International Business Machines Corporation (IBM) Q1 2011 Earnings Report, Transcript and Summary

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

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

Thanks for joining us today. In the first quarter, we drove 8% revenue growth, expanded gross pretax and net margins and delivered operating earnings per share of $2.41, up 21% year-to-year. With this performance, we're increasing our full year 2011 expectation for operating earnings per share to at least $13.15, which is up $0.15 from our previous view of at least $13. This is a great start on the road to our 2015 objective. Looking at the drivers of our 8% revenue growth, Systems and Technology was up 19% with double-digit growth in every platform led by our System z mainframe and POWER offerings. Our Software revenue was up 10% without the divested PLM operations or 8% at constant currency. Our Total Services revenue was up 6% with Outsourcing up 7%. Our Total Services revenue growth rate improved from the fourth quarter. As we’ve discussed the last couple of quarters, the revenue is more influenced by the backlog dynamics than current period transactions, and our total backlog ended the quarter at $142 billion. That's up $8 billion year-to-year or $1.5 billion at constant currency. From a sector perspective, our 2 largest customer sets, Financial Services and General Business, were each up double digits. Combined, they represent about half our revenue. Our key growth plays had fantastic performance. We once again had a very strong quarter in the growth markets, up 12% at constant currency with almost 40 countries up double digits. Business Analytics revenue was up 20% with strong contribution from both Software offerings and our Consulting business. Cloud revenue was up by a factor of 5, and Smarter Planet was up about 20%. Along with IBM's strong revenue growth, we had great margin performance. We expanded operating gross margin by 80 basis points. The improvement was broad based with particularly strong performance in Systems and Technology. With operating expense growing in line with revenue, we improved operating pretax and net margins by 6/10. This quarter, we really demonstrated the leverage in our model. Bottom line, we delivered operating EPS of $2.41, which was up 21% year-to-year. Our strong earnings performance generated $800 million of free cash flow in the quarter. And in the last 12 months, we've generated over $15 billion of free cash flow. In terms of use of capital, we've had a robust program to return value to shareholders. We returned almost $5 billion in share repurchases and dividends this quarter and almost $19 billion over the last year. Now I'll get into the first quarter details, starting with the revenue by geography. With 5% constant currency revenue growth, we had strong performance in major markets and growth markets. I'll focus the geo comments on constant currency. Major markets revenue was up 3%. The U.S., our largest market, was up 7%. And Canada was up 9%, leveraging the value of z, POWER and Software offerings. For the second consecutive quarter, Europe's performance was led by double-digit growth in France. Our growth markets continued very powerful performance, up 12%, outpacing the majors by 9 points. The combined revenue in the BRICs was up 22% with growth in each of the 4 countries and particularly strong growth in China, which was up 33% and Russia, up 53%. We're continuing expansion into new markets. And this quarter, we had double-digit growth in almost 40 growth market countries. We're leveraging our high-end systems in our Software portfolio and implementing transformational services projects. So this quarter, we had 19% growth in Hardware with great performance in mainframe and POWER and System x, and we had 16% growth in software. In Services, we had outsourcing growth of 12%, and our outsourcing signings more than doubled. Recall that last quarter, our signings in the growth markets were up about 250%, so we have continued strong performance in Services. With this performance, we gained share in Hardware, Software and Total Services and in growth markets overall. Now while we're discussing our geographic results, I want to spend a minute on Japan. We have 11% of our revenue in Japan with the bulk of our business in Services, which is predominantly annuity based. And so it tends to be more stable through various market conditions. Looking at the dynamics in the quarter, we had some deterioration in March, but it really wasn't that different than we saw through February. So we didn't see a big change in the trajectory of the business. Our employees did a great job working with our clients in a very challenging environment, and I want to congratulate them on their tremendous effort. Turning to revenue and gross margin by segment. The Total Services revenue growth rate improved to 6% or 3% at constant currency. Global Technology Services led the improvement with higher revenue from backlog and growth from our existing accounts. Systems and Technology again had powerful performance with almost 20% growth. We had strong growth in every platform. All were up double digits at actual rates. The most impressive growth was in our high-value systems. System z mainframes were up 41%, and POWER was up almost 20% as we continue to displace competitive systems. Our Software growth was also very strong, up 10% or 8% at constant currency, both excluding the divested PLM operations. Growth was led by Business Analytics, Storage Management and Business Integration, and Netezza is off to a great start. Turning to growth profit, our operating gross profit margin improved 80 basis points, led by Systems and Software. The largest contribution came from Systems and Technology, driven by improvements in every systems brand and improving mix. We also expanded gross margin in Software, Global Business Services and Global Financing. Now let's take a look below the gross profit line to our expense and spending profile. Our total operating expense and other income was up 8% in line with our revenue growth. The increase was driven by acquisitions over the last 12 months, which contributed 4 points of the increase. This is an assessment of our operating expense and so excludes the impact of amortization. Base expense, excluding currency and acquisitions, was up 4 points driven by a higher level of expense to support this quarter's revenue performance. Now I'll comment on a few items that had larger year-to-year impacts to our profit. First, we had investment gains associated with the asset sales in the quarter, which totaled about $200 million. In our call in January, I mentioned that the investment gains would be relatively offset by a charge for workforce rebalancing actions. This quarter, our workforce rebalancing charges were about $220 million with the majority of the spending in Europe. And if you recall, in the first quarter of last year, we had a gain of almost $600 million associated with the sale of our PLM operations to Dassault. And this was effectively offset by a workforce rebalancing charge of $560 million. So we had a very similar dynamic with a gain offsetting our workforce rebalancing charges. Now in fact, when you look at the combined impact of the 2 unique items last year and the 2 this year, there is minimal impact on IBM's year-to-year performance in the first quarter though it does impact the segment dynamics. This is because the workforce rebalancing activity in both years was incurred in every segment, but last year's PLM gain was booked in Software. And the investment gains this year were primarily booked above our segment level. We provided here a normalized view of the profit and margin dynamics by removing last year's PLM gain and workforce rebalancing charges from both years. This gives you a better view of the underlying operational performance of the segments. You can see our profit and margin performance is broad based, with strong pretax profit growth in every segment. So let's get into the segments. The 2 Services segments delivered $14.6 billion in revenue, up 6% as reported and up 3% at constant currency. Global Technology Services grew 6% as reported, and Global Business Services grew 7% as reported. Both were up 3% at constant currency. Looking at a different cut of the revenue, total transaction revenue was $5.9 billion, up 6% or 3% at constant currency. And total Outsourcing revenue was $6.8 billion, up 7% as reported and 4% at constant currency. Last quarter, we showed you a chart that described the revenue dynamics of our Outsourcing businesses. We have included that exact chart again as reference. You can find it in our supplemental charts. We described how roughly 85% of our annual Outsourcing revenue comes from the backlog at the beginning of the year with the remaining 15% coming predominantly from new sales into our existing client base and a very small fraction coming from new signings. We saw those dynamics reflected in the Outsourcing results this quarter. Revenue from backlog was up over 3%. And revenue from sales into our existing base accounts was up as well, driving total constant currency outsourcing growth of 4%. Total backlog was $142 billion, up $8 billion year-to-year and up $1.5 billion excluding currency. As we have discussed the past few quarters, backlog is a more stable and comprehensive metric with performance characteristics more similar to revenue, especially for Outsourcing. This quarter, backlog growth was driven by an increase in the opening backlog, lower levels of erosion, growth in our base accounts and currency. Now let's move on to the 2 segments. In Global Technology Services revenue was $9.9 billion. GTS outsourcing revenue was up 6% as reported and 3% at constant currency. Revenue growth at constant currency improved by 2 points over last quarter. This was driven primarily by increased revenue from backlog and double-digit growth in add-on business in our Strategic Outsourcing base accounts. Growth markets continued to drive strong performance with revenue up 11% year-to-year at constant currency. Integrated Technology Services revenue grew 7% as reported and 4% at constant currency. Here, too, ITS was up 11% at constant currency in the growth markets. Global Technology Services pretax income, normalized for the workforce rebalancing charges in both years, was up 10% with 0.5 point of PTI margin expansion. Turning to Global Business Services. Revenue was $4.7 billion. Starting this quarter, we will provide the outsourcing and transactional revenue elements for Global Business Services. We believe this will give you better insight into our revenue dynamics. Application Outsourcing revenue, which was just over 20% of GBS revenue, was up 10% as reported and 6% at constant currency. In Consulting and Systems Integration, which includes Consulting, AMS systems integration and the U.S. Federal business, grew 6% as reported and 2% at constant currency. From a geographic perspective, we had good performance in GBS in North America, which was up 6% at constant currency. From a sector perspective, growth was led by Distribution, General Business and Communications. And we continued to have strong performance in our growth initiatives in GBS, with Business Analytics revenue up over 30%. Global Business Services normalized pretax profit was up a very strong 19%, with 1.5 points of margin expansion. This expansion was driven by improved utilization, delivery excellence and improved spending management. Software had a strong quarter with revenue of $5.3 billion, which is up 6% or 4% at constant currency. Adjusting for the divestiture of PLM, which is a more appropriate view of our ongoing business, our revenue was up 10% or 8% at constant currency. Key Branded Middleware grew 16%, gaining share for the 14th straight quarter and the clear leader of the middleware market. Key Branded Middleware accounted for 61% of our total Software revenue. So we're mixing in to a higher growth element of the business. Gartner once again named IBM the worldwide market share leader in the application infrastructure and middleware segment, extending our lead to nearly double that of our nearest competitor. Now let me take you through the drivers by brand. WebSphere had another strong quarter, growing about 50% and gaining share. Application Servers and Business Integration, two of the largest product sets in WebSphere, each grew nearly 30%. Sterling Commerce, Unica and Coremetrics were also strong contributors to WebSphere's performance. Information Management had another good quarter, up 13%. Business Analytics software was up double digits for the sixth consecutive quarter. Our distributed database had an outstanding quarter, with double-digit growth in our base business complemented by exceptional performance by Netezza. Netezza's transactional volumes were up 50% versus a year ago before we acquired them. We know that when we go head-to-head against competition and customer proof of concepts, we win 80% of the time. So this is a really strong offering. Tivoli software grew 8%, and we held share. Tivoli Storage grew 20%, driven by over 60% growth in software for XIV [IBM XIV Storage System]. Rational software grew 5% year-to-year in the first quarter. Rational's Jazz-based products grew 64% year-to-year, the fifth consecutive quarter of year-to-year growth over 50%. Software delivered pretax income of $1.7 billion and margin over 28%. PTI is up 9%, normalized for the prior year gain on the sale of PLM to Dassault, as well as charges for workforce rebalancing activities in both years. Systems and Technology revenue was $4 billion, up 19% year-to-year or 16% at constant currency. This is the best first quarter growth in over a decade. Revenue was driven by double-digit growth in all brands: System z, POWER, System x, Storage, Retail Store Solutions and Microelectronics. Growth markets grew 19% at constant currency, and we had double-digit growth in the major markets as well. Globally, we gained 2 points of market share in total servers, with strong share gains of 4 points in both mainframe and POWER. Gross profit margin expanded 5 points year-to-year to 38%, and normalized pretax margin was up 7.5 points. Now let me take you through the brands. System z revenue grew 41% year-to-year. MIPS grew 34% year-to-year. That's the highest first quarter MIPS growth since 2004. Power Systems grew 19% year-to-year. Entry systems more than doubled year-to-year. And high end grew over 30%, reflecting the strong market acceptance of our POWER7 product line. We extended our market leadership this quarter, the 12th consecutive quarter of year-to-year share gain. IBM's strong performance accounted for almost all of the UNIX industry's 8% growth. In the first quarter, we had 210 competitive displacements, which results in over $200 million of business. Roughly 60% of these wins came from Oracle's legacy Sun installed accounts and 30% from HP installed accounts. Since first quarter 2009, IBM drove nearly 2,000 competitive displacements for about $2 billion of business. In February, IBM demonstrated how an optimized, commercially available mid-range Power 750 system we call Watson could interpret natural language and answer complex questions in real time. We did not invest in this just to play the game of Jeopardy. We invested to provide business applications leadership to our clients. Storage Hardware revenue grew 10% year-to-year driven by Disk, which was up 13%. In the growth market, Storage revenue grew 14% at constant currency. System x revenue grew 13% and held share. This is the sixth consecutive quarter of double-digit growth. High-end systems x grew 42% and gained share. Retail Store Solutions grew 18% and extended IBM's leadership position as a point-of-sale provider. Microelectronics OEM revenue was up 23% year-to-year. Overall, Systems and Technology had a great start to 2011 with a strong performance, with revenue up 19%, gross profit margins up 5 points and normalized pretax income up nearly $300 million, with margin of 7.5 points. Turning to cash flow. We generated $800 million of free cash flow in the quarter, which is down $600 million year-to-year. The year-to-year decline is driven entirely by an $800 million increase due to income tax settlement payments. Excluding the impact of tax payments, free cash flow would have been up about $150 million year-to-year. In addition, we continue to invest in our business to drive future growth. Net capital expenditures were up $150 million year-to-year and supported new services contracts and investments in semiconductor tools. Our inventory continues to be well managed, and collections were strong. Looking at the uses of our cash, we returned $4.8 billion to shareholders, $800 million in dividends and $4 billion in share repurchase, where we bought back 25.5 million shares. At the end of the first quarter, we had $4.7 billion remaining in our buyback authorization. Looking at the balance sheet, we ended the quarter with a cash balance of $13.2 billion, up $1.6 billion from year end. Total debt was $30.3 billion, of which nearly $24 billion was in support of our Financing business, which is leveraged at 7:1. Our non-financing debt was $6.5 billion, and our non-financing debt-to-cap was 25%, up from 23% at the end of the year. With this amount of leverage, we continue to have a high degree of financial flexibility. Our balance sheet remains strong and positioned to support the business over the long term. So let me start to wrap up with the drivers of our operating earnings per share performance. This quarter, 8% revenue growth made a strong contribution to our earnings growth, $0.15 year-to-year. Margin expansion, in this case driven by gross margin, added $0.11, and lower share count contributed $0.15. So we had fairly balanced contribution from each. Now let me put our first quarter performance in the context of the drivers of our 2015 roadmap. Our revenue was up 8%, led by our transaction businesses and Outsourcing. Our growth plays are providing good lift. Revenue in the growth markets was up 12% at constant currency and represented almost half of our geographic revenue growth. We had strong growth in System z, POWER, System x, Software and Outsourcing. Our Business Analytics revenue was up 20%, with 15% in Software and over 30% in GBS. We're continuing to build our capabilities, and Watson is a great example of our continued innovation in analytics. With revenue from cloud offerings up by a factor of 5, we're on track to double our cloud revenue in 2011. Last week, we announced both new private cloud software and the IBM SmartCloud designed to run production applications. We believe this differentiated offering will be a leader in the enterprise cloud segment. In Smarter Planet, which grew about 20% this quarter, we’re applying IT outside our traditional market areas. We're combining our deep industry expertise with software and services capabilities to deliver solutions that range from improving automated manufacturing productivity to optimizing core retail processes to intelligent transportation. So we have good momentum on our growth plays and are continuing to invest in the innovation to drive future growth. The second major contributor to our roadmap is margin expansion. This quarter, we drove significant margin improvement with operating pretax and net margins each up 60 basis points. This profit performance allows us not only to invest for the future but to return significant value to shareholders. In the first quarter, we returned almost $5 billion to shareholders through a combination of share repurchase and dividends. With this start to the year, we're increasing our full year 2011 expectation for operating earnings per share to at least $13.15 on our way to operating EPS of at least $20 in 2015. Now Patricia and I will take your questions.

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

[Operator Instructions] The first question comes from Mr. Toni Sacconaghi with Sanford Bernstein. Toni Sacconaghi - Sanford C. Bernstein & Co., Inc.: Yes, thank you. Mark, I wanted to talk about Services signings, which you uncharacteristically did not discuss in your prepared remarks but are in the exhibit in the supplemental slides. The signings were down 18% year-over-year at constant currency. And I think that was a surprise given you had very strong signings last quarter, and you talked about signings momentum at your analyst day and on your last earnings call. Now I realize that one quarter signings doesn't make a trend, but it looks like your last 4 quarters’ trailing signings are actually down. Your total backlog is up 1% year-over-year. So I guess the questions coming out of that are: can you make some comments around signings, why your short-term signings were down 5%, extensions were up 12%? And is it really realistic to think you're going to have accelerating Services revenue growth as you had previously talked about given your backlog is only up 1% year-over-year at constant currency?

Okay. That's a great question, Toni. Let's start with performance. I mean, in the first quarter, you did see, in fact, that we did have an acceleration of performance in our Services business. I mean, overall, revenue for our Services business was up 1% in total. Our Outsourcing business was up 2%. We had 1% increase in our transaction business. In fact, Outsourcing, the actual rates was up 7%. So we did see the acceleration that we had discussed. Now let's break this into its components. Let's start with Outsourcing. Now first of all, let's acknowledge the fact that Outsourcing in the fourth quarter was up a very strong 25%. In fact, in total, we signed in the fourth quarter $22 billion. So on the Outsourcing business, I think it's quite logical to anticipate that we'd be rebuilding the pipeline in the first quarter. And in fact, that base of business in the fourth quarter with the growth rate that we have, that's our seasonally largest quarter and a very strong performance. So that's driving a lot of what you see in our Outsourcing revenue performance. We characterized this in the last call by saying it was more logical on this base of business to look at backlog. And in that call, we showed the backlog runout, which we've included in the supplementals. Now in the backlog runout, we said that base backlog runout would drive 85% of our Outsourcing revenue performance for the year. And in fact, we said that, that rollout was up 3% in the backlog. In fact, that came right through as we had discussed. The balance of 15% in the Outsourcing business is really driven by base growth. And this signings content in the year on the Outsourcing content really has very little to yield within the -- in that calendar year. That's why backlog is fundamentally a more important metric. That yield from our base account, you look at that growth in our Strategic Outsourcing business, it was up 19% in the fourth quarter for the first time in a long time. And again, in the first quarter, we had very strong growth in our base business at 11% for Strategic Outsourcing. So if you look at that content and the stability of that overall backlog, again, first quarter was $142 billion, and at actual rates, that's up $8 billion year-to-year. We've got a strong base of business going into the year. There will be volatility, especially in that Outsourcing component in signings. But the better metric, I think, and the way we characterize our comments and I think it came through in the quarter to demonstrate that that's fundamentally a better metric, is backlog did yield on revenue growth. And if you look at that overall Outsourcing business, I think we did pretty well. When you look at the transactional business, transactional business in the quarter was impacted by public sector. Now public sector, I think you had all realized, is driven by the events that we're all reading in the newspaper. So let's just airlift public sector out of the transactional revenue and signings. And there you'd see that our transactional business, in fact, was up about healthy mid-single digits in both revenue and signings performance, not inconsistent with the kind of actual rate performance that we saw in the fourth quarter. Going into the balance of the year, we expect to have good yield against the pipeline that we see and the ongoing stability in our backlog driving the Outsourcing business. Funny thing -- fundamentally, when you step back again and say, "What's our objective," our objective is to move to higher value offerings in higher value solutions across the business unit. And I think you saw that in our Services business, with profitability in Services up 13% in total and GBS, a very strong 19%, while our GTS business was up 10%.

Thanks, Toni.

The next question comes from Chris Whitmore with Deutsche Bank.

Thanks. Just wanted to follow up on that last question with respect to the pipeline you see in the competitive environment. We've seen some mixed execution by some competitors. Have you seen any changes to the pricing environment and the competitive environment? That's #1. And then #2 is around the pipeline. You mentioned you expected yield on the pipeline you see. Can you give us a little more color there? Thanks a lot.

Yes. When we look at the pipeline going forward in our Services business, we see good year-to-year performance in the pipeline. And then when you look at kind of other in the -- from an industry dimension behind that, let's look at growth markets. I mean the GMU content -- remember, for Outsourcing signings was up 250% in the fourth quarter. That's an enormous year-to-year growth rate as we see these big opportunities open up in the growth markets element of our business. This quarter, signings once again were up more than 100%, so doubling year-to-year. So we do see the Outsourcing business, especially the Strategic Outsourcing content, opening up in a big way in growth markets. And we're looking at that trend not unlike the trend that we see in other parts of our business. So growth market, a very solid base growing quite substantially in both the fourth quarter and the first quarter as we see more and more business migrate to that growth market envelope. The second thing that I would comment on, the real business and the real job of our Services business is to drive performance in those key growth investments that we have covered for the last 2 analyst meetings. So how did we do on the base of business? Well, if you look at Smarter Planet, Smarter Planet was up 20%. Let's look at Business Analytics. Business Analytics as well was up 20%. Within GBS, GBS supporting Business Analytics was up 32%. So you could see that momentum in those key areas. If you look at our GTS business driving the cloud investment, we saw cloud up 5x, and we feel pretty confident that that's on track to double this year. And if we double this year, that's the kind of trend line we need to generate $7 billion in cloud by 2015, of which 3 will be incremental. And lastly, I can't say enough about GMU. Here we are, GMU in the growth markets content outpacing major markets again by 9 points; coming off of 2008 with an 8-point premium; 2009, again, 8-points faster; 2010, 10 points faster; and another confirmation in that data point in the first quarter.

Thank you, Chris.

The next question comes from Katy Huberty with Morgan Stanley.

Thanks. Mark, I want to get your thoughts on acquisitions this year. Some of the next generation technology companies seem to be hitting tougher growth comps and could stand to benefit from broader distribution from the likes of IBM. How do you think about leveraging your balance sheet to help take these companies to the next level versus sitting back and allowing some of your other large technology peers pick up these assets?

Well, that's a very good question, Katy. We're quite focused on driving that acquisition element of our overall game plan. As we went through analyst day, we had pointed out that we expected within the 2015 roadmap to spend about $20 billion on acquisitions. Now that will not be a straight line. It's not going to be a kind of linear relationship. Those acquisitions are key business investments for us. And the #1 metric we're looking for is when we do the acquisition, we want our cash back. It's very simple. The Chairman's emphasized that, and we make sure that's our primary metric. As far as our ability to drive that acquisition envelope, we did very, very well this quarter on our acquisition base. And you remember that we did $6.5 billion last year. That was 17 acquisitions. So for me, looking at it, that was a very good proof point on our ability to integrate a number of acquisitions simultaneously. And very few businesses, I think, could integrate that many acquisitions. You have to have a very large well-trained team to be able to do that, and they accomplish it with real commitment. So we did a large base of business in the 2010 calendar year: $6.5 billion, 17 acquisitions. As we said in the analyst day, that relatively put us ahead of pace going into the 5-year period for 2015. In fact, just analytically, we would only need about 1/2 of that $20 billion to hit the financial objective we had from acquisitions. So I believe that as we go through this and go through the 2015 roadmap, I would anticipate that we'd stay on that $20 billion objective. And with that, we should be able to overachieve our financial objectives from acquisitions.

Thanks, Katy.

The next question comes from Ben Reitzes with Barclays.

Yes, thanks a lot. Mark, wanted to ask about Japan. You've said it's 11% of sales and mostly Services. So I guess: a, what is the impact in the upcoming quarters? I would assume that revenues there would be pressured more in upcoming quarters, but you didn't mention that. And then in particular, you grew over 6% combined in both your Services segment. And if Japan is mostly Services, even more so than other geos, then wouldn't that lend credibility to 6%-plus this quarter being the high watermark for Services growth for the year? Or am I looking at that completely wrong? Thanks a lot.

Well, thanks, Ben. That's a good question. First of all, when you talk about Japan, I want to take it in steps. Now #1, all of our employees are safe, and that's certainly our #1 priority. Number 2, our infrastructure content within the geography is also in very good shape. I mean, if you look at the impact that we had on infrastructure, the damage was about $20 million, which is a very low level of impact. Number 3, if you look at the supply chain, our supply chain is in very good shape. Frankly, most parts today are dual sourced, so you're not dependent on just one line. But we were not impacted in the quarter based on supply chain impact, and I don't expect that will have any appreciable impact going forward. So then you do come back to the point looking at the Services profile. About 3/4 of the business in Japan is Services. Services -- as we've seen over the past 3 years, when we took the entire corporation through the recession, Services tend to be more stable in those kind of turbulent times. And I think we expect to see that in Japan as well. In the profile in Japan, as you go from the trajectory they were on for January and February into March, March eroded about 1%. So we did see some erosion, but it wasn't a lot of erosion. And that 1% erosion on the kind of magnitude of corporation I think is easily absorbed by the business. I'd also point out one other thing. When you look at Japan's performance in the quarter, they were also negatively impacted by about 2 points based on the PLM compare. There was a lot of PLM business in the country of Japan. Going forward, they won't have that issue in their compares. So relatively, they'll have about a 2-point tailwind compared to the first quarter on their business. So as I look at it, I don't see anything in the performance in Japan that we should have difficulty dealing with as we go through the year, but we're going to have to keep a close eye on it and see how it plays out. Now I do want to close out with our comments on Japan and commend our employees in Japan for their courageous performance in these difficult times and the terrific performance they did supporting our customers.

Thanks, Ben.

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

Thanks. Mark, with the great numbers coming out of z [zSeries] and pSeries, typically, you get some pretty good product cycles, better than expected growth as the product cycles continue. So how much longer do you think we've got some good outsize growth in that business given your performance here recently? Thanks.

Okay. Well, let's take those in turn. First of all, both zSeries and pSeries picked up 4 points a share. And for the pSeries business, that's our 12th consecutive share gain that we had in that business. As well I'll point out that we had 19% growth in our pSeries this quarter, and as we estimated, the UNIX business had about 8%. So given that we have over 40% share in that business, if you just do the math, you could kind of conclude that we had -- we drove in IBM the majority of the revenue growth in the UNIX business. So for us, I see real opportunity to continue this rate of performance on our pSeries base of business. And if you look at pSeries, it's not only a really strong platform in the major markets, it's very strong in the growth markets. When you look at those growth market placements, they've done very, very well as we expand that base of business. zSeries, likewise, did well in growth markets and major markets this quarter and should have ongoing growth potential, especially in the growth market. Now to your point on our product cycle, I think on the zSeries product cycle, this year will be a strong year for us. It will be driven more by box placement and customer acceptances. Next year will be driven more by upgrades. As we get to the fourth quarter, I do expect that the zSeries will now wrap on a very strong quarter last year. But I'd point out that STG had a terrific quarter across every one of their product lines. And I really think it's only zSeries that I would expect to ramp as we go into the fourth quarter. The balance of the businesses, I think, have very healthy prospects throughout the year.

Okay, thank you.

The next question comes from Mark Moskowitz with JPMC. Mark Moskowitz - JP Morgan Chase & Co: Yes, thank you. Mark, quick question here on the Software as we try to kind of contextualize some of these puts and takes to Japan and what it could mean from a Services perspective if there is any sort of impact down the road. Your Software business, really here globally, is tracking to the broader software market for the first time in a while now in the last 2 quarters. I just want to get a sense if you can kind of convey confidence in terms of can that be sustained. And how should we think about the displacements in terms of your new customer accounts versus legacy in terms of what you're selling into with Software?

Sure. When you look at that business against my comments, excluding PLM, we had a 10% growth in the quarter. The Key Branded Middleware was up 16%. Good profit growth on that base, up 9%. So I think once again, we had a very strong quarter from our software base of business, especially if you go down the brands within that. I mean, WebSphere up 51%; Information Management, up 13%; Tivoli, up 8%; Rational, up 5%. I mean, good strong performance across that content. But as you look at the second quarter and look at the pipeline in the second quarter, we've got a very robust pipeline growing double digits year-to-year in the second quarter across our business and even stronger in our large deal base and large account content to drive that transactional performance. So I feel like we had a strong quarter in the first for our Software business. And based on the pipeline we see for the transactional elements of our Software business, we should have another good quarter in the second.

Thank you, Mark.

The next question comes from Richard Gardner with Citigroup.

Thank you very much. Mark, I have to, I guess, echo my competitor's comments that the biggest surprise for me was the lack of transactional signings growth in the quarter given where we are in the cycle. And so I was hoping that you might be able to differentiate a little bit between what you're seeing within transactional signings in pipeline, between the ITS, Consulting and AMS businesses. I guess I'll stop there. Thanks.

Well, when you look at the components, first of all, I want to take transactional performance as a whole. We did have difficulty in public sector. But if you snap public sector out of the transactional performance, then we had mid-single digit growth in our transactional signings and mid-single digit growth in our transactional revenue. Now underneath that, I think ITS did much better as it went into the first quarter. You saw that they had a revenue growth of 4%. Behind that, they had good signing performance, so I expect them to be in an improving trajectory as we go through the year. Excluding the impact of public sector, I think overall, transactional business did well. But I think also, bottom line, when you look at the key elements of our growth plays, we did well in Smarter Planet. We did very well in Business Analytics. And bottom line, as we move into those higher value spaces, those were an element of growing our profitability in GBS by 19% and GTS by 10%. And that is the bottom line objective.

Thanks, Rich.

The next question comes from Keith Bachman with Bank of Montreal.

Yes, thanks. Mark, I actually wanted to ask about Services profitability as you track through the year. And the question is: you had a increase in each of GTS and GBS in terms of profit margins or PTI margins. Would you anticipate that trend to continue through the year? And if you could address also some of your competitors, especially the non-domestic ones, have talked about wage inflation, turnover and even for IBM, addressing mix impact and how that might increase or impact profit margins for Service division as we march through the year.

Well, when you look at the overall performance on both PTI and net income for IBM as a whole, we are up 0.6 point on both. Now on net income, as we've gone through at the analyst meeting, the model for net income is about 0.3 point. So clearly, we had a very strong performance in the quarter, about double the yield that we think we need over the longer term in the base business. A solid player in that contribution was, in fact, as you point out, Services. That in total was up 0.9 point on PTI margin, with GTS up about 0.5 point and GBS 1.5 points. Now if you look at that incremental advantage, that was driven by strong operational performance in the business unit and the attention we're putting on moving to higher value contracts, higher value spaces, globalizing our infrastructure for better productivity. And I think we saw yield in the quarter, and we're going to continue to drive that metric for the year.

Thank you, Keith.

The next question comes from David Grossman with Stifel, Nicolaus. David Grossman - Stifel, Nicolaus & Co., Inc.: Thank you. Mark, I appreciate your incremental disclosures on the services and the commentary about the backlog. That said, could you help us understand what kind of growth you need in the backlog to hit your revenue growth targets for both the Outsourcing business and the transactional business?

Sure. Let's go back, and let's talk about the Outsourcing business to begin with. Again, I would refer you to the bar chart that we put in the supplementals. If you look at that bar chart, you'll say well, what are the big drivers of the revenue within the year as we move through 2011? The biggest driver is the backlog that we entered the year with, and that's going to drive about 85% of the revenue performance in the year. As we did the rollout of that backlog, we said, well, the rollout itself is up about 3%. The balance of 15% is going to be driven, again, not by signings, which can be quite volatile across period, but it's to be driven by base growth performance. And that base growth performance, especially in our SO content, was up 19% in the fourth quarter. It's up 11% in the first quarter. And if we get those 2, we should be able to sustain a pretty good outsourcing growth in revenue throughout the year. Again, on the transactional side, I would say that once again, acknowledge that we were having difficulty in public sector. But outside of public sector, we had mid-single digit performance at both signings and revenue and again, at the bottom line in GBS, 19% profit growth.

Thanks, David.

The last question comes from Bill Shope with Goldman Sachs.

Okay, great, and thanks, Mark. Looking at the weakness in the public sector you just mentioned, should we expect this weakness to start to have some impact on Services revenues or other segment revenues as expressed throughout the year? I'm just trying to get an understanding of the risk we have to the models in that specific vertical given that I would suspect the weakness in transactional signings at least has some indication of what we should see there in coming quarters.

Well, let's put that in the -- first of all, we dealt with the weakness in the public sector content in signings this quarter, and you saw the yield against revenue this quarter. So I think we – though it’s -- the public sector impact on the signings revenue base can be a large part of the GBS business, it isn't going to be the difference maker in the overall IBM base of business. When you look at it and step back further and just look at the sectors across the business, I mean, we did have 1% growth in revenue at actual rates for public sector, and that is about 15% of our business. But on the other hand, Financial Services sector was up 14%. General Business was up 10%. And those are by far the largest sector performances that we have. So I feel as if looking at this, we are prepared to be able to deal with over a longer term kind of a basis. It can be a big deal to GBS. I think it is easily managed by the overall IBM Corporation and the strength that we see in other sectors. So let me just make a few comments to wrap up the call. This quarter, we delivered very strong revenue and profit. Our revenue growth of 8% was driven by our transactional business and Outsourcing, which was up 7%. We had fantastic performance across our growth initiatives: Smarter Planet, up 20%; Business Analytics, up 20%; cloud, up by a factor of 5; and our growth market countries up 12%, 9 points faster than the major markets, continuing the trend we saw in 2008, 2009 and 2010. We expanded margins 60 basis points each in operating PTI and net income and delivered 21% growth in operating EPS. That's the best growth in more than 2 years, and it's on the back of 16% growth last year. So we're exiting the first quarter with a lot going for us: a strong Systems portfolio, a good pipeline in Software, solid Services backlog, momentum in all our key growth plays and ongoing productivity initiatives, as well as a very strong balance sheet. And I think all of this supports an increase of $0.15 to our expectation for the year and puts us on a good track for the trend line to $20 in 2015 with an outlook for the year of at least $13.15. So thanks for joining us. And now, as always, it's back to work.