Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. After the presentation, there will be a question-and-answer session. [Operator Instructions] Today's conference is being recorded. If you have any objection, 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 Third 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 become reconciled to the related GAAP measures in accordance with SEC rules. You'll 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. For some time, we've been talking about the tremendous changes in our industry as our clients move to new areas, get great in value from their data and IT environments and implement new business models. So as we transform our business, we invest where we see higher value over the longer term. We drive growth in the areas where we're investing, while other areas decline as we shift the business and we expect to expand margins in our move to higher value. This is how we transform from one era to the next. Our third quarter results reflect the progress we're making in that transformation. We continued strong growth in our strategic imperatives. We expanded gross and net margins. We generated substantial free cash flow and we continue to high level of investment while returning value to shareholders. We always said this would play out over time, though this quarter we fell a little short of the revenue expectations we set for ourselves. The GBS transformation is taking longer as the market shifts away from some of the more traditional application areas and our storage disc business was weaker as more of the demand moves to our flash. And while our software performance for the quarter was consistent with what we seen all year we did have some weakness in transactions at the end of the quarter. In addition, our revenue trajectory continues to reflect significant impacts from currency movements in our divested businesses, in fact over 12 points of growth in total. Put it altogether and the progress we're making demonstrates that we're on the right strategy as we help our clients move their businesses to the future. We see a lot of opportunity and with this momentum and strategic imperatives; we're going to continue to invest…

Thank you, Martin. Before we begin the Q&A, I’d like to mention the 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 question. Chris, can you please open it up for questions?

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

Yes, thanks good afternoon. You mentioned that the weaker transaction trajectory going into the fourth quarter would not have a meaningful impact on free cash flow this year due to the late timing of those deals, but does that have a negative influence on 2016 and I appreciate it's too early to give guidance, but what are some of the high level gives and takes on free cash flows as you go into next year? Thanks.

Sure, thanks, Katy. A few things. As we noted, in the call because of the late nature we don't expect it to have a profound impact in 2015. Now we'll see obviously we have a range in our guidance as you know so we'll see where we finish and if we were to start at a lower point in terms of transactional content coming out of 2015 then there would be an early year impact I would call it but at this point, as you said it's a bit early to call guidance and then we've got 12 months next year to figure out what the macro environment and what the sales cycle looks like, so it is too early to decide if that has a meaningful impact on next year. And as we go into next year, then we also have a tax impact potentially next year, we're working through cash taxes now so there may be a small cash tax impacted if not the same magnitude as it was in 2014, but there may be a small cash tax impact. And then we have some things that are going our way. We've been quite efficient at improving our sales cycle working capital this year again and we think there's some momentum there. We also will wrap on the divestiture of our System x business in the first half of next year which was a headwind in this year’s cash flow. So there are a few headwinds and tailwinds which we'll be able to better describe as we get into next year but it's too early to declare that this particular element is going to be an impact next year.

Thanks, Katie. Chris, can we take the next question please?

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

Yes, thank you. It sounds like the message that you're providing to investors is the strategy of moving to higher value is correct and that it will take time going forward. That said, it feels like you have been surprised or the results would suggest that you've been surprised at the pace at which this stabilization and migration in the business is taking. You've guided down four out of the last five quarters and against an easier comp the last two quarters, your revenue has gotten fractionally weaker. So I wanted to get your perspective on what has really been different from your forecast and as we look forward, if I just think about 2016, you have currency hedges rolling off, you have very tough mainframe and you power comps because of the product cycles this year, your backlog is down $10 billion in nominal terms which is what you have to deal with for next year. And you've stated that you're going to continue to aggressively invest and so to the timing point I guess, should we be thinking that things actually continue to get worse in the near-term before they get better and I guess the question would be why not and what if any changes are you making?

Okay, well we've -- I think I've gotten all of the questions in so let me try to address them, Toni because there's a lot in there and let me try to address them kind of piece-by-piece. So, we put our guidance in place for 2015 back in January and we said that the trajectory -- the difference between the high and the low was primarily the software trajectory and as we talked about in our prepared remarks and we came out of third we've given the trajectory we would have said we're pointed right at that 15.75 level, but we did observe some longer sales cycle-times particularly in software which we think it's prudent to reflect that experience in our updated guidance, along with what we put in our prepared remarks around transitioning our GBS business into these new areas. By the way, that transformation which I would characterize is well under way is going well. It's just not going at the speed we'd like it to go. So, we know we have to drive that a bit harder. When we get to next year, a few comments I think that's important and you brought up currency and I think currency is an important discussion, so we have -- in the third quarter results, we have a pretty substantial headwind from -- in the revenue line and quite a substantial EPS impact in currency in the third quarter. And in fact, when we look at the fourth, there is still a significant impact in the fourth quarter in currency. So, if we look at the high end and the low end of our guidance and just in the context of currency, at the low end of guidance, EPS at this level would be down 11% and at the high…

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

The next question comes from Tien-tsin Huang with JPMorgan. You may ask your question.

Hi, thanks. Just want to build on Toni's question within GBS and consulting and systems integration. I know that took a step back, I heard the transitioning is slower than you expected, but should we expect this to get worse before it gets better? What are you making in the fourth quarter? I know you've been doing a lot of hiring and workforce rebalancing and it's a people business, just trying to get a sense of where we are in that transition.

Sure, Tien-tsin. So, it is -- as you said, it is a labor-based business and it's important that everyone I think recognize that in the labor-based business particularly when you have the kind of deep client relationships and you're doing the important kind of work that our clients rely on us it's a business that takes time to shift. So, when we look at that GBS business today, there is absolutely a high value strategy for this business and when we look at the strategic in imperatives and we look at the margins we're getting on that part of the business in GBS, they are actually higher than the average GBS business and as you know, we announced the creation of the first Cognitive Consulting Group for the enterprise and that's another example of us moving where we see tremendous amount of value, so we will transition this business. I don't know that I'd characterize where in the process we are. I can say that within our guidance, at the low end, we've not assumed a dramatic improvement and at the high end, we would assume that we make a bit more progress, but we aren't counting or relying on dramatic improvement in the GBS business at this level of guidance. But again, it is a business that where we get to the other side and we do see high value. It is has a lot of appeal and quite frankly it's what part of what differentiates us in the marketplace. We bring a lot of industry skill into our clients' environments and that's done through GBS, so we're going to keep driving that transformation, we're going to keep remixing those skills, we’re going to keep that team focused on moving where the high value is and again, Cognitive like I said is a good example of that.

Thanks, Tien-tsin. Can we take the next question, please?

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

Yeah, Martin, I'm wondering if you could talk a little bit about the trends you're seeing with your top 250 clients in this software business and where that's headed? And also I'm just curious the week is in the transactional business at the end of September; do you think that's more macro or that the industry will see or more IBM-specific? Thanks.

Sure, Brian. Thanks, so a couple things and we've talked for the last year or so about the large client impact if you will within our transactional software business and remember the transactional part of our software business is only about 30% of the total, but it does have a profound impact on the trajectory of that business. And in the third quarter as you saw, we printed down three for the segment, we were down three in the second, so no real change to the trajectory and that's the way I'd characterize also that large client activity. No dramatic change in trajectory between second and third quarter and the phenomenon continues. We continue to provide our clients with flexibility for them to deploy the broadest possible part of the IBM portfolio and I think that's the right thing to do. We think that's the right thing to do and we think it's a way to keep our clients moving toward the future of hybrid. Within the month if you will, I think we'll have to see how the quarter plays out, but there are I think two important elements to keep in mind. One, enterprise technology as you know is a very complex area, so our clients are dealing in very complex environments and they're asking us to help them get to hybrid which means we have to embed our as a service content into the structures they already have and that includes not only the technical aspects of that, but there are business aspects to doing that as well and how they can align their consumption patterns to the way we are able to contract with them. So, there's complexity in the environment, that's a technology statement as well as a business statement and unfortunately, I guess the reality is that not every one of those discussions aligns really, really well with a 90-day reporting period. And at the same time, the other thing to keep in mind is that every CIO, every enterprise is dealing with its own environment and it would be too soon to tell how that plays out for the quarter, but I do think there is always a reality that our CIOs and others are dealing with around how they navigate their own circumstances. So, we'll see how the quarter plays out.

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

Next question comes from Steve Milunovich with UBS. You may ask your question.

Thank you. Martin could you break down the 9 billion of cloud revenue a more granular way, how much comes from maybe hardware, software of services what the growth rates of those pieces might be?

Steve, sure. A couple things. So we had very good cloud performance again in our business and now this is up 50% in the third quarter on trajectory to be up more than 60 on a year-to-date basis and when we look at the content that we're signing in the new deals for instance we just announced Etihad Airways, we just -- we saw that the elements of those, the things that Etihad is looking for us to do is to bring them into the cloud, so a big component of that is that services element moving into the cloud. They are also asking, by the way, to help us build a mobile platform that will scale with them and have the global presence they need and that's not dissimilar to what we're seeing in the Lufthansa contracts and the EVRY contract that we just signed. So, within services we're seeing very good performance, but as you know, not only do we have an as a service business that performed pretty well. We also do a lot of on-prem work where our clients want the agility if you will of the cloud, but their economics suggest that they are better off if they build it themselves. And so we have a pretty big private cloud business and they build those on our hardware and software content. So, clearly there's some element of the premier Z-platform and the power platform that's sitting within that cloud business. But the hardware performance within the overall trajectory is not having a profound impact on the growth rates. It really is the software business and the services business that's driving the bulk of that growth.

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

The next question comes from Keith Bachman with Bank of Montreal. You may ask your question.

Hi. I also wanted to drill down on the software business. It seems like mix is going against you in two ways. First, you have about 34% of your revenue wrapped up in operating systems and other which is in sector of the client and also key brand in middlewear which you said is a little over two-thirds decline this quarter, 1% in constant currency, so I was hoping you could answer two questions. First is as investors think about a decline of 3% in constant currency, is that the right frame of reference that investors should be thinking about as they look at calendar year 2016? And as part of that, the second question would be could you give us an update on where you are in terms of business model? In other words IBM has traditionally been license and maintenance and you talk about moving more to consumption or subscription-based model but I would imagine it's a very small part of your business and probably a headwind as we look out at future revenue growth and a source of deceleration. Could you give us any percentages on where you are in terms of that business mix as it relates to your customers? Thank you.

Sure, so Keith a few things. So, first, we will I think address -- we should address operating systems. Operating systems are about a point headwind to us now and quite frankly, I don't think that point headwind is going to go away in the near-term. In fact we have some of our models suggest it's sort of ever present if you will, so on a segment basis, I think we'll be dealing with a one point headwind from our operating system business. Now, it will round up to a point. Right now it rounds down to a point, so it's a bigger impact now than it will be, but I think that it's safe to model that business as sort of an ongoing headwind. That's a pretty small part of the business by the way. So, if we take that part of the system, of the software out and we just talk about the recurring nature of the software business and as I mentioned earlier on a question about 70%, now that includes the operating system, but 70% of our software business is that annuity kind of structure, so think of it as our SAS portfolio which is showing terrific growth rates, but we've got to drive more content into that SAS platform. Now, that's also by the way newer kind of content for us and so it's a new space and so even though the GP in that area is a little bit lower than what we see in our on-prem business because it's net new content, it's accretive to our margins overall at the IBM level. So we've got a SAS business that sits within that 70%. We have our monthly license charge business which is the bulk of both our mainframe software as well as our…

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

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

Excuse me. Thank you. I'm just wondering, Martin, I haven't gone through this technology transition and the corresponding impact on your growth rate. Are you or is the Company thinking any differently about the scale of the overall business and the need to have as far reaching of a business as you historically have?

You know, it's a good question, David, and it is one that we think about not from the perspective of size or scale because as you know, we're not trying to be the largest of something. What we are though is trying to be the highest value, so as we move to value, that has, that plays a large influence in how we think about deploying capital and where we think about putting our dollars to work and so at this point, when we look at our businesses and the way they work together and I would argue that the world is moving more toward bringing solutions together in front of a client. The world is working moving more toward having industry expertise that can apply across a pretty broad platform. We see each of the elements that we have today bringing or adding to that context and so even in businesses where we know we're in transition like our storage business, you know, we said as we said in the prepared remarks our demand is moving to our flash products which is terrific, the right thing to do for our clients and our business is moving to the software side of storage. That's high value and at the same time, while our acquisition of Cleversafe is really about the cloud, it will also help dramatically our storage business as we put objects storage technologies into our storage business, so that makes that part of the business relevant to the way the world's going in cloud. The future in storage is flash. It's software and it's cloud capable if you will which means object store so what I didn't say in there was we want to be the biggest in storage for instance because we're again on a high value model and you can look across our business and across our segments and we do have that perspective of where we do we think the value is going to be, not is so much of what's going to be the biggest element of that.

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

The next question comes from James Schneider with Goldman Sachs. You may ask your question.

Good afternoon. Thanks for taking my question. Martin I was wondering if you could address the trends within the consulting and systems integration part of GBS this quarter down 7% versus prior quarter down four. How much of that worsening in the rate of growth is down for pricing versus just macro weakness and what are the prospects of that improving at any point in the future, can you see a point at which that could possibly get out of this negative mid-single digits rate that we're at now and what will be the factors that would drive that or is it simply just a function of the secular decline of that ERP slice of business?

So sure, James and welcome to the call. I think you just picked up coverage on us so welcome to the call. On our GBS business as I noted earlier, we do see where we're making the shift to the most contemporary areas, and digitizing for instance our client’s front offices. We're seeing terrific results. Now they are overshadowed at this point by some of the price pressure we're seeing in other areas of the market but it really is on us here to shift those resources as we can free them up from doing the work they are doing for our clients. This is not a business that is in long term secular decline. This is a business that relies on us to drive the shift as quickly as possible and I think when you have a business that is so powerful in our clients with such industry expertise that it gives you two things it gives you the visibility to how powerful that model can be but it also says that it's going to take a little while, so some of this is clearly the pricing environment we're in. I don't think that no there is any reason we shouldn't be able to shift this business and again, the results we see when we do shift are better margins and we see a real ability to influence and to lead our clients into new areas so those are pretty powerful part of our overall model and it is really up to us to keep driving that transformation but it's a big labor based business so it's going to take some time.

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

The next question comes from Maynard Um with Wells Fargo. You may ask your question.

Hi, thank you. Can you just talk a little bit about the pressures driving the declines in the storage? You talked about that little bit but maybe be a little bit more specific in terms of what you're seeing in terms of the competitive landscape and what I guess if you can sort of clearly layout your strategy to stabilize or turn that around? Thanks.

Sure thanks, Maynard. So on storage I think this is the most we've talked about storage by the way on this call in over a year but I'm glad because this is an important part of the business and we see a lot of opportunity in storage. The storage environment and the pricing environment that we were noting in terms of pressure is really in that high end spinning disc environment, so I don't see that changing dramatically given the industry landscape. In fact our view has been continues to be that the faster we can move to flash and the faster we can continue to build out our high value software defined storage platforms, and we've had some pretty exciting announcements this year as you know, the sooner we'll see a return to growth in storage. Now as I noted the storage market is being, is part of the cloud and part of the future of cloud but it’s got to be around objects store because that plays such a critical role in the kinds of use cases that clouds are using, so we'll take as I mentioned the Cleversafe technologies and embed it within our storage, so when we look at the future of the storage business we see terrific growth in flash up again more than 50% in each of the last three quarters, so all this year. We introduced as I mentioned spectrum software which is around our software storage product and we’ve also announced intentions to continue to invest and to drive our investment where we're seeing those returns and those look quite positive and then as I mentioned the other part of our strategy here is to be I have a more cloud-based offering and that means hybrid and that for us means Cleversafe and embedding our objects store so a lot of price pressure and the spinning disc business but there is a future in storage and it's all about flash. It's all about software defined and it's all about object store.

Thanks, Maynard. Chris, why don't we take one last question?

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

Thanks, for squeezing me in guys: Martin, I just want to understand are you talking about a weaker transactional business especially at the September quarter and as you go into the next few quarters your mainframe cycle starts to get fairly difficult, I mean do you envision a scenario where assuming FX and macro static you could see some of the revenue stability it of growth in the next quarter?

Well I think I heard the question. You cut out at the end but I'll answer what I think you asked so first of all, boy, I'd love to assume a static currency environment. I'd be thrilled and we know that's not true so we'll be facing a currency headwind over at least the next nine or 10 months but that wasn't your question. Your question was around how do we wrap and what do we look like, how do we wrap on the mainframe and what do we look like when we come out of the next few quarters and I think a few things we'll have to see how the year plays out in terms of what eventuates from this weaker transactional performance we saw right at the end of the quarter. It's too soon at this point to determine if this is something that's going to persist all the way through the fourth or it's going to persist into the first we don't know. That's why we gave a range by the way because as we head into the fourth quarter which is as you know our largest transactional quarter, that phenomenon against the much larger transactional quarter says that it's prudent to guide the way we did. Now we will wrap on a mainframe cycle at some point, but the mainframe cycle is not going to have a profound impact on the overall IBM. It does have obviously it does provide a good bit of revenue tailwind when we're in that cycle but remember that the margins start to expand in the mainframe business as we get toward the later parts of the cycle, so we'll see how we put together 2016 based on how we come out of this year but our guidance right now reflects at the low end a slowdown if you will in the revenue trajectory on a year-to-year basis and the high end reflects a slight improvement so in the trajectory so again, too soon to tell how this plays out for next year.

Let me make a few final comments to wrap up the call. So as we've been talking about on these calls frequently, we are going through a significant transformation and where we've been investing we've been driving tremendous growth and that obviously gives us tremendous confidence that the strategy is right. The offerings we're delivering into that marketplace are right on and resonating with customers and we're seeing returns. Now as everyone knows, some of the investments we're making have much longer tails, so we're investing heavily in Watson. We're investing heavily in Watson Health. Those returns aren't even in our revenue streams yet but they are the right things to do because those have tremendous futures to them. Within the current transformation though we're also improving margins as we continue to manage the portfolio and we're expanding margins on what year-to-date has been a fairly stable revenue base and that also includes some pretty aggressive investments that we think is important to drive and as I mentioned we're seeing results so we want to keep driving those investments but we also did say from the beginning of this that it would take time and we also said that we're going to manage for the long term and we're confident in our strategy and confident we're on track to get to the long term trajectory. So thanks again for joining us today.

Okay, Chris I'll turn it back to you to close out the call.