Welcome and thank you for standing by. At this time all participants are in listen-only mode. Today’s conference is being recorded. If you have any objections, you may disconnect at this time. Now, I’ll turn the meeting over to Miss Patricia Murphy, Vice President of Investor Relations. Ma’am, you may begin.

Thank you. This is Patricia Murphy, Vice President 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 second 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 their 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. So with that, I’ll turn the call to Martin Schroeter.

Thanks, Patricia. In the second quarter, we generated $20.2 billion in revenue, $3.5 billion in pre-tax income and $2.95 of operating earnings per share. Ninety days ago, we told you what we expected for the second quarter. We said we’d continue to see strength in the strategic imperatives and we delivered 12% revenue growth led by cloud. We said we’d continue to build as-a-service capabilities. Our cloud-as-a-service revenue was up 50% and we exited the quarter with an annual run rate of $6.7 billion in our cloud-as-a-service businesses. That’s up from $5.4 billion last quarter. Certainly we have a benefit from the acquisitions recently closed but we has solid organic growth as well. We said we’d continue a high level of investment as we move into new areas and build new markets, and we did that both organically and through acquisitions. And we said that, given seasonality and actions we took in the first quarter, we’d grow our pre-tax income by about $2 billion quarter to quarter, and we grew a bit more than that. In total, we got done what we set out to do and we saw some improvements in trajectory relative to long-term trends, though, as always, the rate and pace varied by business unit and geography. Let me touch quickly on some of the drivers for the quarter. As I said, we continued to deliver double-digit revenue growth in our strategic imperatives. Over the last 12 months, strategic imperatives delivered $31 billion in revenue, and now represent 38% of IBM. Growth was led by cloud, where our revenue was up 30% to $3.4 billion in the quarter, and over $11.5 billion over the last year so good progress in cloud. Looking at revenue from a segment perspective, the strongest growth came from cognitive solutions led by…

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. So please open it up for questions.

Thank you. At this time, we will begin the question-and-answer session of the conference. [Operator Instructions] Our first question comes from Katy Huberty with Morgan Stanley. You may ask your question.

Thanks. Good afternoon. You didn’t mention the UK in your commentary around EMEA. How did the headlines around Brexit impact the month of June? And did it have any impact on not raising the full-year outlook despite beats in the first and second quarter? Thank you.

Sure, Katie. Thank you. So we certainly – I don’t think that Brexit coming at the end of the quarter helped us at all, but we obviously finished kind of right where we expected to finish. And when we look at our full view of the year, we don’t see an impact, if you will, that has any real materiality on us. And that’s why we continue to hold our operating EPS. So it certainly didn’t help but, again, no – nothing that said we should change our operating EPS for the year. What I typically observe in these kinds of instances is that our discussions with our clients have to go through a process of reprioritization, if you will. And remember, the extent of the discussions we have with our clients is about their most important processes. So as they reprioritize, the length of time that takes depends a lot on how much uncertainty they’re faced with. And obviously, the political leadership in Europe and the UK can help reduce that uncertainty, but we didn’t see – again, we don’t think it helped but it didn’t cause us to change our guidance.

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

Thank you. Our next question comes from Toni Sacconaghi with Bernstein.

Yes. Thank you. Martin, I estimate that software acquisitions helped about $350 million to $400 million in terms of the revenue impact year-over-year. And if that’s the case, then company revenues declined about 4% or a bit more and software revenues declined about 5% or a bit more. I was hoping you could clarify if those numbers are correct, because if they are, it actually suggests that both company revenue and software revenue decelerated from Q1 even though the compare was actually a bit easier. So I was wondering if you could address this notion of what appeared to be some deceleration in the business on an organic basis.

Sure, Tony. A couple of things. First, the acquisitions are part of IBM, so when you say company revenue, I think of the total as kind of company revenue. Within the total, as we’ve talked about, we did at Investor Day and I think this is generally true, given the volume of acquisitions we do, we generally over the long term see about a point help. And as I said in my prepared remarks, we got about twice that. We got about two points of help in total. Now, that’s not all software obviously. Also as you know, we’ve been acquiring some businesses for our GBS business. So on an acquisitive impact across IBM, it was about two points. What we saw in software in the second quarter, I would describe the dynamic as very similar to what we’ve seen over the past few quarters, which is we – in our largest clients, we see continued deployment, and therefore we continue to grow the annuity base in those large clients. And outside those large clients we continue to see growth in total. And then, again, the transactional business, which tends to have an out-sized impact in the second and the fourth quarter because of our mix of revenue – of transactional versus annuity also plays into this when you start looking at it sequentially because they’re not fully comparable, if you will. The mix is a bit different. So acquisitions clearly a benefit to us. About two points, as I said, in total, a mix of software and services. And a set of software dynamics underneath that that suggest to us continued deployment, continued growth in the annuity base, and still some transactional growth pressure, if you will, in some of our largest clients. A – Patricia Murphy: Thanks, Tony. Rowena [ph], can we please take the next question?

Thank you. Our next question comes from Tien-tsin Huang with JPMC. You may ask your question.

Great. Thank you. Good afternoon. Just on the services side, I saw that signings were up nicely. Anything unusual there? And can we see an eventual pull-through there with consulting maybe following behind it? And, Martin, you did mention some inconsistency on execution I think a couple times. Can you elaborate on that? Thanks.

Sure, Tien-tsin. Thanks. So we did have pretty good signings, and that signings kept the backlog in total flat year to year. What we’re seeing in the marketplace, if I start to disaggregate between GTS and GBS for a moment, we continue to see very strong growth in GTS. You saw that in the signings numbers and you see that in the growing backlog. And that profile, if you will, of what we’re working on for our clients is very consistent with what we’ve talked about in the past, which is our clients are looking to move to hybrid clouds. Our clients are looking for us to help them develop and deploy and run some of the latest technologies such as mobile. So that trend continues. The size of those deals continues to be quite substantial. Not every deal is a big deal, but we haven’t seen any reduction certainly in deal sizes. In fact, we’ve had some of the biggest deals – some of the volume of biggest deals that we’ve seen over the past few years continue in the GTS business. And when we look forward at that GTS relationship, if you will, in over the last, call it, 10 quarters, over two and a half years or so, we’ve had pretty good consistent book-to-bill greater than one. So the booking rates, as you know, are the signings we report. And then on the billing side, in GPS you have our maintenance business as well. And so obviously that doesn’t go into the bookings side of the equation. So you’ve got to do the math right but book-to-bill in GTS has been over the last 10 quarters very consistent. Again, reflects, I think, the strong value we bring to clients. On the consulting side in GBS, we did…

Thank you. Our next question comes from Brad Apelo [ph] with JMP Securities. You may ask your question. Q – Unidentified Analyst: Great. Thank you very much. Martin, one quick question I wanted to ask about the EPS trajectory in the second half. And I know you reiterated at least 13.50 in EPS. But in light of the macro headlines, I was wondering if you’re thinking about weighing Q3 and Q4 any differently in the second half of the year. Thanks. A – Martin Schroeter: Thanks, Greg. Sure. So we included a pretty detailed chart, I think, on some of the first half to second half trajectory changes. And I think the one point to make kind of across the board on that chart is that everything there, it gets either the same or better in the fourth. And so when we look at all of the impacts as an example, you know, we’ve got the chart that shows as-a-service scale helping and a chart that shows the actions we took in the first quarter helping in the second quarter. All of those have a bigger impact in the fourth than they do in the third. And the rest do as well, but those are just, again, two examples. So I guess the way I think about third versus fourth in a total perspective, you know, in total third quarter for us tends to be in a fairly tight range. You know, our annuity business plays a bigger role in our overall revenue streams than our transactional business does in the third. So in that EPS range in the third, we have typically been kind of 22% to 24% of the full year. And, you know, when we look at that with the momentum we have on the things that are on that chart, I’d say that we’re more in the middle to the high end of that range in the third and then, you know, the rest obviously in the fourth. So while, you know, those statistics are good indicators in total when we’re going through a transformation like this, you know, at the margin again in the third, we’d say kind of mid to high end of the historical range for third quarter EPS.

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

Thank you. Our next question comes from Joseph Foresi with Cantor Fitzgerald. You may ask your question.

Hi. I wanted to build on the margin question. I was wondering how should we think about the impact of the margin profile, the strategic imperatives through the transformation over the long term? Do you think we’re through the heavy CapEx there and, you know, will the exit of this year and the margin profile there be a good proxy for 2017? Thanks.

Sure, Joe. A couple of things on margins. First, we have talked a bit about what drives margin in the IBM financial model at length, and as you’ll remember, we talked about mix of our business. We’ve talked about productivity in our services business. We’ve talked about portfolio actions. And then this year we started talking about kind of as-a-service based on scale and you can see three of those four elements in our more detailed list of what changes first half to second half. The ones that’s not there obviously is portfolio actions because we don’t have any, you know, we don’t have any big divestitures planned here that are going to drive portfolio. In fact, the way I’d say it is when we look at the portfolio, we think each of the elements can drive value for our clients, and we still see high value in the elements. Part of the way we get comfortable with each of those elements driving value is when we look at the margins on the strategic imperative content relative to the rest, the margins on the strategic imperatives content has been and second quarter again higher than what we see on the core business. So I interpret that as, you know, the places we’re moving to, the places we’re building value for our clients looks like a pretty high value marketplace, and we’ll continue – it’s one that’s worth us continuing to serve. So we think, you know, we build on margin with three of those four components that we typically have from an as-of-service perspective I don’t think we’re through the capital requirements by any stretch. We’ll continue to shift our capital to the cloud business to make sure that we have got the right scale that we need for our model. So we’re not through it, but again I don’t think IBM is becoming more capital intensive overall. A lot of times it’s just a shift from one to another. And then obviously we’ll keep investing in the capital we need to drive our acquisitions as we integrate those as well. A – Patricia Murphy: Thank you, Joe. Rowena, can we please take the next question?

Yes, ma’am. Thank you. Our next question comes from Steve Milunovich with UBS. You may ask your question.

Great. Thank you. The strategic imperative revenue growth, I think it’s slowing. I think it was 17% year-over-year last quarter, 12% this quarter. Analytics is a big piece of that. I think that went from 9% to 5%. Could you talk about what kind of growth you see going forward as these numbers get bigger? And conversely what was the decline in the core franchise revenue? And what’s been the trend there the last few quarters? Thanks.

Sure. Thanks, Steve. On the core, if you will, everything outside the strategic revenue – everything outside the strategic imperatives, that’s kind of been flattish. Right. It’s been flat quarter-to-quarter I should say. It’s down but it’s kind of flat quarter-to-quarter. So in change in trajectory on that part of the business. In the strategic imperatives, you know, when we started talking about this a year and a half ago at our Investor Day, and we put on the table at the time that that business would grow to $40 billion or 40% of our revenue by, you know, at the end of 2018. We think, and we draw that plum line, we think we’re, you know, I’d say probably a little bit ahead of the track that we need to get there. We’re certainly ahead on the percentage mix because 38% of our business is already there, and we only got – we got 2.5 years to go from a timing perspective. So we’re on track to the $40 billion because with $31 billion now trailing 12 months, we actually don’t even have to grow at this rate to get over the line. Now, you know, the acquisitions will play a role in this, and we see continued momentum here. But we don’t even have to grow at this rate in order to get where we set out to get a year and a half ago.

Thank you, Steve. Can we please take the next question?

Yes. Thank you. Our next question comes from Brian White with Drexel. You may ask your question. Q – Brian White: Yeah. Martin, on the cloud business, so cloud it looks like grew 30% year-over-year. Has the cloud business reached the bottom in the margin profile and is on an upward trajectory? Or do we still have a little bit more of a decline? And if you can just put us – give us some type of an idea where are you in cloud margins versus where you hope to be optimally in, say, four or five years? Thank you. A – Martin Schroeter: Sure, Brian. So two things. Remember, you know, our cloud business, we’re really – if I had to oversimplify it, we have – we have part of our business helping our clients build their own clouds. And that includes hardware, it includes software, it has some services as well. And when we do that with our clients, the margins we see in those businesses are exactly what we kind of see in the rest. That’s kind of the demand profile of where some of that business is going. The margins don’t look any different from that perspective. To the extent the mix is different between how much hardware and how much software and how much services go in, there may be a different margin on the solution. But as I mentioned in total, our strategic imperatives are mixing a bit richer and so we’re seeing better margins in total across the imperatives. So that’s the – that’s the kind of help our clients build their own cloud. On the ads of service side of this, I think that as we put on the chart, you know, the ads of service component even though we’re going to continue to drive a fair bit of investment here, the as of service component will start to add – be accretive to our margins on a year-over-year basis starting in the second half already. Now, we’ll see where the marketplace goes and we’ll see where how much we rely on getting or keeping, if you will, that margin growth as opposed to reinvesting. But we see, again, on a big part of some of that cloud business, we see margins that are consistent with what we see in other parts, and the as of service business we start to see year-over-year accretion in the margins from that, even though again, we’ll continue to invest quite heavily.

Thank you, Brian. Rowena, can we please take the next question.

Yes, ma’am. Thank you. Our next question comes from Wamsi Mohan with Bank of America. You may ask our question.

Yes, thank you. Martin, for overall IBM strategic imperatives grew 38% of revenues, but in GBS strategic imperatives is already over 50% of segment revenue. But yet overall GBS revenue was down 3%. So I think there’s a notion of people expecting aggregate IBM to eventually get to growth as you see strategic imperative mix increase over time, but I was wondering if you can comment more specifically with respect to GBS. What some of the offsets were on that revenue line? I think execution you were alluding to margins, but more specifically on the revenue line, which caused deceleration? What would imply strong deceleration in the core on GBS?

Yeah. Thanks, Wamsi. And that’s right. We did see some pretty strong deceleration or declines in the core of that. And as I said, we’re continuing to shift our skills and our resources out of that part of the marketplace. So in a business which if you oversimplified it is really about how do – how do industry experts charge or bill for their time, your billing is going to be limited or constrained by how much resource you have applied to it. That won’t surprise you. And then as I mentioned, we moved about 35% of our resource applied to those core parts of the business over into the strategic imperatives. So that has two effects: One, it obviously reduces the ability of us to grow revenue in those places when you constrain the resource; and, two, because the productivity is not a one-for-one, you know, someone who – someone who is billing on an implementation in an enterprise resource kind of an application doesn’t immediately become a cognitive expert or doesn’t immediately become a mobile expert. So there is a productivity impact, and what we give up, while we give up 100% let’s say of that billing capability, we don’t get 100% back right away. And that’s really what you’re seeing in our Consulting business. In GBS outside of the Consulting, the Application Management, the Global Process Services businesses, they’re fairly stable within the overall GBS equation. But the Consulting business continues to go through this transition as we pull resources off and we put them into and devote the resource or the investments if you will to the strategic imperative areas.

Thanks, Wamsi. Can we take the next question please?

Yes. Thank you. Our next question comes from Jim Schneider with Goldman Sachs. You may ask your question.

Good afternoon. Thanks for taking my question. Just a follow-up on the GBS segment, it sounds given what you just said about the continued pricing headwinds that you’re seeing in the traditional ERP implementations, and maybe the execution issues, that that’s going to be persistent headwind even in the back half of the year. So can you maybe give us some kind of commentary around when you would expect at least the impact of the runoff of some of that more commodity-like business to start to let – not be a headwind anymore? And can you see kind of the end of the execution issues in terms of the cost of some of those implementations that might have been overrun?

Sure, Jim. So a couple of things. One, on when do we kind of work our way through this, one thing to look at here is the signings performance in the quarter, and GBS did grow signings in the quarter. Now, there is obviously a lag. It sits in the backlog. And as you saw in our total backlog is flat. I mentioned earlier that GPS [ph] was up in backlog, and obviously therefore the GBS component of that is down a little. So while we are growing signings, which are a pretty good leading indicator of the kind of business, and that’s a function of all the people we have moved into those new areas while we’ve pull back from the others, that total signings equation is now starting to work. We grew signings in total, right? So the new stuff is offsetting if you will the old stuff. But not enough yet to get the backlog back to growth. And we’ve got to get that backlog back to growth in order to have kind of turn the corner for that signings equation, which we got back to growth to get the revenue equation, if you will, back to growth. A – Patricia Murphy: Thanks, Jim. Let’s take one last question.

Thank you. Our last question comes from David Grossman with Stifel. You may ask your question.

Thank you. So, Martin, there are several factors that are impacting the free cash flow conversion this year. Can you help us understand what known factors are out today? Headwinds or tailwinds that we should consider for conversion next year? A – Martin Schroeter: Sure, David. Thanks. So as we said, we reiterated our view of free cash flow at the end of the first. We were comfortable at the time and remain comfortable to be at the high end of what we had originally provided. So within that, realization for us is a pretty good measure of how we’re converting our cash. Our model is to be in the 90s, and I think with kind of the headwinds, tailwinds we see within free cash flow for the year, I’d say we’re probably more likely to wind up in the high 90s in 2016. Now as we get into next year, you know, there’s a lot that we have to get through in order to understand what next year is going to look like. But I am comfortable that while, you know, we’ll finish again probably high 90s this year. I’m comfortable that our model is right even for next year that we’ll be in the 90s again next year when we look at all of the pieces.

So let me conclude the call by reminding everyone that, you know, we’re running our clients’ most critical process, and that puts us into a pretty unique and terrific, quite frankly, position to move them to the future. And it’s not just about the infrastructure, which is obviously important. We’ve always felt that it’s important and we think it’s important today. But it’s also about helping them become digital businesses and helping them inject cognitive into everything they do. It’s what they’re asking for and it’s quite frankly been our perspective on where the world is going. So we’re not only doing that with our existing clients and not only doing that in kind of a traditional IT, but in some cases we’re building entirely new businesses, and entirely new markets. And so that, you know, for many is beyond what some of you would focus on in terms of infrastructure, but it’s becoming a bigger and bigger part of what IBM is becoming, and again it’s our view of where value will be created for clients and for our investors. And so as we make those shifts and as we build these new markets, you know, we take – we take our temperature, if you will, at the end of June and we’d say we’re right on track with what we wanted to get done for the year. So with that, thanks for joining the call

Rowena [ph], let me turn it back to you to close out the call.

Thank you for participating on today’s conference. The call has now ended. You may disconnect at this time.