throughout the P&L. Expense also includes the year-to-year reduction of over $500 million for workforce rebalancing, driven by last year's charge. And finally within expense, we absorb the lower level of IP income as it hurts our PTI growth by over $200 million. Putting this expense performance together with our gross margin expansion, pretax margin was up over 300 basis points. Our operating tax rate was 10%, including discreet. This is right in line with our all-in first quarter expectation of 10% to 11% we provided in January. And as I said earlier, this was a significant headwind to our net income growth year-to-year. Looking at our cash metrics, we generated $1.7 billion of free cash flow in the quarter, which is up about $350 million over last year. There's a lot of seasonality in our cash generation. And so looking over the last 12 months, we generated over $12 billion of free cash flow that's 114% of our GAAP net income normalized. I'll touch on the cash drivers and uses of cash a little later. And so now before getting into the segment performance, I want to spend a minute on an overview of our 2019 segment structure. As Patricia mentioned, we shared historical information on this new structure a couple of weeks ago. As our clients become digital enterprises, they need tighter integration between hybrid cloud and their data and AI platforms to unlock value. And so we recently made changes to our management system to more effectively address our clients' evolving needs and in preparation for the acquisition of Red Hat. The changes also better align our portfolio to the market and to underlying business models. The business changes resulted in three adjustments to our segment structure for 2019. First, we brought our Cloud and Cognitive Software together in one segment. Second, we combined our security services with security software, consistent with the way we are running that integrated business. And then finally, we moved the results for the businesses we're divesting to the other categories, to provide better transparency to the ongoing operational performance of our software and GBS segments. This concludes the pending sales of our collaboration and on-prem marketing in commerce software to HCL, the pending sale of the balance of our marketing and commerce software to Centerbridge and the just completed sale of our Seterus mortgage servicing business. And so looking at our new segments, we created the cloud and cognitive software segments, bringing software platforms and solutions into one segment. Within this segment, we'll report cloud and data platforms which bring together software for hybrid cloud management with data and AI platforms cognitive applications includes vertical and domain specific solutions that are built on cloud and data platforms. These offerings are increasingly being infused with AI and then transaction processing platforms, includes the middleware and database software that supports our clients' mission-critical workloads running on ZOS, as well as storage software. Looking at our services segments, the scope of Global Business Services segment overall is unchanged. Other than moving the divested mortgage servicing business to other. Global technology services is consistent with the services component of technology services and cloud platforms, excluding security services. And then finally, our systems and global financing segments are also unchanged. So now let me get into the segment results, starting with our Cloud and Cognitive Software segments, where revenue grew 2%. Our clients' journey to cloud and AI is now turning to more mission-critical workloads. As I just mentioned, linking the data, AI and applications together with hybrid cloud in a secure way is critical for any successful digital reinvention. We are uniquely positioned to do this with our comprehensive cloud and data offerings, coupled with a deep understanding of our clients' workflows and security needs. Within this segment, we had good growth in cloud and data platforms and cognitive applications, while transaction processing platforms was flat. I'll breakdown some of the drivers behind these areas. Our cloud and data platforms grew 2%. We delivered growth this quarter by helping clients build across public and private clouds with IBM Cloud Private, which as you know is built on Linux containers and kubernetes. We help them modernize and integrate applications and environments with our integration and digital business automation platforms. And then collect and manage data with the hybrid data management platforms, all of which grew this quarter. This need for tighter integration across hybrid cloud, data and AI are also driving traction for our IBM Cloud Private for data offerings, as well as Watson Assistant and Watson OpenScale that run on IBM Cloud Private for data. We see the value of bringing together the hybrid cloud and data value propositions at a European Tax Authority, which is using our digital business automation platform to re-design their tax processes around their data lake and improve the tax payor experience. In Cognitive Applications, revenue was up 4%. Growth was led by security, as well as solution areas like health, supply chain and weather. In security, we delivered strong double-digit growth with our integrated software and services value proposition. In particular, we continue to see good traction with our threat management software and services offerings, including QRadar and Resilient. And our security intelligence operations and consulting services, which detect and respond to security threat for our clients. Panasonic, for example, is leveraging QRadar and related services to strengthen its threat management posture. Panasonic is also piloting our next gen X-Force Threat Management offering. In Watson Health, we have broad based growth across areas, including payor, provider and government, as clients look to harness data to create actionable insights. We also had good results from our weather offerings, which grew double-digit this quarter and reached a new all time high in the number of active users. Transaction processing platforms revenue was consistent with last year as clients continue to commit to our platform for the longer term. Performance reflects the value we provide clients managing these vital workloads, and their preference for predictability and IT spend. Turning to profit for this segment, we expanded pre-tax margin by 2 points year-to-year. This reflects a lower level of workforce re-balancing this year, mitigated by a headwind in IT income and continued investment in key strategic areas. As we look forward, essentially all of our software portfolio now runs on Linux containers, orchestrated by kubernetes. We have introduced new offerings like IBM Cloud Integration platform, the Digital Business Automation platform and Watson Anywhere to further accelerate hybrid cloud adoption. And we have ongoing activities to educate all of IBM's employees on the journey to cloud, which includes Red Hat skills. All of this better prepares us for the Red Hat acquisition. Moving to Global Business Services. We continued the momentum from last year and delivered another solid quarter. Revenue grew 4% and gross margin expanded 280 basis points. We again had strong growth in consulting, which was up 9% as clients embark on their digital journey to a cognitive enterprise they are turning to GBS to help them with their strategy and implementation, leveraging our deep industry expertise and innovative technology portfolio. The growth this quarter was led digital strategy and IX, as well as consulting for cloud application migration and our next generation enterprise application practice. Within cloud application migration, GBS cloud advisory services works with enterprises to plan and implement a clear strategy and roadmap for their hybrid cloud journey. We are doing this with Tribune Publishing as they transform from a legacy print company to a digital company, helping them determine the right environment for each of their applications and optimizing their migration to the cloud. Our next generation enterprise application offerings assist clients as they build and implement cloud native applications in areas such as Workday, Salesforce and S/4HANA. IBM is now leading the market with over 200 S/4HANA impact assessments, over 200 implementations and more than a 125 go-lives. In application management, we are shifting our business to cloud-based offerings and continue to have good momentum in our cloud migration factory and cloud application development. Overall, application management revenue was flat due to ongoing declines in the traditional application management engagements. And then Global Process Services had solid performance in first quarter. Revenue was up 5% with strong performance in risk and compliance along with financial process services. Turning to GBS profits, our gross margin was 26%, which is up 280 basis points, driven by our mix of higher value offerings, the yield on our productivity and utilization initiatives and a continuing help from currency, given our global delivery mix. This enables us to make investments as we prepare for the Red Hat acquisition, such as scaling our existing Red Hat practice to enhance our journey to cloud offerings for clients leveraging Red Hat capabilities. We are also creating new offerings around advice, build, move and manage services through industry points of view and platform plays. In global technology services, as I mentioned last quarter, we are taking actions to optimize our portfolio by exiting low value services content to increased margin, profit and cash contribution and better position the business for the longer-term. GTS plays an important role in IBM's integrated value proposition, building on its deep client relationships to shift our clients to hybrid cloud. As we moved through last year, we improved GTS profits and margin creating operating leverage. This gives us a solid base from which we can deemphasize lower value contract and third-party content, enabling continued investment for chapter two of the cloud and delivering sustained margin improvement. This is where we are focused. We saw this play out in our first quarter results as overall revenue declined, but gross margin expanded 110 basis points, driven by the mix shift to higher value, a lift from cloud scale efficiencies and productivity improvements. So now looking at the GTS revenue by line of business, infrastructure and cloud services was down 3% and technology support services was down 2%. Within infrastructure and cloud services, we continue to have solid growth in cloud revenue, which was up 13%. This is driven by the backlog where cloud is now over 30% of the total services outsourcing backlog. Keep in mind, most of the cloud opportunity is ahead of us. 80% of the enterprise workload, which represent mission-critical work, has yet to move to the cloud. As clients migrate these workloads to a hybrid multi-cloud environment, they face increased complexity in managing their infrastructure, because we've been running these workloads, we're better positioned to help our client to build and manage these new environments. During the first quarter, we announced that we're moving and managing BNP Paribas and Santander, a couple of the larger banks in Europe to hybrid cloud. That’s on top of companies like Lloyd, Alliance, Westpac, American Airlines and Anthem Insurance, the list goes on. That's all mission-critical work starting to move and they are moving it with IBM. The portfolio actions I mentioned earlier create flexibility to invest in additional cloud capabilities to capture this high value growing market. For example, our IBM services for multi-cloud management offerings provide a single system to help enterprise simplify the management of their IT resources across multiple cloud providers, on-prem environments and private clouds. And as we prepare for the Red Hat acquisition, we are investing to build on our partnership as a services integrator for Red Hat to be a leader in hybrid multi-cloud services. In Systems, revenue was down 9% this quarter with declines in IBM Z, reflecting where we are in the product cycle and in storage, driven by markets and competitive dynamics. That said we had good performance and power. This quarter, IBM Z revenue declined 38%. I'll remind you we are wrapping on strong performance from last year when we had 54% growth. We are seven quarters into the z14 cycle, and the program continues to track ahead of the prior program. We had strong growth in volumes or ShipNet and new workload MIPS continue to outpace our standard MIPS. This growth is led by Linux again this quarter. In our single frame z14 designed specifically for cloud data centers remains a growth diver. Power revenue grew for the sixth consecutive quarter, up 9%, driven by Linux and the full rollout of our POWER9 based architecture. As clients look to handle more data intensive workloads in AI, HANA and UNIX, they are turning the POWER9 systems. These systems are built to handle advanced analytics and cloud environment. Both the high end and entry-level offerings posted strong growth this quarter as clients continue to adopt this new technology. Storage hardware was down 11% with declines in both the high end and mid range, offset by continued growth in All Flash arrays. Performance reflects declines in our high-end, which is tied to our mainframe cycle, and the ongoing competitive dynamics and pricing pressures. We are continuing to introduce new innovations and functionality to differentiate in this environment as we look to manage the portfolio for the market shift to flash. Looking at systems process, pretax margin was down a point, driven by a mix headwind due to where we are in the z14 cycle. So now turning to cash flow, we generated $2.3 billion in cash from operations in the quarter, excluding our financing receivables. Our free cash flow of $1.7 billion is up about $350 million year-to-year. This performance results in free cash flow of $12.2 billion over the last 12 months, and continued strength in our normalized free cash flow realization rate, which is 114%. Our CapEx decline reflects effective capital management and the strategy I mentioned earlier to deemphasize some lower value content. This reduces our capital requirements. And so, free cash flow came in where we expected and there was no change in our full-year outlook of about $12 million. Looking at uses of cash, we've returned $2.3 billion to shareholders in the quarter, including $1.4 billion of dividends and over $900 million of gross share repurchases that’s $10.3 billion over the last 12 months. We bought back nearly 7 million shares and at the end of the quarter, we had $2.4 billion remaining in our buyback authorization. I'll remind you we plan to suspend share repurchase in 2020 and 2021 as we pay down debt for our Red Hat acquisition to get back to our targeted leverage ratio. Looking at the balance sheet, we closed the quarter with a cash balance of over $18 billion and total debt of $50 billion. Both of these are up from December as we prepare for the acquisition of Red Hat later in the year. About 60% of our total debt is in support of our financing business. The leverage in our financing business remains at 9:1, and the credit quality of our financing receivables remain strong at 55% investment grade, that’s 2 points better than a year-ago. As a reminder, our financing debt will decrease throughout the year as a result of the winding down of our commercial OEM content. So to summarize, free cash flow is on track and our balance sheet reflects the strength required to support our continuing investments and return to shareholders. So let me make a few summary comments on the quarter and our view of the year before we move on to Q&A. In the first quarter, we grew in key high-value segments, led by Global Business Services and Cloud and Cognitive Software. While our overall revenue reflects the IBMZ product cycle dynamics and a focus on deemphasizing lower value work and services. Across IBM, our cloud growth accelerated as we help our clients transition their business models to hybrid environments. We had significant margin expansion with gross margin up over 90 basis points. This reflects our shift to higher value and our focus on productivity and operational efficiencies. What I characterize as improving fundamentals. We're continuing to prioritize our investments and announced additional actions to divest some businesses that aren't contributing to the integrated value proposition for our clients. And we're continuing our planning and preparation for the acquisition of Red Hat. With this performance, we continue to expect to deliver at least $13.90 of operating earnings per share and about $12 million of free cash flow. I want to remind you what is and is not included in these expectations, and this is consistent with what we discussed last quarter. We continue to expect Red Hat to close in the second half. Because of financial implications to the year are dependent on the timing of the closing, we have not included Red Hat in the expectations. In contrast, the timing of the closing of our two remaining announced divestitures does not have a significant impact on the year, that's because we continue to expect the combination of the foregone process, the gain on sale, the actions to address the structure and stranded costs and the resulting benefit from these actions to have minimal impact to our profit and earnings per share for the year. And so our guidance assumes these divestitures. Looking at the view of earnings per share for the year, we assume we'll deliver about 22% in the second quarter, in line with the last couple of years. And then looking at the second half, we would expect the growth in EPS to be skewed to the fourth quarter. This assumes we will close the software divestitures in the second quarter with the gain effectively offset by the foregone profit and the charges for actions to address the structure and stranded costs. In other words, we expect essentially no impact to the second quarter. Looking at free cash flow, we do expect an impact from the divestitures, as well as some pre-closing financing costs for the Red Hat acquisition. But with a solid start to the year and free cash flow, we are comfortable that we can absorb these headwinds and the full year expectations of about $12 million. And with that, let me turn it back to Patricia for the Q&A.

Thanks you, Jim. Before we begin the Q&A, I'd like to mention a couple of items. First we have supplemental charts at the end of the slide deck that provide additional information on the quarter. And second, as always I'd ask you to refrain from multipart questions. So operator, please open it up for questions.

Thank you. We will now begin the question-and-answer session [Operator Instructions]. Our first question is from Katy Huberty with Morgan Stanley. Your line is open.

Katy, you there, we can't hear you. Maybe you're on mute.

Okay. It looks like she is no longer showing in queue. Would you like me go onto next question?

Yes. Please.

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

Jim, I'm just wondering if you can comment about how the quarter turned out to your expectations 90 days ago. I think at the time in Q4 you delivered minus 1% growth to constant currency and you've stated that revenues would improve 1 to 2 points in terms of the growth rate, which didn't occur. And on the margin side when I back out restructuring expenses, it actually looks like operating margins declined year-over-year in Q1 and even if I adjust for IP income, it still looks like they were flat year-over-year. So perhaps you can address each of those, particularly relative to your expectations 90 days ago and whether there was anything that fell short of where you thought you would be? Thank you.

Sure, Tony and thanks as always for your question. There is a lot packed into that. So let me take a step back and just give you a perspective of how we saw the quarter play out, and I'll touch on each of your points here as I go through this. We feel like through the first 90 days of the year, we started out with a solid performance. Why, because we see the fundamentals of our business model playing out in terms of growth in key high value areas, whether that'd be cloud and our acceleration there, security, digital and data and AI. And while we see the growth in those key high value emerging areas, we're also delivering strong operating leverage by expanding margins, growing pretax income, expanding operating pretax margins and delivering strong free cash flow. So when you look at the quarter, let me start with revenue, because you've talked about what we expect in 90 days and where we're at. Underneath our revenue, we see continued momentum in our GBS business led by consulting, strong growth again 9% as we're enabling clients to really move on their journey to cloud and drive their digital reinventions and competitive advantage. We also had solid execution in our cloud and cognitive software where our value propositions around hybrid cloud are playing out very nicely and we're winning in the market. And we saw accelerated growth in our cloud-based business. Basically going from mid-single digits in the fourth quarter when you look at our cloud performance to now exiting first quarter where in the quarter we grew 12%, and now we have a trailing 12 month $19.5 billion cloud business that's growing 12%. Now from geography perspective and it gets right at the heart of your question, we talked about 90 days ago that we saw about 1 to 2 point sequential improvement. And if you look at our developed markets, we had pretty good execution. And we delivered that accelerated 1 to 2 points in fact over 2 points when you look at developed markets led by Japan, UK, Italy, Spain and many others that grew very well. It was in the emerging markets, in particular as I said in the prepared remarks, around the AP region where we saw a deceleration in revenue. And that was really driven by our transactional related businesses, both systems and cloud and cognitive software where we had a good transactional pipeline entering the quarter. And just based on client buying decision delays, we did not execute. Those are great value propositions. They're in front of us right now. The teams on the field and we're focused on closing that sales execution. Now, let me go to operating leverage, because you talked a little bit about our operating leverage and with and without charges but let me set the record straight. One, strong gross profit margins up 90 day basis points, driven by our services base of business, which is up 160 basis points year-over-year and this is a strongest operating margin, gross margin that we've had in four years from a year-to-year expansion. On pretax margins you're right, up 320 basis points as printed. But within, that we did get a benefit by much lower workforce rebalancing last year but we're also seeing the fundamentals of our enterprise productivity initiatives play out. And when you adjust for the $200 million impact year-to-year in IP, our operating pretax margins are up they're not down. So we feel like we started out. We delivered a strong quarter. We should have came up with some more revenue, especially in our emerging markets, the team is focused here in the second quarter. But with all that said for the first 90 days, we think we're up for a solid start and that gives us confidence in maintaining our guidance.

Okay Brandon. Can we please go to our next question?

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

Jim, what was the thought process behind not giving strategic imperative segments anymore? And then how are you thinking about Cloud and Cognitive Software growth going forward relative to the 2% growth over the last couple of quarter and especially in the context of the delayed deals that you've referenced in Toni's questions?

Around strategic imperative, again, let me put this in perspective. We put this sign post out back in the beginning of 2015 if you all remember at our Investor Day. Why, because we had to lay the groundwork and how is the Company we needed to fundamentally shift our capital investment allocation and transform our portfolio into capturing the shifts in growth in cloud and data, and analytics, and security, and mobility. Now you fast forward to the end of 2018 and at the time we made this announcement with that signpost, we were about less than a quarter's worth of our business, I think Patricia. We exited '18 where we were consistently above 50%. And when you take a look at that that has become more and more, or I should say less and less of a relevant metric as we move forward. And more importantly, as I've spent quite a bit of time over the last quarter, both at Think with many of you as analysts and also with our investors, to talk about as we changed our external segmentation to reposition and get this company focused our chapter two and the journey to cloud and hybrid cloud. The same feedback we got from many of you and many of our investors is the strategic imperative metric has passed its course and they are looking for now what are the relevant metrics on managing the Company moving forward. And that as we put out in our new segmentation is going to be around cloud, in particular, accelerating our leadership position in $1 trillion market opportunity around hybrid that is going to be around as a service and our scale efficiencies and margin. And finally, it's going to be around operating leverage and value. And that is going to be instantiated in gross margin and operating pretax margin. Now to your second question real quick cloud and cognitive software. Again, as I stated, solid execution again building on a couple of quarters, strong value proposition, strong offering, team executed well, both across cloud and data platforms we were we up 2%, but also across cognitive applications where we were up 4%. And I talked about in the prepared remarks how we continue to differentiate around our hybrid cloud software value proposition where our integration software had a very strong quarter lead by ICP and ICP for data, which has strong adoption and also our cognitive applications where we're growing both in our domain, security and even emerging areas like Blockchain, but also in our industry verticals where we have continued momentum in Watson Health and in supply-chain and weather. Weather we had an all-time high, great quarter and first quarter all-time high on the number of active users. So when you take a look at this portfolio, we had a couple quarters of solid execution. Yes, in emerging markets we had some buying decision delays that will come back here in the second quarter. But we feel very confident in this portfolio. We feel very confident in the value proposition and differentiation. And we see pretty consistent performance moving forward here in the second quarter and throughout the year.

Thanks Katy. Can we go to next question please?

Our next question is from John Roy with UBS. Your line is open.

Jim, I've question for you on really, you were talking about organic constant currency revenue growth. And it looks like you are saying that if the transactional business that come through, you really would have had at this quarter. I'm really questioning or I want to get an idea of how sustainable do you think that is? I mean, if the transaction itself comes through, can you really continue to see organic constant currency revenue growth?

Yes, if you take a look at it John, obviously, we don't give guidance on revenue. But let me give you some dynamics of how we're seeing the business, both around the trajectory of coming out of first quarter but also the operational indices we see right in front of us, and our business plans and strategies that we're executing on moving forward. First, around GBS. Our GBS business has a lot of momentum. We actually delivered signings growth again for our GBS business those were -- we got great momentum around our consulting business and it's driving the digital reinventions of our clients and our journey to cloud. And we see that they are just continuing that momentum in growth right in front of us here in the second quarter. But second half is going to be dependent, as you know, in a very short-term fast yielding type of backlog. We got to continue doing the signings in 2Q, that's going to fuel backlog, that's going to fill revenue in the second half. But we feel good and we feel consistent growth in GBS. In Cloud and Cognitive Software, as I just answered to Katy, we feel confident in that offering portfolio and we also feel confident in continued growth here in the second quarter pretty consistent performance. Around GTS, as I mentioned in our prepared remarks and I'll go back to what we talked about add late 90 days ago, is we embarked on a very conscious strategy around exiting low value third-party OEM content. We said at that time it was going to depress revenue in the near-term but have higher value and higher margins. And better position our portfolio for the long term as we go through the acquisition closure of Red Hat and really trying to address the leadership position in a hybrid multi-cloud arena. So I would expect GTS, as least in the near-term to be pretty consistent with what you just saw in first quarter. And then you get to our system space of the business. This business as you all know quite well always follows innovation cycles. We are on the backend of our mainframe cycle. We got about one more quarter to go through on that. It's going to be GA plus 7 and plus 8 if I'm counting right. It's been our most successful program in a long time but we've got another quarters' worth of headwind on that. But we've got strong growth and momentum in our power following that innovation cycle. We rolled out our POWER9 architecture for the first quarter. We had our high-end. We had strong adoption. We continue to win in that space leveraging our cloud design systems for AI and for data intensive workloads. And then storage, storage was a weak performance in the first quarter. It was entirely driven again by the high end DS8000, which was attached to our mainframe. And we see that pretty consistent until we can bring new innovation to market. So if you look at first quarter where we were down about 90 basis points at constant currency, you take the divested content out of that and we were roughly about flat. If you look at second quarter, I would see pretty consistent performance again, recognizing we got a big headwind on mainframe in the second quarter we grew a 112% last year as we move forward.

Thanks John. Can we go to the next question?

Our next question is from Jim Schneider with Goldman Sachs. Your line is open.

Maybe Jim, I was wondering if you could comment on the overall performance in the services business. Signings were down year-over-year but seems like you're continuing to see very good growth in GBS and maybe little more tempered performance in GTS. So can you maybe just give us a sense about where clients headed at in terms of our new services contracts overall, and maybe any diversions you're seeing in bookings within GBS and GTS right now?

As you stated, yes, signings were down, down 14% if I remember correctly, about $7.5 -- $7.6 billion overall in signings. But let me take a step back and give you some of the dynamics underneath that, because I think it's very, very important because wire signings and indicator that's of interest to all of our investors, because it leads the backlog that then leads to backlog realization and revenue. And as I've said many quarters, all signings are not equal and they vary. They vary with lumpiness, mainly based on the size of signings. And when you look at our first quarter, our first quarter being down 14%, our greater than $100 million signings were down over 50%. Why, because we just came-off of a fourth quarter, if you remember 90 days ago, where we had one of our strongest quarters in greater than a $100 million signings in years where we signed 19 deals greater than a $100 million and we actually had signings growth well north of 25%. Also, we had a very strong signings quarter, particularly and greater than $100 million deals last first quarter where we signed 10 deals and our greater than $100 million signings were up a 130%. So we had a very tough compare as we both looked at last year and also just on what we executed with solid execution exiting the year. But now let's take a look at backlog. Backlog has many factors that influence, and signings only being one of it, the duration, the mix of those signings, erosion and client dissatisfaction issues and also new signings, new logo versus extensions. And when you take a look at our GBS business, to your point, we have strong momentum. We grew signings in the first quarter, because while our greater than $100 million signings were down 50% plus, we actually grew less than $100 million signings, which is going to fuel that backlog and be better revenue realization in the near-term as we move forward. So all-in-all, GBS is doing a very nice job. We restructured our offering portfolio. We are winning in the marketplace with this digital reinvention and our journey to cloud. And you're seeing a much shorter duration backlog and a better backlog optimization because our quality of delivery as we transform that has led to a much lower level of erosion, which has led to higher realization of revenue. That's what's playing out in GBS. In GTS, that is the function as we're shifting our portfolio to really capture the hybrid multi-cloud opportunity, and that backlog in GTS is flat. It's flat while we transitioned now in our GTS outsourcing business, our cloud penetration is over 35%. And we're going to continue driving that differentiated value proposition in the near-term. But as I said to the last question around revenue realization, we're continuing down the strategy of managing this business from margin, profit and cash, and we're going to use our balance sheet appropriately and effectively around third-party capital content.

Thanks Jim. Brandon, could we please take the next question.

Our next question is from Tien-tsin Huang with JP Morgan. Your line is open. Tien-tsin Huang: Hey good afternoon, forgive me for asking another GTS question, but that was the only real delta I think versus our model with margins being better, revenue being a little bit lighter. So I heard everything you just said, you mentioned GTS in the near-term should be pretty consistent with what we saw on Q1. But I'm curious, if you wanted to reconcile your prioritization of margin versus growth, the portfolio cleanup, the deterioration in signings and maybe even re-segmentation impact on revenue and when might we see an inflection point would you care to remix back to growth? Because there's a lot going on there, just trying to make sure we could recast this properly.

Okay, Tien-tsin, thank you very much for the question. On GTS, I'll remind all of us last quarter, we discussed the portfolio prioritization efforts that we were doing in GTS. Why? We continue to focus and shift this business to higher value for our clients and win in the marketplace. And over the last few quarters, we have been exiting low value content in our GBS business that we said would have some near-term impact on revenue, but will result in higher margins and more importantly a better business profile going forward over the long-term. And if you look at first quarter, that's exactly what played out. Our GTS revenue was down about two points from exiting that lower value content, but Tien-tsin to your question. Our gross margins where I really believe in services based business where value is really instantiated. We're up a 110 basis points year-over-year as we continue to drive the value of that mix shift, our productivity initiatives and our cloud scale. But let me spend a moment as to why? Why are we doing this? This is part of a very conscious strategy to focus this business on margin, profit and cash. We chosen our investment prioritization and Chapter 2 was all about leading in hybrid multi-cloud, high-value market with the acquisition of Red Hat and the combination -- through a combination of cash and debt. You see we are very focused on maintaining a very strong balance sheet and are maintaining our strong investment grade profile and paying down that debt and getting back to our targeted leverage ratios in a few years. We've committed that to our shareholders, and we are taking the actions. GTS being one action about getting out of low value third-party content, that ties up our balance, that ties up our financial flexibility and brings little to no profit to it. The second is our IGF business where we made a decision to get out of our commercial OEM that in addition to, as we stated the intense is to spend share we purchase in 2020 and 2021. So, we are serious about our investment personalization, the lead in Chapter 2. We're serious about getting our balance sheet and continue on the strength of that to support our dividend growth policy and continue to invest in our business, and we're serious about driving the innovation and the investments to win in that space. And I'll just conclude to your question. GTS has tremendous value to our integrated model of IBM. 90% of our most strategic accounts, we call them integrated accounts taken advantage of IBM's integrated value through outsourcing. More than 50% of the software used in our sourcing is IBM content and that’s growing, and 60% of our outsourcing engagements include the management of mainframe. So, it is very integral part, we're been selective in our investment prioritization because we chosen where we want to win and how we're going to win going forward.

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

Our next question is from Steve Milunovich with Wolfe Research. Your line is now open.

Jim, you typically take a workforce rebalancing in the first half of the year. You talked about the divestitures not having much net impact. Is that because you're going to include essentially a workforce rebalancing in that beyond just the divestiture and Red Hat and so forth? Or are we going to see a bigger separate charge at some point?

Yes, thanks, Steven. It's good to hear from you again. Yes, let me put in perspective. From a product perspective, around the announced divestitures which most recently included the sale of our marketing and commerce remaining products Centerbridge that on an annualized basis about $1.8 billion, right. From a profit perspective very said very consistent the last quarter that we are going to have a gain on the sale, we're going to have a foregone profit and stranded cost, we were going to take actions to address the foregone profit -- or excuse, the stranded cost and structure of our business overall. And when you take all of that together, there is going to be minimal impact on our full year and let me bring this home to second quarter right now, because as we stated, we expect to close majority if not all of this by the second quarter. And when we take each of the components, the gain on sale, we expect the gain on sale to somewhere be between $500 million and $700 million. And our guidance assumes for right now it’s the low end of that range. With your question, we're going to take actions to address the stranded cost and structures that’s going to spend a majority, a vast majority of that gain. And then Steve as you know, the return on that restructuring in those actions will help us mitigate the foregone profit in the second half of the year because the second half of the year, we are going to have about a two point revenue headwind with that business gone and we'll have a foregone profit that we're going to have to manages as we go forward, so both for the full year and in the second quarter, minimal to no impact to our profit overall.

Thank you, Steve. Brandon, could we please take the next question.

Our next question is from the David Grossman with Stifel Financial. Your line is open.

Jim, obviously, you've been open active in divesting or licensing in certain lines of business that are no longer core to your strategy. We certainly understand your reluctances to talk too much about this publicly, but is there anything that you can share with us that they give us, some idea of how many other assets in the portfolio may this profile? And how much of a drag there has been on your growth rate?

Thanks David. And I think you've answered your question yourself already. I am not going to comment on any further actions, but I'll just give you the high level perspective. IBM is the high-value company and how we remain high-value is through portfolio optimization. We consistently look at our portfolio, and I think we stated this many times before, we look at many different factors from market attractiveness to our ability to win and differentiate to where client value and profit pools are shifting overtime to the value of our integrated model and how well that place together. And we will consistently do that to make sure that we are optimizing the right level of return for our investors, and we can win in the marketplace and deliver the innovated value and technology to our clients to enable them to win and create competitive advantage. And that's what we're focused on overall, David.

Thanks Dave. Let's go to the next question?

Our next question is from Jeff Kvaal with Nomura/Instinet. Your line is open.

Yes, question and perhaps a clarification. I think the question is. Could you Jim, help us with the Cloud as a Service revenue? It seems as though the cloud revenue overall accelerated, but I'm not sure that translates to be as a service side of things. I wondered, if you could help shed some light on that? And then secondly, it seems as though you were indicating the backlog for GBS grew and GTS was flat, but it looks like the overall backlog is down and I'm trying to square that circle?

Sure, Jeff. No problem. Thanks for the question. So -- but actually both kind of clarification question, so let me just try to address it real quick and directly. Our as a Service -- first of all our cloud, our cloud business accelerated in the quarter. First quarter, we grew 12% overall at constant currency that comes up mid single digits in the fourth quarter. If you look at our as a Service business within that, our as a Service business now has an annualized exit run rate of 11.7 billion and that's up mid-teens. I think 15% if I remember correctly. And that is down quarter-to-quarter, but Jeff I would tell you that's due to normal seasonality and also as we talked about in the fourth quarter, there were specific project milestones that we achieved in our AMS business that drove that our AMS business to a 4% growth in the fourth quarter, we said that would normalize back down to about flat. So when you take a look at normal seasonality from fourth quarter to first quarter, and you take into account to catch-up of those project milestones as we continuously improve our service delivery quality that was expected from our perspective and we see that continue momentum building throughout the year as we move forward with the value of our offerings and proposition. And just a clarification question, on backlog. Backlog is down 2% at constant currency. I stated that GBS signings grew, and we have continued momentum in the backlog overall it did not make a comment about that. But I give you some color around the dynamics of the backlog as our GBS business as we architected our offerings and you see a play out in consulting our backlog is moving to a much short duration, higher faster yielding content with greater quality less erosion and its driving backlog realization and revenue momentum. Overall, I did not make a comment about GBS backlog overall.

Thanks, Jeff. Brandon, why don’t we take one last question?

Our last question is from Keith Bachman with Bank of Montreal. Your line is now open.

Jim, I also want to ask about services and the growth rates. And particularly, if I look at GBS, could you make some comments on the durability of that? It's the first part my question. Application maintenance was flattish. Consulting was pretty good at 9%. Should investors be thinking about 3% to 4% growth for the year? And then the second part of my question as it relates to services, if you could revisit since you've had some time since the Red Hat deal was announced. What are your expectations about how the services business, both GBS and really GTS, how the Red Hat business may impact growth or improve growth once that's included into your portfolio, because I think investors are frankly concerned that GTS may have a long runway or runoff here, but how you're thinking that Red Hat may impact both services business but particularly the GTS side?

Thank you, Keith for the question. GBS overall, as I stated, we have very good momentum in the business. Coming throughout the second half of 2018 and into the first quarter where we grew 4% led by consulting up 9% and within that great growth in digital strategy, iX, -- excuse me, our cloud migration and implementation services. NextGen enterprise apps growing. So very good momentum overall. And again, we're coming off another quarter of growing signings, especially in small deals. So when we look at right in front of us we see pretty consistent performance. I think you said somewhere around 3%. Plus or minus, we see that right in front of us and if we continue as we stated winning in the marketplace and driving those signings in the second half is going to fuel backlog, it's going to fuel revenue, we feel pretty confident as you know we run multiples scenarios about our guidance, which by the way is on earnings per share and free cash flow but we feel pretty confidence that we got a strong hand here, our team that’s executing on the field and we're delivering real value to our clients and that’s why we're seeing the performance overall. The second question I think you asked if I remember correctly was around our services businesses and Red Hat. First and foremost we're very excited about the potential combination of IBM and Red Hat as we talked about I think in a handful of other areas around us accelerating the leadership in a $1 trillion hybrid cloud market. We believe this differentiates us as we move forward and we can’t be more excited when you look at Red Hat performance, exiting fiscal year 19 and what they reported and shared publicly, accelerating revenue up in the high teens, the backlog is up 22% if I remember correctly, strong margin contribution and they are delivering very strong cash flow. I think north of a billion dollars on operating cash but when you look at the services piece we're expecting synergistic effects across our portfolio of IBM and us leading this next-generation of hybrid cloud both in our software base of business but also services and when you take a look at services overall, we have spent a lot of time and I talked about this in the prepared remarks about re-architecting our offerings to enable our clients on their journey to cloud, and that spans everything from advising, to building, to moving, to managing. The journey for all of our clients from an enterprise perspective of really taking the 80% of the next phase of the mission-critical workloads to provide competitive vantage for them, so, we're going to have consulting based on synergistic effects, on strategy implementation, we're going to have cloud migration, app development. There's a whole slew of offerings that our teams are now armed with. And we are ready to go once we close this acquisition overall. So thank you all for very good questions. Let me wrap it up and just make a couple comments. We had a solid start to the year as I said and I firmly believe the fundamentals of our business model are playing out in terms of growth in key high-value areas like software and GBS, while delivering strong operating leverage across our business. We will continue this in the second quarter with revenue dynamics from 1Q to 2Q similar to last couple of years, which is about a sequential dollar increase of $900 million to a $1 billion. And as I said, we expect our second quarter to be about 22% of our full year EPS and that is right in line with what our last three years have been. So, from seasonality, you should expect pretty similar to history. This keeps us right on track for a full year expectations for earnings per share and free cash flow, and we will continue to take actions to plan for Red Hat acquisition and position this company for the longer term. So with that, I thank you for joining us today. We look forward to continuing the dialogue over the course of the year.

Thanks, Brandon. Let me have you close up the call.

Thank you for participating on today's call. The conference has now ended. You may disconnect at this time.