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C2010-651 Fundamentals of Applying Maximo Asset Management Solutions V3

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C2010-651 exam Dumps Source : Fundamentals of Applying Maximo Asset Management Solutions V3

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Test Name : Fundamentals of Applying Maximo Asset Management Solutions V3
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IBM Fundamentals of Applying Maximo

foreign enterprise Machines' (IBM) management on this autumn 2018 outcomes - profits call Transcript | killexams.com Real Questions and Pass4sure dumps

foreign business Machines enterprise (NYSE:IBM) this autumn 2018 revenue convention name January 22, 2019 5:00 PM ET

business participants

Patricia Murphy – vice president-Investor relations

Jim Kavanaugh – Chief financial Officer

conference call members

Wamsi Mohan – bank of america Merrill Lynch

Toni Sacconaghi – Bernstein

Katy Huberty – Morgan Stanley

Tien-tsin Huang – JPMorgan

David Grossman – Stifel

John Roy – united states04a7d3d609129a9296bf7ac0608c2097)

Jim Schneider – Goldman Sachs

Joseph Foresi – Cantor Fitzgerald

Jim Suva – Citi

Keith Bachman – BMO

Operator

Welcome and thanks for standing by. at the moment, all members are in a hear-best mode. nowadays’s convention is being recorded. if in case you have any objections, you can also disconnect at the moment.

Now, i will flip the meeting over to Patricia Murphy with IBM. Ma’am, you may start.

Patricia Murphy

thanks. here is Patricia Murphy, vp of Investor members of the family for IBM, and i’d want to welcome you to their fourth quarter income presentation. I’m here today with Jim Kavanaugh, IBM’s Senior vp and Chief monetary Officer.

The prepared remarks should be available within a couple of hours, and a replay of the webcast can be posted by this time day after today. I’ll remind you that certain feedback made in this presentation may well be characterised as forward-searching beneath the inner most Securities Litigation Reform Act of 1995.

these statements contain a number of components that might trigger precise effects to vary materially. additional information concerning these elements is contained in the business’s filings with the SEC. Copies are available from the SEC, from the IBM internet web site, or from us in Investor relations.

Our presentation additionally includes definite non-GAAP economic measures, with a purpose to give more information to investors. All non-GAAP measures had been reconciled to their linked GAAP measures in keeping with SEC suggestions. you'll locate reconciliation charts at the conclusion of the presentation, and within the kind eight-okay submitted to the SEC.

So, with that, I’ll turn the name over to Jim.

Jim Kavanaugh

Thanks Patricia, and due to all of you for becoming a member of us. The fourth quarter capped off a 12 months the place they grew revenue, operating pre-tax salary, and working profits per share. They stabilized their margin as they moved through the year, and they accelerated gross and pre-tax margin in the fourth quarter. They persisted to make investments and take movements to shift their company towards bigger-price areas like hybrid cloud and AI, together with the announcement of their acquisition of red Hat.

And they once more generated strong free money stream, which enables this endured investment and shareholder returns. in the fourth quarter, they delivered $21.8 billion of income, which become down 1% at consistent currency, although down three% with the affect of currency translation.

As always, I’ll focus on consistent foreign money effects. Their working pre-tax earnings turned into $5 billion, and they had $4.87 of working income per share. They had powerful performance in application, and in functions they had profits increase and gross margin expansion. This was offset by using the anticipated have an impact on of their IBM Z product cycle dynamics.

Our complete software profits changed into up 2%. They entered the quarter with an excellent pipeline of utility alternatives, and they done neatly, driven by way of hybrid cloud adoption and strong demand for analytics and AI offerings.

total features income become up 2%. They had consistent development in global business functions all through the year, with 6% boom within the fourth quarter and income increase and gross margin expansion across all three of their GBS enterprise traces.

world technology services had a modest earnings decline, with solid gross margin enlargement. They had a great signings quarter, reflecting robust demand for hybrid cloud implementations and their value prop to deliver productiveness. Their hardware revenue changed into down. You’ll do not forget in 2017 they had a terrific fourth quarter in IBM Z, and so their decline reflects a wrap on that performance.

This remains a very successful Z software and remains forward of their prior cycle. once once again, they had potent growth in power, with POWER9 now introduced all the way through their portfolio.

As you understand they supply expertise and industry capabilities to assist run their consumers’ most crucial tactics, which places us in a special position to support them seriously change their organizations. As they exit 2018, we’re carrying on with to see a couple of themes across their engagements. First, their shoppers proceed to look to turn facts into competitive potential with the aid of making use of analytics and AI, with an business lens.

second, consumers are increasingly trying to cloud to power enterprise cost. As they move extra mission-essential workloads to the cloud, they should securely move statistics and workloads throughout distinct cloud environments and that requires a hybrid and open-cloud approach.

And third, purchasers are concentrated on productivity and predictability of their spend. Now, IT has always been about using each expertise innovation and productivity, with the balance moving over time. We’re recently seeing increasing pastime in productivity as purchasers appear forward to the subsequent couple of years.

And so their results this quarter reflect their capability to convey innovation and productiveness you see this in their amazing results in analytics and AI, in their as-a-carrier cloud earnings, and in strong signings in their features company that convey technology solutions and financial price, right through their integrated value proposition. That’s why businesses such as Vodafone and BNP Paribas are leveraging the IBM Cloud, the place they benefit from their hybrid multi-cloud capabilities and entry to probably the most advanced technologies. And it’s why Bradesco bank made a utility, hardware and features multi-yr dedication to the IBM Z platform, to take them to the next degree in AI and hybrid IT, with greater predictability of their operating can charge.

throughout their segments, their strategic imperatives revenue for the 12 months changed into up 9% to about $40 billion. inside that, their cloud earnings is over $19 billion, and they exited the year with an annual run expense for cloud-delivered-as-a-carrier of over $12 billion, which is up 21% over remaining year. this is a solid base of cloud and cognitive capabilities, and we’re carrying on with to convey innovation in these excessive price areas. as an instance, within the fourth quarter they brought AI OpenScale, a platform to manipulate the lifecycle of all styles of AI models, and Multicloud manager, a service to deploy and control finished purposes, in any cloud ambiance.

We’re adding resourceful functions, just like the world’s first business quantum computer available on the IBM Cloud. You may additionally have considered that ExxonMobil is already using it to assist handle its most complicated company challenges, corresponding to power exploration and chemical compounds manufacturing. The number of new consumers the use of IBM Cloud inner most accelerated within the fourth quarter, and adoption is transforming into for their IBM Cloud deepest for data platform, which turned into named a pacesetter within the first quarter 2019 Forrester Wave document on commercial enterprise insight platforms. All of here is a validation of their hybrid, open strategy to cloud, and they have a robust basis from which to power synergies throughout the enterprise with the addition of purple Hat.

Let me pause right here to remind you of the cost they see from the aggregate of IBM and pink Hat, which is all about accelerating hybrid cloud adoption. The client response to the announcement has been overwhelmingly wonderful. They take into account the power of this acquisition, and the aggregate of IBM and purple Hat capabilities, in helping them circulate beyond their initial cloud work to really transferring their enterprise applications to the cloud.

they are concerned concerning the comfortable portability of data and workloads throughout cloud environments, about consistency in management and security protocols across clouds, and in heading off vendor lock-in. They have in mind how the mixture of IBM and pink Hat will assist them tackle these considerations.

We see the mighty bookings pink Hat currently suggested as extra proof of consumers’ self belief in the value. bear in mind, the quarter ended a month after the transaction turned into announced. From a price perspective, apart from the growing pink Hat enterprise itself, they see a chance to elevate all of IBM by selling extra of their own IBM Cloud and through promoting extra of their analytics and AI capabilities on OpenShift across varied platforms.

As shoppers proceed on their experience to get more enterprise cost from the cloud, they need extra features support from the digital design, to app modernization, to native app building, to administration of hybrid cloud environments. You saw remaining week the effects of purple Hat’s shareholder vote, with very high participation, and over ninety nine% vote casting in aid.

we're moving through the regulatory procedure and proceed to expect to shut in the 2nd half of 2019. We’ve had a decade-long partnership with pink Hat and extended it practically a year in the past around hybrid and multi-cloud. And now, after the announcement in late October, we’ve begun the inside enablement planning a good way to hit the ground running publish closing.

So now, I’ll go in the course of the particulars of the fourth quarter, wrap up with a summary of the whole 12 months, and their view of 2019. As I spoke of, their revenue within the quarter turned into $21.eight billion. This comprises a foreign money harm to profits of over $500 million, which is one hundred fifty million greater than mid-October spot rates counseled, as the dollar has persisted to fortify. their margin dynamics, they multiplied both their gross and pre-tax working margins.

Our gross margin become up 10 groundwork features, with effective efficiency within the functions groups, together up a hundred ninety basis aspects. This changed into mitigated by the anticipated combine headwind from the IBM Z cycle dynamics. Their working cost was greater 5%. When foreign money affects the right line, it often helps cost, due to both translation and the improvement of hedging contracts.

And so, with the strengthening of the dollar, foreign money helped their cost via almost five aspects. bear in mind, the vast majority of their hedges are mirrored in price, and these hedging good points mitigate the foreign money influences all the way through the P&L. We’ve been focused on driving productiveness in their business, enforcing new methods of working, like the usage of agile methodologies, and leveraging automation and infusing AI into their strategies. This gives flexibility to drive innovation in areas like hybrid cloud, AI, security and blockchain, whereas additionally delivering working leverage.

within their fee decline, they also had a lessen degree of IP earnings. firstly of the year they mentioned they anticipated IP revenue to be down yr-to-yr, and it has been monitoring lessen, down $a hundred sixty five million year-to-12 months within the fourth quarter, and basically $450 million for the complete 12 months. placing this price performance in conjunction with their gross margin expansion, pre-tax margin changed into up 50 groundwork elements.

working tax, at the start of 2018, they provided a spread for their full 12 months tax price of 16% plus or minus two features and that changed into without discrete gadgets. With their last geographic and product mix, the total yr fee with out discretes become about 15%, inside the expected latitude. including the discrete objects within the first and third quarters, their full yr operating tax cost turned into 8%, which is a headwind year-to-year. The resulting tax price in the fourth quarter turned into 12%, which is up about six points year-to-yr.

related to their GAAP tax rate, you saw in their press unlock that their fourth quarter cost also displays a charge for a GILTI tax election, linked to the implementation of 2017 U.S. tax reform. This charge impacts GAAP web income and GAAP income per share.

And so, turning returned to their working consequences, working profits per share of $4.87 turned into pushed through strong operating leverage, offset through an anticipated headwind from tax.

their money metrics, they generated $6.5 billion of free cash flow in the quarter with $eleven.9 billion for the 12 months, in keeping with their expectations. Their realization of GAAP internet revenue is 111% for the yr, normalizing for the non-working tax reform can charge. This supports a excessive stage of funding and shareholder returns. So now let me flow on to the segments.

Cognitive options salary changed into up 2%, with three% increase in solutions utility and 1% growth in Transaction Processing application. They elevated pre-tax margin by virtually three features, providing working leverage on this revenue boom, from both operational efficiencies and mix, while nonetheless investing at excessive ranges.

in the quarter, they continued to convey innovation to their consumers and scale their platforms and options, resulting in increase in their transactional profits and SaaS signings. In Transaction Processing utility, they capitalized on the effective pipeline of bigger transactions they mentioned getting into the fourth quarter, pushed through their purchasers’ buying cycles. Their fourth quarter performance reflects these valued clientele’ dedication to their platform for the longer term, given the price they give in managing their mission-essential workloads and predictability in their spending.

In solutions application, boom was led by analytics and AI offerings, with a few different high-value areas turning out to be as well. In their underlying analytics platform, they had extensive-based mostly increase across their Db2 portfolio together with analytics home equipment, and statistics Science choices.

Demand for their IBM Cloud private for facts providing accelerated, and now over one hundred customers have adopted the platform, and that’s seeing that launching simply over six months in the past. New consumers encompass the Korea information superhighway and protection agency, which is establishing an app on ICP for statistics that leverages a whole lot of facts sources and machine learning models to locate and thwart new cyber threats.

in addition, we’re scaling their latest Watson functions working on IBM Cloud inner most for information, like AI OpenScale. In safety, they persevered to have solid demand for their built-in security and features options, including powerful growth in their protection intelligence and orchestration offerings, QRadar and Resilient. inside their trade verticals, Watson health had growth across Payer, provider, Imaging and executive and IoT once once again had powerful boom in their core offerings, Maximo and Tririga, the place they lead the market in asset administration and amenities management.

within the rising blockchain area, they announced several new purchasers this quarter, together with their work with sensible Dubai on the middle East’s first executive-recommended blockchain platform. They added an on-prem providing in November, the IBM Blockchain Platform for IBM Cloud deepest, and signed a few new deals this first month. They see a powerful pipeline as consumers have an interest within the advantages of blockchain in the back of their firewall.

Now, over the closing few quarters, I known as out choices within their options software, which tackle horizontal domains the place we’ve faced secular shifts in the market, specially collaboration, commerce and ability. We’ve been taking moves, and closing month they introduced the divestiture of their collaboration and on-prem advertising and commerce items to HCL. After closing, which is currently expected to be mid-yr, this action will increase their Cognitive solutions salary efficiency, normalizing for the divested content, and displays their dedication to disciplined portfolio management.

So now moving on to capabilities, before entering into both segments, I are looking to give a view of the overall capabilities business. As I mentioned prior, profits became up 2%, and gross margin expanded a hundred ninety foundation features. their signings, on their last profits call they talked in regards to the mighty pipeline of offers they had going into the fourth quarter. And they finished smartly, supplying signings of $15.8 billion, which is up 21% at constant forex.

This results in a backlog which is now $116 billion. on the grounds that it’s measured at 12 months-end spot quotes, foreign money is definitely impacting the backlog. but at steady forex, the backlog is down 60 basis features yr-to-year, which is a few two-point growth versus last quarter’s efficiency.

customers are more and more looking to leverage digital for increase and innovation, while at the same time increasing efficiencies and decreasing can charge inside their organizations. IBM features can deliver this value through leveraging its breadth throughout GBS and GTS. A fresh illustration is on the financial institution of the Philippine Islands, the place we’ll deliver IT infrastructure services in addition to Digital adventure options to assist the bank’s ongoing digital transformation, increasing their IT efficiency and scale, and enabling them to seize alternatives in an increasingly digital financial sector.

So now turning to global business capabilities, they again, delivered strong efficiency, constructing on the momentum throughout the year. The GBS group has done a really exceptional job repositioning this enterprise, and you'll see it in the effects. salary grew 6%, with growth across all enterprise traces, and gross margin accelerated 300 groundwork elements.

Consulting salary increase accelerated to 10%. this is validation of their success in bringing collectively know-how and business expertise to assist their customers on their digital adventure. They had continued mighty boom in Digital approach, fueled by using their Digital Commerce and CRM offerings. we're additionally accelerating boom in next generation enterprise functions led by way of potent demand in their consulting and implementation services in areas like S4/HANA, Salesforce, and Workday.

In application administration, they grew four%. This quarter they back to increase with amazing performance in cloud migration manufacturing unit and cloud application construction, mitigated through persisted declines in common application administration engagements, as their shoppers stream to the cloud. The 4% boom also displays the achievement of large milestones across a number of bills. We’ve been additionally enhancing their revenue profile in international procedure services.

earnings grew 5% as they reinvent industry workflows by using leveraging automation and infusing AI. And previous this month, they announced the sale of their mortgage servicing business. The transaction is expected to shut in the first quarter and will outcome in enhancing income and margin profile, normalizing for the divested content. So, this action, like the divestiture of choose software belongings, is set portfolio optimization. We’re focusing on greater-price offerings that are essential to their built-in value proposition.

Turning to GBS gross earnings, there are a number of drivers of their 300 groundwork element growth, together with the working leverage they get on the salary growth, their mix against larger-value offerings, and taking pictures the cost for cost, a support from currency, given their world start combine, and the yield on their productiveness and utilization initiatives, together with the re-alignment of their potential pyramids to key boom areas.

In know-how capabilities and Cloud systems, they delivered $8.9 billion of earnings, which is flat versus ultimate year, and gross margin multiplied approximately a hundred and fifty groundwork aspects. They endured to have mighty growth in cloud earnings within the phase, this quarter up 22% yr-to-12 months. They had a robust signings quarter, with 16 transactions over $a hundred million every. each new and latest purchasers wish to IBM to manipulate their crucial infrastructure and bring innovation, whereas concurrently reaching predictable spending. They continue to peer momentum in their open hybrid multi-cloud method.

i mentioned BNP Paribas past. BNP Paribas has chosen IBM to improve its cloud atmosphere, with a hybrid multi-cloud strategy, bringing collectively the IBM Cloud, inner most clouds, together with present infrastructure. Leveraging IBM’s technical and industry capabilities, BNP Paribas will accelerate its digitization to present its shoppers the top-rated services, while respecting the safety and confidentiality of their statistics.

looking on the profits via line of enterprise, Infrastructure functions salary changed into flat. As they prioritize their portfolio, they are exiting some decrease cost content, which somewhat influences near-time period revenue performance, but results in greater margins.

In Technical support functions, salary turned into down 3%. TSS continues to be impacted by the hardware product cycle dynamics, partially off-set via persisted boom in their core multi-seller services offerings. And, finally, Integration utility boom accelerated to four%. This performance changed into pushed through continued powerful adoption of IBM Cloud private, where they introduced 200 new valued clientele. That brings their total variety of valued clientele using this ingenious platform to 600 in only over a year, as they continue to modernize ordinary workloads.

We additionally now have over 100 IBM software choices integrated with IBM Cloud private, including Blockchain, Watson, IoT, and Analytics. they are carrying on with to carry innovation during this area, with new choices to enable customers in an open, hybrid, multi-cloud world, like IBM Multicloud supervisor which i mentioned prior.

Turning to income for the section, gross margin development is driven by means of the lift of their productiveness initiatives. This comprises infusing AI and automation in their delivery procedures, corresponding to by using leveraging IBM services beginning Platform with Watson, and embedding agile pondering into their provider delivery techniques. We’re also leveraging productivity and talent optimization efforts, the place they continue to optimize company methods, reskill their skilled group of workers and leverage their international scale. PTI margin turned into flat, reflecting persevered investments to extend their go-to-market capabilities and increase new offerings to catch the hybrid market probability.

So, to wrap up services originally of 2018, they observed they anticipated an improving trajectory in their services income and income, and they delivered on that throughout the yr, with a strong fourth quarter.

In systems, income was down 20% this quarter. I’ll remind you that here is in comparison to a extremely mighty performance in the fourth quarter last yr, where they grew 28%. programs pre-tax margin become down 6.5 aspects, reflecting the mix headwind from the IBM Z product cycle.

I’ll walk through the distinct dynamics across the hardware portfolio. In IBM Z, we're six quarters into the z14 cycle. Z revenue declined 44%, whereas margins expanded modestly, based on the place we're in the cycle. The program continues to track forward of the prior software, with extensive client adoption throughout industries and countries. They endured so as to add new purchasers and new workloads to the platform. considering the fact that launching the z14 application, their MIPs skill has expanded almost 20%, with new workload MIPs transforming into twice the price of their common MIPs.

So, we’re taking competencies of the secular shifts available in the market, and now over fifty five% of their put in MIPs inventory is in rising workload areas. And while there is volatility in the hardware because of product cycles, as they continue to grow their install base, up roughly 3.5 times over the last decade, this gives steadiness in their linked software, services and financing company throughout IBM. energy revenue changed into up 10% driven through Linux and continued potent adoption across their new POWER9-primarily based architecture.

within the fourth quarter, they achieved the unencumber of their subsequent technology POWER9 processors in the excessive conclusion, and they had strong adoption in both the low and high-end methods. Their Power9 methods are designed for managing superior analytics, cloud environments and records-intensive workloads in AI, HANA, and UNIX markets and they now have prolonged HANA certification to their Power9 high end.

within the fourth quarter, they had mighty preliminary traction with their new offerings that optimize both hardware and utility for AI, such as PowerAI vision which they added in the 2d half of 2018. And we’ve pretty much completed the deployment of their supercomputers on the U.S. department of power labs within the quarter.

Storage hardware changed into down, with declines in midrange, mitigated via persevered strong boom in All Flash Arrays. The storage market is still very aggressive, with ongoing pricing pressures. We’re carrying on with to introduce new improvements and functionality. for example, in December they prolonged their next era NVMe know-how into the midrange, with strong initial customer adoption. they are able to continue to roll out NVMe across the storage portfolio within the first half of 2019.

So now turning to money, they generated $7.3 billion of money from operations in the quarter, excluding their financing receivables. With nearly $900 million in capital expenditures, they generated $6.5 billion of free money movement in the fourth quarter. This capped off a yr with $15.6 billion of cash from operations, also excluding financing. They invested $three.7 billion in CapEx this 12 months, peculiarly in their functions and cloud-primarily based companies, and that’s up $400 million from

remaining yr.

And so, they generated free money move of $11.9 billion for the year, and as i discussed, their normalized free cash stream realization turned into 111%. You’ll recollect that they expected their free money movement to be about $12 billion for 2018. The 12 months-to-year decline displays the headwinds they predicted from CapEx, working capital and cash taxes. They lower back over $10 billion to shareholders within the year, together with dividends of $5.7 billion. We’ve now accelerated their dividend per share for 23 consecutive years, and they continue to be committed to continued dividend increases. They also bought lower back just under 33 million shares, decreasing our

normal share count number by way of over 2%. on the conclusion of the 12 months, they had $3.three billion ultimate in their buyback authorization.

Now searching on the steadiness sheet, they ended the 12 months with a money steadiness of $12.2 billion, which without the have an effect on of forex is in step with a year in the past. total debt was $45.8 billion, down a $1 billion yr-to-yr, with sixty eight% in help of their financing business. The leverage in their financing business is in response to the goal of 9 to 1, and the credit score first-class of their financing receivables is still mighty at fifty five% investment grade, a point improved than a year in the past. And so, their stability sheet continues to be potent, and they are committed to preserving a robust investment grade credit rating.

As they typically do at the end of the yr, I wish to give a short update on their retirement-related plans. Their U.S. plan has been frozen for over a decade, and over the remaining several years we’ve moved their asset base to a decrease chance, reduce return profile. at the conclusion of 2018, in combination, their international tax-qualified plans are essentially totally funded, with the U.S. at 104%, consistent with a year in the past. So, despite the volatility within the markets, their plans are in in fact decent form.

So, let me birth to wrap up with some recommendations on 2018, after which I’ll flow on to expectations for 2019. As they opened the 12 months, they talked about the work they had done to reposition their company to assist circulation their valued clientele to the long run, shifting their portfolio, changing their operating mannequin and the style they work, and reallocating their capital.

And in their profits call closing January, they pointed out how that drove their expectations for 2018, in income, in margin, and in revenue per share. First, they noted they anticipated to develop earnings at then-current spot rates. They did definitely develop income for the yr, and that’s despite the U.S. dollar appreciation on the grounds that early 2018, decreasing their income growth by about two aspects, or $1.7 billion.

2nd, they pointed out we’d stabilize gross margins. while they fell somewhat short for the entire 12 months, they stabilized gross margin in the third quarter, and multiplied each gross and pre-tax margin within the fourth quarter and 2d half, that’s for the primary time in over three years. They pointed out tax would be a headwind for the yr. And it become a headwind to us, for the year, and in the fourth quarter. They persevered to return value to shareholders, with share repurchases contributing to earnings per share growth.

and at last, they said they expected working revenue per share of at least $13.eighty and free money circulation of about $12 billion and they done both of these. So, looking lower back on 2018, they grew revenue, working income and working revenue per share for the 12 months, with potent free cash movement realization. They had first rate momentum in GBS, with certain electricity in consulting, led via their digital and cloud application offerings. They achieved well in software within the fourth quarter, finishing the yr effective, led via analytics and AI, and their hybrid cloud utility.

As they execute their approach to assist their shoppers enforce hybrid cloud, their complete cloud profits grew to over $19 billion. throughout application and capabilities, they persevered to construct their as-a-provider revenue, and they exited the year with a $12 billion annual run cost, which is up 21%. They persisted their very successful IBM Z application and robust performance in power, with their Power9 structure roll-out. They repositioned their operating model and drove productiveness, which improved their margin profile.

We additionally endured to prioritize their investments and took movements to optimize their portfolio. They introduced the sale of choose application and services companies, movements that no longer handiest enrich their go-ahead profits profile, however enable us to raise their focal point and investment in the excessive value segments of IT in areas like hybrid cloud, AI, and blockchain.

All of this provides a superior business and fiscal foundation for the addition of purple Hat. And it gives us self belief in their expectation for full year 2019 working revenue per share of at the least $13.90. earlier than they go to mp;A, I wish to be clear about what is, and isn't covered in their expectations.

As i mentioned prior, purple Hat is expected to close in the 2d half, and given the monetary implications to 2019 are closely elegant on the timing of the closing, purple Hat isn't included in their expectations. We’ll update their view of the yr at the time of closing.

in the final month and a half, we’ve also announced two divestitures, the sale of their collaboration and on-prem advertising commerce application and the sale of their Seterus personal loan servicing enterprise. For these organizations, after they agree with the aggregate of the foregone earnings, the profit on the sale of utility belongings, the moves to address structure and stranded costs and the resulting advantages from these movements, they predict there to be minimal influence to their earnings and income per share for the 12 months.

and unlike the pink Hat acquisition, the timing of the closing does not have a significant have an impact on on the financial implications for the 12 months, although it can have an effect on the quarterly skew. consequently, their tips assumes these divestitures. talked about an extra manner, since the divestitures are practically neutral to their earnings for 2019, they don’t have an impact on the operating EPS information for the 12 months, notwithstanding they do have a advantage to their financial profile over the long term.

Turning to free money flow, they are expecting about $12 billion in 2019, with a cognizance fee of about 100%. This displays their expected operational earnings performance and persevered working capital effectivity, partially offset with a cash tax headwind. they have also taken under consideration the estimated free money move influences of the application and capabilities divestitures.

note that whereas these are rather impartial to salary, they're a headwind to their free money flow, because the benefit proceeds stream into the investing section of their cash move statement. finally, whereas they haven’t covered red Hat, they now have taken into consideration an estimate of the pre-closing financing prices associated with the acquisition. So, should you put all of it collectively, they see free cash circulation of about $12 billion, which is roughly flat year-to-yr, even after absorbing the headwind from the portfolio movements.

And with that, let me flip it back to Patricia for the mp;A.

Patricia Murphy

thank you, Jim. earlier than they begin the mp;A, I’d like to mention a few gadgets. First, we've supplemental charts at the conclusion of the slide deck that deliver additional info on the quarter and the total yr. This contains the 2018 efficiency and 12 months-end assumptions for their retirement-connected plans, and aiding information on the 2019 implications of their divested companies.

And 2d, as all the time, I’d ask you to refrain from multi-half questions. So, operator, let’s please open it up for questions.

question-and-answer Session

Operator

thank you. they will now start the query-and-reply session of this conference. [Operator Instructions] Their first query is coming from Wamsi Mohan of financial institution of the usa Merrill Lynch. Your line is open.

Wamsi Mohan

yes, thank you. Jim, IBM delivered a pleasant profit trajectory here exiting 2018. in this weaker macro backdrop, it seems like you've a pretty effective 2019 guidance. and i turned into hoping so that you can aid talk via what the profit trajectory seems like and gross and PTI level in 2019 and some color on the broader puts and takes embedded to your 2019 e-book together with the IP earnings and taxes. that might be constructive. thanks.

Jim Kavanaugh

k, Wamsi. thank you very much for the question. And it be likely an excellent area to start given they just concluded the prepared remarks and they stated probably the most dynamics of what is in their counsel. however as always, you can are expecting they run diverse situations here across their company and we're searching on the trajectory of their company, the macroeconomic atmosphere, what their business clients are telling us. And they additionally have in mind their personal operational indices in front of us and their business plans and techniques.

And after they put all that collectively this is what gives us self belief in and expectation of their working EPS of at least $13.90 for 2019. Now, as I just cited, this suggestions excludes red Hat simply given to the timing sensitivity and the economic implications I wish to shut as, however it includes the announced divestitures. And they will discuss that via all these mp;As regarding any forward-looking guidance.

however they enter – from my perspective, they enter 2019 with a an awful lot more suitable company profile when it comes to one riding working leverage and also you noticed how that played out within the second half. And or not it's correct to the core of your query. And two, I imply, their strategic imperatives presently, the high price rising segments within the IT trade are now continuously over 50% of IBM's enterprise.

So they do not give information on profits. Let me provide you with a bit color behind that and then i could go to working leverage and gross and pretax margin and tax, as they circulate ahead. but first i may beginning with a tailwind. we've a high-quality annuity base in their business, nowadays or not it's about 60% of IBM and that builds resiliency into their model.

And they obtained good momentum in their as-a-carrier as you heard. They exited the year with an annualized exit run fee of $12.2 billion and that's the reason up 21% year-over-12 months. You mix that with the power within their functions enterprise, they accelerated during the yr and they exited the yr with a really potent efficiency through GBS team who is just doing extraordinary relating to carrying on with to win in entrance of the marketplace and bring price to their shoppers.

And they additionally captured large signings in the fourth quarter that positions their GTS business, and definitely instantiates their price around hybrid cloud and the way we're winning. and then you couple that with strong execution on utility. They talked ninety days in the past about where they were at within the third quarter around application and they made some ahead-looking projections and they grew to become their software company round to boom becoming 2% within the fourth quarter, and they now have a strong portfolio lineup so they might predict that to continue.

And in hardware, sure, we’re on the lower back end of their mainframe cycle. and i would inform you it be probably the most a success mainframe we’ve had in quite slightly of time. however they proceed to carry new innovation to market to convey value for their consumers in their POWER9 architecture, which is resonating neatly within the industry and they acquired awesome acceptance, grew 10% in the fourth quarter. They are expecting to be able to continue to play out in 2019. So they have obtained a good ebook of enterprise right here and some tailwinds at us.

And from a headwind standpoint, you noted macro. neatly, the primary aspect i might call out is foreign money. The U.S. dollar continues to enhance all the way through 2018. primarily even considering that their ultimate profits name 90 days ago, the U.S. dollar endured to admire. And at this time you saw in the supplemental charts they give you transparency, they expect about a one to two element headwind on foreign money. after which at last, they are taking very disciplined portfolio actions throughout their business where they don't align to their built-in cost play and the place they are able to reprioritize and focus their investment to drive the value around the IBM business that divested contents goes to be a few one factor headwind.

So for those who put it all together, we've obtained some pluses and minuses at the true line. however actually, this yr, in 2019, it's going to be predicated on operating leverage. They made decent progress through 2018 and it positions us very neatly into expand margins in 2019. So amongst all of their scenarios, their guidance mannequin and their expectations point out that they are going to extend gross and pre-tax working margin in 2019 as they proceed to bring cost. and that is the reason going to come back out of scale efficiencies, that's going to come out of their functions momentum and the mixed shift and productivity, with the intention to offset – greater than offset the product cycle mix, they nonetheless have in the divested content.

And one ultimate factor that i might call out is tax. We're guiding to an all-in rate of about eleven% to 12%, which by the way is a headwind yr-to-year that we're going to have to overcome, a completing with a broadcast expense of about eight% in 2018. Now this price assumes estimated talents discretes. here is a transformation we're doing this to give enhanced transparency into their counsel as they circulation forward. but i'll tell you discretes with the aid of nature, vary in timing. They fluctuate in quantities and will be recorded after they turn up in 2019.

but you set all that collectively, now they have got headwinds and tailwinds on revenue, potent portfolio line-up in their excessive price features and software. They got expanding operating leverage that they predict, the tax price all-in of about eleven% or 12%. This offers us self belief in their full yr EPS of as a minimum $13.ninety and a free money stream of about $12 billion.

Patricia Murphy

wonderful. Thanks. Thanks Wamsi. can they go to the query, please?

Operator

here their subsequent question is coming from Toni Sacconaghi of Bernstein. Your line is open.

Toni Sacconaghi

yes. thanks. And thanks for the clarification on the previous query. I just wanted to know if you might clarify what the dimension of the expected benefit is on the sale of property to pink Hat, excuse me to HCL. and then even if you predict directionally purple Hat to be accretive or dilutive to free cash circulate and EPS this 12 months?

and then on application, may you touch upon the power that you just saw, became it a push out? Do you think like you captured gigantic commercial enterprise license agreements or is that this kind of a more normalized booklet? and will they are expecting cognitive to grow in Q1 and Q2 at an identical tempo to what they saw in this autumn? thanks.

Jim Kavanaugh

k, Toni. thanks very tons. Very first rate questions. Let me are attempting to take each of those piece through piece. first of all as you saw from their last earnings, they continue to take disciplined portfolio prioritization efforts round – their portfolio both when it comes to an announcement of the acquisition of purple Hat and additionally the announcement of sale of definite belongings within their cognitive and GBS company.

red Hat, as they observed, expected became – we're working through regulatory at this time. They expect to close that in the 2nd half. however on the topic of your specific query on divestitures, they included in their information the sale of their collaboration in non-prem advertising and commerce enterprise and the sale of their Seterus mortgaging business.

each of these will force headwinds as that you may imagine in earnings for the yr. They expect the mortgage company to shut later in the first quarter. That could be a headwind this year to GBS earnings. however on a sustainable basis, this improves each their salary profile in GBS and their margin profile as they proceed to shift the better value as they stream ahead.

when it comes to their Cognitive property that they offered, concerning collaboration in non-prem, those organizations generated roughly a little bit over $1 billion of income over the closing three hundred and sixty five days. They observed they expected to close that by using mid-yr. The transaction rate become $1.eight billion, but the expected profit, i will be able to tell you, can be an awful lot below that $1.eight billion as we're working during the acquisition accounting presently concerning goodwill and the way an awful lot goodwill can be applied to that. but they still predict a large benefit, nowhere close $1.8 billion, but a big profit.

And as they pointed out, we've acquired to beat; one, the foregone profit of these agencies, the stranded can charge of those businesses, and they can take that profit and as you possibly can predict, they will make the most of a element of that profit to tackle that stranded prices and structure and we’ll get return on that.

All of that put collectively is minimal have an impact on to their profit. So they blanketed that in their suggestions. It has minimal have an impact on to their income and EPS, however does have an affect to free money flow. just given what I noted a little while ago in the organized remarks, on the profit, on the asset sale, we’ll turn out to be in the investing section, their free cash flow. So they now have overcome that and nonetheless guided their free money circulate, it is roughly flat at about $12 billion.

Now your 2nd query was on Cognitive. They most likely performed well. You dial back ninety days ago and they had some relatively frank discussions about their portfolio, how they had self assurance in their portfolio, the competitiveness and the price they deliver to shoppers. And they failed to execute in third quarter and they got here returned, they carried out on robust pipelines.

software was up 2% ordinary. Their transact – they had amazing transactional efficiency. but doubtless what i'm most proud about is it turned into pervasive. They grew in hybrid cloud integration application 4%, they grew in options software three% across a lot of their choices led with the aid of records and AI and analytics, additionally in many offerings in their trade verticals around Watson fitness, and they grew in transaction processing utility, which they talked about that enterprise’s mission-crucial, high price to their shoppers and a foul client-purchasing cycles.

So if the rest in their universal portfolio software that’s tied to skew, it’s definitely the transaction processing application business, where they close robust pipeline, which they mentioned ninety days in the past. So they believe very first rate about the competitiveness and price of their portfolio. We’re going to think even more desirable after they shut the pink Hat acquisition, and what that does to give us an acceleration in a management position on a hybrid multi-cloud and we’re excited and searching forward to that.

Patricia Murphy

Thanks, Tony. and might they please go to the subsequent question?

Operator

thank you. next query is coming from Katy Huberty of Morgan Stanley. Your line is open.

Katy Huberty

thanks. first rate afternoon. Congrats on the exceptional numbers in the fourth quarter. question around linearity in 2019, there’s plenty happening with tax, grade, divestiture, a different crimson Hat numbers are within the information yet. but how may still they consider about linearity given that the timing of some of these discrete items may also exchange the walkthrough within the 12 months?

Jim Kavanaugh

k. thank you, Katy. And thanks on behalf of the complete IBM group, truly simply convey the strong fourth quarter here. but if you're taking a look at, it’s very good query. Why don’t I just address it via making an attempt to get some visibility into first quarter? It’s correct in entrance of us presently. if you take a glance originally quarter once again, they guided full yr EPS of at the least $13.ninety. in case you look originally quarter, firstly, on an EPS point of view, we'd are expecting the working EPS skew to be round sixteen% of the whole 12 months $13.ninety.

So if you happen to take a glance at that, it receives us off to a superb birth. It does acknowledge that they are on the again conclusion of a mainframe product cycle, but they bought acceleration in their capabilities and their software base of enterprise. And they consider assured in as a minimum that sixteen% starting out the year. Now, if you study that in comparison to the ultimate three years, it'll reveal that it’s a little bit less attainment.

however to your – heart of your question, the remaining few years they had great discrete tax items in the first quarter. if you go back to sixteen%, they closed on the Japan audit. if you go returned to closing 12 months, they closed on the U.S. audit contract. They don't see any place close the degree of discretes within the first quarter. and i would challenge somewhere around 11%, 10%. There should be would becould very well be some thing in the first quarter, however we’re now not speaking tremendous quantity.

So it truly is really EPS. On earnings, which they probably have the top-rated visibility simply given their operational indices, the mixed differential of their profits base between annuity and transactional, when they movement from a fourth quarter and the primary quarter. That seasonality, the transactional corporations have a greater muted effect on 1Q versus 4Q. and as the mix of greater annuity content material, which plays out within the first quarter, this may still make a contribution a couple of 1 to 2 aspect sequential development and their boom at constant currency. They simply got here off their fourth quarter with many different dynamics that produce a down 1 at constant foreign money.

So they do see an development just given the blended shift in the electricity of their annuity content material as they circulation ahead. The closing aspect that I’ll convey up about first quarter is, I talked a little bit about foreign money for the yr, they now have their toughest examine on forex in the first quarter, just given ultimate yr the greenback weakened throughout the first quarter after which dramatically accelerated or fortify as they flow through 2Q to 4Q.

in order you noticed within the supplemental chart, their foreign money affect is going to be a three to four aspect headwind and based on what I looked that had been dollar closed late today, it’s going to be likely nearer to that 4 aspect headwind standard.

Patricia Murphy

okay. Thanks, Katy. will they go to the next question, please?

Operator

thank you. subsequent query is coming from Tien-tsin Huang of JPMorgan. Your line is open.

Tien-tsin Huang

Thanks. I wish to ask on features that superior, like you said, it might in 2018. I’m curious, your outlook is for 2019 inside features, as a result of there are some moving ingredients GBS is perform really neatly software management up into a nice vicinity, so curious on a sustainability there. simply as a clarification away from the features, what strategic imperatives of 9%, there wasn’t as lots discuss that within the organized remarks. I’m curious, that nevertheless going to be a metric that’s going to be provided or entice going forward. Thanks.

Jim Kavanaugh

okay, Tien-tsin. thanks very a good deal for the query. They most likely are very completely satisfied with their functions business and the way we’ve endured to reposition their portfolio both in GBS, but additionally in their GTS space of business as they move throughout 2018. but when you look at the trajectory of their enterprise, they ended the yr with an overall are absolute backlog of $116 billion, that’s down 60 groundwork elements at regular forex and it’s a huge improvement from the place they began a 12 months ago. in case you be aware their discussions here a 12 months in the past, they had loads of discussion about your common backlog is down 3% at steady forex and they talked a lot about what they saw play out in 2018 and the team’s simply executed a brilliant job. We’re in a higher position. And they do see across their complete features business in 2019 sustained earnings increase and margin profile.

well, let me take the items and just offer you a bit bit of perspective. GBS, I couldn’t be greater proud of the team about what they’ve executed to reposition their portfolio and their offerings in capturing, in delivering increase to their shoppers, in digital, in cognitive and cloud. You noticed in the fourth quarter, they exited GBS, I’ll get these numbers fairly shut. Strategic imperatives growing mid-young adults, cloud growing 30%-plus and their as-a-carrier based mostly business, exiting would over a $2 billion number, I believe up sixty four% usual.

And we’ve got pervasive growth throughout all three strains of enterprise led by means of digital. They did state an software administration, where they finally again again to increase in the fourth quarter. we're executing and offering cost and using cloud migration features and cloud utility building. we've a differentiated providing and we’re offering price to their valued clientele, but they also closed on many customer selected milestones that caught up in the fourth quarter, but they nevertheless see first rate growth. It’s just no longer going to be on the degree that you just noticed right here in the fourth quarter.

With all that referred to, their margin and operating leverage, they think comfy. They grew GBS operating gross margins 300 groundwork aspects within the fourth quarter. with the intention to dissipate all the way through 2019, but they nevertheless see effective working leverage led by using their mix shift to higher value in the choices, how we’re taking pictures that rate realization and how we’re offering actual value and best to their customers.

Now in GTS, we're most likely profitable with their hybrid cloud momentum. They had a strong signings quarter, actually led via GTS standard within the hybrid cloud value prop, delivered $15.eight billion of signings, up 21% that’s what more desirable their backlog place right here at the conclusion of the yr, and we’re exiting with $8 billion as-a-provider annualized exit run fee which gives a robust annuity based content material and resiliency in their mannequin.

Now with that spoke of, they are doing portfolio prioritization in GTS. we're invariably going to focus on the place they are able to exploit and deliver cost to their customer and also make excessive price returns for the IBM shareholder. we're walking away from low cost based mostly content in GTS, you noticed that within the fourth quarter where their GTS enterprise ordinary became down I think, 50, 70 basis features.

And whilst you see that lower back – absolute backlog enhance, they are going to proceed prioritizing high value as a result of they are looking to get prioritization of money, income and margin out of that business and leverage that company in the value of incumbency and moving their valued clientele to the future in capitalizing on hybrid cloud.

So we’ll see persevered margin growth in GTS as they flow forward and that’s going to come back out of very equivalent scale efficiencies, productiveness. And bear in mind in each, we’re nevertheless going to get the second half of their productivity from their 2018 moves. So they believe fairly comfortable and assured in their features base of enterprise as they stroll into 2019.

Patricia Murphy

Thanks, Tien-tsin. will they go to the next question please.

Operator

thank you. next question is coming from David Grossman with Stifel. Your line is open.

David Grossman

thank you. So Jim, you’ve introduced two divestitures within the remaining six weeks, I believe you outlined in your organized remarks, you are exiting some GTS enterprise that turned into in all probability decrease margin, slower increase. definitely, devoid of getting too specific, what else can you inform us in regards to the other efforts that are underway to streamline the legacy core that may positively affect the agility of the corporation in addition to positively have an effect on your boom expense.

Jim Kavanaugh

okay. David, thanks very lots for the query. Let me take a large step lower back. obviously I’ve been considering this as Jenny and everybody else. From my perspective, they perpetually say IBM is a excessive cost based mostly enterprise. We’re a excessive value to their customers. We’re excessive price to their shareholders. in the method they continue to be excessive cost is through disciplined portfolio optimization. And whether you go over, what they just did the remaining 90 or one hundred twenty days otherwise you go over the ultimate three to five years, we've at all times focused on one, where is the market moving when it comes to growth, high cost offerings, customer cost, and most significantly earnings pools. and also you’re seeing us continue to do that as they move ahead.

These latest actions really center around disciplined portfolio prioritization round market beauty, around differentiation and around how they really play to the integrated price of the IBM portfolio. Their differentiated hardware application capabilities, and that was really at the coronary heart of the divestitures that they simply announced round definite belongings in their Cognitive solutions segment and in their international processing loan servicing unit, they were in reality more and more bought as standalone only items and offerings that can also be leveraged and brought to their shoppers through a distinct accomplice, who will make the investment prioritization as they flow forward.

I might inform you, we're at all times portfolio optimization, and the way they prioritize their funding and capital allocation and also you see that with the announcement of pink Hat and also you see that play out and what they just did with Cognitive and GBS. but as they go forward, we're going to proceed to prudently managing their portfolio and operate what that monetary self-discipline when it comes to acquisitions. Their strategy hasn't changed. or not it's always been built around assisting excessive value.

And it be about constructed around leveraging the investment thesis and narrative of IBM ingenious know-how, deep business expertise and have confidence and security all delivered through an built-in mannequin of hardware, software services. and then finally, i might inform you, they have a powerful steadiness sheet. we've exceptional cash circulate and they have enough financial flexibility to proceed to invest in their business and returning price to their shareholders over the long run. So they believe fairly good.

Patricia Murphy

Thanks, David. do they go to the subsequent query please?

Operator

thank you. subsequent question is coming John Roy of UBS. Your line is open.

John Roy

top notch. thanks so a good deal. So, well, most likely, cloud is a style that all and sundry is giving off greater significance here within the commercial enterprise space and yet, you have somewhat of a flat quarter. i used to be curious as to in case you win cloud offers as to why and the way would you see the crimson Hat acquisition is altering the colour round why you win and how plenty you win?

Jim Kavanaugh

ok, John. thank you very lots for the question. Let me try to position this in point of view round cloud. First of their cloud typical for the yr, it turned into $19.2 billion. That changed into up 12%. And within that, as they at all times talk in regards to the high price rising areas of as-a-provider comprehensive when an annualized exit run rate of $12.2 billion up 21%, which definitely obviously underlines their consistent execution in us taking pictures the high value secular shifts around cloud in that as-a-service. Now, should you study cloud within the quarter, the cloud quantity as printed truly displays the same basic headwind on the wrap of the product cycle or mainframe that they had to overcome.

Now that isn't new, they expected that. now they have been talking about that all 12 months long. second half of the yr, they knew they have been going to be on the backend of their mainframe product cycle. bear in mind they got here off a mainframe that grew 71% within the fourth quarter of 2017. And here is as I stated earlier than, probably the most a success mainframe product cycle in fairly a while, which incidentally generates and captures new rising workloads round pervasive encryption, however also as capturing new workloads around cloud as they move forward.

so that cloud enterprise with out mainframe become actually up 19%. that is an acceleration underlying their utility acceleration from 3Q to 4Q underlining their functions acceleration from 3Q to 4Q and they see that as they move forward as a result of be aware, despite the fact they had a deal with the biggest transactional quarter on mainframe, albeit in 2019, that begins to dissipate as a result of we're through that greatest quantity based quarter.

So they see cloud nonetheless resonating with their purchasers into your coronary heart of your question about purple Hat, red Hat and IBM together they see this move of how they will deliver price in leading the 2nd part, Ginni calls this chapter two, the 2nd section round where clients are relocating, very business vital company value lead workloads and that's about 80% of the workloads ahead of us.

So the value of bringing IBM and crimson Hat collectively goes to be founded round hybrid open multicloud and us wrapping round their safety, relaxed to the core and how they will carry that differentiated cost proposition. And we're simply excited about what crimson Hat is going to imply to the IBM enterprise and their customers.

Patricia Murphy

Thanks John. and can they please take the next question?

Operator

next query is coming from Jim Schneider of Goldman Sachs. Your line is open.

Jim Schneider

decent night. Thanks for taking my question. Jim, it's decent to peer the growth in application and cognitive relative ultimate quarter. I guess the query is on a go ahead foundation otherwise you have a target of mid-single-digit boom long-time period in cognitive, is it realistic to expect that you simply could achieve that, as they head throughout 2019 and maybe speak concerning the affect of any of the transactional enterprise you may additionally have considered this quarter that might have an effect on that, and just type of talk largely concerning the macro environment for that product fit in standard?

Jim Kavanaugh

sure. Jim, thanks very plenty for the query general. we're completely happy with their utility efficiency exiting the yr. As I observed, I suppose or not it's basically an instantiation that demonstrates their skill to bring innovative solutions embedded with AI, that drives enterprise value to their purchasers actually through an trade lens that plays across the built-in cost of IBM. What are functions base of enterprise in stacked on properly of their hardware based mostly structures, however should you study fourth quarter, they exited 2% growth.

We had respectable pervasive increase across the portfolio, as I noted earlier than, respectable, strong transactional increase, good SaaS signings, high renewal quotes, and bear in mind this cognitive answer segment is high value, high operating margins, and they proceed to extend operating margins right here within the fourth quarter and for the full 12 months.

Now when you take a step again, U.S. lengthy-term, neatly most likely in 2019 we'll cope with the headwind I observed what the home content, on the way to to cognitive options likely be, on a trailing twelve months they did a over a little over $1 billion. it would be a couple of four, five aspect headwind in 2019 and that's pre pink Hat acquisition because purple Hat’s not in 2019 yet. however we're going to have correct off the bat of 4 to 5 element headwind.

but the underlying fundamentals in their long-time period sustainability round that. sure, their long-term model has now not changed. They still see the strength of their offering portfolio, one, even getting more suitable around their hybrid integration utility, two round their analytics portfolio, which simply had a fine quarter, a knowledge AI, their business based mostly verticals their Watson fitness had growth across many of its choices as I observed prior.

And even in IoT they had boom around their core franchises, their amenities administration and asset management, Maximo, Tririga. So they received a pretty good, decent lineup. it's going to be on us to execute right here in 20 – 2019. They entirely expect to do that.

Patricia Murphy

Thanks, Jim. do they go to the subsequent question please?

Operator

thanks. subsequent question is coming from Joseph Foresi of Cantor Fitzgerald. Your line is open.

Joseph Foresi

hello, it gave the impression of for your remarks past that you simply notion you might bring sustainable biological constant currency boom in 2019. And so does that consist of or exclude red Hat after which simply as importantly, probably you can provide us some color around first half margins versus 2d half margins and perhaps what the margin exit rate should be for 2019? Thanks.

Jim Kavanaugh

certain, Joe, thanks very plenty for the call. firstly, they don’t e book on income for the yr. So, I don’t remember mentioning that they are going to develop the 12 months at steady currency organically et cetera. crimson Hat is not in any of the guidance as they noted upfront. They do have the divestitures in right here and divestitures are going to be about a degree headwind as they flow forward and as I mentioned, currency is going to be a one or two point headwind at genuine rates. but they do think assured within the booklet of enterprise they have round their capabilities and around their application as they circulate ahead. but the underlying dynamics as I talked about, they obtained many different situations we’re working right here.

the entire point to given us self assurance in their expectation of at least $13.ninety as they circulation ahead. That goes to be a combination of the mixture of their portfolio, the salary of their portfolio, the operating leverage of their portfolio, the tax constitution IP, there are numerous variables that go into that $13.ninety standard.

We do see strong operating leverage carrying on with in 2019; both gross and pretax margin leveraging their scale efficiencies, leveraging their combined shift, the larger cost, leveraging their productivity initiatives.

And for those who look at it, we’ve received high-quality momentum exiting 2d half in certain on their capabilities base of business. second half services grew working gross margins with the aid of 200 groundwork aspects. and i consider you would are expecting the same first half trend around that and in second half, we’ll delivery wrapping on a bit bit more challenging compares, however for the first, excuse me, for the total year, we'd expect first rate working leverage and that’s what we’re guiding to.

Patricia Murphy

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

Operator

thanks. Their subsequent question is coming from Jim Suva of Citi. Your line is open.

Jim Suva

thank you very plenty. on your organized slides, Slide number 10, it turned into very informative to aid us bridge the two different years on their revenue. The question I have is, as they appear forward to subsequent 12 months i do know you have loads of variables, are there any bridge items that you wish to chiefly call us out for surely to ensue to hit your $13.ninety, and the way come cash move wouldn’t be transforming into if your income starting to be? thank you.

Jim Kavanaugh

okay, Jim. firstly, thank you for the question. Thanks for the compliment. crew does work very complicated that you simply deliver the right degree of transparency. So their buyers can bear in mind the working dynamics of their business. Chart 10 lays out that full 12 months. You see how 2018 played out, strong operating leverage, tax headwind, profits boom at actuals for those who study it and also you go lower back to starting of January final 12 months, they pointed out what they noticed for the year. They grew salary. They grew working leverage. They grew working pretax salary. They grew income per share and that performed out smartly. if you examine 2019, as I stated numerous eventualities, however what have they noted already on this name?

One, they see persevered working leverage coming out of gross and pretax margin in 2019. Two, they do see tax being a headwind to us in 2019 and once more, they tried to supply stronger transparency, where we’re supplying you with an all in fee of as a minimum 11% to 12%, but even with that, that’s a 3 to 4 element headwind. We’ll continue to buy again shares as they mentioned.

I suppose that’s one stage of confidence and they have within the long-term cost of IBM, however’s also a stage of self belief that they have within the vigour of the IBM and purple Hat acquisition. So, I think you could see that continuing to play out. after which I wager last, they observed currency on income; foreign money on earnings, the affect of one or two aspects and the divestiture. So, they are able to proceed showing the transparency of the CPS bridge, helps their traders bear in mind the operating dynamics as they movement forward.

Patricia Murphy

and then jim, in your question on cash, as jim said within the organized remarks, they most likely have a headwind from the divested agencies, as a result of they now have the forgone – we’ll have forgone income and we’ll have a profit, but the profit doesn’t go into free cash circulation. They additionally could have some gadgets that hit their free cash circulate relative to a couple pre-closing fees for red Hat. So, that’s the motive that their free cash flow is flat despite the fact that they have a few headwinds within them. So, operator, why don’t they take one ultimate query.

Operator

thank you. Their remaining question in queue is coming from Keith Bachman of BMO. Your line is open.

Keith Bachman

hello, thanks. Jim, only a clarification first then a question on the clarification, you mentioned the have an impact on of the divestitures. And the slide that suggests the impact is $1.5 billion, I think you mentioned $1 billion changed into popping out of cognitive and i simply desired to look in case you just clarify, where is the leisure popping out of?

and then the question is on expertise features and cloud platforms. i wished to get your viewpoint as you analyze 2019; this enterprise continues to path a little bit relative to GBS in terms of revenue performance. Would you are expecting or anticipate this enterprise to grow and CY19? And therefore, would you predict working leverage to even be proven in this business? thanks.

Jim Kavanaugh

sure. Thanks keith for the query basic. first off, for your clarification, the influence of divestitures, they truly did give a supplemental chart that confidently every of you and their traders will admire on the transparency and the implications each on 2019 and then directionally on 2019. I consider, I noted a little over $1 billion, in case you examine Chart 15 within the supplementals, the cognitive application assets of divesting collaboration and their on-prem marketing and commerce was a couple of $1.three billion.

so that’s what I intended about a bit over $1 billion. in case you take a glance on the GBS personal loan servicing divesture that’s about $200 million, so on a full yr basis annualized it’s about $1.5 billion between the two of them. So with a bit of luck that solutions the clarification.

after which in your 2nd query, TS and CP, they entire the 12 months with mighty signings increase, which basically instantiates their hybrid cloud cost proposition and additionally the price of incumbency that they deliver with their valued clientele of figuring out their workloads, realizing their enterprise processes, and enabling us to circulation them to the longer term and taking pictures that cloud backlog. truly cloud backlog is up over 5 features yr-to-year as a p.c of their total outsourcing backlog.

but as I spoke of prior, GTS business, they are going to control this enterprise for profit, for money and for leveraging their incumbency to movement their shoppers sooner or later and supply more suitable client value and pleasure them through loyalty as they circulate forward. And we're going to exit some low cost content material enterprise. So for 2019, i would expect fairly similar efficiency in GTS usual on a exact line, however in margin they are going to expand margin that’s in their expectations and you see that play out within the second half of 2018 and they expect that to proceed.

So, all correct, with that noted, make an apology for going a bit bit long right here, they wanted to get a whole lot in right here, one in regards to the quarter however two about wrapping up the yr and what it skill for 2019, so a couple of feedback to wrap up.

We’re getting into 2019 in a very good place to support their customers whether or not they’re hunting for innovation or productiveness or each. We’ve got an outstanding base of company. You see this in their utility and features effects with strategic imperatives now normally at about half of their salary. And an operating leverage we’re driving and they are expecting that to continue. This offers us self assurance in their expectation of as a minimum $13.ninety of revenue per share for the 12 months and their hand-rolling gets more advantageous with the addition of purple Hat, which positions us because the chief in hybrid multi-cloud world.

So thanks for becoming a member of us these days. They seem to be forward to carrying on with the talk over the route of the yr. thanks very plenty.

Patricia Murphy

k. And let me turn it back to you to wrap up the call.

Operator

thank you for taking part in today’s call. The conference has now ended you may now disconnect.

SeekingAlpha

The expertise 202: Lawmakers be anxious about China's funding in 5G | killexams.com Real Questions and Pass4sure dumps

Ctrl + N

Attendees determine their smartphone contraptions through a 5G signal right through the hole day of the cell World Congress (MWC) in Barcelona, Spain. Photographer: Simon Dawson/Bloomberg

The race to be the primary nation to transform to 5G instant networks is on -- and the U.S. and China both need to win. 

Lawmakers on both sides are already making it a proper priority this Congress to ensure the U.S. moves abruptly to deploy subsequent-era instant networks so China doesn't beat it to the punch.

The stakes are high: The country that first generally adopts 5G -- if you want to deliver a ways sooner down load speeds and the ability to run billions extra instruments on cell networks, together with self-using cars-- will profit a competitive side on the realm stage.

So an awful lot so, Sen. Roger Wicker (R-omit.) stated, that 5G has the competencies to usher in a fourth industrial revolution. And dropping that capabilities part to China could be unthinkable, mentioned Wicker, the chair of the Senate Committee on Commerce, Science and Transportation. 

"Failing to win the race to 5G would not simplest materially lengthen the merits of 5G for the American people, it could continuously cut back the financial and societal gains that come from main the realm in technology,” Wicker noted at the committee's first hearing of the yr, which was concentrated on 5G. 

The listening to highlighted the experience of urgency in Washington to work with trade on facilitating the 5G rollout, primarily in ensuring satisfactory vital mid-band spectrum is obtainable to make certain the USA can keep pace with international competitors. Contracts that will shape the basics of those networks will be negotiated in 2019, even though it's going to probably take five or greater years for the system to be thoroughly up and operating.

With their eyes on successful this digital arms race against China, lawmakers additionally stated they’re focused on making certain that business adopts key safeguards against cyberthreats and considers customer privacy as 5G services are anticipated to enable expertise to develop ever more pervasive.

Lawmakers heard a sobering account of China’s coordinated approach to make frequent 5G a truth. Michael Wessel, a U.S.-China economic & security evaluate commissioner, informed lawmakers that China is poised to invest at least $four hundred billion at this factor into its 5G construction. China is also increasingly attempting to exert its have an impact on over overseas typical-surroundings groups such because the international overseas Telecommunications Union to advantage chinese organizations. China chairs more of the company’s committees than every other nation, Wessel said, stoking considerations amongst lawmakers.

“We haven't any comparable plans here within the U.S.,” Wessel instructed lawmakers in his opening testimony.

Congress is renewing its consideration on 5G as the Trump administration alerts that government motion is coming on next-technology instant, which is among the “reducing-edge industries of the future,” Trump talked about in his State of the Union tackle this week.  

“inside the coming weeks they could are expecting to peer motion designed to keep American R&D management in synthetic intelligence, 5G, and the primary deliverables from the countrywide Quantum Initiative Act,” an administration authentic informed me in a press release Wednesday.

for their half, lawmakers could accept as true with legislative proposals just like the Airwaves Act, which changed into delivered in the remaining Congress to require the Federal Communications fee to grasp auctions over the next three years to supply licenses for certain spectrum bands that might permit 5G. That invoice, which stalled in Congress, would have also allotted funding from the auctions to make sure that 5G is elevated in rural areas which have been previously left at the back of in such transitions.

5G is in its early ranges of deployment in certain components of the U.S.. In Silicon Valley, organizations are eagerly investing in new technologies with a view to depend on faster instant networks -- such as synthetic intelligence or augmented truth. 

the united states knows firsthand how a good deal is at stake during this global race against China. the united states led the world on 4G wireless expertise, which enabled a era of latest smartphone features that past networks wouldn’t have had the ability to guide.

“Ten years ago, no person imagined Uber or countless other companies which are dependent upon the 4G platform,” referred to Brad Gillen, the govt vp of CTIA, an business group representing wireless groups. “We are just scratching the surface.”

however China’s coordinated method makes it a bold opponent in the dash to herald the subsequent period of wireless. The massive scale of web clients in China make it one of the most world’s most lucrative digital markets, and the nation goes to prioritize its properly home groups as 5G rolls out. Huawei and ZTE have each and every been promised a third of the 5G market in China, according to Wessel. That might create a scramble amongst international suppliers for the remaining third. 

extra regarding is how these organizations might impact the market outside China. China’s organizations are deeply intertwined with the state, especially below a 2018 national intelligence legislation that requires companies to assist and support national intelligence, Wessel referred to. the united states is worried in regards to the cybersecurity and surveillance threat that chinese language groups could pose if they give the apparatus that makes it possible for the spine of so many basic digital capabilities.

the USA is warning European allies to now not use chinese language gadget for 5G networks, in response to a Tuesday file from Reuters. The Trump administration has weighed an government order that could supply the commerce secretary the authority to block U.S. offers involving overseas telecommunications equipment. 

“China’s innovation efforts are vast and deep,” Wessel warned the committee. “China desires to be a worldwide innovation leader and is doing all it may possibly legally and illegally to obtain its desires.”

you're reading The technology 202, their ebook to the intersection of technology and politics. not a daily subscriber?

BITS, NIBBLES AND BYTES

 fb CEO Mark Zuckerberg arrives to testify before a joint listening to of the Commerce and Judiciary Committees on Capitol Hill in Washington, about the use of fb information to target American voters in the 2016 election. (AP photo/Pablo Martinez Monsivais, File)

BITS: Germany’s competitors watchdog advised facebook that its Whatsapp and Instagram features can't combine data they bring together with a consumer’s main facebook account unless that user gives voluntary consent, in accordance BBC information. The regulator also ruled that facebook needs person permission to acquire data from third-birthday party websites and assign it to someone’s facebook account.

The decision would severely prevent the social community’s present records assortment practices. facebook plans to attraction the decision, in accordance with the BBC. although the restrictions most effective follow to fb’s services in Germany, it might prompt other international locations to trust an identical suggestions. 

facebook has one month to challenge the ruling earlier than it becomes legally beneficial. “If the order is upheld, the enterprise ought to advance technical solutions to be sure it complies inside 4 months. If it refused to accomplish that, it may in concept be fined as much as 10% of its annual revenues,” the BBC stated.

John Legere, T-cell's chief govt, arrives at a Senate Judiciary subcommittee hearing in Washington on June 27, 2018. (Andrew Harrer/Bloomberg news)

NIBBLES: Executives from T-cellular together with chief govt John Legere have booked greater nights than previously stated on the Trump overseas inn in the District since the company requested the Trump administration to approve its merger with sprint ultimate year, The Washington post’s Jonathan O'Connell, David A. Fahrenthold and Mike DeBonis pronounced. My colleagues discovered that T-mobile executives have booked at the least 52 nights on the hotel considering that then – including an extra 14 nights to the 38 that had been up to now pronounced. And the executives’ bookings have attracted the attention of two Democratic lawmakers.

Sen. Elizabeth Warren (D-Mass.) and Rep. Pramila Jayapal (D-Wash.) have despatched a pair of letters to Trump firm officials and to Legere to demand answers together with on how the bookings happened. “These transactions lift questions about even if T-cell is making an attempt to curry choose with the President throughout the Trump corporation and exacerbate their considerations concerning the President's persevered financial relationship with the Trump organization,” Warren and Jayapal wrote. The lawmakers also requested how a lot money T-cell officials spent on the resort.

The WhatsApp application on a phone display on Aug. 3, 2017. (Thomas White/Reuters) 

BYTES: WhatsApp talked about it deletes 2 million money owed per month in order to curb the unfold of disinformation as the business launched a white paper in India on “stopping abuse” of the platform, in response to the Guardian's Michael Safi. India is WhatsApp's greatest market with more than 200 million clients and the company has faced criticism from Indian authorities as mob lynchings were fueled by way of rumors spreading on the messaging provider.

Carl Woog, head of communications for WhatsApp, spoke of Indian political parties are abusing the platform because the nation is decided to hold a prevalent election through may, Reuters's Sankalp Phartiyal and Aditya Kalra stated. “we have considered a number of events try to use WhatsApp in ways that it changed into not meant, and their firm message to them is that using it in that way will influence in bans of their provider,” Woog mentioned.

because the Guardian mentioned, WhatsApp additionally said it's using laptop getting to know to spot bills that appear to unfold messages in big portions — the business limits the number of message forwards to 5 in India and mentioned remaining month that it is expanding the rule globally.

private CLOUD

The Apple logo is viewed on a window at an Apple save in Beijing on Jan. 7. (Kevin Frayer/Getty photos)

— industry analysts say Apple's retailers have lost a few of their shine as they lack elements to inspire loyalty among consumers, The Washington submit's Hamza Shaban pronounced. Daniel Ives, an analyst at Wedbush Securities, said product launches lately and routine on the enterprise's retailers were disappointing. “The final few years have in reality been void of the lines across the shop, sleeping at the shop, anticipating the product,” Ives told my colleague. “a part of it's that customers have gotten used to the Apple shop — there is not any longer the wow aspect.”

an electrical scooter in Washington on Jan. 3. (Salwan Georges/The Washington publish)

— About 1,500 individuals within the u.s. had been injured in incidents involving electric scooters for the reason that late 2017, according to an investigation from buyer reports's Ryan Felton. doctors say they have got treated serious accidents considering the fact that electric scooters from businesses akin to Lime and fowl had been deployed in cities throughout the nation. “We’ve had varied concussions, nasal fractures, bilateral forearm fractures, and some americans have required surgery,” Beth Rupp, scientific director on the Indiana college health core in Bloomington, Ind., informed consumer reviews.

— Telecommunications organizations sold sensitive customer area tips called “assisted GPS” statistics to third-party corporations who in turn offered it to bounty hunters, Motherboard's Joseph Cox said. Such assisted GPS or A-GPS facts is intended to be used via first responders to locate individuals who name 911 throughout emergencies. Motherboard additionally said that about 250 bounty hunters and different third-celebration corporations had access to the region information of AT&T, T-cell and dash purchasers.

— greater know-how information from the private sector:

Uber is intensifying its pursuit of core East riders after taking flight from other overseas markets in recent years, lured with the aid of the place’s exploding formative years inhabitants.

The Wall street Journal

IBM Corp. has developed technology to foretell and monitor when and where timber and vegetation threaten energy traces which might support improve vigour give operations and in the reduction of outages, it said on Wednesday.

Reuters

“we can listing a 5-2nd video of your face. ... To proceed, enable entry to your webcam.”

BuzzFeed news

PUBLIC CLOUD

A safety digital camera is set up on the side of a constructing in long island on July 31, 2013. (Mark Lennihan/AP) 

— a larger number of cities than up to now pronounced have experimented with the predictive policing application PredPol, which claims to make use of a machine-gaining knowledge of algorithm to foretell and help keep away from crime, in keeping with Motherboard's Caroline Haskins. The utility claims that it might probably predict where crime is probably going to occur in areas of 500 ft by 500 feet by using old crime data so that legislations enforcement can boost patrols in certain places. Motherboard acquired PredPol files from police departments in states together with California, Utah, Georgia and Washington.

Shahid Buttar, director of grass-roots advocacy on the digital Frontier foundation, warned about bias in predictive policing. Predictive policing is “pushed by way of what appears to be objective ancient statistics that itself reflects longstanding and pervasive bias,” Buttar advised Haskins. 

Rep. Yvette D. Clarke (D-N.Y.) on the 2016 Democratic national convention in Philadelphia on July 27, 2016. (Ron Sachs/image-alliance/dpa/AP images)

— Yvette D. Clarke (D-N.Y.) warned that the USA have to no longer fall behind in the race to 5G as other countries including China are also making a push into the technology, the Hill's Cady Stanton suggested. “it's going to put us at a disadvantage if they are late to the video game,” Clarke mentioned during an event that became hosted by the Hill and sponsored by using Qualcomm. “Our groups are already form of leaders during this space, and if they permit different businesses around the globe to hit that candy spot around 5G earlier than they do, imagine what it could imply when it comes to the shrinking of their entry to the market.”

— greater know-how news from the general public sector:

jump, the e-bike and e-scooter enterprise owned via Uber, got renewed hope Tuesday for its bid to be a part of San Francisco’s scooter cohort, even though it didn’t prove that its previous rejection by means of the metropolis was unfair.

San Francisco Chronicle

an immense tax damage changed into alleged to create a manufacturing paradise, however interviews with forty nine individuals common with the mission depict a chaotic operation unlikely to ever make use of 13,000 people.

Bloomberg news

speedy FWD

— news about tech group of workers and culture:

delivery startup says its independent ‘consumers’ could be allowed to hold their assistance devoid of dropping pay.

The Wall street Journal

nobody likes paying taxes, however new millionaires in California’s IPO gold rush wish to protect their money.

Recode

The company quietly laid off staffers monitoring americans around the net to promote facebook adverts.

Bloomberg information

#TRENDING

— Tech information producing buzz across the net:

e-book dogs, prosthetics and accessibility emojis welcomed with the aid of rights businesses

The Guardian

web way of life

A falsehood has been spreading in darkish corners of the information superhighway that Ruth Bader Ginsburg is useless. A Washington put up reporter saw her Monday nighttime, however wasn't satisfactory to douse the flames of this theory.

Eli Rosenberg and Abby Ohlheiser

@MENTIONS

— Caryn Marooney, facebook's vice chairman of communications, is leaving the enterprise, Wired's Issie Lapowsky mentioned.

404 ERROR

a person appears at an iPhone 8 Plus at an Apple keep in Tokyo on Sept. 22, 2017.(Franck Robichon/EPA-EFE)

— Some hackers and scammers are taking half in an “underground industry” that makes a speciality of disposing of the iCloud account of a person from their iPhone in order that the machine will also be resold, Motherboard's Joseph Cox and Jason Koebler reported. If the iCloud account of a user whose iPhone became stolen continues to be on the device, that allows the sufferer to remotely lock the cellphone and song it down through the use of the locate My iPhone function — and that's why resellers or thieves may are seeking for to eliminate the iCloud account.

“In practice, ‘iCloud free up’ because it’s regularly referred to as, is a scheme that involves a complex deliver chain of distinct scams and cybercriminals,” Motherboard pronounced. “These include the use of false receipts and invoices to trick Apple into believing they’re the legit proprietor of the mobilephone, using databases that look up suggestions on iPhones, and social engineering at Apple outlets.” although, Motherboard additionally referred to that “no longer all iCloud-locked phones are stolen devices.”

— extra information about tech incidents and errors:

It’s a lose-lose situation for Google’s Nest

The Verge

BURN fee

— today in funding information:

SoftBank has spent at least half of its almost $one hundred billion imaginative and prescient Fund in under two years, expanding the power to raise greater money if the realm’s biggest tech investor wants to retain that pace.

The Wall street Journal

Daniel Ek says he wants to spend as much as $500 million on acquisitions this yr.

Recode

Calm.com Inc. -- which makes an app that publications people through relaxation workout routines and encourages users to breathe -- has been valued at $1 billion in a funding circular led with the aid of TPG growth, the startup noted on Wednesday.

Bloomberg information

On-demand electric scooter startup Lime announced that it has closed a $310 sequence D circular, which values the enterprise at $2.four billion.

VentureBeat

assess-INS

these days:

Coming quickly:

  • The Brookings establishment holds a panel discussion titled “sensible cities and synthetic intelligence” on Feb. 11.
  • WIRED IN

    Conspiracy theorists are saying RBG is useless. She’s no longer.

    Trump's remarks on ISIS, in a single minute:

    was Trump’s State of the Union tackle bipartisan?


    AT&T blockchain effort contains IBM, Microsoft | killexams.com Real Questions and Pass4sure dumps

    AT&T has delivered consulting and internet of issues services for agents, manufacturers and healthcare organizations...

    the use of IBM's and Microsoft's cloud-based mostly blockchain expertise.

    The possible use situations for the multivendor services include asset management and records sharing inside a provide chain. For the latter, blockchain would replace natural SSL/TLS certificate-based mostly cryptography fashions, which have a few vulnerabilities.

    Proponents declare blockchain is a securer choice because it information information via a disbursed database ledger held by all individuals in a transaction. No celebration can make changes to the ledger with out the expertise or approval by the different parties.

    IBM and Microsoft are both making an attempt to build a enterprise round blockchain as a service, and the recent AT&T blockchain announcement shows the provider is able to join their effort.

    AT&T blockchain with IBM

    AT&T has integrated its Asset management Operations core with IBM's Maximo network on Blockchain and Maximo Asset fitness Insights. Asset administration Operations center is a web centralized console for monitoring and monitoring gadget and different IoT contraptions.

    The IBM blockchain carrier lets groups securely share information with individuals or companies through a digital ledger. The ledger's creator determines who can entry it and the forms of transactions every participant can perform.

    IBM's blockchain know-how is attainable for Maximo Asset health Insights, which tracks the condition of corporate machine. The monitoring helps avoid downtime by using signaling when to perform preservation before a breakdown.

     AT&T blockchain with Microsoft

    With Microsoft, AT&T is integrating its IoT platform with Microsoft's Azure-based blockchain technology. obtainable functions for IoT gadgets encompass monitoring, administration and community connectivity.

    Microsoft offers tools for know-how and security teams that need to try blockchain within the cloud. The tools let developers construct supply chain-connected blockchain functions using average Microsoft construction libraries.

    IBM and Microsoft are just two of a starting to be number of providers -- new and based -- constructing blockchain applications and equipment. for example, startup Guardtime offers comfortable give chain connectivity through blockchain and longtime business application vendor SAP presents the technology as a provider in its SaaS cloud.

    worldwide spending on blockchain know-how will enhance at an annual cost of seventy three%, accomplishing $eleven.7 billion in 2022 from $1.5 billion this yr, in response to IDC. The analyst company expects the financial business to spend probably the most this year, adopted by means of the retail and expert services industries and manufacturing.


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    International Business Machines' (IBM) Management on Q4 2018 Results - Earnings Call Transcript | killexams.com real questions and Pass4sure dumps

    International Business Machines Corporation (NYSE:IBM) Q4 2018 Earnings Conference Call January 22, 2019 5:00 PM ET

    Company Participants

    Patricia Murphy – Vice President-Investor Relations

    Jim Kavanaugh – Chief Financial Officer

    Conference Call Participants

    Wamsi Mohan – Bank of America Merrill Lynch

    Toni Sacconaghi – Bernstein

    Katy Huberty – Morgan Stanley

    Tien-tsin Huang – JPMorgan

    David Grossman – Stifel

    John Roy – UBS

    Jim Schneider – Goldman Sachs

    Joseph Foresi – Cantor Fitzgerald

    Jim Suva – Citi

    Keith Bachman – BMO

    Operator

    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 Patricia Murphy with IBM. Ma’am, you may begin.

    Patricia Murphy

    Thank you. This is Patricia Murphy, Vice President of Investor Relations for IBM, and I’d like to welcome you to their fourth quarter earnings presentation. I’m here today with Jim Kavanaugh, IBM’s Senior Vice President and Chief Financial Officer.

    The prepared remarks will be available within a couple of hours, and a replay of the webcast will be posted by this time tomorrow. I’ll remind you that certain comments made in this presentation may be characterized as forward-looking under the Private Securities Litigation Reform Act of 1995.

    Those statements involve a number of factors that could cause actual results to differ materially. Additional information concerning these factors is contained in the Company’s filings with the SEC. Copies are available from the SEC, from the IBM web site, or from us in Investor Relations.

    Our presentation also includes certain non-GAAP financial measures, in an effort to provide additional information to investors. All non-GAAP measures have been reconciled to their related GAAP measures in accordance with SEC rules. You will find reconciliation charts at the end of the presentation, and in the Form 8-K submitted to the SEC.

    So, with that, I’ll turn the call over to Jim.

    Jim Kavanaugh

    Thanks Patricia, and thanks to all of you for joining us. The fourth quarter capped off a year where they grew revenue, operating pre-tax income, and operating earnings per share. They stabilized their margin as they moved through the year, and they expanded gross and pre-tax margin in the fourth quarter. They continued to invest and take actions to shift their business toward higher-value areas like hybrid cloud and AI, including the announcement of their acquisition of Red Hat.

    And they again generated solid free cash flow, which enables this continued investment and shareholder returns. In the fourth quarter, they delivered $21.8 billion of revenue, which was down 1% at constant currency, though down 3% with the impact of currency translation.

    As always, I’ll focus on constant currency results. Their operating pre-tax income was $5 billion, and they had $4.87 of operating earnings per share. They had strong performance in software, and in services they had revenue growth and gross margin expansion. This was offset by the expected impact of their IBM Z product cycle dynamics.

    Our total software revenue was up 2%. They entered the quarter with a good pipeline of software opportunities, and they executed well, driven by hybrid cloud adoption and strong demand for analytics and AI offerings.

    Total services revenue was up 2%. They had steady improvement in Global Business Services throughout the year, with 6% growth in the fourth quarter and revenue growth and gross margin expansion across all three of their GBS business lines.

    Global Technology Services had a modest revenue decline, with solid gross margin expansion. They had a great signings quarter, reflecting strong demand for hybrid cloud implementations and their value prop to deliver productivity. Their hardware revenue was down. You’ll recall in 2017 they had a terrific fourth quarter in IBM Z, and so their decline reflects a wrap on that performance.

    This continues to be a very successful Z program and remains ahead of their prior cycle. Once again, they had strong growth in Power, with POWER9 now introduced throughout their portfolio.

    As you know they provide technology and industry expertise to help run their clients’ most important processes, which puts us in a unique position to help them transform their businesses. As they exit 2018, we’re continuing to see a few themes across their engagements. First, their clients continue to look to turn data into competitive advantage by applying analytics and AI, with an industry lens.

    Second, clients are increasingly looking to cloud to drive business value. As they move more mission-critical workloads to the cloud, they need to securely move data and workloads across multiple cloud environments and that requires a hybrid and open-cloud strategy.

    And third, clients are focused on productivity and predictability in their spend. Now, IT has always been about driving both technology innovation and productivity, with the balance shifting over time. We’re recently seeing increasing interest in productivity as clients look forward to the next couple of years.

    And so their results this quarter reflect their ability to deliver innovation and productivity you see this in their strong results in analytics and AI, in their as-a-Service cloud revenue, and in strong signings in their services business that deliver technology solutions and economic value, all through their integrated value proposition. That’s why companies such as Vodafone and BNP Paribas are leveraging the IBM Cloud, where they benefit from their hybrid multi-cloud capabilities and access to the most advanced technologies. And it’s why Bradesco Bank made a software, hardware and services multi-year commitment to the IBM Z platform, to take them to the next level in AI and hybrid IT, with more predictability in their operating cost.

    Across their segments, their strategic imperatives revenue for the year was up 9% to about $40 billion. Within that, their cloud revenue is over $19 billion, and they exited the year with an annual run rate for cloud-delivered-as-a-Service of over $12 billion, which is up 21% over last year. This is a solid base of cloud and cognitive capabilities, and we’re continuing to deliver innovation in these high value areas. For example, in the fourth quarter they introduced AI OpenScale, a platform to manage the lifecycle of all forms of AI models, and Multicloud Manager, a service to deploy and manage complete applications, in any cloud environment.

    We’re adding innovative services, like the world’s first commercial quantum computer available on the IBM Cloud. You may have seen that ExxonMobil is already using it to help address its most complex business challenges, such as energy exploration and chemicals manufacturing. The number of new clients using IBM Cloud Private accelerated in the fourth quarter, and adoption is growing for their IBM Cloud Private for Data platform, which was named a leader in the first quarter 2019 Forrester Wave report on Enterprise Insight Platforms. All of this is a validation of their hybrid, open approach to cloud, and they have a strong foundation from which to drive synergies across the business with the addition of Red Hat.

    Let me pause here to remind you of the value they see from the combination of IBM and Red Hat, which is all about accelerating hybrid cloud adoption. The client response to the announcement has been overwhelmingly positive. They understand the power of this acquisition, and the combination of IBM and Red Hat capabilities, in helping them move beyond their initial cloud work to really shifting their business applications to the cloud.

    They are concerned about the secure portability of data and workloads across cloud environments, about consistency in management and security protocols across clouds, and in avoiding vendor lock-in. They understand how the combination of IBM and Red Hat will help them address these issues.

    We see the strong bookings Red Hat recently reported as further evidence of clients’ confidence in the value. Remember, the quarter ended a month after the transaction was announced. From a value perspective, in addition to the growing Red Hat business itself, they see an opportunity to lift all of IBM by selling more of their own IBM Cloud and by selling more of their analytics and AI capabilities on OpenShift across multiple platforms.

    As clients proceed on their journey to get more business value from the cloud, they need more services help from the digital design, to app modernization, to native app development, to management of hybrid cloud environments. You saw last week the results of Red Hat’s shareholder vote, with very high participation, and over 99% voting in support.

    We are moving through the regulatory process and continue to expect to close in the second half of 2019. We’ve had a decade-long partnership with Red Hat and extended it nearly a year ago around hybrid and multi-cloud. And now, after the announcement in late October, we’ve begun the internal enablement planning so they can hit the ground running post closing.

    So now, I’ll go through the details of the fourth quarter, wrap up with a summary of the full year, and their view of 2019. As I said, their revenue in the quarter was $21.8 billion. This includes a currency hurt to revenue of over $500 million, which is 150 million more than mid-October spot rates suggested, as the dollar has continued to strengthen. Looking at their margin dynamics, they expanded both their gross and pre-tax operating margins.

    Our gross margin was up 10 basis points, with strong performance in the services businesses, together up 190 basis points. This was mitigated by the expected mix headwind from the IBM Z cycle dynamics. Their operating expense was better 5%. When currency impacts the top line, it generally helps expense, due to both translation and the benefit of hedging contracts.

    And so, with the strengthening of the dollar, currency helped their expense by nearly five points. Remember, the majority of their hedges are reflected in expense, and these hedging gains mitigate the currency impacts throughout the P&L. We’ve been focused on driving productivity in their business, implementing new ways of working, like using agile methodologies, and leveraging automation and infusing AI into their processes. This provides flexibility to drive innovation in areas like hybrid cloud, AI, security and blockchain, while also delivering operating leverage.

    Within their expense decline, they also had a lower level of IP income. At the beginning of the year they said they expected IP income to be down year-to-year, and it has been tracking lower, down $165 million year-to-year in the fourth quarter, and nearly $450 million for the full year. Putting this expense performance together with their gross margin expansion, pre-tax margin was up 50 basis points.

    Looking at operating tax, at the beginning of 2018, they provided a range for their full year tax rate of 16% plus or minus two points and that was without discrete items. With their final geographic and product mix, the full year rate without discretes was about 15%, within the expected range. Including the discrete items in the first and third quarters, their full year operating tax rate was 8%, which is a headwind year-to-year. The resulting tax rate in the fourth quarter was 12%, which is up about six points year-to-year.

    Regarding their GAAP tax rate, you saw in their press release that their fourth quarter rate also reflects a charge for a GILTI tax election, associated with the implementation of 2017 U.S. tax reform. This charge impacts GAAP net income and GAAP earnings per share.

    And so, turning back to their operating results, operating earnings per share of $4.87 was driven by solid operating leverage, offset by an expected headwind from tax.

    Looking at their cash metrics, they generated $6.5 billion of free cash flow in the quarter with $11.9 billion for the year, in line with their expectations. Their realization of GAAP net income is 111% for the year, normalizing for the non-operating tax reform charge. This supports a high level of investment and shareholder returns. So now let me move on to the segments.

    Cognitive Solutions revenue was up 2%, with 3% growth in Solutions Software and 1% growth in Transaction Processing Software. They expanded pre-tax margin by nearly three points, delivering operating leverage on this revenue growth, from both operational efficiencies and mix, while still investing at high levels.

    In the quarter, they continued to deliver innovation to their clients and scale their platforms and solutions, resulting in growth in their transactional revenue and SaaS signings. In Transaction Processing Software, they capitalized on the strong pipeline of larger transactions they discussed entering the fourth quarter, driven by their clients’ buying cycles. Their fourth quarter performance reflects these clients’ commitment to their platform for the longer term, given the value they provide in managing their mission-critical workloads and predictability in their spending.

    In Solutions Software, growth was led by analytics and AI offerings, with several other high-value areas growing as well. In their underlying analytics platform, they had broad-based growth across their Db2 portfolio including analytics appliances, and Data Science offerings.

    Demand for their IBM Cloud Private for Data offering accelerated, and now over 100 clients have adopted the platform, and that’s since launching just over six months ago. New clients include the Korea Internet and Security Agency, which is developing an app on ICP for Data that leverages a variety of data sources and machine learning models to find and thwart new cyber threats.

    In addition, we’re scaling their newest Watson services running on IBM Cloud Private for Data, like AI OpenScale. In Security, they continued to have solid demand for their integrated security and services solutions, including strong growth in their security intelligence and orchestration offerings, QRadar and Resilient. Within their industry verticals, Watson Health had growth across Payer, Provider, Imaging and Government and IoT once again had strong growth in their core offerings, Maximo and Tririga, where they lead the market in asset management and facilities management.

    In the emerging blockchain area, they announced several new clients this quarter, including their work with Smart Dubai on the Middle East’s first government-endorsed blockchain platform. They introduced an on-prem offering in November, the IBM Blockchain Platform for IBM Cloud Private, and signed several new deals this first month. They see a strong pipeline as clients are interested in the benefits of blockchain behind their firewall.

    Now, over the last few quarters, I called out offerings within their Solutions Software, which address horizontal domains where we’ve faced secular shifts in the market, specifically collaboration, commerce and talent. We’ve been taking actions, and last month they announced the divestiture of their collaboration and on-prem marketing and commerce products to HCL. After closing, which is currently expected to be mid-year, this action will improve their Cognitive Solutions revenue performance, normalizing for the divested content, and reflects their commitment to disciplined portfolio management.

    So now moving on to services, before getting into the two segments, I want to provide a view of the total services business. As I said earlier, revenue was up 2%, and gross margin expanded 190 basis points. Looking at their signings, on their last earnings call they talked about the strong pipeline of deals they had going into the fourth quarter. And they executed well, delivering signings of $15.8 billion, which is up 21% at constant currency.

    This results in a backlog which is now $116 billion. Since it’s measured at year-end spot rates, currency is obviously impacting the backlog. But at constant currency, the backlog is down 60 basis points year-to-year, which is about a two-point improvement versus last quarter’s performance.

    Customers are increasingly looking to leverage digital for growth and innovation, while at the same time increasing efficiencies and reducing cost within their businesses. IBM Services can deliver this value by leveraging its breadth across GBS and GTS. A recent example is at the Bank of the Philippine Islands, where we’ll provide IT infrastructure services as well as Digital Experience Solutions to support the bank’s ongoing digital transformation, increasing their IT efficiency and scale, and enabling them to seize opportunities in an increasingly digital financial sector.

    So now turning to Global Business Services, they again, delivered solid performance, building on the momentum throughout the year. The GBS team has done a really nice job repositioning this business, and you can see it in the results. Revenue grew 6%, with growth across all business lines, and gross margin expanded 300 basis points.

    Consulting revenue growth accelerated to 10%. This is validation of their success in bringing together technology and industry expertise to help their clients on their digital journey. They had continued strong growth in Digital Strategy, fueled by their Digital Commerce and CRM offerings. They are also accelerating growth in next generation Enterprise Applications led by strong demand in their consulting and implementation services in areas like S4/HANA, Salesforce, and Workday.

    In Application Management, they grew 4%. This quarter they returned to growth with strong performance in cloud migration factory and cloud application development, mitigated by continued declines in traditional application management engagements, as their clients move to the cloud. The 4% growth also reflects the achievement of significant milestones across a few accounts. We’ve been also improving their revenue profile in Global Process Services.

    Revenue grew 5% as they reinvent industry workflows by leveraging automation and infusing AI. And earlier this month, they announced the sale of their mortgage servicing business. The transaction is expected to close in the first quarter and will result in improving revenue and margin profile, normalizing for the divested content. So, this action, like the divestiture of select software assets, is about portfolio optimization. We’re focusing on higher-value offerings that are important to their integrated value proposition.

    Turning to GBS gross profit, there are a number of drivers of their 300 basis point expansion, including the operating leverage they get on the revenue growth, their mix towards higher-value offerings, and capturing the price for value, a help from currency, given their global delivery mix, and the yield on their productivity and utilization initiatives, including the re-alignment of their skills pyramids to key growth areas.

    In Technology Services and Cloud Platforms, they delivered $8.9 billion of revenue, which is flat versus last year, and gross margin expanded approximately 150 basis points. They continued to have strong growth in cloud revenue in the segment, this quarter up 22% year-to-year. They had a strong signings quarter, with 16 transactions over $100 million each. Both new and existing clients are looking to IBM to manage their critical infrastructure and deliver innovation, while simultaneously achieving predictable spending. They continue to see momentum in their open hybrid multi-cloud approach.

    I mentioned BNP Paribas earlier. BNP Paribas has selected IBM to strengthen its cloud environment, with a hybrid multi-cloud approach, bringing together the IBM Cloud, private clouds, along with existing infrastructure. Leveraging IBM’s technical and industry expertise, BNP Paribas will accelerate its digitization to offer its clients the best services, while respecting the security and confidentiality of their data.

    Looking at the revenue by line of business, Infrastructure Services revenue was flat. As they prioritize their portfolio, they are exiting some lower value content, which slightly impacts near-term revenue performance, but results in higher margins.

    In Technical Support Services, revenue was down 3%. TSS continues to be impacted by the hardware product cycle dynamics, partially off-set by continued growth in their core multi-vendor services offerings. And, finally, Integration Software growth accelerated to 4%. This performance was driven by continued strong adoption of IBM Cloud Private, where they added 200 new clients. That brings their total number of clients using this innovative platform to 600 in just over a year, as they continue to modernize traditional workloads.

    We also now have over 100 IBM software offerings integrated with IBM Cloud Private, including Blockchain, Watson, IoT, and Analytics. They are continuing to deliver innovation in this space, with new offerings to enable clients in an open, hybrid, multi-cloud world, like IBM Multicloud Manager which I mentioned earlier.

    Turning to profit for the segment, gross margin improvement is driven by the lift of their productivity initiatives. This includes infusing AI and automation in their delivery processes, such as by leveraging IBM Services Delivery Platform with Watson, and embedding agile thinking into their service delivery processes. We’re also leveraging productivity and talent optimization efforts, where they continue to optimize business processes, reskill their expert workforce and leverage their global scale. PTI margin was flat, reflecting continued investments to expand their go-to-market capabilities and develop new offerings to capture the hybrid market opportunity.

    So, to wrap up services at the beginning of 2018, they said they expected an improving trajectory in their services revenue and profit, and they delivered on that throughout the year, with a strong fourth quarter.

    In systems, revenue was down 20% this quarter. I’ll remind you that this is compared to a very strong performance in the fourth quarter last year, where they grew 28%. Systems pre-tax margin was down 6.5 points, reflecting the mix headwind from the IBM Z product cycle.

    I’ll walk through the different dynamics across the hardware portfolio. In IBM Z, they are six quarters into the z14 cycle. Z revenue declined 44%, while margins expanded modestly, in line with where they are in the cycle. The program continues to track ahead of the prior program, with broad client adoption across industries and countries. They continued to add new clients and new workloads to the platform. Since launching the z14 program, their MIPs capacity has increased nearly 20%, with new workload MIPs growing twice the rate of their standard MIPs.

    So, we’re taking advantage of the secular shifts in the market, and now over 55% of their installed MIPs inventory is in emerging workload areas. And while there is volatility in the hardware due to product cycles, as they continue to grow their install base, up roughly 3.5 times over the last decade, this provides stability in their related software, services and financing business across IBM. Power revenue was up 10% driven by Linux and continued strong adoption across their new POWER9-based architecture.

    In the fourth quarter, they completed the release of their next generation POWER9 processors in the high end, and they had strong adoption in both the low and high-end systems. Their Power9 systems are designed for handling advanced analytics, cloud environments and data-intensive workloads in AI, HANA, and UNIX markets and they now have extended HANA certification to their Power9 high end.

    In the fourth quarter, they had strong initial traction with their new offerings that optimize both hardware and software for AI, such as PowerAI Vision which they introduced in the second half of 2018. And we’ve essentially completed the deployment of their supercomputers at the U.S. Department of Energy labs in the quarter.

    Storage hardware was down, with declines in midrange, mitigated by continued strong growth in All Flash Arrays. The storage market remains very competitive, with ongoing pricing pressures. We’re continuing to introduce new innovations and functionality. For example, in December they extended their next generation NVMe technology into the midrange, with strong initial client adoption. They will continue to roll out NVMe across the storage portfolio in the first half of 2019.

    So now turning to cash, they generated $7.3 billion of cash from operations in the quarter, excluding their financing receivables. With nearly $900 million in capital expenditures, they generated $6.5 billion of free cash flow in the fourth quarter. This capped off a year with $15.6 billion of cash from operations, also excluding financing. They invested $3.7 billion in CapEx this year, mainly in their services and cloud-based businesses, and that’s up $400 million from

    last year.

    And so, they generated free cash flow of $11.9 billion for the year, and as I mentioned, their normalized free cash flow realization was 111%. You’ll recall that they expected their free cash flow to be about $12 billion for 2018. The year-to-year decline reflects the headwinds they anticipated from CapEx, working capital and cash taxes. They returned over $10 billion to shareholders in the year, including dividends of $5.7 billion. We’ve now increased their dividend per share for 23 consecutive years, and they remain committed to continued dividend increases. They also bought back just under 33 million shares, reducing our

    average share count by over 2%. At the end of the year, they had $3.3 billion remaining in their buyback authorization.

    Now looking at the balance sheet, they ended the year with a cash balance of $12.2 billion, which without the impact of currency is consistent with a year ago. Total debt was $45.8 billion, down a $1 billion year-to-year, with 68% in support of their financing business. The leverage in their financing business is in line with the target of 9 to 1, and the credit quality of their financing receivables remains strong at 55% investment grade, a point better than a year ago. And so, their balance sheet remains strong, and they are committed to maintaining a strong investment grade credit rating.

    As they typically do at the end of the year, I want to provide a quick update on their retirement-related plans. Their U.S. plan has been frozen for over a decade, and over the last several years we’ve moved their asset base to a lower risk, lower return profile. At the end of 2018, in aggregate, their worldwide tax-qualified plans are nearly fully funded, with the U.S. at 104%, consistent with a year ago. So, despite the volatility in the markets, their plans are in really good shape.

    So, let me start to wrap up with some thoughts on 2018, and then I’ll move on to expectations for 2019. As they opened the year, they talked about the work they had done to reposition their business to help move their clients to the future, shifting their portfolio, changing their operating model and the way they work, and reallocating their capital.

    And in their earnings call last January, they talked about how that drove their expectations for 2018, in revenue, in margin, and in earnings per share. First, they said they expected to grow revenue at then-current spot rates. They did in fact grow revenue for the year, and that’s despite the U.S. dollar appreciation since early 2018, reducing their revenue growth by about two points, or $1.7 billion.

    Second, they said we’d stabilize gross margins. While they fell a bit short for the full year, they stabilized gross margin in the third quarter, and expanded both gross and pre-tax margin in the fourth quarter and second half, that’s for the first time in over three years. They said tax would be a headwind for the year. And it was a headwind to us, for the year, and in the fourth quarter. They continued to return value to shareholders, with share repurchases contributing to earnings per share growth.

    And finally, they said they expected operating earnings per share of at least $13.80 and free cash flow of about $12 billion and they achieved both of these. So, looking back on 2018, they grew revenue, operating profit and operating earnings per share for the year, with strong free cash flow realization. They had good momentum in GBS, with particular strength in consulting, led by their digital and cloud application offerings. They executed well in software in the fourth quarter, finishing the year strong, led by analytics and AI, and their hybrid cloud software.

    As they execute their strategy to help their clients implement hybrid cloud, their total cloud revenue grew to over $19 billion. Across software and services, they continued to build their as-a-Service revenue, and they exited the year with a $12 billion annual run rate, which is up 21%. They continued their very successful IBM Z program and strong performance in Power, with their Power9 architecture roll-out. They repositioned their operating model and drove productivity, which improved their margin profile.

    We also continued to prioritize their investments and took actions to optimize their portfolio. They announced the sale of select software and services businesses, actions that not only improve their go-forward revenue profile, but allow us to increase their focus and investment in the high value segments of IT in areas like hybrid cloud, AI, and blockchain.

    All of this provides a solid business and financial foundation for the addition of Red Hat. And it gives us confidence in their expectation for full year 2019 operating earnings per share of at least $13.90. Before they go to mp;A, I want to be clear about what is, and is not included in their expectations.

    As I mentioned earlier, Red Hat is expected to close in the second half, and given the financial implications to 2019 are heavily dependent on the timing of the closing, Red Hat is not included in their expectations. We’ll update their view of the year at the time of closing.

    In the last month and a half, we’ve also announced two divestitures, the sale of their collaboration and on-prem marketing commerce software and the sale of their Seterus mortgage servicing business. For these businesses, when they consider the combination of the foregone profit, the gain on the sale of software assets, the actions to address structure and stranded costs and the resulting benefits from these actions, they expect there to be minimal impact to their profit and earnings per share for the year.

    And unlike the Red Hat acquisition, the timing of the closing does not have a significant impact on the financial implications for the year, though it may affect the quarterly skew. As a result, their guidance assumes these divestitures. Said another way, because the divestitures are essentially neutral to their profit for 2019, they don’t impact the Operating EPS guidance for the year, though they do have a benefit to their financial profile over the longer term.

    Turning to free cash flow, they expect about $12 billion in 2019, with a realization rate of about 100%. This reflects their expected operational profit performance and continued working capital efficiency, partially offset with a cash tax headwind. They have also taken into account the estimated free cash flow impacts of the software and services divestitures.

    Note that while these are relatively neutral to earnings, they are a headwind to their free cash flow, because the gain proceeds flow into the investing section of their cash flow statement. Finally, while they haven’t included Red Hat, they have taken into account an estimate of the pre-closing financing costs associated with the acquisition. So, when you put it all together, they see free cash flow of about $12 billion, which is roughly flat year-to-year, even after absorbing the headwind from the portfolio actions.

    And with that, let me turn it back to Patricia for the mp;A.

    Patricia Murphy

    Thank you, Jim. Before they begin the mp;A, I’d like to mention a couple of items. First, they have supplemental charts at the end of the slide deck that provide additional information on the quarter and the full year. This includes the 2018 performance and year-end assumptions for their retirement-related plans, and supporting information on the 2019 implications of their divested businesses.

    And second, as always, I’d ask you to refrain from multi-part questions. So, operator, let’s please open it up for questions.

    Question-and-Answer Session

    Operator

    Thank you. They will now start the question-and-answer session of this conference. [Operator Instructions] Their first question is coming from Wamsi Mohan of Bank of America Merrill Lynch. Your line is open.

    Wamsi Mohan

    Yes, thank you. Jim, IBM delivered a nice profit trajectory here exiting 2018. In this weaker macro backdrop, it looks like you've a pretty robust 2019 guidance. And I was hoping that you can help talk through what the profit trajectory looks like and gross and PTI level in 2019 and some color on the broader puts and takes embedded in your 2019 guide including the IP income and taxes. That would be helpful. Thank you.

    Jim Kavanaugh

    Okay, Wamsi. Thank you very much for the question. And it's probably a good place to start given they just concluded the prepared remarks and they talked about some of the dynamics of what's in their guidance. But as always, you would expect they run multiple scenarios here across their business and we're looking at the trajectory of their business, the macroeconomic environment, what their enterprise clients are telling us. And they also take into account their own operational indices in front of us and their business plans and strategies.

    And when they put all that together this is what gives us confidence in and expectation of their operating EPS of at least $13.90 for 2019. Now, as I just stated, this guidance excludes Red Hat just given to the timing sensitivity and the financial implications I want to close as, but it includes the announced divestitures. And we'll talk about that through all these mp;As with regards to any forward-looking guidance.

    But they enter – from my perspective, they enter 2019 with a much improved business profile in terms of one driving operating leverage and you saw how that played out in the second half. And it's right to the core of your question. And two, I mean, their strategic imperatives right now, the high value emerging segments in the IT industry are now consistently over 50% of IBM's business.

    So they don't give guidance on revenue. Let me give you a little color behind that and then I'll go to operating leverage and gross and pretax margin and tax, as they move forward. But first I'll start with a tailwind. They have a solid annuity base in their business, today it's about 60% of IBM and that builds resiliency into their model.

    And they got good momentum in their as-a-Service as you heard. They exited the year with an annualized exit run rate of $12.2 billion and that's up 21% year-over-year. You combine that with the strength within their services business, they accelerated throughout the year and they exited the year with a very strong performance by GBS team who is just doing excellent with regards to continuing to win in front of the marketplace and deliver value to their clients.

    And they also captured significant signings in the fourth quarter that positions their GTS business, and really instantiates their value around hybrid cloud and how we're winning. And then you couple that with solid execution on software. They talked 90 days ago about where they were at in the third quarter around software and they made some forward-looking projections and they turned their software business around to growth growing 2% in the fourth quarter, and they have a strong portfolio lineup so they would expect that to continue.

    And in hardware, yes, we’re on the back end of their mainframe cycle. And I would tell you it's the most successful mainframe we’ve had in quite a bit of time. But they continue to bring new innovation to market to deliver value for their clients in their POWER9 architecture, which is resonating well in the marketplace and they got great acceptance, grew 10% in the fourth quarter. They expect that will continue to play out in 2019. So we've got a good book of business here and some tailwinds at us.

    And from a headwind perspective, you talked about macro. Well, the first thing I would call out is currency. The U.S. dollar continues to strengthen throughout 2018. Especially even since their last earnings call 90 days ago, the U.S. dollar continued to appreciate. And right now you saw in the supplemental charts they provide you with transparency, they expect about a one to two point headwind on currency. And then finally, they are taking very disciplined portfolio actions across their business where they don't align to their integrated value play and where they can reprioritize and focus their investment to drive the value around the IBM company that divested contents is going to be about a one point headwind.

    So when you put it all together, we've got some pluses and minuses at the top line. But really, this year, in 2019, it's going to be predicated on operating leverage. They made good progress through 2018 and it positions us very well into expand margins in 2019. So amongst all of their scenarios, their guidance model and their expectations indicate that they will expand gross and pre-tax operating margin in 2019 as they continue to deliver value. And that's going to come out of scale efficiencies, that's going to come out of their services momentum and the mixed shift and productivity, which will offset – more than offset the product cycle mix, they still have in the divested content.

    And one last thing that I would call out is tax. We're guiding to an all-in rate of about 11% to 12%, which by the way is a headwind year-to-year that we're going to have to overcome, a finishing with a printed rate of about 8% in 2018. Now this rate assumes estimated potential discretes. This is a change we're doing this to provide enhanced transparency into their guidance as they move forward. But I will tell you discretes by nature, vary in timing. They vary in amounts and will be recorded when they occur in 2019.

    But you put all that together, we've got headwinds and tailwinds on revenue, strong portfolio line-up in their high value services and software. They got expanding operating leverage that they expect, the tax rate all-in of about 11% or 12%. This gives us confidence in their full year EPS of at least $13.90 and a free cash flow of about $12 billion.

    Patricia Murphy

    Great. Thanks. Thanks Wamsi. Can they go to the question, please?

    Operator

    Here their next question is coming from Toni Sacconaghi of Bernstein. Your line is open.

    Toni Sacconaghi

    Yes. Thank you. And thank you for the clarification on the previous question. I just wanted to know if you could clarify what the size of the expected gain is on the sale of assets to Red Hat, excuse me to HCL. And then whether you expect directionally Red Hat to be accretive or dilutive to free cash flow and EPS this year?

    And then on software, could you comment on the strength that you saw, was it a push out? Do you feel like you captured large enterprise license agreements or is this sort of a more normalized book? And should they expect cognitive to grow in Q1 and Q2 at a similar pace to what they saw in Q4? Thank you.

    Jim Kavanaugh

    Okay, Toni. Thank you very much. Very good questions. Let me try to take each of these piece by piece. First of all as you saw from their last earnings, they continue to take disciplined portfolio prioritization efforts around – their portfolio both in terms of an announcement of the acquisition of Red Hat and also the announcement of sale of certain assets within their cognitive and GBS business.

    Red Hat, as they talked about, expected was – we're working through regulatory right now. They expect to close that in the second half. But with regards to your specific question on divestitures, they included in their guidance the sale of their collaboration in non-prem marketing and commerce business and the sale of their Seterus mortgaging business.

    Both of these will drive headwinds as you can imagine in revenue for the year. They expect the mortgage business to close later in the first quarter. That will be a headwind this year to GBS revenue. But on a sustainable basis, this improves both their revenue profile in GBS and their margin profile as they continue to shift the higher value as they move forward.

    In terms of their Cognitive assets that they sold, with regards to collaboration in non-prem, those businesses generated roughly a little bit over $1 billion of revenue over the last 12 months. They said they expected to close that by mid-year. The transaction price was $1.8 billion, but the expected gain, I will tell you, will be a lot less than that $1.8 billion as we're working through the acquisition accounting right now with regards to goodwill and how much goodwill will be applied to that. But they still expect a sizable gain, nowhere near $1.8 billion, but a sizeable gain.

    And as they said, we've got to overcome; one, the foregone profit of these businesses, the stranded cost of these businesses, and they will take that gain and as you would expect, we're going to utilize a portion of that gain to address that stranded costs and structure and we’ll get return on that.

    All of that put together is minimal impact to their profit. So they included that in their guidance. It has minimal impact to their profit and EPS, but it does have an impact to free cash flow. Just given what I said a little while ago in the prepared remarks, on the gain, on the asset sale, we’ll end up in the investing section, their free cash flow. So we've overcome that and still guided their free cash flow, that's roughly flat at about $12 billion.

    Now your second question was on Cognitive. They obviously executed well. You dial back 90 days ago and they had some pretty frank discussions about their portfolio, how they had confidence in their portfolio, the competitiveness and the value they bring to clients. And they didn't execute in third quarter and they came back, they executed on strong pipelines.

    Software was up 2% overall. Their transact – they had strong transactional performance. But probably what I'm most proud about is it was pervasive. They grew in hybrid cloud integration software 4%, they grew in solutions software 3% across many of their offerings led by data and AI and analytics, also in many offerings in their industry verticals around Watson Health, and they grew in transaction processing software, which they said that business’s mission-critical, high value to their clients and a foul client-buying cycles.

    So if anything in their overall portfolio software that’s tied to skew, it’s really the transaction processing software business, where they close strong pipeline, which they talked about 90 days ago. So they feel very good about the competitiveness and value of their portfolio. We’re going to feel even better when they close the Red Hat acquisition, and what that does to provide us an acceleration in a leadership position on a hybrid multi-cloud and we’re excited and looking forward to that.

    Patricia Murphy

    Thanks, Tony. And can they please go to the next question?

    Operator

    Thank you. Next question is coming from Katy Huberty of Morgan Stanley. Your line is open.

    Katy Huberty

    Thank you. Good afternoon. Congrats on the nice numbers in the fourth quarter. Question around linearity in 2019, there’s a lot going on with tax, grade, divestiture, another Red Hat numbers are in the guidance yet. But how should they think about linearity given that the timing of some of these discrete items may change the walkthrough in the year?

    Jim Kavanaugh

    Okay. Thank you, Katy. And thanks on behalf of the entire IBM team, really just deliver the solid fourth quarter here. But if you take a look at, it’s very good question. Why don’t I just address it by trying to get some visibility into first quarter? It’s right in front of us right now. If you take a look at first quarter again, they guided full year EPS of at least $13.90. If you look at first quarter, first of all, on an EPS perspective, they would expect the operating EPS skew to be around 16% of the full year $13.90.

    So when you take a look at that, it gets us off to a good start. It does acknowledge that they are on the back end of a mainframe product cycle, but they got acceleration in their services and their software base of business. And they feel confident in at least that 16% starting out the year. Now, if you look at that compared to the last three years, it will show that it’s a little bit less attainment.

    But to your – heart of your question, the last few years they had substantial discrete tax items in the first quarter. If you go back to 16%, they closed on the Japan audit. If you go back to last year, they closed on the U.S. audit settlement. They do not see anywhere near the level of discretes in the first quarter. And I would project somewhere around 11%, 10%. There might be something within the first quarter, but we’re not talking substantial amount.

    So that is really EPS. On revenue, which they probably have the best visibility just given their operational indices, the mixed differential of their revenue base between annuity and transactional, when they move from a fourth quarter and the first quarter. That seasonality, the transactional businesses have a more muted effect on 1Q versus 4Q. And as the mix of more annuity content, which plays out in the first quarter, this should contribute about a 1 to 2 point sequential improvement and their growth at constant currency. They just came off their fourth quarter with many different dynamics that produce a down 1 at constant currency.

    So they do see an improvement just given the mixed shift in the strength of their annuity content as they move forward. The last thing that I’ll bring up about first quarter is, I talked a little bit about currency for the year, they have their toughest compare on currency in the first quarter, just given last year the dollar weakened throughout the first quarter and then dramatically accelerated or strengthen as they move through 2Q to 4Q.

    So as you saw in the supplemental chart, their currency impact is going to be a 3 to 4 point headwind and based on what I looked that were dollar closed late today, it’s going to be probably closer to that 4 point headwind overall.

    Patricia Murphy

    Okay. Thanks, Katy. Can they go to the next question, please?

    Operator

    Thank you. Next question is coming from Tien-tsin Huang of JPMorgan. Your line is open.

    Tien-tsin Huang

    Thanks. I want to ask on services that improved, like you said, it would in 2018. I’m curious, your outlook is for 2019 within services, because there are some moving parts GBS is perform really well application management up into a nice place, so curious on a sustainability there. Just as a clarification away from the services, what strategic imperatives of 9%, there wasn’t as much talk about that in the prepared remarks. I’m curious, that still going to be a metric that’s going to be provided or attract going forward. Thanks.

    Jim Kavanaugh

    Okay, Tien-tsin. Thank you very much for the question. They obviously are very pleased with their services business and how we’ve continued to reposition their portfolio both in GBS, but also in their GTS space of business as they move throughout 2018. But when you look at the trajectory of their business, they ended the year with an overall are absolute backlog of $116 billion, that’s down 60 basis points at constant currency and it’s a big improvement from where they started a year ago. If you remember their discussions here a year ago, they had a lot of discussion about your overall backlog is down 3% at constant currency and they talked a lot about what they saw play out in 2018 and the team’s just done an excellent job. We’re in a much better position. And they do see across their total services business in 2019 sustained revenue growth and margin profile.

    Well, let me take the pieces and just give you a little bit of perspective. GBS, I couldn’t be more proud of the team about what they’ve done to reposition their portfolio and their offerings in capturing, in delivering growth to their clients, in digital, in cognitive and cloud. You saw in the fourth quarter, they exited GBS, I’ll get these numbers pretty close. Strategic imperatives growing mid-teens, cloud growing 30%-plus and their as-a-Service based business, exiting would over a $2 billion number, I think up 64% overall.

    And we’ve got pervasive growth across all three lines of business led by digital. They did state an application management, where they finally returned back to growth in the fourth quarter. They are executing and delivering value and driving cloud migration services and cloud application development. They have a differentiated offering and we’re delivering value to their clients, but they also closed on many client specific milestones that caught up in the fourth quarter, but they still see good growth. It’s just not going to be at the level that you saw here in the fourth quarter.

    With all that said, their margin and operating leverage, they feel comfortable. They grew GBS operating gross margins 300 basis points in the fourth quarter. That will dissipate throughout 2019, but they still see strong operating leverage led by their mix shift to higher value in the offerings, how we’re capturing that price realization and how we’re delivering real value and quality to their clients.

    Now in GTS, they are obviously winning with their hybrid cloud momentum. They had a strong signings quarter, really led by GTS overall in the hybrid cloud value prop, delivered $15.8 billion of signings, up 21% that’s what improved their backlog position here at the end of the year, and we’re exiting with $8 billion as-a-Service annualized exit run rate which provides a strong annuity based content and resiliency in their model.

    Now with that said, they are doing portfolio prioritization in GTS. They are constantly going to focus on where they can exploit and deliver value to their client and also make high value returns for the IBM shareholder. They are walking away from low value based content in GTS, you saw that in the fourth quarter where their GTS business overall was down I think, 50, 70 basis points.

    And while you see that back – absolute backlog improve, they are going to continue prioritizing high value because they want to get prioritization of cash, profit and margin out of that business and leverage that business in the value of incumbency and moving their clients to the future in capitalizing on hybrid cloud.

    So we’ll see continued margin expansion in GTS as they move forward and that’s going to come out of very similar scale efficiencies, productivity. And remember in both, we’re still going to get the second half of their productivity from their 2018 actions. So they feel pretty comfortable and confident in their services base of business as they walk into 2019.

    Patricia Murphy

    Thanks, Tien-tsin. Can they go to the next question please.

    Operator

    Thank you. Next question is coming from David Grossman with Stifel. Your line is open.

    David Grossman

    Thank you. So Jim, you’ve announced two divestitures in the last six weeks, I think you mentioned in your prepared remarks, you are exiting some GTS business that was perhaps lower margin, slower growth. Obviously, without getting too specific, what else can you tell us about the other efforts that are underway to streamline the legacy core that may positively impact the agility of the organization as well as positively impact your growth rate.

    Jim Kavanaugh

    Okay. David, thanks very much for the question. Let me take a big step back. Obviously I’ve been thinking about this as Jenny and everyone else. From my perspective, they constantly say IBM is a high value based company. We’re a high value to their clients. We’re high value to their shareholders. In the way they remain high value is through disciplined portfolio optimization. And whether you go over, what they just did the last 90 or 120 days or you go over the last three to five years, they have constantly focused on one, where is the market moving in terms of growth, high value offerings, client value, and most importantly profit pools. And you’re seeing us continue to do that as they move forward.

    These latest actions really center around disciplined portfolio prioritization around market attractiveness, around differentiation and around how they really play to the integrated value of the IBM portfolio. Their differentiated hardware software services, and that was really at the heart of the divestitures that they just announced around certain assets in their Cognitive Solutions segment and in their global processing mortgage servicing unit, they were basically more and more sold as standalone only products and offerings that can be leveraged and delivered to their clients through a different partner, who will make the investment prioritization as they move forward.

    I could tell you, we're always looking at portfolio optimization, and how they prioritize their investment and capital allocation and you see that with the announcement of Red Hat and you see that play out and what they just did with Cognitive and GBS. But as they go forward, we're going to continue to prudently managing their portfolio and operate what that financial discipline in terms of acquisitions. Their strategy hasn't changed. It's always been built around supporting high value.

    And it's about built around leveraging the investment thesis and narrative of IBM innovative technology, deep industry expertise and trust and security all delivered through an integrated model of hardware, software services. And then finally, I would tell you, they have a strong balance sheet. They have great cash flow and they have enough financial flexibility to continue to invest in their business and returning value to their shareholders over the long term. So they feel pretty good.

    Patricia Murphy

    Thanks, David. Can they go to the next question please?

    Operator

    Thank you. Next question is coming John Roy of UBS. Your line is open.

    John Roy

    Great. Thank you so much. So, well, obviously, cloud is a trend that everybody is giving off more importance here in the enterprise space and yet, you have somewhat of a flat quarter. I was curious as to when you win cloud deals as to why and how would you see the Red Hat acquisition is changing the color around why you win and how much you win?

    Jim Kavanaugh

    Okay, John. Thank you very much for the question. Let me try to put this in perspective around cloud. First of their cloud overall for the year, it was $19.2 billion. That was up 12%. And within that, as they always talk about the high value emerging areas of as-a-Service finished when an annualized exit run rate of $12.2 billion up 21%, which really clearly underlines their consistent execution in us capturing the high value secular shifts around cloud in that as-a-Service. Now, when you look at cloud in the quarter, the cloud number as printed really reflects the same fundamental headwind on the wrap of the product cycle or mainframe that they had to overcome.

    Now that isn't new, they expected that. We've been talking about that all year long. Second half of the year, they knew they were going to be on the backend of their mainframe product cycle. Remember they came off a mainframe that grew 71% in the fourth quarter of 2017. And this is as I said before, the most successful mainframe product cycle in quite some time, which by the way generates and captures new emerging workloads around pervasive encryption, but also as capturing new workloads around cloud as they move forward.

    So that cloud business without mainframe was actually up 19%. That's an acceleration underlying their software acceleration from 3Q to 4Q underlining their services acceleration from 3Q to 4Q and they see that as they move forward because remember, although they had a deal with the largest transactional quarter on mainframe, albeit in 2019, that starts to dissipate because we're through that biggest volume based quarter.

    So they see cloud still resonating with their clients into your heart of your question about Red Hat, Red Hat and IBM together they see this movement of how they can deliver value in leading the second phase, Ginni calls this chapter two, the second phase around where clients are moving, very business critical business value lead workloads and that's about 80% of the workloads ahead of us.

    So the value of bringing IBM and Red Hat together is going to be centered around hybrid open multicloud and us wrapping around their security, secure to the core and how we're going to deliver that differentiated value proposition. And we're just excited about what Red Hat is going to mean to the IBM company and their clients.

    Patricia Murphy

    Thanks John. And can they please take the next question?

    Operator

    Next question is coming from Jim Schneider of Goldman Sachs. Your line is open.

    Jim Schneider

    Good evening. Thanks for taking my question. Jim, it's good to see the improvement in software and cognitive relative last quarter. I guess the question is on a go forward basis or you have a target of mid-single-digit growth long-term in cognitive, is it realistic to expect that you could achieve that, as they head throughout 2019 and maybe talk about the impact of any of the transactional business you may have seen this quarter that might affect that, and just kind of talk broadly about the macro environment for that product fit in general?

    Jim Kavanaugh

    Yes. Jim, thanks very much for the question overall. They are pleased with their software performance exiting the year. As I talked about, I think it's really an instantiation that demonstrates their ability to deliver innovative solutions embedded with AI, that drives business value to their clients really through an industry lens that plays across the integrated value of IBM. What are services base of business in stacked on top of their hardware based platforms, but when you look at fourth quarter, they exited 2% growth.

    We had good pervasive growth across the portfolio, as I said before, good, strong transactional growth, good SaaS signings, high renewal rates, and remember this cognitive solution segment is high value, high operating margins, and they continue to expand operating margins here in the fourth quarter and for the full year.

    Now when you take a step back, U.S. long-term, well obviously in 2019 we're going to deal with the headwind I talked about what the domestic content, that will to cognitive solutions probably be, on a trailing 12 months they did a over a little over $1 billion. It'll be about a four, five point headwind in 2019 and that's pre Red Hat acquisition because Red Hat’s not in 2019 yet. But we're going to have right off the bat of four to five point headwind.

    But the underlying fundamentals in their long-term sustainability around that. Yes, their long-term model has not changed. They still see the strength of their offering portfolio, one, even getting better around their hybrid integration software, two around their analytics portfolio, which just had a great quarter, a data AI, their industry based verticals their Watson Health had growth across many of its offerings as I talked about earlier.

    And even in IoT they had growth around their core franchises, their facilities management and asset management, Maximo, Tririga. So they got a good, good lineup. It's going to be on us to execute here in 20 – 2019. They fully expect to do that.

    Patricia Murphy

    Thanks, Jim. Can they go to the next question please?

    Operator

    Thank you. Next question is coming from Joseph Foresi of Cantor Fitzgerald. Your line is open.

    Joseph Foresi

    Hi, it sounded like in your remarks earlier that you thought you could deliver sustainable organic constant currency growth in 2019. And so does that include or exclude Red Hat and then just as importantly, maybe you can give us some color around first half margins versus second half margins and maybe what the margin exit rate will be for 2019? Thanks.

    Jim Kavanaugh

    Sure, Joe, thank you very much for the call. First of all, they don’t guide on revenue for the year. So, I don’t remember stating that they are going to grow the year at constant currency organically et cetera. Red Hat is not in any of the guidance as they talked about upfront. They do have the divestitures in here and divestitures are going to be about a point headwind as they move forward and as I stated, currency is going to be a one or two point headwind at actual rates. But they do feel confident in the book of business they have around their services and around their software as they move forward. But the underlying dynamics as I talked about, they got many different scenarios we’re running here.

    All the point to given us confidence in their expectation of at least $13.90 as they move forward. That is going to be a mixture of the mix of their portfolio, the revenue of their portfolio, the operating leverage of their portfolio, the tax structure IP, there are many different variables that go into that $13.90 overall.

    We do see strong operating leverage continuing in 2019; both gross and pretax margin leveraging their scale efficiencies, leveraging their mixed shift, the higher value, leveraging their productivity initiatives.

    And when you look at it, we’ve got great momentum exiting second half in particular on their services base of business. Second half services grew operating gross margins by 200 basis points. And I think you would expect a similar first half trend around that and in second half, we’ll start wrapping on a little bit tougher compares, but for the first, excuse me, for the full year, they would expect good operating leverage and that’s what we’re guiding to.

    Patricia Murphy

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

    Operator

    Thank you. Their next question is coming from Jim Suva of Citi. Your line is open.

    Jim Suva

    Thank you very much. In your prepared slides, Slide number 10, it was very informative to help us bridge the two different years on their earnings. The question I have is, as they look forward to next year I know you have a lot of variables, are there any bridge items that you want to particularly call us out for most likely to happen to hit your $13.90, and how come cash flow wouldn’t be growing if your earnings growing? Thank you.

    Jim Kavanaugh

    Okay, Jim. First of all, thank you for the question. Thanks for the compliment. Team does work very hard that you provide the right level of transparency. So their investors can understand the operating dynamics of their business. Chart 10 lays out that full year. You see how 2018 played out, strong operating leverage, tax headwind, revenue growth at actuals when you look at it and you go back to beginning of January last year, they stated what they saw for the year. They grew revenue. They grew operating leverage. They grew operating pretax income. They grew earnings per share and that played out well. If you look at 2019, as I stated many different scenarios, but what have they talked about already on this call?

    One, they see continued operating leverage coming out of gross and pretax margin in 2019. Two, they do see tax being a headwind to us in 2019 and again, they tried to provide enhanced transparency, where we’re giving you an all in rate of at least 11% to 12%, but even with that, that’s a three to four point headwind. We’ll continue to buy back shares as they talked about.

    I think that’s one level of confidence and they have in the long-term value of IBM, but it’s also a level of confidence that they have in the power of the IBM and Red Hat acquisition. So, I think you could see that continuing to play out. And then I guess last, they talked about currency on revenue; currency on revenue, the impact of one or two points and the divestiture. So, they will continue showing the transparency of the CPS bridge, helps their investors understand the operating dynamics as they move forward.

    Patricia Murphy

    And then jim, on your question on cash, as jim said in the prepared remarks, they obviously have a headwind from the divested businesses, because they have the forgone – we’ll have forgone profit and we’ll have a gain, but the gain doesn’t go into free cash flow. They also will have some items that hit their free cash flow relative to some pre-closing costs for Red Hat. So, that’s the reason that their free cash flow is flat despite the fact that they have a couple of headwinds within them. So, operator, why don’t they take one last question.

    Operator

    Thank you. Their last question in queue is coming from Keith Bachman of BMO. Your line is open.

    Keith Bachman

    Hi, thank you. Jim, just a clarification first then a question on the clarification, you mentioned the impact of the divestitures. And the slide that indicates the impact is $1.5 billion, I think you said $1 billion was coming out of cognitive and I just wanted to see if you just clarify, where is the rest coming out of?

    And then the question is on technology services and cloud platforms. I wanted to get your perspective as you look at 2019; this business continues to trail a little bit relative to GBS in terms of revenue performance. Would you expect or anticipate this business to grow and CY19? And therefore, would you expect operating leverage to also be demonstrated in this business? Thank you.

    Jim Kavanaugh

    Yes. Thanks keith for the question overall. First of all, on your clarification, the impact of divestitures, they actually did provide a supplemental chart that hopefully each of you and their investors will appreciate on the transparency and the implications both on 2019 and then directionally on 2019. I think, I said a little over $1 billion, if you look at Chart 15 in the supplementals, the cognitive software assets of divesting collaboration and their on-prem marketing and commerce was about a $1.3 billion.

    So that’s what I meant about a little over $1 billion. When you take a look at the GBS mortgage servicing divesture that’s about $200 million, so on a full year basis annualized it’s about $1.5 billion between the two of them. So hopefully that answers the clarification.

    And then on your second question, TS and CP, they finished the year with strong signings growth, which really instantiates their hybrid cloud value proposition and also the value of incumbency that they provide with their clients of understanding their workloads, understanding their business processes, and enabling us to move them to the future and capturing that cloud backlog. In fact cloud backlog is up over 5 points year-to-year as a percent of their total outsourcing backlog.

    But as I said earlier, GTS business, they are going to manage this business for profit, for cash and for leveraging their incumbency to move their clients in the future and provide better client value and delight them through loyalty as they move forward. And they are going to exit some low value content business. So for 2019, I would expect pretty similar performance in GTS overall on a top line, but in margin they are going to expand margin that’s in their expectations and you see that play out in the second half of 2018 and they expect that to continue.

    So, all right, with that said, apologize for going a little bit long here, they wanted to get a lot in here, one about the quarter but two about wrapping up the year and what it means for 2019, so a few comments to wrap up.

    We’re entering 2019 in a great position to help their clients whether they’re looking for innovation or productivity or both. We’ve got a solid base of business. You see this in their software and services results with strategic imperatives now consistently at about half of their revenue. And an operating leverage we’re driving and they expect that to continue. This gives us confidence in their expectation of at least $13.90 of earnings per share for the year and their hand-rolling gets stronger with the addition of Red Hat, which positions us as the leader in hybrid multi-cloud world.

    So thanks for joining us today. They look forward to continuing the dialogue over the course of the year. Thank you very much.

    Patricia Murphy

    Okay. And let me turn it back to you to wrap up the call.

    Operator

    Thank you for participating in today’s call. The conference has now ended you may now disconnect.

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    Figure 1.1 The System Center Configuration Manager console.

    Business Solutions Addressed by System Center Configuration Manager

    System Center Configuration Manager 2007 R2 SP2 helps maintain consistency in system configuration and management. Rather than having each and every workstation, laptop, and server built from scratch in an ad hoc manner with configuration settings based on the individual desires of the IT professional building the system, SCCM uses templates in the build process.

    The templates are created by the IT personnel to meet specific business, security, and functional application needs of the organization. Once a template is created, all systems of similar function can have the exact same template used to build and configure the system with only the unique server name or other identifier being different from system to system. With the template-based installation, the organization can depend on consistency in build configuration for like servers, like desktops, and like laptops throughout the enterprise.

    In fact, SCCM has additional components that ensure that the systems, once deployed, maintain the consistency by preventing users from updating systems using unsupported or unique update parameters. Rather, policies are established to update all systems of a similar functional role to be upgraded or updated the same. If a patch or update goes out to one system of a configuration type, then all systems of that configuration type are updated at the same (or relatively same) time. This concept, technically called Desired Configuration Management (DCM), can be audited and reports can be generated to show security officers and compliance auditors that standards are enforced throughout the data center and throughout workstation systems across an entire organization.

    Major Features of System Center Configuration Manager

    System Center Configuration Manager 2007 R2 SP2 has hundreds of features and functions that an IT administrator can leverage as part of their system configuration and management practices; some of the major features in the product are as follows:

  • Operating system deployment—At the start of the system's life cycle is the installation of the core operating system. SCCM provides all the tools an organization needs to deploy an operating system, either as an imaged installation (formerly, organizations used Norton Ghost, but no longer need to because SCCM includes image creation and deployment tools) or as a scripted method of installation.
  • Patching and updating—Once the operating system has been deployed, SCCM includes the mechanism to patch and update systems. Although many organizations use the Windows Server Update Services (WSUS), a free tool for patching and updating systems, SCCM leverages everything WSUS does but also provides IT administrators a more active patching and updating addition to WSUS. The Software Updates portion of the SCCM console, shown in Figure 1.2, is an example of the detail of the update information. The active update system enforces updates, forcing systems to be patched, updated, and rebooted based on policies that the IT department publishes and ensuring consistency in the update cycle of systems. Figure 1.2

    Figure 1.2 Details in the SCCM console relative to patching and updating systems.

  • Asset tracking—As part of the operating system deployment and patching and updating process, the management tool needs to know what type of hardware, software, and applications make up the system so the system can be properly updated. SCCM includes the tools necessary to track the hardware and software assets of the systems it is managing.
  • Remote control—In the event that a user working on a system needs help, or that a system needs to be serviced, SCCM has a remote-control process that allows the IT administrator or a help desk individual to remotely control and support a user or manage a system whether the system is on the network or remote of the network.
  • Software deployment—Although the operating system deployment will install the base operating system on a server or client system, applications need to be installed and managed as well. SCCM provides the tools to push out software applications, whether it is something as simple as a plug-in or utility or as complex as a complete suite or server-based application, including unique application configuration and customization.
  • Desired Configuration Management—Beyond just having an operating system and applications installed on a system, keeping a system configured in a standard setup is crucial in consistency controls. SCCM provides a process called Desired Configuration Management, or DCM, that has policies established for system configurations so that a system cannot be changed or modified beyond the configuration standards set by policy for the system. This ensures all systems have the same software, drivers, updates, and configuration settings meeting stringent audit and controls standards consistent with regulatory compliance rules.
  • Internet Client—A very significant component in SCCM is the Internet Client. In the past, for a system to be managed, the system had to be connected to the network. For remote and mobile systems, that means the system has to be VPN'd into the network to have patches and updates applied or for the IT department to inventory or remotely control the system. With the Internet Client and the use of a PKI certificate installed on the system, a remote or mobile system merely needs to be connected to the Internet anywhere in the world, and the SCCM client will automatically connect back to the corporate SCCM server through a secured tunnel to allow SCCM to inventory, patch, apply policies, and update the system. The remote system does not need to VPN into the network or do anything other than simply establish connectivity to the Internet.
  • Reporting—SCCM integrates into the product a report generation tool, shown in Figure 1.3, that comes with a full set of out-of-the-box reports, including the ability for IT personnel to create customized reports on everything from asset inventory reports to standard configuration reports to reports on the patch and update level of each laptop and desktop in the entire enterprise. Reports can also be customized in the report tool querying any data sets of information collected by SCCM and producing reports specific to the needs of the organization.
  • Background on System Center Configuration Manager

    System Center Configuration Manager 2007 R2 SP2 is easily a half-dozen or more generations into the life cycle of the product. From its early roots as Systems Management Server, or SMS, that had a bad reputation for being a management product that took more to manage the management system than managing workstations and servers themselves, SCCM has come a long way.

    Some of the major revisions and history of the product are as follows:

  • Systems Management Server v1.x—Systems Management Server (SMS) v1.x had a few versions, 1.0, 1.1, and 1.2, all available in the mid-1990s to support systems typically in a Windows NT environment. Because Windows NT domains were clusters of systems but not really a highly managed hierarchy of systems, SMS 1.x had its own site structure for identifying and managing systems. With most organizations at the time using Ghost to deploy system images, and patching and updating not really a common practice, SMS pretty much just provided the packaging of software programs and upgrades of software programs for systems. An expert who knew how to bundle up Microsoft Office or Adobe Acrobat into an MSI installation script had a full-time job as the process of packaging applications during these early days was neither easy nor intuitive. Smaller organizations found it was easier to just take a CD-ROM and walk from computer to computer to install software than try to create a "package" and hope that the package would deploy properly over the network.
  • Systems Management Server v2.0—SMS 2.0 came out in 1999 and provided similar software-deployment processes as before; however, instead of using ad hoc site configurations, SMS 2.0 started to leverage subnets as its method of identifying systems on a network. SMS 2.0 also transitioned into the Active Directory era, although not without its challenges as it was a non-AD product that was somewhat set up to support an Active Directory environment. Needless to say, SMS 2.0 was about as successful as SMS 1.x was in helping in systems management.
  • Systems Management Server 2003 (also known as SMS v3.0)—SMS 2003 came out to specifically support systems in an Active Directory environment, and although Microsoft now supported Active Directory sites, the product still required a packaging and scripting expert to be able to do anything with the product. Patching and updating became a requirement as viruses and worms spread across the Internet and a tool was needed to do the updates. So SMS 2003 was best known for its ability to provide patching and updating of systems; however, the setup and complexity of SMS 2003 to just control patching and updating allowed a number of other third-party companies like Alteris, Marimba, and LanDesk to challenge Microsoft in having an easier system for patching, updating, and deploying software.
  • System Center Configuration Manager 2007—By 2007, Microsoft rebranded their management products under the System Center designation and finally broke away from the old legacy "site" concept of the Windows NT-based SMS product and fully redesigned the product for Active Directory, calling it System Center Configuration Manager 2007. With significantly better packaging, patching, and inventory tools along with a much better server role structure, SCCM 2007 finally "worked." Organizations were now able to create software packages in minutes instead of days. Patching and updating leveraged the highly successful WSUS patching tool with enhancements added into the SCCM update for patching and updating to enforce updates, force system reboots, and better manage the mobile workforce.
  • System Center Configuration Manager 2007 SP1—SCCM 2007 SP1 added support for managing Windows Vista systems as well as support for remote-management components that Intel built in to their chipset called vPro technologies. With systems with vPro built in, an SCCM administrator can wake up a powered-off system, boot the system to a remote-management guest operating system, and perform management tasks, including flashing the system BIOS without ever touching the actual system.
  • System Center Configuration Manager 2007 R2—The R2 release of SCCM 2007 added automatic computer provisioning and multicast support for operating system deployments into the R2 release of the product. R2 also added App-V support in addition to ForeFront integration into the R2 release of the product.
  • System Center Configuration Manager 2007 R2 SP2—Most recently, the release of SCCM 2007 R2 SP2 has now added the support of dozens of features, functions, and tools that support the imaging, management, and support of Windows 7 client systems.
  • What to Expect in the System Center Configuration Manager Chapters

    In this book, four chapters are dedicated to the System Center Configuration Manager product. These chapters are as follows:

  • Chapter 2, "System Center Configuration Manager 2007 R2 Design and Planning"—This chapter covers the architectural design, server placement, role placement, and planning of the deployment of System Center Configuration Manager 2007 R2 SP2 in the enterprise. The chapter addresses where to place site servers, discusses how to distribute images and large update files, introduces the various server roles and how the server roles can be placed all on a single server in a small environment or distributed to multiple servers, and covers the best practices that have been found in combining certain roles and the logic behind combining roles even in the largest of enterprises.
  • Chapter 3, "System Center Configuration Manager Implementation and Administration"—Chapter 3 dives into the installation process of SCCM along with routine administrative tasks commonly used in managing an SCCM environment. This includes the familiarization of the SCCM management console features and how an administrator would use the management console to perform ongoing tasks.
  • Chapter 4, "Using Configuration Manager to Distribute Software, Updates, and Operating Systems"—Chapter 4 gets into the meat of SCCM, focusing on core capabilities like distributing software, patching and updating, and creating and deploying operating systems. Any organization with SCCM implemented tends to use these features and functions at a minimum. The whole value in SCCM is to deploy operating systems (either imaged or scripted), patch and update systems, and deploy new software programs. This chapter covers the process as well as digs into tips, tricks, and lessons learned in sharing best practices used when deploying these features in the enterprise.
  • Chapter 5, "Configuration Manager Asset Management and Reporting"—The final chapter on SCCM in this book covers other components, such as the asset management feature and the reporting capabilities built in to SCCM. Some organizations only use the asset feature in SCCM as the prerequisite to patch and update the system, whereas other organizations greatly utilize the asset management function for regulatory and compliance purposes. It's the same with reporting: Some organizations never generate a report out of SCCM, just using SCCM for operating system deployment, updates, and software pushes. However, other organizations heavily depend on the reporting capabilities in SCCM to generate reports for Sarbanes-Oxley (SOX) auditors or security compliance officers to prove the operational status of the systems.
  • System Center Configuration Manager 2007 R2 SP2 is a very powerful tool that is the start of the life cycle of a networked environment, providing templates and standard configurations for systems all the way through updates, management, and reporting. Jump to Chapters 2 through 5 of this book for specific information and deployment and configuration guidance on how SCCM can be best leveraged in your enterprise.



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