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'd like to welcome you to our First Quarter Earnings Presentation. The prepared remarks will be available within a couple of hours and a replay of the webcast will be posted by this time tomorrow. I'll remind you that certain comments made in this presentation may be characterized as forward-looking under the Private Securities Litigation Reform Act of 1995. Those statements involve a number of factors that could cause actual results to differ materially. Additional information concerning these factors is contained in the company's filings with the SEC. Copies are available from the SEC, from the IBM 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 the 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 will turn the call over to Martin Schroeter.

Thanks, Patricia. In the first quarter, we delivered $19.6 billion of revenue, $2.9 billion of operating net income, and operating EPS of $2.91; that's up 9% from last year. It's quite a good start to the year, and obviously better than the mid-single-digit growth we discussed 90 days ago. Our revenue was flat year-to-year, excluding the impact of currency and the divested businesses. There's been a lot of focus on the implications of a stronger dollar, especially to companies like IBM, where, as you know, two-thirds of our revenue are outside the U.S. So let me address this right up front. In the first quarter, we had an eight point impact from currency translation. This impact is even greater than 90 days ago, and also from the update we provided at the end of February. As always, we put a chart in the back-up that shows the impact of currency translation to revenue for the first quarter and the full year. And as we shift our portfolio to higher value and divest businesses that no longer fit our strategic profile, this also results in an impact to our reported revenue growth. In the first quarter, it was over four points. So together, the impact of currency and the divested businesses reduced the reported revenue growth by 12 points. Now, for the balance of the presentation, I'll focus on our revenue performance at constant currency, and excluding the impact of the divested businesses. This is the way we look at our business, and again, on that view of our business, our revenue was flat year-to-year. At our investor briefing at the end of February, we spent a lot of time on how we are transforming our business to where we see long-term value in enterprise IT. We have a core portfolio…

Thank you, Martin. Before we begin the Q&A I’d like to mention a couple of items. First, we have supplemental charts at the end of the slide deck that provide additional information on the quarter. 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] Our first question comes from Toni Sacconaghi with Bernstein.

Yes. Thank you. Martin, I was wondering if could comment more broadly about progress in the transformation. Because if I kind of look at this very narrow-mindedly, hardware grew enormously. And if I take out hardware, the rest of the company grew at minus 2 which is what you've been doing the last couple of quarters. And you commented that your strategic imperatives had actually accelerated in growth. So if we takeout hardware and the strategic imperatives are actually growing faster than before, doesn’t that suggest the core businesses outside of hardware and the strategic initiatives are actually getting worse. And when we look at the gross margin profile of services and software which are 90% plus of your business, they actually got notably worse year-over-year even adjusting for the restructuring. So I would like to just maybe push back a little bit on -- beyond what we saw in hardware which I think is probably cyclical, what is the progress in the transformation. And should we be thinking more like 30% growth rate in the strategic initiatives and that's sustainable on what drives it or perhaps you can just help us think through that.

Sure. Sure, Toni. Thanks for the question. Well, there is lot in that question. So, I will -- I will try to address it at a high level. First, in terms of the strategic imperatives continuing 30%, we are not thinking that this is a 30% strategic imperative growth every quarter now for the rest of the year as you know. And as we've talked about in Investor Day, they’ve been on a very steady 19%-20% growth rate year-to-year. Now they are a pretty substantial part of our business now and we view that 30% growth -- part of its driven obviously by the mainframe and power cycle. And we are thinking now when we look at the rest of the year that we are kind of accounting on a continued 19% to 20% growth. So our guidance is not requiring 30% growth. In fact, we expect it to kind of return to what we've seen, still very strong growth, still ahead of the marketplace and still contributing a fair bit of growth to IBM. But think of it as more of a 20% growth. With the quarter, as we talked about on the call -- on the prepared remarks, outside the strategic imperatives we've been talking about that business in kind of a high single digit decline similar to the market that it sits in and we kind of saw that again in the first quarter. So the revenue dynamics in the first quarter were really a reflective of that acceleration, not a change in the core underneath that. Couple of other points, I think that you are ready to. One, progress in the transformation, I think the transformation that is underway in the marketplace and is underway in our investment levels, is underway in our focus, continues at…

Thanks Toni. Let’s go to the next question please Dory.

Thank you. Our next question comes from Tien-Tsin Huang with J.P. Morgan.

Hey, thanks. Just want to ask on the services side, how that came in both in revenue and margin versus plan. Seem like with mostly done with the heavy workforce rebalancing, heard little bit about China make shifting way from the lower margins from GTS being little bit weak. But seems like we could assume certainly better performance starting in 2Q, can you maybe expand on that Martin?

Sure, Tien-Tsin. Thanks. So a couple of things. One, we did see a deceleration in GTS in the first quarter in Global Technology Services. But keep in mind that when we had these pretty substantial transactions and new relationships that we signed last year. Those will only move into the run phase over the next few quarters, primarily in the second half. So we would expect those to contribute bit more or something in fact, they didn’t contribute anything in the first quarter. But they will start to contribute in the Global Technology Services. Margins within Global Technology Services will continue to reflect the currency environment we’re in as well as the investments we are making in order to grow out our SoftLayer platform and to shift the business to these new higher areas. As you noted on our prepared remarks we talked about shifting away from lower margin offering in some of our site facilities business and redeploying that and that will continue. So from a Global Technology Services perspective between the currency environment that we are in and the shift we are making, and the investments we are making, we are not relying on dramatic growth or margin improvement in GTS in our guidance. On GBS, we've got some very strong results, continued strong results in Japan and in Europe. And we continue to shift that business as well into these new areas where we are comfortable that the margin profile there will be consistent with our guidance also, so two different stories between GTS and GBS within our guidance. We are not relying on dramatic growth here. But we will see some improved performance coming out of the backlog because of the big deals we signed last year.

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

Thank you. Our next question comes from David Grossman with Stifel Financial.

Thank you. Martin, I wondered if we could just look in little more detail for software business. The compares get much easier in the back half of the year. And based somewhat you are seeing in the business today and if there is no material shifts in the economic backdrop. Would these comps be enough to stabilize the software segment on its own or is it possible that growth could remain negative given all those different things you talked about in the back half of the year even against the negative comps that we see versus last year in the back half of the year?

Sure David. Thanks. So software, as we talked about when we provided guidance initially back in January, we said we still feel this way. The difference in our low end of our guidance and our high end of our guidance really depends on the trajectory of software. What we saw in the first quarter was a one point improvement in the trajectory, not back yet to growth, but a one point improvement in our trajectory. Now that's not all year. We haven’t seen it yet all years. But again, the difference high and low guidance is that trajectory improvement. Assuming we were at the same level, same trajectory we had last year, we said that's kind of the low end of our guidance. We do see an environment where that's kind of the trajectory performance that we can rely on, if you will. We continue to sign ELAs with clients. We signed 200 ELAs again in the first quarter. We continue to have an impact in our growth from the operating system component of software. But we saw pretty good uptake in our as a service offerings which are driving growth of more than 50%. And at the same time our clients with their reduced visibility continue to look for flexibility in our offerings for those who have deployed the most. So software again represents for us the difference between the low end and the high end of our guidance. We saw that one quarter sequential improvement in the first and we see how we go for the rest of the year.

Thanks David. Can we go to the next question please?

Thank you. Our next question comes from Steve Milunovich with UBS.

Thank you. Martin, would you be able to share with us the EPS impact on currency. You gave us revenue, but could you tell us cents per share? And then I was curious on the free cash flow you gave us flat for the year, could you talk a bit about the plus and minus factors that you've got there, CapEx, cash taxes and so forth and how those are going to play out?

Of course. And since currency and free cash flow are so related we will count that as a one part question, Steve.

Thank you.

So, first on currency. We did talk -- as we mentioned in the call, currency was an impact of about eight points on the revenue line. So a bit over a $1.7 billion in terms of translating the first quarter revenue back to dollars and we saw some significant movements not only since January, but also even since we provided an impact on the day of our Investor Day, so a pretty big impact on the revenue line. From a profit perspective, now, this is somewhat of an imprecise calculation, right? It is not knowable. It is unknowable number. We can estimate it. But we think their profit growth was impacted year-to-year by somewhere between $0.15 and $0.20 in the quarter. That's a pretty big impact. So, obviously, that shows up in margin. And that first quarter impact then given where the dollar is now, you could adjust. We are working to try to -- we will obviously have to manage our way through this. But if you just took that $0.15 to $0.20 impact at the high end assuming the rates stay here, you could see an $0.80 year-to-year impact full year on earnings from this, again, without us having done anything. So, obviously, it’s something we are thinking about and working on pretty hard. In terms of free cash flow, we said relatively flat year-to-year in full year. The bridge items are not dissimilar or not going to surprise you. First, we do see cash taxes this year being better year-to-year than they were last year. So that's probably about $2 billion better year-to-year, so that will certainly help. Reducing that on a full year basis though, will be increased CapEx investments which we'll be making. We've talked about that already in January and we mentioned again in Investor Day. We also have while we expect a lower level of workforce rebalancing charges, the timing of those, the cash impact of those is likely to lead to an increase this year relative to last year of about $0.5 billion. And then our performance related cash payments this year for prior year accruals will probably be up $700 million to $800 million as well. So outside of that, our cash performance will look a lot like our income performance which is kind of what you would expect I think.

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

Yes. Thank you. Our next question comes from Bill Shope with Goldman Sachs.

Okay. Thanks. I have a question on the mainframe site. If you are only shipping the new mainframes in the last few weeks of the quarter and you were able to double revenue. Should we assume that we still have some potential for growth to accelerate from here? And then I guess just looking at the cycle overall, can you talk about whether there are any unique financial dynamics for this cycle that we should consider relative to last few cycles. I guess, I'm particularly focused on the dynamics around pricing where it looks like you actually had an ASP tailwind relative to MIPS growth this quarter and also the pull through for as-a-service on this platform. Thanks.

Sure, Bill. Few things on the mainframe. So first, we had a terrific first quarter in the mainframe. But I think it’s important to understand two elements of this, first, this is what we expected our mainframe performance to be. This was not a surprise to us. And so I don’t think that you should take away from either our prepared remarks or even the questions that we think we did better than we would have. We think this was the mainframe performance we expected very clearly. I think that the element for the mainframe, though, that are most widely misunderstood by many who follow us are twofold. One -- and this has to do with the timing of what you’re seeing in the quarter. One, I don’t that mainframe is fully appreciated for the essential nature of the work it does for the impact that our clients feel from an upgraded mainframe and for the kinds of enterprise class saleable workloads that it drives. So we used the example of UPS in the call, 5 billion packages they have to deliver on time and again they can't be down. So, one, I think there is an under appreciation for the mainframe and its value to our clients. Two, I think there is a huge difference, obviously between how consumer technology works and how enterprise technology works. And so when you read that we were shipping the mainframe since March, remember, we've been having the discussions with about 60 of our clients for months and months and months, because they help us build and design this for their needs in those enterprise spaces. But the January announcement is when we start building the value propositions for our clients, and so the work for the sales teams begin in January. The…

Thank you, Bill. Can go to the next question, please?

Yes, thank you. Brian White with Cantor Fitzgerald.

Yeah Martin, I'm wondering if you could talk a little bit about how customers are feeling in the broad IT spending environment. It seems like financials and first quarter were actually very strong and a huge FX impact. So, I'm just curious how customers are feeling and how we should think about general seasonality throughout the year?

For us, Brian, I think couple of things. One, we have not seen a dramatic shift in trajectory across lot of our sectors. Financial services sector is obviously one where the mainframe plays a pretty vital role in how the world banks run and when you get a new mainframe, particularly when so relevant to them shifting their business into mobile, particularly one where counter fraud is such an important part of what they have to think about every day. And again you need scalability, you need reliability. You have to run all the time. That, as a particular, that new mainframe as an emphasis within financial services sec are, and therefore we did see an improvement in the trajectory in financial services. But across the rest, I would say not a dramatic shift in what we saw in the first quarter. Again, the common thread that we're seeing is not a sector-by-sector other than what I pointed out in the financial services. The common thread here is the relevance of our offering in the strategic imperatives where the need for mobility, the need for social ways of engaging either your employee base, your client base and the need for really powerful scalable systems kind of drove the day in the first quarter with 30% growth year-to-year relative to what had been a 20% kind of growing business.

Thanks, Brian. Dory can we take the next question, please?

Thank you. Our next question comes from Keith Bachman with Bank of Montreal.

Hi, Martin, thanks for taking the question. I want to go back to cash flow, if I could. In your past comments, you talked about this year being flat, but previously called out a number of one-time items including pensions. And I was just wondering if you could comment directionally how we should be envisioning cash flow in 2016 relative to 2015. It seems like some of the items should be one-time in nature, but the tax payments, restructuring, et cetera, been both directionally and relative to the percent that you normally provide versus net income.

Sure. A few things, Keith. One, as we said a number of times, cash flow, we expect to be flat in 2015, relative to 2014. And relative to 2014, what we showed in Investor Day were the drivers of our realization and 2014, were really two-fold. One, we had a very high cash tax rate last year relative to net income and as I mentioned in the prior answer, we don't see that same level of headwinds this year. So, on a realization basis, taxes -- cash taxes will not be an impact to 2015. I'll come back to 2016 in a moment. And then all so last year, we had a pretty substantial gain, which obviously showed up as cash in the IBM Corporation, but showed up in the investing line not in the free cash flow line so that drove realization down about 20 points from the -- say if we set ourselves high 90s. So, this year, as I mentioned, we don't the cash taxes as a primary headwind and we do expect to improve realization this year pretty dramatically. I did talk about, a little bit, on a full-year basis about some of the differences in cash flows this year including performance related payments and workforce rebalancing payments and increased CapEx within 2015, but still an improvement in our realization rate in 2015. Now, when we get to 2016, I think a few things happen. One, we again will have, I think, the cash tax headwind. Now this is at a planning level and we're nine months away from the start of the year, which means we're 21 months away from figuring out the settlement of audits and things. So, we've got a long way to go, but right now, we would envision a cash tax headwind again in 2016 that we can see. From a pension perspective, we're kind of -- we're in our pensions by the way. We've been -- we have a closed pension and we've been moving our asset side of our portfolio to more mimics the liability side, which is we've been moving to more debt instruments within that and allocating to more interest rate securities. So, we don't have as much risk in the portfolio and our U.S. pension remains very well-funded and our global pensions are in a pretty good funding position, so we don't see a lot of -- at this point, we don't see a lot of impact from pensions.

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

Thank you. Our next question comes from Sherri Scribner with Deutsche Bank.

Hi. Thanks. Martin, I was hoping you could walk through your expectations for profitability as we move through the year? It looks like from a profitability perspective on a year-over-year basis, services and software declined a bit but hardware was more profitable. Hoping you could walk us through the rest of the year. Thanks.

Sure. Let's -- I'll talk about how we see the rest of the year playing out, first in -- from a full-year perspective and then I'll bring it to the near-term and what we see coming in the second quarter. So, first, as I mentioned earlier, our low end of guidance assumes, essentially, that software doesn't improve for the rest of the year and as we already saw that first quarter was just a bit of head of that, so the high end of guidance assumes – as we see a slight trajectory improvement in our software business right back to essentially flat. In the near-term -- so that's the difference between high and low -- the near-term, from a profitability perspective, we have a fairly typical skew in our pretax profit from first to second quarter. It's fairly typical. Now, as we transform our business, as we continue to make investments, as we continue to see growth in our strategic imperatives business, we will get, as I mentioned another good quarter out of the mainframe. But as we transform that business, I would expect to see a fairly typical skew from first to second quarter on a pretax profit basis. Now, on a year-to-year basis we have dynamics within our workforce rebalancing charges from prior years that drive the growth rates to look at odd. So, with essentially roughly the same level of workforce rebalancing from first quarter to second quarter this year, we take that out of the equation, therefore, on a quarter-to-quarter basis, but the transformation of our business and the cycle we are in the mainframe, I think, probably gets us to a typical -- a more typical, if you will, sequential improvement of about $1 billion of pretax profit quarter-to-quarter. And again, on a full-year basis, we see the difference in the high end and the low end of being that software trajectory.

Thanks, Sherri. Let's go to the next question, please.

Thank you. Our next question comes from Wamsi Mohan with Bank of America Merrill Lynch.

Yes, thank you. Thanks for taking my question. Martin, could you talk about any changes in IT spending demand trends, especially in regions where there were significant effects, double the factor at all in terms of any deferrals? And can you help us think through how the expense levels will change with FX relative to the revenue levels as we go through the year. This quarter they were in pretty good alignment, but you also saw a pretty strong America's revenue. So, just wondering what the puts and takes there could be.

Yes, I mean I'd say a few things. So, we did not see dramatic -- we didn't see any improvement in, for instance, in Asia-Pacific. So, we continue to see a slow spending environment in AP and I think our performance there mimics what we're seeing in the marketplace in general. Japan, spending continues to go quite well and we continue to perform. But it's more than just the environment in Japan. The team has done a terrific job of maintaining growth now well into their third year and so it’s the strength of our offerings that are underpinned by a reasonable spending environment within Japan. In other places, as we noted on the call, North America, U.S. did quite well and we see a spending environment there that is supportive of the investments we're making in the way we are shifting the business. So, in total, with some exceptions where we see weak spending environment in AP, we see a reasonable environment. Now, from an expense perspective, our focus is obviously on continuing to drive that in those investment levels and as we talked about in the prepared remarks, outside of the translation impact of currency and outside of the divested content, our spending was essentially flat year-to-year. And so on an EDR basis, that was about the same and we will continue to shift within that our spending toward the strategic imperatives. And so, when you look at 30% growth and again, we don't expect it to stay at 30 -- but when you look at 30% growth that supported by a pretty dramatic shift of spending within IBM and at the same time, that funding, that spending is coming from those core businesses. So, some of what you're seeing in that core business decline is that engineered shift toward the strategic imperatives.

Thank you, Wamsi. Dory, let's take one last question, please.

Thank you. Our final question comes from Jim Suva with Citi.

Thank you very much. And if you can focus a little bit on the Services segment. Help us understand kind of what's going on there. It looks like both GBS and GTS profitability is down year-over-year and the signings have a lot of volatility around them. But kind of the rate of $10 billion seems to be a multi-year low. How should we kind of think about what's going on in services, mostly the shift to the strategic imperatives and how should we kind of think about that. Could it be the shift we would expect profitability to actually be up year-over-year, or maybe it's FX? Thank you.

Sure, so a few things. And you're right; FX is obviously playing a role here in how some of those services profits translate back to U.S. dollars. But on a broader context, signings growth in the first quarter, which is there plenty of opportunity out there? There certainly is. We see a lot of opportunity for continued growth in our outsourcing business, double-digit growth, in fact, across all our outsourcing businesses and signings. And the backlog, in total, was essentially flat year-to-year. Obviously, there is a currency impact here on the divestiture impact, but backlog in total was essentially flat. What we see and services is really a couple of things. One, within Global Technology Services, we continue to invest pretty heavily, as I noted earlier, in order to drive that SoftLayer platform, for instance. We continue to invest to build out that infrastructure as-a-Service capability where we're seeing very good growth in our SoftLayer platform and very good growth across cloud. In the GBS business, we're seeing very good performance in Japan. We got a return to growth in Europe, which was quite encouraging and there are some areas of strength in other parts of those emerging market. Latin America did quite well, doing well in the Middle East and Africa. What we are seeing is the slowdown that's driving the revenue line in the U.S. Now, some of that's driven by consulting. But quite frankly, now, we did grow our signings again in the U.S. So, we have -- we're building, if you will, a backlog that will turn into revenue in the future. But right now, we're dealing with the slowdown in our U.S. consulting business. The mix of our business in GBS is pretty consistent around the world. They have a very high mix of the strategic imperatives. And within that mix, the growth is very high. So, we're comfortable that we're making the shift in GBS. We obviously have, as I noted, some work to do in our U.S. business. But we do see good -- some pretty good growth and pretty good performance in other parts of the world in GBS.

So, I wanted to wrap up the call just with a few points. And again, to thank you for joining this afternoon. Our first quarter performance, we view as another proof point that the strategy is right, the actions we're taking to reinvent our businesses, the innovation we're delivering in our hardware business and our software business and in our services businesses, is starting to pay off and the investments and the focus on those solution areas are all contributing to the very strong growth we saw in the strategic imperatives. So, as we move through the year, we'll continue the transformation. We'll continue to make these investments and to build those ecosystems that we talked about. It certainly takes some time. But, certainly this was a very good start to the year. So, thanks for joining.

Dory, can I turn it back to you to close out the call for us?