International Business Machines Corporation (IBM) Q4 2011 Earnings Report, Transcript and Summary

Welcome, and thank you for standing by. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the meeting over to Ms. Patricia Murphy, 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 Senior Vice President and CFO, Finance and Enterprise Transformation. Thank you for joining our fourth 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'll 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.

Thank you for joining us today. In the fourth quarter, we grew revenue, expanded growth, pretax and net margins and delivered operating earnings per share of $4.71, up 11% year-to-year. For the full year, we delivered revenue of almost $107 billion, which was up 7%, operating pretax income of $21.6 billion, up 9%, and operating EPS of $13.44, up 15%. Our 2011 results put us well on track to our 2015 roadmap objective. Looking at the fourth quarter by segment, we continued to build our momentum in software, our performance reflecting both strong demand for our offerings and leadership sales execution. Our software revenue was up 9%, driven by aggressive growth in our focus areas like Smarter Commerce, business analytics and storage solutions. Our software profit was up 12%. Our Services business delivered powerful margin and profit growth, with combined pretax income of 17%. Services revenue growth was again led by growth markets, which were up 13% at constant currency. Our total services backlog ended the year at $141 billion. At constant currency, that's flat year-to-year and up $5 billion since September. Within Hardware, Power Systems was up 6% as we continue to drive competitive displacements. We've now had 15 consecutive quarters of share gain in UNIX. In fact, with the exception of mainframe, which was coming off of the biggest quarter in its history last year, each of our 16 brands across the company gained or held share. Turning to profit, our ongoing focus and productivity, together with the relative strength of our software business, drove strong margin performance. Our operating gross margin was up 1.1 points to over 50%. We expanded operating pretax margins almost a full point and grew pretax income 6%. And while our tax rate was up year-to-year, we still expanded net margin above our model rate. When you put this all together, we delivered operating EPS of $4.71, which was up 11% and $13.44 for the year, up 15%, making this our ninth consecutive year of double-digit EPS growth. Our strong earnings performance drove $9 billion of free cash flow in the quarter and $16.6 billion for the year. With that cash, we continue to invest in capital and acquisitions and we delivered significant returns to shareholders with over $18 billion in share repurchase and dividends this year. Looking forward, we're confident in our ability to continue to leverage our business model to expand margin, grow profit, generate cash and return value to shareholders. And in 2012, we expect to deliver at least $14.85 of operating earnings per share for the year. For the fourth quarter, revenue at constant currency was in line with our expectations. While currency provided a benefit to revenue growth of about 25 basis points in the quarter, currency movement, since we announced our third quarter earnings in October, impacted our revenue by about 1 point of growth or $300 million. Looking at the geographies on a constant currency basis, revenue in our major market countries was essentially flat year-to-year. In the Americas, Canada had terrific performance, up 13%. The U.S. grew 1% off of last year's very strong growth of 10%. In Europe, our growth rate improved compared to the third quarter. Germany returned to growth, up 4%, and once again, we had good growth in the U.K. and Spain, which were each up 9%. We've now had 9 consecutive quarters of constant currency revenue growth in the U.K. and Spain has now grown 5 consecutive quarters, leveraging its global relationships. Our growth markets outpaced the major markets by 8 points of revenue growth. The BRICS had another good quarter. Combined, they were up 11%. And with nearly 2/3 of our growth markets business outside the BRICS, all together, we had double-digit growth in 40 growth market countries, so our performance was broad based. We're continuing to expand into new countries and territories to build out IT infrastructures in support of economic growth and to take a leadership position in key industries. This year, to drive market expansion, we opened 92 new branches and we added over 1,500 new sales reps. We gained 4 points of share in the quarter and 4 points for the year. In 2011, our growth markets grew 11%, which outpaced the majors by 10 points, and growth markets now make up 22% of our geographic revenue. Turning to revenue and gross margin by segment, Global Technology Services constant currency revenue growth rate was consistent with the third quarter, while our Global Business Services growth rate improved. In both segments, we had great year-to-year performance in the growth markets, with double-digit constant currency revenue growth and expanding margins. Our software business had another fantastic quarter, with strength across the portfolio, WebSphere, Information Management and Tivoli all had very good growth and gained share. In Systems and Technology, last year, we had a great fourth quarter with over 20% growth driven by a new mainframe that had almost 70% revenue growth. This quarter, we wrapped around that performance. And we had strength in POWER as we continued to extend our share gains. Turning to gross profit, our operating gross margins improved 1.1 points to over 50%, driven by a combination of good margin expansion in both Services segments and an improving segment mix due to the relative strength of software. The services margin improvement was driven by a number of factors, including productivity improvements and mix to higher value offerings and markets. For hardware, our product mix negatively impacted margin. Finally, our Global Financing business, which is better measured by return on equity, this quarter delivered return on equity of 42%. Now that's impressive. So 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 2%, in line with our revenue growth. Acquisitions over the last 12 months contributed a point of growth. And our base expense was up 1%. There was effectively no year-to-year impact from the combination of currency translation and hedging dynamics. I'll comment on a couple of expense items that had larger year-to-year impacts to our profit. As you can see from our income statement, IP income was down $65 million year-to-year. Second, we had an increase of about $55 million in our accounts receivable provisions, though our reserve coverage is down 30 basis points from a year ago and down 20 points since September. Typically, we talk about the impact of our hedging programs as a driver of expense. However, this quarter was effectively no year-to-year impact on expense due to our hedging programs, consistent with the fact that currency ended up being fairly neutral on a year-to-year basis. So now let me get into the segments. The 2 Services segments delivered $15.3 billion in revenue, up 3%. The combined Services segments grew pretax profits 17%, and pretax margin was up 2.1 points. Total outsourcing revenue was $7.2 billion, up 4%, and total transactional revenue was $6.2 billion, up 3%. Overall growth was driven by the growth markets, with constant currency revenue up double digits in the outsourcing, transactional and maintenance businesses. Total backlog in the quarter was $141 billion. At constant currency, that is flat year-to-year and up $5 billion quarter-to-quarter. Moving on to the 2 segments in Global Technology Services, revenue was $10.5 billion, up 3%. GTS outsourcing revenue was up 3% and we gained share in the quarter and full year. Integrated Technology Services revenue grew 5%. We had great performance in the growth markets where we're seeing the benefits of geographic expansion in offerings like business continuity and resiliency services. Global Technology Services delivered very strong profit and margin this quarter, with pretax income up 18% and pretax margin up 2.3 points to 18%. This margin expansion was driven by productivity and cost management, along with a mix into higher-margin growth markets. We had gross margin improvement in all lines of business, outsourcing, ITS and maintenance. Turning to Global Business Services, revenue was $4.9 billion, up 3%. Application Outsourcing revenue was up 5%, led by strong performance in the growth markets. Consulting and Systems Integration, which includes consulting, AMS systems integration and the U.S. federal business, grew 2%. At constant currency, our growth rate improved over last quarter. Overall GBS revenue continued to be impacted by Japan and public sector. So total GBS revenue, excluding Japan and public sector, was up 9% at constant currency and up 8% for the year. And although declines in Japan and public sector continued, we did see some improved performance in public sector. Global Business Services delivered very strong profit and margin performance again this quarter. Pretax profit was up 14% year-to-year, with pretax margin up 1.8 points to 16.6%. Now I want to spend a minute on backlog and runout as we begin 2012. Last year, in the fourth quarter, we took you through an analysis of the key drivers of Services revenue. We focused the discussion around outsourcing, and in particular, the revenue generated by the runout of the outsourcing backlog. This year, we have expanded that analysis to give a view of the Total Services backlog runout. This view is more comprehensive and more indicative of the Total Services business as we start the year. There are 3 primary drivers of Total Services revenue: backlog, sales into our existing contract base and new client signings. A very high percentage of services revenue, roughly 70%, comes from the runout of the backlog we start the year with. In 2012, we expect about 3% revenue growth from that backlog. This gives us a very solid base of revenue to begin the year, with the remaining revenue coming from sales into our existing accounts, which have been on a good trajectory, and new client signings. So with that, let me wrap up the year in Services. We had very consistent revenue performance in the year driven by stability in the backlog. We continue to build out our services within the growth markets, with Total Services revenue up double digits in those markets and strong margins, with gross margin 2 points higher than that in the majors. We continue to get good traction in the growth initiatives, cloud, business analytics and Smarter Planet. And we had great profit and margin performance in both Services segments, with GTS pretax profit up 14% and GBS up 18% as we mixed a higher value offerings and markets and continued to drive productivity. Software had another great quarter, with revenue of $7.6 billion, up 9%. Key Branded Middleware grew double digits for the fifth consecutive quarter and gained share for the 17th straight quarter as we continue to extend our lead in the middleware market. Turning to brand performance, WebSphere was up 21% and continues to gain share. Each of WebSphere's 5 product areas grew 10% or better, including our Smarter Commerce offerings, which were up over 25%. This contributed to IBM's performance in the retail industry where we have grown in each of the last 9 quarters. Information Management grew 9% and again gained share. Our distributed database grew double digits, led by strong performances from our Netezza offerings, which were up nearly 70%. This appliance complements and extends our Business Analytics portfolio with a rapidly deployed low-cost of ownership solution for high performance queries and analytics. For the quarter, almost 1/3 of the transactions were with new Netezza clients. Since acquiring Netezza, IBM has expanded its customer base by over 40%. And when we go head-to-head against competition in proof of concepts, we had a win rate of over 80% this quarter. Our Business Analytics software offerings, most of which are part of Information Management, continue to outpace the market with double-digit growth. IBM's acquisition of Algorithmics in the fourth quarter further strengthens our business analytics and optimization offerings by providing risk analytics capabilities that help customers make informed business decisions. Tivoli software was up 14% and gained share, driven by storage software growth of 30%. Security solutions also delivered strong growth. With the recent acquisition of Q1 Labs, we can now offer clients a new level of intelligence around security to enable them to better predict, prevent and detect all types of security threats. Rational grew 4% and gained share, driven by strong performance in Telelogic. The fourth quarter wrapped up another powerful year for our software business. In 2011, software revenue grew 11%, gross margin expanded by 0.5 point and software delivered nearly $10 billion of pretax profit. Systems and Technology revenue of $5.8 billion was down 8%. This performance reflects very strong growth last year, driven by mainframe growth of almost 70%. Gross profit margin was down 3 points year-to-year, with a significant impact from product mix. Now let me take you through the brands. System z revenue declined 31% as we wrapped on the successful launch of our zEnterprise 196 last year. MIPS declined 4% this quarter. System z gross profit margin was up, reflecting a higher proportion of microcode upgrades, which is typical at this point of the product cycle. POWER grew 6%. This is the 15th consecutive quarter of share gains in POWER. We continued our success in competitive takeouts. In the fourth quarter, we had over 350 competitive displacements which resulted in over $350 million of business. This is our strongest quarter in terms of competitive displacements since we started tracking this in 2006. Roughly 60% of this business came from HP, with most of the balance coming from Oracle/Sun. 2011 was the second year in a row we had over 1,000 competitive displacements, which this year generated over $1 billion of business. System x revenue declined 2%. We anticipate this is in line with the market. Storage hardware revenue was down 1%. When combined with the storage software growth of 30%, the total grew 5%. Retail Store Solutions had a great quarter, up 9%, and we continued to grow share. When you look at the full year, Systems and Technology delivered solid performance, with revenue up 6%, gross margin up 1.6 points and $1.6 billion in pretax income, up 12% year-to-year. Turning to cash flow on a full year basis, we generated $16.6 billion of free cash flow, which is up $300 million over last year. Excluding the impact of the income tax payments driven by audit settlement activity, which I discussed in prior quarters, full year free cash flow would have been up $1.1 billion, roughly in line with our net income growth. We continue to invest in our business, spending another $4 billion in capital expenditures. When I look at the uses of cash for the year, we returned $18.5 billion to shareholders, including $3.5 billion in dividends, and we bought back almost 89 million shares for $15 billion. At the end of the year, we had $8.7 billion remaining in our buyback authorization. In addition, we spent almost $2 billion to acquire 5 companies. Over the last 2 years, we spent almost $8 billion. In addition, we've announced several acquisitions that didn't close by year end, including Emptoris, DemandTec, Platform Computing and earlier this month, Green Hat. With $9 billion of free cash flow generation in the quarter and $16.6 billion for the year, we're positioned to continue to invest in innovation and return value to shareholders. Looking at the balance sheet, we ended the quarter with a cash balance of $11.9 billion, up $600 million from September. Total debt was $31.3 billion, of which $23.3 billion was in support of our financing business, which is leveraged at just over 7 to 1. Our non-financing debt was $8 billion, up $600 million from the third quarter and up $2.2 billion from a year ago. Now let me spend a minute on our retirement-related plans and the impact to the balance sheet. Despite volatile market conditions in 2011, we had good returns on global assets. The discount rate environment was challenging, which resulted in an impact to equity at the end of the year. This took our debt-to-cap up to 32%. And we're comfortable operating in this range of 30% to 40%. At the end of 2011, our defined benefits qualified plans were well funded and our cash requirements remained stable. We have supplemental charts that show the specific performance in rates, as well as a forward-looking view of the P&L and cash implications based on year-end 2011 assumptions with sensitivities. Suffice it to say that as we look forward, while changes in the return on assets and discount rate may drive some volatility in nonoperating elements of the P&L, there is little implication to our cash requirements. So now let me start to wrap up with the drivers of our operating earnings per share performance. Knowing that we faced a tough fourth quarter on revenue, we drove other elements of our model, productivity, mix and cash utilization to deliver our earnings performance. Our revenue growth contributed $0.07 to our earnings growth. Our solid gross margin expansion more than offset a higher level of expense and an increase in the tax rate. Gross margin drove $0.19 of EPS growth, while we had a $0.02 impact from expense and a $0.04 impact from a higher tax rate. All in, margin expansion contributed $0.13. And a lower share count resulting from our ongoing share repurchase program contributed $0.26. Bottom line, we delivered 11% EPS growth in the quarter. And for the full year, we delivered 15% growth. Revenue growth was the largest contributor to our earnings growth, though we had good contribution from share repurchase and margin expansion. So 2011 was another very good year for us, with solid revenue performance, continued margin expansion, strong profit and cash generation and effective use of cash. Our focus on key growth initiatives and investments in innovation are enabling us to expand into new markets and capitalize on trends like analytics and cloud. Our growth market strategy to expand into new markets, build out IT infrastructures and lead in specific industries is driving powerful performance and share gains. These countries contributed almost 2/3 of IBM's constant currency revenue growth and now represent 22% of IBM's geographic revenue. Our Business Analytics solutions help our clients leverage massive amounts of data and content to gain insight and optimize results. This year, Business Analytics grew 16%. Our Smarter Planet initiatives generated close to 50% growth. Smarter Commerce, in particular, is gaining momentum by helping companies buy, market, sell and service their products and services. We're not just addressing an existing market, we're actually making markets. And in cloud, we're helping our clients improve the economics of IT. This year, we continue to expand our offerings. And our cloud revenue in 2011 was more than 3x the prior year. With powerful contribution from these growth initiatives, we delivered 7% revenue growth. We said at the beginning of the year that we expect the growth in the first half of the year to be higher than the second half. By leveraging all of the elements of our model, productivity, mix and utilization of cash, we delivered operating pretax and net income growth of 9% and operating EPS growth of 15%, with double-digit growth in each of the 4 quarters. So now, as we enter 2012, we expect to deliver operating EPS of at least $14.85 for the year, with the growth rate more skewed to the second half. So we've just completed our centennial year. And as we reach this milestone, we've learned that you have to continually transform and reinvent yourself to be a leader in your industry. IBM's performance is the result of a transformation we started years ago. We've been shifting our business to higher-value areas, improving productivity and investing to drive future growth. These changes contributed to 9 consecutive years of double-digit earnings per share growth. But more importantly, they strengthened our business and put us on track to achieve our 2015 roadmap objective of at least $20 of operating EPS. Now Patricia and I will take your questions.

[Operator Instructions] Operator, please open it up for questions.

[Operator Instructions] The first question comes from Bill Shope with Goldman Sachs.

Can you comment on your perspective on customer budget activity throughout the quarter and what that may tell you about overall spending intention into 2012? And I guess related to that, outside of currency, how should we think about your overall revenue growth potential this year?

Okay, if you look at our business equation, I mean, to be honest, Bill, we don't really judge that based on what our customers are doing with their budgets. To be honest, I don't know what they're doing with their budgets. I do know what we do with our budget, and it's very similar to the conversations that I have with other CFOs. They're looking for the best value to move their business and move their business rapidly. And so I think it's a measure of our ability to bring value to those clients. If you look at our business and evaluate that now and give us a report card on just those key investment priorities that we had, we did very, very well, I think. Business Analytics, up 16%; cloud computing, more than tripled; Smarter Planet, almost 50% growth. And you look -- now you look at the GMU, another very strong quarter from GMU, BRICS up 11%, GMU, 8 points faster than the majors. So obviously, we are satisfying value considerations within our customer set. You can see that, I think, in the surprising mix, in some respects, of our penetration within individual countries. So when you look at Europe. Europe at 1%, let's take it though and look at it by country, some pretty interesting statistics. Number one, we had Spain growing 9%. That's a fifth quarter of growth sequentially from Spain. We had the U.K. growing 9% for the 9th consecutive quarter. Germany returned to growth, up 4%. Let's look at North America. You look at the U.S., up 1%. That's on the back of that 10% growth last year, driven by our big mainframe announcement. If you look at that on a 2-year basis, that's a 5% compound growth rate, which is pretty strong performance. Canada, up 13%. Strong growth statistics on our growth markets, 40 countries at double-digit. So that's, I think, the best measure of our value, and you can see it in the individual countries. This isn't just a homogenous base across these individual geographies. You can also see it as you look at our overall share performance. So if you look at it and break down from a brand perspective into the 15, 16 composite brands in the business, I mean, we gained or held share in 15 of the 16. So we gained in ITS, Integrated Technology Services, we gained in global process services. We gained in AMS, both SO and SI. We gained in WebSphere, in Information Management, in Tivoli, in Rational, in POWER, Retail Store Solutions. The only brand that we lost share was in mainframe. Now who do you think we lost share to? We lost share to POWER series, our own product line. Every other brand held. So I think that's also a good view of how we're adding value really pretty consistently across the product line as we enter 2012. Now if you look at 2012, your second part of your question, we move into '12 starting with the software business. We had 9% growth in the quarter, about 12% profit growth, very strong performance out of our software base of business. And I’d remind you that software now in 2011 is almost $10 billion of profit. That's up from the beginning of the decade when they were $2.8 billion. Big success, and we move into 2012 with a strong set of opportunities. So I would expect to see similar performance from our software business. When you look at the overall Services business, we gave you, I think, a much more comprehensive metric on revenue. This year, looking at the total backlog of $141 billion, and within that backlog, the runout of the total backlog should be up 3%, covering about 70% of the revenue we need in the year. And you look at our Hardware business, though the Hardware business was -- face a difficult compare in the first half of the year, with new announcement content by the time we get to the second half of the year, I'd expect them to generate mid-single digit growth. So once again, I think we entered the year on the value side, both brand and geographic, with a pretty strong hand.

The next question comes from Toni Sacconaghi with Sanford Bernstein. A.M. Sacconaghi - Sanford C. Bernstein & Co., LLC., Research Division: I was wondering if you could elaborate a little bit more on the margin expansion you're seeing in the Services business. This quarter, revenues were up 3% and operating profit was up 17%. If I look at your operating margins, GTS is 18%, GBS is 14%. Those seem extremely high relative to non-Indian peers. I know you spoke to productivity enhancements, but I'd like to, a, better understand what that is. Is that just a code word for labor migration, off-shoring as a result of the headcount reductions you did at the beginning of the year, or what does it mean? And secondly, more importantly, given that you appear to be at best practice, how much room is there and how much confidence do you have that Services operating margins can continue to expand?

Okay, first of all, very good question. Within Services, first of all, I think the Services business did a very, very good job in the year of driving towards higher value offerings and higher value content for their customer set that is able to bring in the other elements of the IBM equation from both software content and hardware business that our competitors are not able to bring to the table. So within the Services businesses, once again, they did a very good job on both the GBS side and the GTS side to continue to improve that value equation to their customer set. And as we look at the contracts that they're now moving and carrying into 2012, they've already done a very strong job on big contracts where we have more challenging financial dynamics that we know we're going to deliver in 2012. But the other point I'd make, Toni, we were very specific in the overall business model for both the 2010 roadmap and the 2015 roadmap of our attention to pull spend and drive productivity across the corporation as a global corporation. That's the $8 billion that we identified in the last Analyst Meeting. And we've done our first down payment on that right on track. Now, who do you think is a beneficiary of a lot of that structural takeout? The Services business. The Services business are a big beneficiary at that large corporate structural takeout. And to a large degree, I think a lot of that operating leverage that we get is unique to IBM and differentiated from our competition and is not given away necessarily in price. So that structure element is a big assist to our overall services margin, right on track for the objectives that we had set and a strong complement. As far as opportunity and headroom, let's look at it from the IBM equation. I mean, we’re still not in the top quartile of the S&P in the tech universe. There's no reason, with the value that we bring to our customer base, that we shouldn't be in that top quartile. It's a very integrated part of our business model that we've integrated into our budgeting systems. And as I said, I do believe we ought to be able to achieve an overall economy of scale of a large corporation, and a lot of that displayed in our Services business. So as our game plan for IBM as a whole, we're going to drive that software mix within IBM, and you can see from the segment results that the PTI for our software business runs between 40% and 50%. We're going to continue to work to spend reductions and productivity, much of that delivering within our Services segment and drive value add in the customer engagement with assets, research and value-add approach.

The next question is from Ben Reitzes with Barclays Capital.

Mark, would you mind just talking a little bit more about your comment about EPS growth getting higher in the second half? What are the drivers? You grew 11% in the quarter, it would seem, then you decelerate for a few quarters and then reaccelerate to well above that in order to hit your targets. What are the drivers? Is it HDDs being alleviated? Currency cost-cutting or any product cycles that allow you to reaccelerate?

Yes, sure. Let me now take that from the IBM level and then I'll go specifically to your question on kind of the skew in the drivers and the SKU. So as I had said in the earlier questions, if you look at the software-base of business, I think we've got real momentum going into 2012. You saw that in our fourth quarter achievement. Additionally, within that, I can tell you that our acquisition performance for the $6.2 billion of spend that we did in 2010, plus the $1.8 billion that we did, those business case and the performance of those acquisitions against the business case was about the best I've seen in years. Real traction. And I think we entered 2012 with traction on our software business. And I believe they ought to be able to generate double-digit profitability once again. I explained that in our Services business already, in the backlog runout, now against the total backlog for Services, that we already have about 3% in the backlog runout, which would comprise about 70% of our revenue. The balance of the revenue coming from new signings and base growth, even if that new signings base growth were flat, which I don't believe it will be, but even if it were, 70% of the 3 would drive 2% revenue growth in Services. And we showed last year that we could drive double-digit profitability on that base, and we will run the same plays to deliver against that again. So driving for double-digit profit growth in our Services business. The question you asked and the distinction between first half and second half, that's really the STG equation. So STG will have a tough compare in the first half compared to last year's announcement cycle on the high end. But when we get to the new announcements, we get into second half, I would expect that STG should return to mid-single digit revenue growth, and with that, double-digit profit growth. So that, all together, gives us a good handle. Now if you can compare that first half to second half, I'm talking about a couple of points difference between the growth rate that we would see in the first half and the second half. It's not like a major difference, but I do think it has a couple of points differentiation based on that hardware platform. This is, overall, very consistent, once again, with our model. Revenue growth, margin expansion on mix to software and productivity and improved usage of our cash to drive investments, acquisition and our balance sheet for share repurchase. Now like all years, we're going to acquire and we're going to divest businesses. We're going to invest in market opportunities and we're going to drive productivity wherever it's more challenging. We're going to rebalance our workforce to opportunities and skills aligned with our key investments and hire to drive in those growth initiatives. When you look at workforce rebalancing, I think it should be roughly consistent with what we've seen over the last 4 years. More specifically, I think, it would be more like 2010. Once again, if there's a charge associated to that, it would be offset above net income. But you put that all together, and I think we have a good hand as we enter 2012.

The next question comes from Brian Marshall with ISI Group.

Brian, are you there? [Technical Difficulty]

The next question comes from Katy Huberty with Morgan Stanley.

Mark, you highlighted on this call a number of important areas that IBM is taking share, which highlights the expanding distribution and the focus on value-add offerings. You also commented that the return on recent acquisitions has been the best you've seen in some time. So I wonder why not be more aggressive on acquisitions in 2012 relative to what was a pretty quiet year in 2011 and, frankly, even potentially get more aggressive than you were in 2010 when valuations were high in some sectors.

Well, I think that's a very fair question. I still think the best guide over the longer period, Katy, we had said that in the 2015 time frame that we saw about $20 billion of acquisition spend. In that specific calendar time frame, we've only done about $1.8 billion. I still think the $20 billion is a realistic number. We are pretty tough on the financial returns in the cases. We're very, very tough on that. If it doesn't make very strong financial sense then we're either going to hold or we're going to walk. And there have not been exceptions to that rule, at least since I've been in the job. Consequently, we're there to perform against those. Now when the market gets more reasonable on a price level, we'll move in, in a bigger way, and when it gets pricier, we’ll peel back. In 2010, I thought prices were pretty reasonable. We had a lot of good candidates. We did 17 acquisitions, as I'll remind you. Things got a little frothier as we went into 2011. We did pull back, but we still had some very strong acquisitions. You've seen in the last -- in the fourth quarter, we had about 4 acquisitions. We've already done 3 this year. Within that, one aspect of that improving performance, I think, and I can't give you a precise variance analysis on it, but we've built a tool with research based on the analytic performance in all of the acquisitions that we've done since 2000. You've got to imagine that's a pretty rich database to drive that. So now when we go in and do due diligence in an acquisition, we use that analytical tool, this is called "eating your own cooking," we use that analytical tool to improve our performance. So when you do an acquisition, you’re going to put that team on the ground, we now know the 5 or 6 key elements that we have to actually -- absolutely nail to perform against that, and we can hit those very, very quickly. Analytics, I think, has really paid off for us. But I do think the acquisition play is a good one, and I do think the market’s in a more reasonable position.

The next question comes from David Grossman with Stifel, Nicolaus. David Grossman - Stifel, Nicolaus & Co., Inc., Research Division: Mark, if I understood your commentary earlier about the backlog in Services, you've got about visibility on 2% growth in the Services business going into the year. And if that's true, the transactional business, I assume, on the margin is a big component of making up any difference over and above that. And now that we're anniversary-ing the issues that you were having in Japan, as well as public services, do we have some tailwinds in that transactional business as we get into 2012?

Well, I -- when you look at the -- your view of tailwinds, I don't know if I would call them tailwinds. But against the way we kind of plumbed the plan, I do think they present some opportunities. So if you look at -- let's discuss that, kind of on the GBS base of business. On the GBS base of business, they were impacted in the year, and I think it was -- it would have been very difficult for them to offset this because about 1/3 of their business is in public sector in Japan. And with the difficulties in both of those, if you airlift them out of their results, in the fourth quarter, GBS did about 9% growth. So a bit of an acceleration off the 8% that they would have done on that basis in the first, second and third quarter. So we exit the year, I think, with the balance of that business performing pretty well. As we go into 2012, we should start to wrap on the public sector performance. We should also start to wrap on the issues in Japan. And so I do think that gives us an opportunity to improve performance, but we haven't banked on that as we built our budgets and our structure.

The next question comes from Mark Moskowitz with JPMorgan. Mark A Moskowitz - JP Morgan Chase & Co, Research Division: Mark, considering the margin improvements in both Software and Services, I want to get a sense if you could help us understand the buckets of cloud, Smarter Planet and Business Analytics? You talked about or referenced a really nice growth there in terms of revenue. How are the 3 key components of hardware, services and software represented in those buckets? Are they similar to the corporate average? Are they below or above? Because I'm trying to get a sense of as those 3 initiatives continue to grow faster and faster, they're more service- and software-laden, are you going to get even a better margin momentum story down the road?

Yes, well, that's a very, very good question because if you look at the construct underneath that, boy, I can't tell you how structured we are on those growth initiatives, GMU, Smarter Planet, Business Analytics, cloud computing. And within that, if you look at -- let's take consulting and consulting's role. Is consulting's role in those simply to provide consulting content and value add? That's part of it, but it’s also to create the entrée for our software value add and our hardware content as well. So if you look at that construct behind Smarter Planet, Business Analytics and cloud computing, more than half of that is software. And that's what we're looking for. More than half of it is software. Software, again, you can see this segment, as well as anybody, that's come in at very high PTI margins, very high value add to our customer set. Some of the plays we've called there on security, on commerce, commerce has been a very, very -- Smarter Commerce is very, very successful for us in that blend of our organic spend and the acquisitions that we've done. So that's the objective, good question. Big software mix within that, over half of the revenue, software revenue.

Next question comes from Keith Bachman of Bank of Montréal.

Mark, I wanted to ask on services-related questions. Number one, at the end of 2012 -- the backlog runoff charge is helpful. At the end of 2012, would you anticipate that the backlog that you report will be higher or lower based on the runoff schedule? And I know that backs into some of the signings. And related to that, is -- the transaction businesses were a little bit weaker for IBM this quarter and I think have been weaker for all the service providers. And so to get back to a previous question, with the backlog runoff, can you do constant currency growth in services, more broadly if 2% to 3%, if there is a persistent weakness in the transactional side?

Well, I think, actually, you look at the fourth quarter performance, I thought we did pretty well on the transactional content. I think to pick one, we entered 2012 with our stronger positions in our ITS transactional services as we go into the year. And actually our transactional backlog on a year-to-year basis was pretty strong. So one way to kind of look at that is if you look at that backlog runout that we described in the presentation, last year, had we analyzed that, more of the backlog runout would have been driven by our outsourcing business. This year, consistent with year-to-year dynamics in backlog, more of that backlog runout is driven by the transactional businesses. So I think it's part of -- it's reflected in both of those metrics, which are quite consistent. And once again, I think it does put us in a good position as we enter 2012.

The next question comes from Richard Gardner with Citigroup.

I wanted to go back to Bill's question earlier, Mark, and just ask you specifically whether you've seen any of the lengthening of sales cycles or additional levels of approval that one of your major competitors on the software side talked about during the December quarter. And then maybe just a comment about -- I think you've talked about this a little bit, but how you feel about the pipeline for Services and Software as we head into Q1?

Sure. When you look at the overall -- let's start with the pipeline. When you look at the overall pipeline going into 1Q for Software and Services, I mean, I think they looked pretty good. The Software has a very strong set of offerings. And I think the strength and momentum we've seen in the offerings is most conservative. On the Services side, I mean, we've already had a very large win-back from one of our competitors that's driven pretty good quarter-to-date performance in our business. So I feel pretty good about those. As far as lengthening of the sales cycle and more approvals, I do think people and CFOs are cautious about their business, and they want to make sure they have the right processes engaged. And we did see that. But on the other hand, they're also looking for value to apply to the business equations. And I think if you can bring real value to apply to those business equations, it puts you in a stronger position. So that's why I think, in our fourth quarter, we saw a pretty good performance in our business, especially in those key investment categories and our software business.

Next question comes from Brad Zelnick with Macquarie.

Mark, in your prepared remarks, you talked about share gains in just about all the key software brands. And you specifically mentioned an 80% win rate in bake-off situations. Can you remind us what this had been in prior quarters? And specifically, can you share any details from your win-loss analysis versus Oracle and whether anything is changing there?

Well, I mean if you look at -- let's look at this from a couple of perspectives. One way we can look at it is from the Netezza perspective. Now Netezza turned out to be a very, very strong acquisition for us. In fact, the revenue was up 70%. We were sold out. I mean, we could have done even better on Netezza but we sold out the box. Behind that, in each of the proof of concepts that we ran versus Oracle, we won 85% of the time. So that's a pretty strong statement. Now let's look at it from another dimension. Let's look at it from pSeries performance. If you look at the competitive displacements that we had in the quarter, we had 350 competitor displacements, driving $350 million. That's 1,000 for the year and $1 billion for the year. $350 million -- or 350, that's the best quarter we've had since we started tracking this in 2006. And if you look at the content between those competitive displacements, 60% came from Hewlett-Packard, and 40%, the balance, was primarily driven from Oracle.

The last question comes from Rob Cihra with Evercore Partners.

I was hoping to ask a question on the premium growth from your growth markets in Q4, but also sort of within the context of your 2015 roadmap. And I guess 2 things, one is you’re only 1/5 of the way into that roadmap, but I'm wondering if you feel like ahead of that plan to reaching 30% of revenue. And then more specifically, is that dependent on kind of emerging market economies simply outgrowing mature economies? Or is there a lot of IBM specifics that go into it in terms of your investments there in footprint, OpEx, CapEx, et cetera?

Okay. Well, if you look at the growth market performance for the quarter, as we said, 8 points better than the majors for the year or 10 points better. At 10 points better, we did 10 points better this year, we did 10 points better last year but the prior 2 years were both 8 points better. So that differential, it's hard to look at that differential and not conclude it's relatively improving for the last few years and driving our mix equation. So we do feel pretty good about that mix performance. What I really feel good about is the profit performance behind that growth because they are a big contributor. So if you look at the performance that we saw in the quarter, at their relative mix, they drove about 42% of the profit growth that we had on a growth -- so that was a very strong contributor. If you look at the dependencies there, number one, I think we bring a lot of value to those geographies. So if you look at that value construct, I mean, a play like Smarter Planet plays in a very big way in our growth markets. Secondly, we're able to roll out with our structural advantage on the back-office, the central structure of the business, we can move into new cities without recreating that back-office. It's as if you have a -- kind of a -- for lack of a better word, a branch in a box and you plug in the back-office. And the back-office is running the systems across the geographies. I think that gives us an advantage. And then third, not to be -- plus we have a very good reputation, very good reputation and very good brand image in our growth markets as well. So we feel pretty confident in that play. So a lot of good questions. Let me wrap up now, just make a few comments. We just delivered a great quarter to cap off what I think was a great 2011. For the year, we generated 7% revenue growth to almost $107 billion. We expanded margin in line with our model and delivered $13.44 of operating EPS, which is our ninth consecutive year of double-digit EPS growth. Looking forward to 2012, we see good opportunity in our growth markets and in our higher value solutions like analytics and Smarter Planet, where we believe our enterprise clients will continue to focus. And we'll leverage the strength and flexibility of our business model, driving productivity, improving mix and using our capital effectively. So this all supports our expectation of at least $14.85 of operating earnings per share for the year. That's up 10.5% and keeps us right on track to deliver at least $20 in 2015. So thanks for joining us, and now it's back to work.

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