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

Thank you. This is Patricia Murphy, and I want to welcome you to IBM’s Second Quarter 2020 Earnings Presentation. I am here with Arvind Krishna, IBM’s Chief Executive Officer; and Jim Kavanaugh, IBM’s Senior Vice President and Chief Financial Officer. We’ll 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. These 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. For example, we present revenue and signings growth at constant currency throughout the presentation. In addition, to provide a view consistent with our go-forward business, we’ll focus on constant currency growth adjusting for the divested businesses for the impacted lines of total revenue, cloud and our geographic performance. We have provided reconciliation charts for these and other non-GAAP measures at the end of the presentation and in the 8-K submitted to the SEC. Finally, consistent with our last few quarters, IBM’s revenue, profit and earnings per share reflect the impact of purchase accounting and other transaction-related adjustments associated with the acquisition of Red Hat. These adjustments and charges are primarily non-cash. So, with that, I’ll turn the call over to Arvind.

Hello, everyone. I am pleased to be speaking with you again. In April’s call, I talked about the impact of the global public health crisis and I told you about the important work we are carrying out to help the shifting needs of our clients. I also told you about the confidence I have in our strategy and our portfolio, which is focused on hybrid cloud, as well as data and AI, all of this continues. Today there are two topics I’d like to cover. First, I want to tell you about what we’re seeing in the market and then, I want to discuss our priorities and actions we have taken to move them forward. From a market perspective, while the current environment poses certain short-term challenges, it also presents long-term opportunities that IBM will seize, as our clients accelerate their shift to hybrid cloud and AI. The essential work that we do in terms of running our clients’ mission-critical processes continues. More profoundly, we see that the digital transformation of businesses is accelerating. Our second quarter results demonstrate this, with an increase of over ten points in our cloud revenue growth over last quarter. The trend we see in the market is clear. Clients want to modernize apps, move more workloads to the cloud and automate IT tasks. They want to infuse AI into their workflows and secure their IT infrastructure to fend off growing cybersecurity threats. As a result, we are seeing an increased opportunity for large, transformational projects. These are projects where IBM has a unique value proposition. But they are also projects that take time to shape and therefore to close. At the same time, we are feeling the impact of austerity measures that businesses have put in place to preserve cash and capital. Our software and services results reflect this reality. Jim will take you through this in more detail. Taken altogether, this is the backdrop of our results for this quarter. They reflect the immediate challenges and long-term opportunities of this environment. Now, let me move on and discuss my priorities moving forward. As I touched upon in our last call, IBM is focused on helping our clients in the two major transformational journeys they are on: hybrid cloud as well as data and AI. Hybrid cloud is the dominant force driving change in our industry, but it’s far from universal adoption. Only 20% of the workloads have moved to the cloud. The other 80% are mission-critical workloads that are far more difficult to move. There is a massive opportunity in front of us to capture these workloads. When I say hybrid cloud, I am talking about an interoperable IT environment across on-premise, private, and publicly operated cloud environments, in most cases from multiple vendors. Why do we believe this is the future, rather than a pitstop along the way? Clients find that choosing a hybrid cloud approach is two-and-a-half times more valuable than relying on public cloud alone. This considers factors such as innovation, development time and portfolio optimization. Let me spend a minute to describe our hybrid cloud platform. It starts with Linux, which is the de facto operating system standard. We have a tremendous advantage with Red Hat Linux, which is the market share leader. Linux, along with Containers and Kubernetes, provides the architectural foundation of our platform, and OpenShift is our core product that captures all this and more. IBM has a vast software and middleware portfolio, which has now been containerized and runs on OpenShift and Red Hat Linux. The family of Cloud Paks we introduced in the second half of last year allows our middleware to run in a cloud-native environment and bridge our clients from the past to the future. This means clients can now deploy our software anywhere OpenShift runs. It is infrastructure agnostic, across not just public and private clouds, but also our mainframes and power system platforms. OpenShift is also what makes it possible to develop and consume software in a new way. It’s what enables DevSecOps and all the subsequent boosts in productivity, security, and speed of deployment. Our hybrid cloud platform also includes a set of advanced technologies, such as Watson, analytics, encryption, IoT and many others. What gives our hybrid cloud platform the fuel it needs to accelerate adoption and become pervasive is the large ecosystem of partners we are building. We have gone to great lengths to forge a global coalition of best of breed ISVs. This includes recent additions like Adobe, Salesforce, SAP, Box and Slack. All are using our hybrid cloud platform to help clients modernize mission-critical workloads. We have done the same with major systems integrators Ernst & Young, Infosys, Wipro, Tata Consultancy Services, Tech Mahindra, Persistent Systems, all are examples that are helping expand the reach of IBM’s hybrid cloud platform. Finally, you’ll recall that nearly half of the hybrid cloud opportunity lies in services. An important part of our platform’s value lies in the expertise we provide to help clients on their journey, whether that’s modernizing apps, building cloud-native apps, migrating to the cloud or managing these applications on the public and private cloud infrastructures. We are currently helping hundreds of major clients on these journeys. I believe that our strategic vision is taking hold in the marketplace. I mentioned the acceleration in our cloud growth this quarter to over 30%. This hybrid cloud platform generated over $23 billion of revenue over the last 12 months. I just described the importance of Red Hat Linux and OpenShift to our platform, and Red Hat continued its momentum in the quarter, with the combination of IBM and Red Hat driving strong revenue and bookings growth. Across the board, we are seeing greater demand for Red Hat products. Clients are eager to tap into open source innovation. They want the freedom to securely deploy, run and manage their data and applications on the cloud of their choice and retaining that choice is critical. Clients such as Bharti Airtel, American Express, Vodafone, Broadridge Financial Solutions, Banco Sabadell, and CaixaBank all see the value in a hybrid cloud architecture built by IBM and Red Hat. As part of our hybrid cloud strategy, a key focus is to help clients tackle complex and highly regulated workloads. Last year, we launched the financial services-ready public cloud with Bank of America and we recently created a new program for ISVs and SaaS, Software-as-a-Service, providers. I am happy to share that we now have 30 ISVs signed up. This happened with great speed, and I am confident that more will join soon. So, let me pause for a moment and remind you of the three priorities I shared with IBMers on my first day as CEO: One, help our clients on their journey to cloud and AI. Two, win the architectural battles in cloud with Red Hat. Three, continually delight our clients. These priorities remain the same, and you can see how we have made progress in all of them. At the same time, we have continued to deliver a series of new innovations in the last quarter. We launched our new edge and telco network cloud solutions built on Red Hat OpenStack and Red Hat OpenShift that enables clients to run workloads anywhere, from a data center, to multiple clouds, to the edge. We also launched our AI for IT offering to give every CIO the ability to automate their IT infrastructure that immediately reduces cost and becomes more resilient. AI for IT runs across any cloud and works in collaboration with an ecosystem of partners that includes Slack and Box. On quantum computing, we added an additional four systems, which expands our fleet to 22 quantum computing systems. That includes eight systems that have demonstrated a quantum volume of 32, a yardstick IBM has proposed to measure the relative power and usefulness of quantum computers. I’ve talked previously about the importance of both organic and inorganic investment to drive innovation. We recently announced two acquisitions that will enhance our hybrid cloud and AI capabilities. In June, we acquired Spanugo to boost our compliance and cybersecurity capabilities for the hybrid cloud. And, in early July, we agreed to acquire WDG Automation that advances AI-infused automation capabilities into our Cloud Paks. Needless to say, this is a unique and challenging time for our clients. To continue to be their most trusted partner, we are spending a lot of time and energy to drastically simplify how our teams go to market. We are doing a lot of work on the back-end to bring our portfolio together in a more cohesive fashion, so our teams can come with simpler and more relevant proposals. We are also focused on changing our culture and operating model, so we can make decisions more quickly and make our interactions with clients a lot more experiential. Jim will take you through a few of our more recent actions. Moving forward, we will continue to take actions that improve our operating model and accelerate our strategic priorities so that we can emerge stronger. Before turning to Jim, let me end by saying a few words on our commitment to corporate social responsibility. This has always been important to IBM. But, as you know with the current events in the United States, there has been a renewed focus to do more. As IBM’s CEO, I am fully committed to ensuring that IBM will continue to lead in this area. But this is also about skills and creating opportunity. Since 2011, IBM has helped to develop and expand a new public-education model called PTECH. P-TECH provides high school students from underserved backgrounds with the skills and credentials they need for competitive jobs in STEM. To that end, we recently made a commitment to hire 1,000 interns who come from P-TECH. To put this in context, we have between 5,000 and 10,000 interns at IBM each year. So this represents more than ten percent of our intern base. I am always happy to expand later on this and other topics relating to our ESG efforts. Now, back to the quarter and the business, Jim is going to take you through our results. Jim, over to you.

Thanks, Arvind. During our first quarter earnings call, I talked about how we are prepared for a wide range of outcomes given the economic uncertainty. Our second quarter results were within that range. We delivered $18.1 billion of revenue, expanded gross margin, reported operating earnings per share of $2.18 and continued to generate solid free cash flow. Our balance sheet remains strong, and we continue to have ample liquidity. The external dynamics we saw in March continued into the second quarter, with varied impacts by region and industry. As we discussed in April, we are not immune to the macroeconomic environment. But our client and our portfolio mix provide some stability in our revenue, profit, and free cash flow. We saw that again this quarter. Let me remind you of how our business mix provides this stability. From a client perspective, our business is more concentrated in large enterprises, which in total have been relatively more stable throughout the pandemic. Though as you would expect, we saw more weakness from smaller enterprises this quarter. About 70% of our revenue comes from industries that run the world’s most critical processes and those industries have been less impacted by the current economic and health crisis. We saw that in our results again this quarter, and in fact grew revenue in financial markets, government and education. From a geographic perspective, we have a global footprint of more than 170 countries. This provides a bit of a natural hedge, as we continue to see markets experience different impacts from the pandemic over time. And then finally, when you look at our portfolio, about 60% of our revenue comes from recurring revenue streams. While we’ve adapted quickly to conduct business virtually around the world, as expected, we did have disruptions in transactional performance and volume reductions. Many clients continued to delay projects, defer purchases, and favor OpEx over CapEx spending in this environment. This pause in large purchases and discretionary spending was most evident in our perpetual software licenses and project-oriented services. While clients remain focused on near-term priorities, running mission-critical processes, operational stability, and cash preservation, as Arvind mentioned, the last few months also highlighted the need for clients to accelerate their digital transformations, leveraging hybrid cloud and AI. Across IBM, our cloud revenue grew 34%, which is up from the 23% growth in the first quarter. IBM’s hybrid cloud platform generated more than $23 billion of revenue over the last 12 months. With Red Hat, we are positioned to win the hybrid cloud architectural battle, and have developed the most secure, open hybrid cloud platform, underpinned by OpenShift. We’ve brought Red Hat and IBM technology together in our modernized Cloud Pak software solutions, providing the leading hybrid cloud platform. We now have over 2,400 clients using our container solutions and nearly 600 IBM Services clients utilizing Red Hat technology. Red Hat delivered strong results in the period with normalized revenue growth of 18%, driven by the synergistic effect of IBM and Red Hat. Last August, we talked about how Red Hat would benefit from IBM’s incumbency in large accounts and leverage our global reach to expand into new markets. We’re seeing that where IBM and Red Hat come together, clients are making larger scale architectural commitments and longer-term and more strategic purchases. This quarter we had a significant increase in the number of Red Hat large deals and expanded Red Hat’s presence in underpenetrated focus markets. In the second quarter we took additional steps to better position IBM in this environment and emerge stronger. We announced new offerings including AI for IT and 5G edge and we recently added key capabilities in RPA and cloud security through two acquisitions. We are also working to fundamentally shift our operating model. We are simplifying the geographic dimension of our go-to-market by consolidating our operations and moving to a streamlined structure for sales teams to be more flexible and responsive to our clients. We’ve enhanced our virtual selling capabilities, including co-creation with clients on virtual platforms, addressing client needs and solutions with real-time data and shifting to contactless delivery even for the most complex transformation projects. We’ve created a virtual Dynamic Delivery Model to effectively reimagine services delivery, including improved access to expertise and enhanced business resiliency and security. We’re transforming key business support functions to simplify our organizational structure and infuse AI into our workflows to deliver faster and better insights. And we’re expanding our developer and ISV-centric ecosystem to drive workloads to our hybrid cloud platform. The last dimension of our business model I want to spend a minute on is our liquidity and balance sheet profile. We further strengthened our cash and our balance sheet in the second quarter, fueled by solid free cash flow, and we took additional measures to improve our liquidity position. We ended June with a cash balance of over $14 billion, up over $5 billion from the end of last year. We remained opportunistic in the capital markets, issuing $4 billion of debt across multiple tenors with very favorable economics. This provides us with additional liquidity in the short term while we remain committed to our longer-term deleveraging plans. Our debt of just under $65 billion was consistent with March, as our bond issuance was offset by $4 billion in term debt and commercial paper reductions. Our debt includes $22 billion of global financing debt, which is primarily in support of IBM products and services and has a stable credit portfolio. Recently, we also successfully completed our annual renewal of IBM’s global credit facilities. We’re maintaining over $15 billion in undrawn credit, one of the largest corporate facilities in the S&P. Our high-value business model and strong balance sheet and cash flows gave us the confidence to increase our dividend in this environment, the 25th consecutive year with an increase. Looking at the key highlights in the quarter, I’ve mentioned our strong growth in cloud, and our continued momentum in Red Hat. The combination of Red Hat, our focus on productivity and operational efficiencies and our cloud scale-out drove significant operating gross margin expansion, up 160 basis points. Our balance sheet strength was enhanced by $2.3 billion of free cash flow this quarter. We had strong working capital performance, driven by stable collections and good financing attach rates, primarily on IBM Z. This was offset by higher net capital expenditures and workforce rebalancing payments. The CapEx increase was driven by the build-out of our cloud infrastructure and lower proceeds from real estate sales, while deemphasizing lower-value services content. In the quarter, we also continued to have free cash flow contribution from Red Hat, net of interest expense. Overall, we generated $11.5 billion of free cash flow over the last year, which is about 145% of GAAP net income. These results show solid free cash flow performance, and a strong financial profile. Now, I’ll turn to the segment performance, beginning with Cloud and Cognitive Software, where revenue was up 5% driven by growth in Cloud and Data Platforms. Ninety days ago, we highlighted how software transactions stalled in March as clients quickly shifted their focus to resiliency efforts. That focus on resiliency continued into the second quarter and impacted software performance, especially in the first part of the quarter. Later in the quarter, demand improved for critical priority areas, such as hybrid cloud solutions and some AI applications. We had a sequential improvement in software renewal rates, as clients favored subscription models. Perpetual software licenses continued to be impacted, particularly in some of the more troubled industries. In Cloud and Data Platforms, revenue was up 30%. This reflects the synergy of bringing IBM and Red Hat together, as we’ve standardized on Red Hat OpenShift as our hybrid cloud platform and modernized our software portfolio to run on it. This quarter, we had good performance across Red Hat, including amplified bookings growth in the 30 underpenetrated countries where IBM has helped Red Hat expand go-to-market efforts over the last year. And with further Cloud Pak traction this quarter, clients are embracing a hybrid cloud strategy and increasingly leveraging the OpenShift container platform. These actions all contributed to growth in the number of clients using our container platform to over 2,400. Cognitive Applications revenue declined, as clients in some of the more impacted industries deferred transformational or discretionary spending. We saw this play out in IoT engineering lifecycle management, where demand from automotive, electronics, and aerospace clients softened this quarter. These industries remained focused on core operations rather than transformational purchases. And our Weather consumer business was impacted by general weakness in the advertising market. In Transaction Processing Platforms, client focus on OpEx versus CapEx continued to impact transactions this quarter. Looking at the profit for the segment, the decline in pre-tax margin was primarily driven by the purchase accounting impacts from the Red Hat acquisition. Now turning to our Services segments, Global Business Services revenue declined 6%. As we entered the year, GBS had good momentum and we expected revenue to accelerate throughout the year. But, as the pandemic intensified and the macroeconomic climate worsened, clients quickly shifted their focus to operational stability and cash preservation. This resulted in a delay in both the existing projects and new commitments, especially in projects that are more discretionary or with longer time to value, such as next-generation enterprise applications. The delays impacted the revenue coming out of backlog, which is about 80% of the quarterly revenue, as well as the smaller in-period signings, which yield revenue more quickly. While declines continued in these smaller signings from March through May, the trajectory improved, and we returned to modest growth in June. For the quarter, GBS cloud signings grew at a double-digit rate as clients are prioritizing their digital transformations. Offerings such as cloud strategy consulting, application development and modernization continued to grow revenue in the second quarter. These offerings, standardized on Red Hat’s OpenShift platform, enable clients in their cloud journeys. We are working with an additional 60 clients such as Bank of America, Medtronic, Loblaws, Bank of England, Credit Mutuel, and Deutsche Telekom to utilize Red Hat technologies to transform their businesses. Looking at profit, we expanded gross margin in GBS by 240 basis points. We managed the business well in this environment, by leveraging our variable and global delivery resource model, improving price-margin realization, and optimizing utilization. We also had a currency benefit, which is fairly consistent with the last couple of quarters. At the same time, we are continuing to invest, building skills and practices through education and hiring. Overall, while we’re dealing with some near-term macro challenges, GBS’s deep industry expertise combined with IBM’s, and now Red Hat’s innovative technology, play a critical role in the acceleration of clients’ digital transformations. In Global Technology Services, revenue declined 5%, fairly consistent with the first quarter’s performance. We had signings growth in the quarter and strong growth in cloud revenue, but this was offset by continued declines in client business volumes. As we’ve talked about in the past, about 90 percent of GTS’s quarterly revenue comes from contracts in our backlogs. While this business has a high mix of recurring revenues, there is some variability in that revenue stream. We provide clients with flexibility in their capacity to deal with volume changes due to their business needs and macroeconomic environment. As the pandemic intensified through the end of March and into the second quarter, we experienced lower client-based business volumes reflecting challenges across industries. While performance in some of these industries, like financial services was consistent quarter to quarter, other industries had a more significant decline. We saw this especially in retail, automotive, consumer goods, and travel and transportation. This impacted the revenue coming out of our backlog in the second quarter. At the same time, clients are continuing their infrastructure transformations to hybrid multi-cloud environments. For example, at Daimler, we have expanded our relationship to migrate their global aftersales platform to the IBM cloud. And, this quarter we announced Sabadell Mexico, the first 100% mobile bank in Mexico, will host its infrastructure on the IBM cloud, and use Red Hat Enterprise Linux to modernize its applications. They join other financial institutions like Bank of America, BNP Paribas, Banco Santander, Lotte Card, and CaixaBank, among others, as they move forward on their cloud journey. These commitments contributed to the signings growth for GTS and, in fact, in the first half, signings grew at a double-digit rate. This results in an improved backlog trajectory from where we entered the year. Given the overall duration of the backlog, this will convert to revenue over a longer-term horizon. Looking at gross profit, GTS margin declined 30 basis points. This was driven by mix, as the high-value TSS business is impacted by the current product cycle. I’ll remind you, we have not yet realized the benefits from our first quarter structural actions. Turning to Systems, revenue was up 6% this quarter, and gross margin expanded over 400 basis points. We again had good growth in both IBM Z and storage. Clients value the new innovation of the z15 mainframe and high-end storage. Similar to the first quarter, the z15 offered enterprises valuable capabilities, including remote management, security and importantly, scalability. This quarter, clients also increasingly looked to IBM Z for resiliency and business continuity to keep mission-critical workloads running smoothly. We continue to offer additional hybrid cloud capabilities on z15. We released Red Hat Ansible Certified Content for IBM Z and launched a new cloud native development offering, Wazi Workspaces, which allows developers to use industry standard tools from IBM Z to multi-cloud platforms, optimized on OpenShift. The growth in Z and storage was partially offset by weaker performance in Power, reflective of where we are at in our product cycle and Power’s client base of smaller enterprises, which are impacted more during this pandemic. Now let me bring it back up to the IBM level. I think Arvind summed it up well. The current environment presents some near-term challenges for our clients, but it also provides some longer-term opportunities for us. We have a business profile and business model that provides some stability in the current environment. We have also recently taken a number of actions that strengthen our operating model for today, and for the future. We built a robust hybrid cloud platform based on what we firmly believe is the winning architecture. This technology-centric platform, together with our deep industry expertise and ecosystem partners will enable us to accelerate client digital transformations and move more of our clients’ mission-critical workloads to the cloud. As we enter the second half, we have a compelling set of offerings and a strong pipeline across software, services, and systems. How that pipeline yields to revenue will ultimately be tied to the rate and pace of the economic recovery and the resulting client spending confidence. Given the uncertainty in the environment and consistent with our direction from last quarter, we are not going to provide guidance for 2020. But I do want to remind you of a few specific dynamics. Systems performance reflects where we are in a product cycle and we wrap on the IBM Z launch in September. In software, our transaction versus annuity mix varies by quarter. Historically, we have a lower mix of transactions in the third quarter, and our largest transactional base is in the fourth quarter. And then for Red Hat, we anniversaried the acquisition in early July. We are wrapping on a large part, but not all of the impact of the deferred revenue adjustment and transaction charges. We also wrap on the divestitures completed in the second quarter of last year. And the savings from our structural actions will start to yield in the second half, providing better cost competitiveness and margin performance, especially in GTS. Finally, we remain confident that we have ample free cash flow and liquidity to invest in our business and return value to shareholders through dividends. Arvind, any final comments?

Jim, what’s most important to me and to IBM, is that we emerge stronger from this environment with a business positioned for growth. And I am confident we can do that. My focus will be on investing and maintaining flexibility to take actions, not just to strengthen our operating model, but also to advance our strategic priorities. Now, over to Patricia for the Q&A.

Thank you, Arvind. Before we begin the Q&A, I’d like to mention a couple of items. First, we’ve included supplemental information at the end of the presentation. And finally, as always, I’d ask you to refrain from multi-part questions. Sheila, let’s please open it up for questions

[Operator Instructions] Our first question will come from Matt Cabral with Credit Suisse. Your line is open.

Thank you very much. Understanding you guys are looking to give formal full year guidance at this point, but just wondering you can spend a little bit more time about how we should think about moving into the third quarter versus seasonality where, I think typically you are down a little bit over $1 billion sequentially. And maybe just dig a little bit deeper into some of the biggest swinging factors we should be thinking about by segment going from 2Q into 3Q?

Thanks, Matt for the question. Let me start and then I will give it to Jim for adding a bit more color and a bit more detail. So, as both of us said on the call, we are seeing that there is – it’s two-sided. We see opportunity in hybrid cloud, we see opportunity in digital transformation, we see opportunity in people as they are doing a return to the workplace and projects that all advance those things. Some of those give them long-term benefit, some give them short-term benefit. That said, we are seeing that there is a negative on things that require CapEx, things that have very long-term pay-offs, and project-based businesses. If we think about the difference in third and fourth quarters, third is a bit lighter on transactions, fourth is very heavy on transactions. If we also look at some of those project-based businesses, we will likely – and this is where it’s tough to give guidance, but it’s likely that we see that the economic recovery is looking to be longer and more protracted than we might have hoped for back in March. And as we see that bouncing ball on the economic recovery, whether it’s in the United States, in Brazil, in India, that has an impact on all of these elements. But the other thing that is important in some of the remarks that Jim made, we kind of have a two-third to one-third mix, maybe if it’s more than that in industries which are les impacted versus industries that are more impacted and that of course will play out in our results, as well. But let me give it to Jim to make some of those things more precise.

Yes. Thanks, Arvind, and thank you very much for the question overall. As we stated, wrapping up the prepared remarks, we do have a very strong pipeline across our offering portfolio around systems, around software, around services. But as Arvind just indicated, the yield will be tied directly to the rate and pace of the recovery of the pandemic curves which by the way vary based on market around the world and industry, which tie directly to client spending confidence overall. If you look at just macro level dynamics of our business profile, there is a couple of things that I think will play out as we look forward. One is, we are going to wrap on divestitures, that’s been a two point headwind to the IBM Company for the last four quarters. We wrap as we enter second half. Number two, we are dealing with actually a weaker dollar and you’ll see in the currency back up, that is now flat to about one points of a headwind where we were dealing with about a 2 to 2.5 point headwind over the last few quarters. Three, the dynamics of client buying behavior is really shifting that acceleration to digital transformation and to cloud, you see it play out in our results and we actually have a strong pipeline. Red Hat had another very good quarter. Good pipeline set up. Our hybrid cloud solution offerings around Cloud Paks with good momentum. We got a good annuity base of business that we are going to continue to build on more renewal rates and we’ve got a systems business that we refresh with new innovation. When you look at services, to your point, we’ve got structural actions that are gone to start yielding as we exit – excuse me – as we enter second half and we got a strong pipeline as Arvind stated on the call of large transformational deals. Now those are always binary as to when they close, but they will reposition the emerging stronger theme of our backlog in services overall. In the mean time, we are going to continue to deal with the economic impact around discretionary projects, in particular around GBS.

Okay. Thank you, Matt. Can we please go to the next question?

Yes. Next we will hear from Amit Daryanani with Evercore ISI. You may go ahead.

Thanks a lot. Good afternoon and thanks for taking my question guys. I guess, my question is really around the cloud revenue growth which I think was about 34% this quarter. It was a really impressive acceleration from, I think, even what you guys said in the March quarter. Is there a way to think about, just how sustainable do you think this growth as we go forward? And then, when I think of this number, 34%, is there a way to see how much of this growth is from new logos and new wins on the customer side versus perhaps taking existing customers from an on-premise to a hybrid off-premise journey?

Okay. Amit, let me start. This is Arvind. And then, we will ask Jim to add a lot more color. So, Amit, so clearly, since this is the last quarter where Red Hat was, I’ll call it inorganic. That clearly had an impact on this. That said, we are still actually quite happy with the results despite that that had accelerated quite a bit from earlier and from both the first quarter and last year. So I’ll just say it like that and leave it at that. The second part you asked was, are we just moving our people from one side to the other or are we getting new wins? Amit, the vast majority of this, there is a big core of Red Hat as I described, our hybrid cloud platform. That’s not a left to right shift. That is actually net new. When we think about our wins in telecom, actually those are places we were never present, actually either of us, not just one of us. If you think about modernizing people’s applications, that’s not a shift, that’s actually net new work for us. You asked about new logos, that may apply to a little bit of services. But for the company at large, look we have all the lines, I mean, almost any enterprise of any size is already our client, especially on the product side of the house. So talking about them being new logos would be unfair, but are we getting into areas within them that we previously did not have access to, I would say, we are absolutely doing that and that’s a big part why you see that 34% growth. So, with that, let me give it to Jim for adding to that.

Yes. Just some color around how that 34% was actually delivered overall. Arvind talked about it from a client perspective in the value we bring around our hybrid cloud differentiated value proposition. But the 34%, Amit, as you indicated is up about 11 points sequentially quarter-to-quarter with regards to growth profile. That was driven pervasively across all four segments of our business. And in fact, there was 11 point sequential year-to-year improvement or quarter-to-quarter improvement was entirely organic. Red Hat contributes significantly to the 34% overall, but even on a pro forma organic perspective, we are growing right around 20%. We got a GTS business that has over a $9 billion book of business in our cloud portfolio that grew 20% this quarter and accelerated from first quarter. Our GBS business, which is about $5.5 billion, on a trailing 12 months grew in the mid-teens and our software business which is about a $5.5 billion book of business grew well in excess of 100%, but grew around 20 plus percent pro forma organically. So, I think we are seeing broad based acceleration really driven by the client buying behavior shifts that are happening in the marketplace. And to Arvind’s prepared remarks overall, we feel pretty confident about the offering portfolio and the differentiated architecture around our hybrid cloud platform that positions us to continue to capitalize on that going forward.

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

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

Yes. Thank you. I was wondering if you could comment on linearity in the quarter relative to sort of normal linear patterns. It sounded like, software was a little worse in the first half of the quarter and then got a little bit better. I think there was one other business where you referenced things maybe looking a little better as the quarter progressed. So could you comment on whether that’s a fair observation? And if it is, why shouldn’t we be thinking about modeling normal or better than normal seasonality from Q2 to Q3? And then separately, could you just comment on GBS signings? It sounds like they were down, perhaps 20% year-over-year and what that might suggest for the GBS business trajectory over the next couple of quarters? Thank you.

Hi, Toni. You very astute in your observations about the linearity in the second quarter. So let me just add a little bit of color to that. When we finished the fourth quarter, we were quite transparent in saying that March was a lot worse than we expected compared to what we see. I wouldn’t use the word linear because on the transactional side, the last month of the quarter is a lot more. So I’ll just compare to normal, maybe as opposed to linear. When we entered second quarter, the energy side of the business yields pretty evenly other than the slight – I’ll call it, maybe 4% to 5% in volume that goes up and down. So that side is linear approximately and that didn’t change. When we look at the transactional side of the business, I would tell you that the month of May was significantly worse than we would normally expect and we saw that begin to come back in June but not really recover to normal levels. That’s why I pause on saying, will 3Q be better because, since May was worse than June, but June was still worse than we might have expected last year. So, that’s also something about that. And then, let me give it to Jim to also comment on the impact of the signings, as well as more on the imports linearity question.

Yes. So, thanks, Arvind and thanks, Toni for the question. But as you indicated, with the heart of your question overall, the dynamics in March that we saw generally played out as we entered the first part of second quarter. Clients really continue to focus on mission-critical operational stability, cash preservation as any company as we were in the midst of the worst pandemic we’ve seen in quite a period of time. And then I could even tell you, as CFO of the IBM Company, we were maniacally focused on liquidity. So, they are most unexpected. But what we see play out as we move through the quarter is really the demand profile is really correlating to the curves of the pandemic and that plays out differently around markets around the world, around industries around the world. And that’s why we try to give some color about our geographic diversification, which we believe provides a natural hedge in this environment as many markets are going through different curves and our industry concentration being 70% in industries that are minimally or moderately impacted by the pandemic overall per Gartner and IDC. But when you look at the raining pace of that economic recovery as we said when we conclude the prepared remarks is really going to follow that pandemic. But when you look at our performance in the second quarter and not to repeat Arvind, but just give a little color by unit, our GBS business really stalled in the month of March after starting very strong through two months. That continued through the first two months of this quarter. In actually June, we saw our small transaction volume, which has high yielding revenue content going forward actually come back to growth and it was led by Europe, which stabilized with their pandemic curves and it was led by Asia Pacific. Actually, the Americas was the exact opposite, both Latin America and U.S. we started out pretty strong as the U.S. was getting the pandemic in curve underway and then when it started bouncing in June, we took a big step back. So that’s what happened in GBS. CNC Software, very strong conclusion where value in hybrid cloud solutions, certain AI-specific Red Hat, very strong closure to the quarter. But I’ll tell you one, we came off of a very strong second quarter, a large deal closure last year. So we had a very tough compare. But we didn’t grow in the month of June. We were just much better than March and April and May. Systems finished pretty strong which is a testament to our value prop. And GTS, I’ll tell you, GTS was kind of a mixture, 90 plus percent of that business is annuitized. We are dependent on client-based business volumes. That’s 70% of industry. We actually saw stability and for the first time in a while, some growth in like financial markets, government, et cetera but we are getting impacted in GTS by client base business volumes in particular around airline, travel, transportation and retail.

Okay. Thank you, Toni. Sheila, can we please go to the next question?

Thank you. Our next question comes from Wamsi Mohan with Bank of America. Your line is open.

Yes. Thank you. Arvind, you noted that the hybrid cloud opportunity is half in services. Do you see for IBM a larger opportunity at GBS or GTS? And any additional color on the GTS, GBS mix of those large transformational deals you alluded to in your prepared remarks will be helpful. And if I could, Jim, could you maybe also talk about the seasonality relative to cash flows in second half versus first half this year given the Red Hat contribution in the first half? Thank you.

Alright. Thanks, Wamsi. So, I have mentioned explicitly that half the opportunity is services. But we look the market, that’s a $1.2 trillion market for hybrid cloud and about $550 billion, you could say, maybe a touch more is a services opportunity. So that’s the almost half. Within that, the bulk of the opportunity is in application modernization and improving the end-to-end workflows of our clients’ processes. So when you look at those elements, and then you look at both private and public cloud, the nature of those operations is much more automated and much more captured in code than traditional infrastructure. That’s my – I guess my technologist way of saying that the opportunity will be larger in GBS than GTS for those opportunities. However, just for a caution, with that said, the run component does remain important. It’s not that it goes away, but in terms of pure dollar opportunities, it’s shifting more towards the GBS side or that side of the market as opposed to the traditional infrastructure. And we are seeing that play out in the mix of the opportunities, because people need to get the work done first in terms of transforming their applications and that innovation is what is driving that interest and that’s why you see us keep using the word transformational, because that is where people see the huge opportunity of these projects. And so, with that, Jim?

Wamsi, thank you for the question overall around free cash flow and seasonality. In the first half, we delivered $3.6 million of free cash flow and $5.1 million of cash from ops. Cash from ops is about flat year-over-year. Our free cash flow is down about $400 million. That positions us on a trailing 12 month $11.5 billion I think in a very strong free cash flow realization. Let me give you some of the underlying dynamics and then I’ll give you some color, given we are not giving forward-looking guidance, we are not going to give a free cash flow guidance here on the call, but to your question, I’ll give you some color about seasonality and what were some of the headwinds, tailwinds. As we stated, when we entered January, very similar we talked about capital. We are going to continue to invest in this business. Capital through the first six months was a headwind of almost $0.5 billion. Our workforce rebalancing payments were a headwind predominantly in the first half. That will diminish as we get into second half and cash tax was a headwind through the first half already and that should be pretty consistent as we move forward. Offsetting some of that here in the first half is we’ve had very strong working capital efficiency. Very strong collection rates, even in this environment talking to the testament, I think of the value and how essential we are to our clients in delivering mission-critical value and also we are in a mainframe cycle. So our IGF attach rates are doing quite well and that is helping our free cash flow overall. So, I assume as we move into the second half, we’ll have similar dynamics around the headwinds. We start now in the second half as we anniversaried Red Hat. The profitability of Red Hat will start accelerating as we get into the second half. That should help us. We’ll start reducing the amount of tailwind on working capital efficiency as we get through our Z cycle overall. And I think with regards to cash taxes, I stated pretty similar.

Thanks, Wamsi. Can we please go to the next question?

Next we will hear from Katy Huberty with Morgan Stanley. Your may go ahead.

Thank you. Good afternoon. A number of your peers, Accenture, SAP, Oracle have recently provided guidance. Is there something different about your business exposure? Or what you see in the market that is holding you back from providing guidance? And what is that that you are looking for in order to return to the prior framework of giving an annual outlook?

Hi, Katy. Thanks for the question. I think it’s to deal – I can’t comment on, is the business different or do we see differently. I can comment on what we see. We have a lot of uncertainty in the economic environment around the globe. And when we look at it by geography, by continent or by industry, there is just so much variability that we can’t answer it. In April when we said that we’ll reevaluate it 90 days, maybe we were a little bit optimistic that we will get more stability on the health, which internally for the economic conditions, and that curves will begin to flatten in three to four months which was, at that time a reasonable, but turned out to be a misplaced expectation. And so, we just can’t tell where those go. And because those have an impact, not in a month or two but over six to nine months, even on portions of the annuity business as Jim has been very clear, there is clients do get the ability to dial volumes up and down in some range. But that creates for us the inability to really want to give guidance that we are confident about. And so, it’s that mixture of confidence and uncertainty, the economic that makes us unwilling to provide guidance.

The only thing I would add, Katy, is that, it’s not a statement of the confidence we have in our portfolio, our offerings, our strategy and our platform, what Arvind is trying to drive as the new CEO of the IBM company overall, we feel pretty confident in that and Arvind articulated that in his prepared remarks around our hybrid cloud strategy, our platform, our architecture and components of our business. As we see play out in the second quarter, this demand profile and the resulting client spending confidence is going to follow the pandemic curves around markets and around industries. And we saw that play out in the second quarter and we’ll see how the world deals with the overall pandemic, the crisis and how we enable our clients and our employees and our communities to move forward. So, it is not prudent right now in this environment as we are still dealing with it that tie down our flexibility to move forward. We are going to continue to invest in our business and we have the right liquidity, strength of our balance sheet and investment in fin flex profile that take the right actions in this environment to advance our strategic priorities going forward.

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

Our next question will come from Tien-tsin Huang with JP Morgan. Your line is open. Tien-tsin Huang: Hey. Thank you so much. Arvind, you mentioned you are seeing large transformational projects in the pipeline. I think, Jim you underlined that a couple of times. I was curious how meaningful could this be unless we can compare it to past cycles. I recognize this is going to hinge a little bit on the world’s healing. But, just trying to get a perspective on the sides in here. And then, also just as a second clarification, you talked about trading off the – the trade-off of OpEx versus CapEx, do you have pretty good line of sight at this point on your annuities business? It looks like transaction processing, for example is pretty stable quarter-to-quarter in terms of the year-on-year trends. I just want to make sure I didn’t miss anything there. Thank you.

Thanks. Thanks, Tien-tsin for the question. How meaningful can the large transformational projects be? So, when we say large, these are typically projects that measure in the multiple hundreds of millions of dollars in contract value. But Tien-tsin, you do the peak times here and you say, pick a number, the $300 million, $400 million, $500 million in total contract value, and you do that and you say, those typically will give that full yield over five to seven years. That’s the kind of nature they take and then you say, how many of those are we going to get done? We have a fairly large number of them in the pipeline. What we are hesitant to say is, will they take three, six, nine or twelve months to get closed fully, though we’ve be in at it for a few months already. And so, I think it is quite meaningful if we begin to close them. We will absolutely see the needle move on our services business as those begin to close and yield. Relative to past cycles, I think as we came out past recessions, or as we came out of different crises I am not sure I can call the dot com burst is close quite, maybe it was minor recession, but it was a different year back, that second actually for sure and we saw then back of those kinds of projects different nature. Now they are about move into the cloud, journey to cloud, hybrid cloud transformation, then they were more about perhaps of the nature of outsourcing and beginning to create a lot of efficiency in infrastructure management. So the nature of these projects has changed. And so, let me – let Jim add color to it and also talk about the annuity business.

Yes, I would just – thanks Tien-tsin for the question. I would just add to your last point. I think the nature and the rate and pace of those large transformational deals right now be much quicker than when we were sitting back in 2008 moving through this. It was a very different recessionary time that impacted industries differently and markets differently. This is more so of a consumer base small, medium market base, industry-specific base that is getting impacted at least immediately right now. But that time to value will shift over time as we move forward. So, I think Tien-tsin, when we went back and we’ve done many different stress tests of our business model to ensure our balance sheet, our liquidity position, scenarios, we looked at prior recessions, we don’t see anything different. The only difference is, where that client behavior and now shifting from a managed services years ago to more of a hybrid cloud asset base differentiation. The last thing on your annuity, we feel pretty confident about our annuity business. Over 60% of our revenue today, it’s pretty stable. TPP is a mixture of some annuity or most annuities, I should say, some transactional. I think from an annuity perspective, we performing pretty consistent with the market overall and we see that continuing to play out here in the second half.

Thanks, Tien-tsin. Sheila, can we please go to the next question?

Yes. Our next question will come from David Grossman with Stifel Nicolaus. Your line is open.

Thank you. Good afternoon. The TTF business, this appears to be all these different moving pieces, you are significantly impacted by volume, but it looks like you have pretty good signings in the first half of the year, duration is up in the backlog, et cetera. So, is there any way you could kind of sit through this for us? The cyclical impacts with it, we can get a better sense of how the transformation in that business is trending, particularly given the ongoing revenue challenges which we had over the last several quarters. And perhaps you could reconcile this, because Arvind, you made a comment seeing a shift to the applications layering from GTS to GBS, and maybe it’s more informative to look at it on a combined basis. I mean, you are managing it under one person and now you are trying to move the two together. So, maybe you see more acceleration in GBS coming out of this and GTS maybe flat. So, just trying to get a better sense of how to think about the health of that business now and how it’s trending?

Okay. So, David, let me maybe start and then, I’ll ask Jim to add color. So, we should acknowledge that we are never happy when a business is declining even at mid-single-digits. So let’s just re-acknowledge that and then say, but then what are the elements under it, which is what you are asking about what are all the moving parts. And given the large annuity nature of that business, that does reflect signings and commitments from the past, not just within the quarter. So, that is there and that means that you are looking at the revenue impact that even if you have good signings that every impact takes a long time to sort of make its way through that business and also in terms of the backlogs that are in that business. So, when I look through the cyclical impacts there, I think that we want to be careful about trying to say that the trends change dramatically quarter-to-quarter. I think that those are places where it is going to take a while for the revenue trajectory in that business to change. And I am not sure that looking at it combined. It is important to be able to leverage the parts of the business with each other and there are some elements that can be leveraged and that is why you refer to Mark Foster’s roles where he has both of those teams. However, they are very different businesses and they are different business models. So, I am not sure that I would say that looking at them combined is a better indicator of how they are trending. Jim?

Yes. David, I would just add to that last point you just made. They are fundamentally different business models. While they are both, you mean, capital based, one is a datacenter managed services base business model that is highly capital-intensive. The other is a strategic capability industry lens project base business that is fundamentally human capital, not physical capital dependent. So they have different economic equations, different growth profiles. One is a growth engine, GBS. The other is a value based platform in GTS overall. Now, with all that said, we’ve said all along that we’ve got a leverage at least some in offering capability and to some extent at a client lens some leverage between those two. Because clients are making architectural decisions that are application first and infrastructure second. But the GTS business model overall and I would echo Arvind’s point we’ve been doing a ton of work around the portfolio. Looking at this backlog which by the way, any year, David, as you know quite well, about 80 plus percent of a year’s out of that business is under contract. Now we do have variability collars within that of about 30% of our clients today have that. But this is long annuitized base contracts that has a duration of probably five plus years. So you don’t turn that overnight. So when you take a look at that business, we’ve been looking at it by offering, by client, by industry, by contract type, and we’ve been trying to determine how do we won, reposition and leverage the value of incumbency and then also two, invest in new transformational services which is where the growth is coming in managed services building off of the back of the application side of GTS or it’s GBS I should say. And that is things like cybersecurity, managed services, data, managed services, compliance services and alike. So, we’ve got our arms around this, but it’s going to take time to turn this business overall especially, in the pandemic.

Thank you, David. We are already at ten minutes after the hour. So why don’t we take one more question?

Thank you. Our last question will come from Keith Bachman with Bank of Montreal. Your line is open.

Hi, thank you very much. Jim I’ll direct it to you. I wonder if you could talk about Cloud and Cognitive a little bit and my question is, how should we be thinking about it? What I really want to dig into is, you are going to anniversary Red Hat for the first time, albeit you had some DR rate also it’s going to complete anniversary. You are going to go ex mainframe cycle too. So, is there some impact on the transactions processing side or any other part of it? But all else equal, I would think that the growth rate over the next couple quarters is going to drop pretty meaningfully just given the anniversary of Red Hat, but perhaps combined with the mainframe cycle as well. But, what are the puts and takes you want us to think about over the next couple of quarters in Cloud and Cognitive?

Yes. Thank you, very much for the question as we wrap up right now. So let’s take the Cloud and Cognitive business overall. Right, I think first from a Cloud and Data platform perspective, we are seeing very good growth overall. Yes, albeit very strong momentum on Red Hat and we couldn’t be more pleased with the synergistic value we are bringing to our clients with regards to IBM and Red Hat that are together. To your question, we – Keith, we actually anniversary that on July 9. So, we will now wrap around on the operational performance of Red Hat going forward. Still growing nicely at an 18% historically normalized basis here in the second quarter. So we will still get growth off of that, but second to your other point, we’ve been dealing with this deferred revenue non-cash purchase accounting adjustment for the last four quarters. That now starts lessening over time. So when you look at Cloud and Cognitive software with regards to Red Hat contribution in the first half of what we’ve seen to the second half of where we are going forward, it’s about a point or give or take of a headwind compared. But still a positive contribution to Cloud and Cognitive software overall. The other dynamic I’d bring up and I think Arvind talked about this earlier, you got to make sure that this business, while 75% annuity, 25% give or take in a year transactional, that transactional skew varies very differently between the third quarter and the fourth quarter. Second quarter and fourth quarter are more like 25% to 35% of a transactional skew. First and third quarter are more like a 15%. So, just based on that dynamic, when you look at 2Q to 3Q, we’ll get more of a tailwind and then when as we get into fourth quarter, if the pandemic curves do not lessen over time, then we are still going to have to deal with this large perpetual license OpEx versus CapEx phenomenon overall. So with that, I will turn it back over to Arvind.

Thanks, Jim. So, let me make a couple of comments to wrap up this discussion. I hope everybody have taken away from this call is that while these are challenging times, we are excited about the opportunity that we have moving forward. I hope you got that from the remarks that both Jim and I made in the Q&A and in the prepared remarks. We have aligned our offerings to the opportunity. The opportunity being that of hybrid cloud, as well as AI. And I am certain we will continue to take the right steps to emerge stronger as a company. And I look forward to continuing this dialogue in the third quarter. In the mean time, I hope all of you stay safe and productive. Thank you.

Okay, Sheila I am going to turn it back to you to close out the call.

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