Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, I will turn the meeting over to Ms. Patricia Murphy, 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 today with Martin Schroeter, IBM's Senior Vice President and Chief Financial Officer. I want to welcome you to our Fourth Quarter Earnings Presentation. Prepared remarks will be available within a couple of hours and a replay of the webcast will be posted by this time tomorrow. I'll remind you that certain comments made in this presentation may be characterized as forward looking under the Private Securities Litigation Reform Act of 1995. Those statements involve a number of factors that could cause actual results to differ materially. Additional information concerning these factors is contained in the company's filings with the SEC. Copies are available from the SEC, from the IBM website, or from us in Investor Relations. Our presentation also includes certain non-GAAP financial measures, in an effort to provide additional information to investors. All non-GAAP measures have been reconciled to their related GAAP measures in accordance with SEC rules. You will find reconciliation charts at the end of the presentation and in the Form 8-K submitted to the SEC. Now, I'll turn the call over to Martin Schroeter.

Thanks Patricia. Today I will start with a brief overview of our fourth quarter and full year performance, review the details of the quarter and wrap up with a discussion of 2014 and expectations for 2015. Our strategy is focused on leading in the areas where we see the most value in enterprise IT and in 2014 we made tremendous progress in repositioning the portfolio and making investment to shift into these areas. Our results reflect all of that. In the fourth quarter, we delivered revenue of $24.1 billion, net income of $5.8 billion, free cash flow of $6.6 billion and operating earnings per share of $5.81. Our total revenue performance reflects the divestitures of System x and Customer Care, which together had $1.6 billion of revenue in the fourth quarter of 2013 and we had about a $1.2 billion impact from currency movements. So combined, this represents about $2.8 billion of revenue or a 10 point impact to the reported revenue growth rate. That currency impact was even greater than spot rates suggested 90 days ago, excluding the impact of currency and divestitures, our total revenue was in line with our expectations. We once again had strong performance in our strategic imperatives that address the market shifts in data, cloud and engagement. Together, they posted double-digit growth as they did in every quarter of 2014. We had solid improvement in gross and pretax margin as we drive our overall business to higher value. That will certainly continue into this year as we benefit from the recent portfolio actions and we are continuing to shift our investments and resources to our strategic imperatives and solutions that address our clients most critical issues. Looking at the full year from a financial perspective, we delivered $21 billion of pretax income and operating…

Thank you, Martin. Before we begin the Q&A, I’d like to mention a few items. First, we have supplemental charts at the end of the slide deck that provide additional information on the quarter and the year. We also have provided historical data on continuing operations. And second, I’d ask you to refrain from multi-part questions. Operator, can you please open it up for questions.

Thank you. [Operator Instructions] The first question comes from Katy Huberty with Morgan Stanley. You may ask your question.

Yes. Thank you. As it relates to the EPS guide, how are you expecting PTI in the hardware, software and services businesses to trend relative to the fourth quarter? And then also, should we expect the tax rate to continue to climb higher?

Sure, Katy. A few things. So first, on tax, we’ll address that first, because that’s probably the easiest. We’re assuming a tax rate at 20% in the full year, so a slight decline from where we finished 2014. Now on the guidance in terms of what we saw coming out of the fourth, I think there are a few things that I would mention relative to the trajectories in some of our businesses. We do expect that the launch of the mainframe, along with the success in Power 8 that we’re seeing, that will generate some momentum. And so we would expect to see growth in our systems in kind of the mid-single digit range of growth coming out of '14 when we didn't have the cycle. In services, we’ve not built a revenue trajectory or assumed revenue trajectory that requires a lot of growth within our EPS. And then the most important I think from a guidance perspective is software. So we have, as you know, a range in our EPS. And I think the way to characterize the bottom of the guidance and the top of the guidance is that at the bottom of the guidance, we're not assuming that we see an improvement in the trajectory of our software business. And I would characterize the top of the guidance as sort of a stabilization of the software business relative to 2014.

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

The next question comes from Toni Sacconaghi with Bernstein. You may ask your question.

Yes. Thank you. I’m wondering if you could elaborate a little bit further on cash flow for 2015. Looks like you're guiding for it to be flat, which is under 80% of net income if I sort of work back or it’s from the midpoint of your range. Can you help us understand what the forces at work are that create the significant discrepancy between free cash flow and net income? And can you also help us understand how we should be thinking about relative free cash flow spending on acquisitions versus dividend and stock repurchases relative to history?

Sure, Toni. A couple of things. So our free cash flow guidance is essentially flat year-to-year, given the range of profit we provided and a couple of things within that. And I’ll try to address this sort of in the reverse order that you asked about it. Relative to share repurchase, we've only assumed about a 2 to 3 point impact from share repurchase, which is obviously less than what we were able to do in the last year, so a reduced level of share repurchase. I guess, the way to think about it is we entered 2015 with a bit over 6 billion of authorization remaining and we've just assumed that we used the authorization now. There obviously, timing will impact that's impact on EPS, but think about our share repurchase in the year as consuming the bulk of that authorization. In terms of dividends, we have assumed that we would obviously, continue to pay the dividend and we’d like to and will talk about the dividend with the Board. We’d like to talk about how we might grow the dividend as well. We typically do that, as you know, in April. So those discussions will start soon. From a realization perspective, we printed a 79% realization in 2014 and we see that improving to the mid 80's. Now there are a few elements of our free cash flow relative to realization that I think are important to keep in mind. We’ll start it, call it a 100% just for simplicity. We get a 5, 6 point impact just because we have a pension in terms of realization now. Sometimes that is not as steep as that and sometimes it can be more depending on what the markets due to the pension. But right now in 2014, we saw…

Thanks, Toni. Kristine, can we go to the next question please.

The next question comes from David Grossman with Stifel Nicolaus. You may ask your question.

David, you are on mute?

It looks like he has disconnected. Would you like to move on?

Yes, please.

Thank you. The next question comes from Steve Milunovich with UBS. You may ask your question.

Thank you. Philosophically, Martin, how did you approach this guidance, even at the low end, you’re only down about 5% in EPS from what you did in ‘14. And given how currencies moved against you and so forth, do you feel you're being conservative enough particularly, given that, it doesn’t sound like the share counts going to come down too aggressively. And maybe you talk about what you're assuming for restructuring since restructuring is part of your reported EPS?

Sure. Sure. Steve, so first thing I’d say, the guidance is only about an hour and 15 minutes old. So I’m not going to recharacterize what we’ve already provided. Now having said that and we talked -- I talked a little bit about it in response to Katy’s question, at the low and the high end of the range, I think the primary difference is the software trajectory that you assume. One assumes no change in trajectory at the low-end and one assumes in software stabilization if you will. And as you said, we’re not going to get the same year-to-year improvement from our share repurchase program that we got last year. But at the same time, we've taken a lot of action to position our business coming out of 2014 that we feel very, very good about. So that $25 billion of strategic imperatives revenue growing at 16% a year is a very powerful part of the portfolio now. And in fact those deliver gross profit margins that are better than the IBM portal on average I should say because they have a higher software mix in them. So we are not going to get the same level of EPS at a share repurchase I’ve shared. Again the dynamics on software and then the other part that you asked about was restructuring. We are not going to replicate the same level of restructuring that we had last year. It will be a lower mountain. Now we will continue to remix our skills. It’s part of our business. As you said, we include it in the way we report. So its part of our business, but we will not spend at the same rate. And we will get obviously some of the rollover benefits from what we’ve done this year. So parts of our business continue to do very well, and the elements of the business that don't have that same level of growth remain very high margin, very profitable, very high value for us. Now I should remind you that currency is a big impact for us. We've included in the backup charts the impact to revenue. It’s about 5 to 6 points based on spot, that's just a revenue impact. As we saw in the fourth quarter, it was nearly a $300 million impact to us in the fourth. And a $300 million on our base that is really the difference between growing pretax income and not growing pretax income in the fourth quarter for us. So it will be a big impact and despite that, we will grow margins next year or this year as well. So a few, I guess, I’d say puts and takes on this but again I'm not going to re-characterize the guidance, which is now an hour and eighteen minutes old.

Thanks Steve. Can we go to our next question please?

The next question comes from Bill Shope with Goldman Sachs. You may ask your question.

Okay, thank you. I wanted to see if you could get a bit more detail on the cash flow comments that you made earlier. At the other elements, you mentioned that sustained the gap between cash flow and earnings for this year, which specifically are likely to be less of a factor beyond 2015. And I guess what specifically should allow you to get to that 90% conversion goal overtime?

Sure, a couple of things. So again if I worked down from the 100, we do see an increased allocation of capital to the investments we are making. As I mentioned, we've included in our ‘15 guidance about a more than $0.5 billion of increase. Now we don't see that rate and pace continuing forever. So yes we see increased capital expenditure requirements overtime as we continue to invest in things like our cloud, but not at the same rate and pace. So that will slow a bit. At the same time, as we see markets perform or differently, we don't assume that the pension impact, it will not be a year-to-year impact I should say, continuing into the future. So slower CapEx spending growth, reduced impact from the pension on a year-to-year base. And then, we do see as we go through this transition, as we’ve talked about in our longer-term trajectory, we see profit growth in the high single-digits. And that profit growth has been the primary driver of our free cash flow growth over the year, as we talked a bit about this in Investor Day. The primary driver over the past 10 years of our free cash flow has been profit growth and as we get back to that profit growth, we see most of that converting back into free cash flow as well.

Thanks, Bill. Christine, can we please take the next question?

The next question comes from Benjamin Reitzes with Barclays. You may ask your question.

Yeah. Thank you. Hey, Martin. You mind talking about acquisitions. Do you feel like you may need to acquire more to recapture a growth trajectory and/or will that be, or will you use the same tuck-in model that you guys have been using previously? I guess my question is do you see a need for bigger bets? And what is the acquisition budget within your guidance for this year? Thanks.

Sure. A couple of things, Ben. One, the way we approach acquisitions, which has worked very, very well for us is the way to complement the organically developed innovations we can create and then to build around what we view as the future of enterprise IT. So over the last few years with that as sort of an approach, we've been pretty aggressive in acquiring analytics companies. We’ve been pretty aggressive in acquiring -- we bought SoftLayer. We've been building out our cloud platform. We've been aggressive in acquiring new ways for clients to engage with their customers. So our acquisition model again has been built around our view of the future of enterprise IT and how we supplement the technologies and the innovations we are bringing to market. I think that model works really, really well. Now, I do think that we see two differences, as we move into the future on our acquisition policy or our acquisition approach. One is more of our acquisitions will probably be on an as a service basis as opposed to say an on-premise model. And that’s kind of the nature of the market and that's also where we have a lot of opportunity because we don't really play in some of those areas today. So, we have over 100 as-a-service offerings, our as-a-service business in total, finished at $3.5 billion on an exit run rate. But we still see a lot of opportunity to expand, if you will in that as a service base. So one is more as-a-service acquisition content and then secondly, we've been more active and been very successful in partnering with leading companies in order to help transform industries and in order to help transform professions. And I think there is a great example in Apple and what we're working on with them and there's a great example in Twitter. So those partnership models obviously require investment and we investment in them heavily. But we don't have to own all the technology in order to bring it to our clients. And one of the things our clients also went over again is that they look to us to help bring some of these things together so they can they can use it in the most effective enterprise class way. So, you'll see also more partnerships, if you will as opposed to acquisitions. But from an acquisitions standpoint, more as-a-service I would think as opposed to on-prem.

Thanks, Ben. Let’s go the next question, please.

The next question comes from Brian White with Cantor Fitzgerald. You may ask your question.

Yeah. Hi, Martin. I am wondering if you could talk about how you are thinking of cloud growth in 2015. You talked about 60% growth in 2014. How are you thinking about 2015 in the cloud and net-net, if you could just give us a view on the impact the cloud is having on IBM? Obviously this business is growing, but it’s impacting other parts of the IBM business. Thank you.

Sure. So, cloud for us, a $7 billion business. I think that kind of puts us at the forefront of cloud in the cloud industry, in the cloud space if you will, so $7 billion growing 60%. We are delighted with the investments we've made and we see a very powerful opportunity in the cloud. That cloud business for us is made up not only of as-a-service business, which as I mentioned was a $3.5 billion dollar run rate at the end of the year. It also has our foundational offerings in it, where clients are building private clouds and deploying hybrid environments and we've been talking about hybrid for many years now. We think that the hybrid environment is the way that we see most enterprises getting the benefit of the agility of the cloud linked in with their systems of record. So our foundational offerings are deploying private clouds and hybrid clouds and we see that trend continuing as well. So, $7 billion, we see continued strong double-digit growth in that for us. Cloud for us remains a terrific opportunity for all aspects of our business. When we sign as an example these large services deals that you’ve seen for instance coming out of Europe, big element of those outsourcing transactions is also to embed and include the cloud environment for those clients as well. So cloud is sort of permeating a lot of the elements that that we are bringing to market and as part of why we brought all that together into a cloud organization just in January this year, something we mentioned we would do back in October and we announced the cloud unit in January, which will bring all that together for our client. So very powerful opportunity, very substantial business opportunity for us now at $7 billion last year and we see continued strong growth.

Thanks, Brian. Can we go to the next question?

The next question comes from Tien-Tsin Huang. You may ask your question.

Geography and outlook there, it look like Asia plays nicely in the fourth quarter.

Tien-Tsin, can you start again.

Yeah. Can you start again? You cut off in the beginning.

Is this little better?

Yeah. Great. Thank you.

Okay.

Yeah. Just want to ask on geography and the outlook there. I was just saying that Asia look like got a little bit better, Japan and China on the better place. So, any calls out on growth guidance by geography overall for the year? Thanks?

Sure, Tien-Tsin. A couple of things, Japan, again had a very good quarter, very consistent growth now and boy we are delighted with the progress that Japan team has made and the way they are bringing innovation to their clients. So I think it's a terrific story for us. When we look at the other growth markets, the other highlight I’d point out is China, as I said on the prepared remarks, down 1% in the quarter at constant currency, now that’s without the divestiture of the System x business, but we had seen some pretty dramatic declines in that business prior to that. So with our top banking customers deploying substantial new mainframe capacity in the quarter, we are pleased to see that that business is starting to stabilize. Again X currency, X divestitures, we are pleased to see that business is stabilizing and quite frankly, China has been a substantial business for us and it was again in the fourth and continues to be. We will continue to be a very important part of our business. And the other geographies in Latin America, I think it's probably worth talking a little bit about because in Latin America, what we had -- in the fourth quarter was an impact from our transactional business as it wrapped on some very strong prior year. So more annuity like businesses in Brazil and LA, in Brazil in particular, in LA we are fairly stable with good growth and our transactional businesses, which had been growing in the first nine months of the year hit a tough compare and so we are down. So LA finishes the year with growth, very good growth at about 8%, but down in the fourth quarter. And then in Asia-Pacific, you we did not see a dramatic change in trajectory here going into the fourth in the third and the fourth and even the full year kind of 6% to 7% declines in Asia-Pacific. And fairly consistent even when we look across some of the constituents in the geography, Australia did not get any better, Asian did not get any better. So we are seeing some challenging growth environment in Asia-Pacific. The one driver, I would say that's going to permute across all these organizations though is that the shift to the cloud, the shift to big data and analytics, and the shift to new systems of engagement is a key source of growth within all these geographies and we see that fairly consistently in our business, that phenomenon is consistent across the geographies.

Thanks, Tien-Tsin. Can we go to the next question please?

The next question comes from Joseph Foresi with Janney Montgomery Scott. You may ask your question.

Hi. I was wondering if we could get a little bit more color around the margin profile for cloud and the timeframe for improving those margins and any targets for the strategic initiatives as a percentage of revenue over the long-term? Thank you.

Sure. First, I will talk about the margin profile. So what we see across all of our strategic imperatives. We see on that $25 billion base is the gross profit margin that is greater than the IBM average. So we're actually seeing very good margin performance in gross margin on that strategic imperative content and again growing very rapidly. Now we are investing heavily. So net margins are not -- they don't have that same dynamic. They are not yet greater. But we will see in that as a service business now as we talked a bit about on the call, we will see an improvement in scale, we are not yet at scale, but we will see an improvement in scale as that business from $3.5 billion on a negative run rate continues to grow. So we see good margin opportunity in our strategic imperatives as we deliver high value. And then in terms of revenue target for strategic imperatives over the long run. I wouldn’t pick a number of percentage per se, what I would say is that, a $25 billion growing solid double-digit just on a trajectory basis, the math would say, you continue to make pretty good progress i.e. continues to represent a bigger and bigger percentage of your revenue. But bear in mind that the recurring core franchise business to us, which is fairly stable and we expect it to continued to be fairly stable, remains very high margin as well as very high value. So those strategic imperatives will continue to grow, very good performance over the long run. They will represent a larger percentage of our business. Obviously, a sheer math would suggest that. But those other Recurring Core Franchises are delivering very high value to clients as well.

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

The next question comes from David Grossman with Stifel Nicolaus. You may ask your question.

Thank you. Sorry I dropped. So if this has been answered, feel free to take it offline. But I wanted to ask a quick question about software, information management and WebSphere are probably the segments with the most noticeable and perhaps impactful deceleration. And you’ve outlined the issues related to the structuring of the ELAs. Can you provide for us some framework that would help us better understand when you would expect growth to return to more normalized levels and why you would expect that?

Sure, David. And no, it hasn’t been asked yet. So, I’m glad you got back in. Couple things on software. First, we have to remove from a growth trajectory perspective, I'll take the currency impact out and I will talk about it, excluding currency. Full year growth in our software business was -- clearly our software segment was clearly impacted by the operating system content. So that was about a point and a half of impact over the years. So total software group, as you saw at constant currency was down about 1%. That includes just under 1%. That includes the impact of the operating system content. So the difference between the total segment is really the total middleware. Our total middleware business did grow, grew about 1%, excluding the currency. Now as we’ve said, there is a software-as-a-service business in there that's doing very well, growing 50%. We have elements of our middleware that are doing quite well. And in the prepared remarks, we talked about the flexibility we provided within that growth rate and we saw that in the fourth quarter as well. The elements of that, the flexibility that we provided to our larger customers, as they deploy, as I mentioned earlier, things like hybrid cloud environments and private cloud environments. Their commitment to the platform over the long-term comes with our giving them some flexibility on how they deploy. So it's an impact of the growth, as I mentioned, total middleware was up a bit in 2014 on a full year basis. And then within that content, if you look at the more transactional elements of our business, we still signed 350 or so ELAs in the fourth quarter. So the ELA structure still continues to be highly valued by clients. They really are just looking for this flexibility and how they deploy. The other way to look at it or in other way that we think about it, those large clients use flexibility to deploy outside of those large clients. We actually saw growth in our middleware business, very good growth in our middleware business. So part of way we set the guidance the way we did was really reflective of the question that you asked. And I guess, the way I’d answer it is for our guidance, we’re not relying on an improvement in trajectory in -- at the low end of guidance. And we are -- we would need a stabilization if you will in order to see the high-end of guidance. But the phenomenon here is middleware is growing. Total middleware is growing. Different deployment rates in our larger customers than the growth we’re seeing in the rest of our customers.

Okay, Christine, let’s take one last question please.

Thank you. The last question comes from Amit Daryanani with RBC Capital Markets. You may ask your question.

Thanks a lot. Martin, I guess my question is regarding the transition IBM is undergoing. It looks like 2015 will be another year of EPS decline as we shift revenues towards the strategic imperatives. I’m curious when do you think the business model gets an optimal level where you see the target you outlined of low single-digit sales, high single-digit EPS growth. Is 2016 the year we get there or do you see that happening at a later point?

Well, Amit, we’re going to talk more about the longer term at Investor Day in February. So I'm going to limit my guidance today to talk about 2015 in what we just provided. And I think we characterized it pretty well for what we’re expecting and what is implied if you will in that guidance. But we look at 2014 and we look at how much we got done in positioning our business for the longer term. Again $25 billion business growing at 16%, including the impacts of currency. We look at the investments we made in our cloud business, including building out our software platform across 15 countries now including things and by the way, we will see the impact of that and the uptake of that capacity going forward. We look at the relationships we are building and now executing on with again partners like Apple and Twitter and that's not yet in the 2014 obviously because we just did them that has a lot of good growth coming up. We look at the analytics business, the substantial business, $17 billion last year with reasonable growth. And importantly, we’re really pleased with the progress we’re making in commercializing Watson. I would not characterize the $17 billion as reflective of a substantial revenue impact, if you will, from Watson, certainly a big investment for us but it's absolutely a right investment. And we’ll see all that growth still coming to us. And then we look at other elements of our portfolio like mobile tripling and security up solid double-digit. So from a growth and investment standpoint, we feel terrific about what we got done in 2014. And then we also undertook a lot of difficult decisions to position our business over the long term for other elements. So we…

Thanks Christine. Can you close out the call for us, please?