Welcome, and thank you for standing by. [Operator Instructions]. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the meeting over to Ms. Patricia Murphy with IBM. Ma'am, you may begin.

Thank you. This is Patricia Murphy, Vice President of Investor Relations for IBM, and I'd like to welcome you to our Fourth Quarter Earnings Presentation. I'm here today with Jim Kavanaugh, who was announced last week as IBM's Senior Vice President and Chief Financial Officer; as well as Martin Schroeter, who is now Senior Vice President, Global Markets. 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'll find the 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 over to Jim Kavanaugh to start us off.

Thanks, Patricia, and hello to everyone on the call today. As a quick introduction, I've been with IBM for 21 years. I was the IBM Controller from 2008 through January of 2015 when I became the Senior Vice President of Transformation and Operations where I've been focused on driving IBM's operating model transformation. In October of last year, I came back to be Senior Vice President of Finance and Operations. I participated in IBM's annual investor briefings for the last 10 years and have met many of you. I'm now looking forward to working more closely with the investment community as IBM's CFO. Given I'm a week into the new role, Martin is going to cover the fourth quarter, and then I'll put into context our 2017 performance and how that positions us for 2018. We'll then take the Q&A together. So for now, I'll turn it over to Martin.

Thanks, Jim. Back in July, we planted the flag for our businesses, and we pointed to an improved trajectory in the second half. Now as we look back on the year, we did, in fact, significantly improve the trajectory in our revenue and our gross margin performance. We did this by ramping our cloud and as-a-service offerings by continuing to reinvent our systems brands, by driving a higher level of software transactional revenue and by improving consulting performance. In the fourth quarter, we returned to revenue growth. Our revenue of $22.5 billion is up about 3.5% and up 1% without the currency tailwind. We also grew our operating net income and our operating earnings per share. As you saw in our press release, our operating net income and EPS exclude a one-time charge associated with the enactment of tax reform because of the unique nature and to provide comparability to the operating expectations we've been providing for 2017. For the year, we delivered $79 billion of revenue, $13.80 of operating earnings per share and free cash flow of $13 billion, which is up over $1 billion year-to-year. Looking at some of the revenue dynamics of the fourth quarter. Our systems results were terrific across IBM Z, Power and storage. This was our first full quarter with the z14. And with pervasive encryption and the ability to address new technologies like blockchain, we're adding new clients and new workloads to the platform. in Cognitive Solutions, we had good growth in several areas, including security, IoT and our industry-based solutions like Watson Health and Watson Financial Services, though we were disappointed by the performance in a few of our more traditional analytics offerings. And in Services, we had our second consecutive growth in consulting, led by digital offerings. Performance in our outsourcing…

Thanks, Martin. Let me take a couple of minutes to wrap up. We've been doing a lot of work to reposition our business, to help move our clients to the future, investing, shifting skills and reallocating capital. In short, a lot of heavy lifting. And our results for 2017 reflect that, with an improvement in revenue and our gross profit trajectory in the second half. Let me make a few comments on 2017 by business and how it positions us for 2018. In Cognitive Solutions, we're driving good results across most of our solutions portfolio, including our Watson and security offerings. Most of these new areas have a software-as-a-service delivery model. And so for 2018, we'll continue to build scale in these as-a-service businesses. In our Services segments, we've got some momentum in Consulting, driven by our digital offerings and strong growth in our cloud content as we help our clients to build out hybrid environments. As you know, the majority of Services revenue in any given year comes out of the opening backlog. as we enter 2018, the projected revenue from the current backlog points to an improved revenue trajectory in 2018 versus 2017, and that's in both GTS and GBS. In Systems, we had a great year. Looking to 2018, we have a strong start to our new z14 and are introducing POWER9 systems and have the most competitive storage offerings in some time. And then across our businesses, our Strategic Imperatives revenue was up at a double-digit rate to $36.5 billion for the year, which is now 46% of our revenue. So when you take all of this together, we're entering 2018 with a stronger revenue profile than a year ago. In 2018, we'll maintain a high level of investment. This is important as we continue to…

Thank you, Jim. Before we begin the Q&A, I'd like to mention a few items. First, as Jim said upfront, he and Martin will take your questions together. Second, we have supplemental charts at the end of the slide deck that provide additional information on the quarter and the full year. [Operator Instructions]. So operator, let's please open it up for questions.

[Operator Instructions]. Our first question is from Wamsi Mohan from Bank of America Merrill Lynch.

Jim and Martin, congrats to both of you on your new roles. Jim, your guidance calls for some revenue growth and margin stability here in 2018. And I was hoping you can share some color on the key puts and takes here as it pertains to your EPS guide. Looks like tax is going to be a big headwind, and if you could quantify sort of that in relation to the operational improvement. And if I could, Martin, could you just comment on what drove the decline in Strategic Imperatives and the Cognitive Solutions segment in 4Q, that would be helpful as well.

Okay, thank you, Wamsi. I appreciate the opening question, and thanks for the comment on the job movement. As you can imagine, when we enter any year, there are multiple scenarios around how we position the full year guidance. And in this year, especially given the improvement that we've seen in the second half of 2017, and taking into account that trajectory of our business and all other operational indices, all of this supports our guidance of at least $13.80. Now as I stated in my prepared remarks, let me first start with tax. Our 2018 operating tax rate of 16%, plus or minus 2 points, incorporates the new tax law. This is a 4-point headwind year-to-year compared to our 2017 operating tax rate of 12%. Both of these are before any discretes. In terms of discretes, like we've had in recent history, we do anticipate some potential benefits from tax discretes. And as in the past, we will likely take action to offset some of those benefits as we always look to position our business for the long term. Taking all of this into account, tax will be a headwind in 2018 year-to-year. Now in terms of the other drivers as you asked. Given our trajectory exiting 2017 and the confidence we have in our portfolio and how we've repositioned it, we do expect revenue growth at current spot rates for 2018. We see stabilization of our margins on a year-to-year basis, driven by the continued scale-out of our cloud business as we drive efficiency, and we're also going to get yield from our services productivity improvements. And this will start in first quarter. And looking at expense, there are many different dynamics here. And I want to make sure we get this right. We're going to continue to…

Yes, thanks, Jim. So let me give you a little color on Cognitive Solutions for last year. So keep in mind that the majority of our business in Cognitive is annuity-based. And that includes, by the way, the SaaS offerings, which are growing quite well. Where we saw weakness, as we noted in the prepared remarks, was in a couple of traditional analytics offerings like data integration and content management where we either have to go spend some more time getting those offerings better developed, and we did come out with some new wins at the end of the year, but it wasn't soon enough to have an effect in the year, or we're shifting some of those license models to as-a-service. So we don't see a difference in the secular trends, we still believe Cognitive Solutions is going to be driven by the shift to analytics, the shift to cloud, the shift to security. We see that continuing. We just have a couple of offerings here that either we're shifting aggressively or we have to see how the new offerings perform in the marketplace.

Our next question is from Toni Sacconaghi from Bernstein.

I'd like to just clarify the guidance, please. You keep talking about a tax rate in 2017 of 12% but, with discretes, it was actually under 7%. And so are you saying you believe that your actual reported tax rate can go from 7% to 16% in 2018 and you can deliver $13.80 in earnings? Or do you know now that you have significant discretes and that your real tax rate that will be reported will be dramatically lower? Because it's very difficult to get the bridge, I think, with the tax rate that's really, in effect, almost 1,000 basis point steeper. And then separately, I'm wondering if you can just comment on the erosion in operating profit margins in both GBS and in Technology Services & Cloud Platforms. The margin erosion there was actually the worst we've seen in history on a pretax basis. That did not appear to be an improvement as you expected. I think, if you back out the tax rate, you actually missed your guided EPS by $0.40 relative to a 15% tax rate. And it all seemed to come from the margin erosion in those businesses. Perhaps, you could address that a little more directly, please.

Sure, Toni. It's Martin. I'll give you a couple of points. One, when we gave guidance at the beginning already of last year, we said our tax rate on an annual effective basis would be 12% to 18%, and we came in at the bottom on an annual effective rate. And as you point out, we had a couple of discretes already in the first half, nothing additional in the second, so the printed rate was lower than that, but I don't think that's news. We're trying to be clear, by the way, on tax for next year, so I'm glad you said we're -- you're not quite there yet, so we should spend some more time on it. The annual effective rate going from 12% to 16% is what the headwind that Jim noted. And we do see discretes as we always do. I don't think we've ever had a year where we don't have a discrete in the year. So I would expect there to be discretes. And Jim noted already that we'll have one in the first, which will largely be offset. So the math that we're talking about from a modeling perspective is 12 to 16. In any case, by the way, the year-to-year headwind in tax is real. We see a headwind in tax. We don't expect at this point at the $13.80 that we'll print a number that we did this year. And again, the 12 to 16 is a good way to do it. The erosion in operating profit, I guess, my view, one, we were looking for a sequential improvement in gross profit. We said both in July, when we said first half to second half, we'd get better; and also, when we talked about it back in January, we said sequentially we'll continue to improve margins. When we got to the fourth, we were up about 2 points. And quite frankly, we thought we could have probably gone to about 2.5 points. And the shortfall there was really driven by 2 things. One is mix. We had a terrific, terrific Systems quarter. And our Systems business is high-margin, but it's not as high a margin as our Software business, so that had an impact on mix. And then some of the productivity we were looking for out of Services got pushed out. Now that wasn't a huge, huge surprise that the revenue performance in TS & CP to us because we talked about the contracts already. And GBS, we said, as we get consistent, signings growth will get to backlog growth, will get to revenue growth, and we saw a nominal improvement in the revenue trajectory but not enough yet to drive overall revenue growth. But as Jim noted, as we go into 2018, we have a much better backlog.

And we also expect the margin trajectory in both of those businesses to start off and improve as we move forward to the year.

Our next question is from Katy Huberty from Morgan Stanley.

I appreciate the commentary around the first quarter skew and expecting revenue growth at constant currency in the first quarter. I wonder if you can provide some clarity as well on margin stabilization for 2018. Is that stabilization for the full year? And how would you think the first half versus second half looks like as it relates to year-on-year margin trends?

Yes. Thank you, Katy. This is Jim. So I'll take that. As I stated in my prepared remarks, the skew is 17%, 18% of the full year on EPS, which is on the average over the last 5 years, but it's also above the last couple of years. Embedded in that, we do see the stabilization of margin on a year-to-year basis starting immediately in the first quarter. We entered the first quarter with some good strength, and we feel very good about our portfolio lineup, strength in our transactional businesses coming out of mainframe where we're ahead of the product cycle in the first 2 quarters, we have enclosed the highest fourth quarter shipped MIPS in history, and it's evident that the market has capacity demands and continues to see the value of that platform. So we see very good performance in our Systems lineup. By the way, Power grew, storage grew. So we had pervasive growth in the fourth quarter, and we feel very strong coming into first quarter. Second, we do see software having growth in the first quarter, and that's just due to the mix between annuity and transactional. As Martin indicated during the prepared remarks, we continue to drive high renewal rates, and we continue to drive the annuity content of our business. And just given the dynamics there, that will give us growth in the first quarter, and it's going to give us mix and margin benefit in the first quarter overall. And then finally, Services, as I stated, we do see revenue from opening backlog, which, in the first quarter, given it's right in front of us, is almost about 90% of the first quarter revenue needed. And it does show improved trajectory throughout 2018. And I'll remind you, throughout '17, we talked about the headwinds we faced in our TS & CP business around some large contract conclusions that was delayed in 2017. We didn't realize it until the very end. We are going to start off 2018 in a much better position on margin, and we see overall stabilization beginning immediately.

Our next question is from Amit Daryanani from RBC Capital Markets.

I guess, maybe I just want to focus more explicitly on gross margins and how you guys think gross margins will stack up in 2018. I know you've talked about margin stabilization, but it would be helpful if you just talk about how do you see gross margins in 2018. And then what are the levers that you think can enable a gross margin expansion environment in '18 for you guys, given the fact you are talking about revenue growth?

Well, if you take a look at 2018 overall -- thanks, Amit -- we expect margins to stabilize, as I said. And we continue to drive -- that's going to come from a couple of areas, one, continued scale of our cloud business; two, improvement in yield of our services productivity as we wrap around some of those completed contracts I talked about; and three, just getting operating leverage from returning this business and portfolio back to growth. So we're going to continue making the strategic investments that are required to position us to win in key growth areas and position this company for the long term. And we're going to drive the base productivity, and we're going to get scale out of our as-a-service business as we move forward. And we saw great instantiation and proof points in the second half of last year overall. So if you play that out across our portfolio, I would tell you we'll get mix contribution from our Cognitive Solutions business segment, just driven based on the product lineup and the strength we have in our Watson offerings, in security and in our industry verticals. We're going to get margin and productivity benefit out of our services businesses, GBS and GTS. And we're going to get scale efficiencies out of our as-a-service and cloud-based businesses in our TS & CP overall segment. Martin, if you want to add a few comments.

Yes. The other thing I'd add, kind of the way I think about it, in addition to what Jim went through, one, the margins in our Strategic Imperatives remain higher than the margins in the rest of our business. And remember, the whole business, by the way, has high margins, right? We're a high-margin -- we're a high-value model with high margins, we're 49% -- between 49% and 50% margin. So we're building the businesses. The places we're moving to -- and you saw a great performance out of Strategic Imperatives, the places we're going to offer higher margins than the places we're coming from, and the reweighting alone gets us some content. And as Jim pointed out, in any scale business, the worst is behind us because we're building scale every day.

Our next question is from Mark Moskowitz from Barclays.

Just one clarification and a question. Did you guys say that the revenue growth for '18 can grow for full year, both reported and constant currency? And then also wanted to understand more on this topic of scale, which has become the common thread throughout the call today. What are kind of the key metrics that you're looking to that your algorithms internally state in terms of the cloud as a percentage of revenue and also Strategic Imperatives as a percentage of total revenue? What do those need to glide to, to get to greater scale, so you can start talking about incremental operating leverage returning to the story, i.e. 50% gross margin and 20% plus operating margin?

Yes. So thank you, Mark, for the question. So yes, a couple of questions. Let me start with the first one around revenue growth. We did state that based on the trajectory in the second half and how we made significant improvement, and the confidence we have in our portfolio and the strength in winning in key market segments, that we see revenue growth for the full year at current spot rates. I also said that starting in the first quarter, we see revenue growth both at actual rates and current spot rates. Now I will tell you, one, we've got a lot of momentum that we built up through the second half. But 2018, there's a lot of work to get done. We have best visibility of what the quarter we're in right now with the 90 days and all of the operational indices around what the profile of our business looks like, and we're very confident that we will grow at both constant currency and at actual rates. And we got a lot of work to do the rest of the year, and we fully expect that we're going to continue that momentum, and we'll update you as we go through the year on that.

I guess, Mark, it's Martin. In terms of scale, I guess, one way to think about it, because of the backlog of business we have, which it's north of $120 billion of Services business, that business is moving on to the IBM Cloud. That's the process we're going through now. So not only are we building and moving new SaaS properties into the cloud, which have great margins, not only are we building the Platform-as-a-Service and building ecosystems around that, we have 120 -- north of $120 billion backlog in our services business that we're in the process of moving to the cloud. We've got some progress, but we are not through the majority of this yet. We got a long way to go. So when we talk scale, we're moving our whole services platform on to the IBM Cloud, and that's going to give us the scale we need, not just for that infrastructure layer but it's going to give us the scale we need to manage applications, it's going to give us to scale we need to deliver SaaS as effectively as possible and efficiently as possible, so we got a lot of scale coming our way.

Our next question is from Mr. Steven Milunovich from UBS.

I know you're always excited to hear my suggestions. One would be to provide a bridge, an earnings bridge, which some companies do, and we're obviously all trying to get at that. But it'd be helpful if, at some point, maybe you guys would put one together for us. But a couple of points I wanted to touch on. One would be currency in terms of a bridge, I assume that's positive to EPS. Another is investments. It's very hard to understand. Are your investments increasing year-over-year at a slower rate than they've been? Are they actually declining year-over-year? And then charges. So you're kind of suggesting there's going to be charges that maybe offset some of the discretes on tax. Can you give us a sense of what charges for the year might be like? And there's obviously a lot of speculation about GTS. You're talking about moving things to the cloud, I'm assuming it'd be related to that in part.

Thanks, Steve. I appreciate it. And believe me, as we get to know each other, I'm always looking for suggestions.

Yes, I was going to say, Steve, we only have a thing about multipart questions, not multipart suggestions. We're happy to get those.

You took what I was just going to say.

Sorry. All right, back to you.

Let's start with currency overall. So as you saw in the fourth quarter, currency, finally after -- Martin, how many years?

Too many.

Five years we've been living with this? And it's been a dramatic drain on our portfolio overall just given the dynamics of how much business we do outside U.S. dollar-denominated. But currency is finally a tailwind to the IBM company of a 2.7 points here in the fourth quarter, which was about a $600 million help on the top line. And that's driven from a variety of FX rates across different countries. But as you know quite well, we constantly build a financial discipline in our model, and we hedge those currencies to protect the volatility of our business from the bottom line. And so I would tell you, bottom line currency overall in the period, was de minimis. It was a couple of pennies at most. But what happens is, over the long run, it allows you flexibility to change your pricing, change your sourcing, change your business dynamics. And we've been dealing with that, as I stated upfront, for quite a period of time. And we're glad that it's finally going our way, and we're going to capitalize on that as we move forward.

Our next question is from Tien-tsin Huang from JPMorgan.

I guess, just a couple of quick ones, if you guys don't mind. I know you got a lot of questions around the stable margin outlook. How much of that is coming from expected productivity versus mix and changes in investments? And the second one, just to better understand the tax point here. Just is your capital allocation going to change at all? I heard a little bit about the CapEx, which makes sense, but just wanted to make sure, any change in assumption around capital deployment posttax?

Okay, thank you, Tien-tsin. This is Jim. Let me address the margin piece. As we've been talking throughout the call, obviously, we've got a lot of focus on, one, returning this business back to revenue growth; and two, stabilizing these margins year-over-year. And we firmly believe and are confident that we got the plans in place overall. But when you look at it, I tend to look at margin in a couple of different buckets, as I stated earlier. Number one, we will continue to drive base productivity out of this business. It's instrumental to our financial model, and it's what our clients require as we continue to help our clients move and apply technology and expertise to help enable their businesses to move from one era to the other. And that will be probably about 0.5 point improvement in our margins overall. On the flip side, we're going to continue to invest in our business to position us strategically, to win in key growth segments. I talked about AI, I talked about cloud, I talked about security in new eras -- areas, excuse me, like blockchain, which you saw a couple of days ago our latest announcement with Maersk around global trade distribution and how we're building and scaling that platform overall. So we're going to continue making investments. And then the third part of the equation is the mix equation. And that's going to come off of driving revenue growth in high profitable areas around our Cognitive Solutions area, and that will drive operating leverage to the IBM company overall. So Martin, you want to address the tax side?

Sure. So a couple of things, Tien-tsin. First, we've been supporters of, proponents of and pushing for fundamental tax reform for a long, long time. We think it's the right thing to go. So we're delighted, absolutely delighted, that we got tax reform. Now in the short term, we took a charge, this toll charge, right, to recognize a shift from one system to the territorial that we've all been supportive of. So we'll pay the toll charge. And as Jim noted, within our cash flow guidance, we have a cash headwind, which is all captured -- cash tax headwind, all of which is captured in the guidance. But for us, it's a long-term benefit because we now have freedom of capital movement. It's not really a near-term capital allocation issue for us. So we have -- well, as you know, we have $12 billion of cash around the world. We don't have big cash pile stock -- cash stockpiled outside the U.S. We've always had a really good access to our cash. And we got tax reform done, or they got tax reform done in a period where it wasn't an issue for us, so no capital allocation changes for us. The reason we're able to grow the dividend over time, the reason we're able to reduce the share count is because we've always had good cash flow, we've had enough to reinvest in the business. But tax reform by itself -- well, again, not -- we are huge supporters, we're glad it happened, not a near-term capital event for us.

Our next question is from Lou Miscioscia from Pivotal Research Group.

Okay, great. I'll ask a question just on Systems, but maybe, as everybody else, a multipart. I just want to look at Systems. Obviously, nice that you have the mainframe cycle. Could you give us an idea how long that could last, in that usually, you get at least 2 nice quarters of it, maybe even 3? And then also on the storage front, obviously, you've been doing very well there. Is your mix more over -- well over 50% or 60% all-flash, so we could expect a good year from that? And then finally, you came out with an AI chip, POWER9. Does that fall into the systems sector? And do you have any traction with that yet, given there's obviously a lot of discussion about AI?

Thank you, Lou. I appreciate the question. And believe me, we are very pleased with our overall Systems performance here in the fourth quarter, and that goes well beyond mainframe. But let me start with mainframe. Very pleased, as I said, with the performance as it instantiates how we continually modernize and build an enduring platform. Strong value proposition, it's definitely resonating in the marketplace, and we continue to handle mission-critical workloads and also, very, very important, open up new profit pools with our pervasive encryption capabilities, getting strong resonation in the market, our new workloads around Linux and HANA and also emerging workloads like Blockchain. So mainframe, with the second quarter, and we had a couple of weeks here in September, we delivered 71% revenue growth at constant currency, and we had the largest shipped MIPS in any quarter in its history. And now our MIPS installed base has grown double digits year-to-year, and it's 2.5x the last 10 years. So this performance is, right now, above the prior cycle and consistent with z12 a few years ago. And while we've got many scenarios -- as I said earlier, we gave a guidance of at least $13.80, we got many scenarios and many people working tirelessly to continue to drive innovation into this platform so we can do much better than just the typical cycle. Our guidance is not counting on any material change to that. Now I'm glad you brought up Power and storage because we were very pleased in the fourth quarter. Power grew 15%. We started shipping the first POWER9 architecture with the Cora win. I think we won two of the three. We're only able to win two of the three, by the way. So a strong start to POWER9 architecture, and we'll roll the rest of that out, our low-end, starting later in the first half and early in the second half. So we look for continued momentum in our Power portfolio overall. And then finally, on storage, this is the first year in a long time, for 4 quarters in a row, we've grown storage. And that's been based on the great work our storage team has done about repositioning their portfolio, leveraging and growing share in flash, but it's also about software-defined and also, more importantly, as we move forward, object storage that will continue to look for growth. So we're very pleased with our system portfolio, and we look for that to continue. Martin, do you want to say a few words?

I guess, Lou, it's an interesting question. I guess, since it's only about Systems, it doesn't count as multipart. But we get questions, as I'm sure you do, this idea, what's cyclical, what's secular. And when we go back to why we started talking about the Strategic Imperatives, those are the secular changes in the enterprise IT world. They're all about cloud, they're all about security, they're all about analytics, they're all about mobile. And while what you asked about was a product view, remember that the secular trend that these are tied into continues. And so the demand for mainframe is driven by the secular trend for security. It is not so much about, like, there's a new mainframe, so I have to buy one. It's not so much in POWER9 that, Oh, there's a new POWER9. I have to buy it. All of these machines -- and we kind of shorthand it to say they're built for the most contemporary workloads. But we introduced those shifts and those secular ideas through the Strategic Imperatives, and all of these offerings are riding that secular trend. Mainframe and security is a good example. Power and analytics -- POWER9 and analytics is a good example. And quite frankly, and Jim mentioned this, storage, as it moves to the cloud, needs object store. And our object store offerings in storage are doing terrifically well. So the cyclical versus secular is not as simple as some want to portray it, it really is, are these offerings tied into those long-term secular trends, and our Systems business is absolutely tied to those.

Our next question is from Jim Schneider from Goldman Sachs.

Welcome, Jim, and congratulations, Martin. I was wondering if you could maybe give us a little bit of color on a constant currency basis for the revenue outlook, and which of the segments' constant currency you would expect to be up versus any that you expect to be down?

Okay, thank you, Jim, for the question. As I stated before, our full year guidance of at least $13.80 is predicated on us delivering revenue growth at current spot rates. I said that earlier because we got a lot of work to do. And while we've got great momentum that we built out in the second half, and we feel very confident about our portfolio across the board, the best line of sight that we have right now is first quarter. And in first quarter, we will deliver revenue growth, both at actual rates and at constant currency. And let me just give you a little color underneath that. If you start with Cognitive Solutions, as Martin said earlier in one of the Q&As, we have repositioned through strategic investments in many different areas that portfolio and have been generating tremendous penetration in our annuity content. Today, in Cognitive Solutions, annuity is about 80% of that portfolio. And underneath that, it's being driven by a strong acceleration in Software-as-a-Service in the mix. Over the last 12 months, our Software-as-a-Service is up 30% overall. So we see, just based on the annuity versus transactional seasonality of first quarter, we will grow Cognitive Solutions at a constant currency level. In both of our services areas, which, as we talked about earlier, pretty consistent performance throughout the second half, we are actually opening up our backlog with a runout that is showing improvement year-to-year from where we were opening last year. So while our total backlog at $121 billion is up 2% overall, down 3% at constant currency, that backlog and the composition of that backlog gives us much more better confidence and will make sequential improvement in our revenue growth trends as we move throughout the year. And then Systems, coming off of a phenomenal fourth quarter of 28% growth, growth across all 3 platforms, we expect growth to continue, albeit probably not at that rate, but it will continue as we continue to leverage the value of our mainframe proposition and start scaling our Power and the continuation of performance in our storage area.

Our last question is coming from David Grossman from Stifel Financial.

Actually, I think you may have just answered it. But just to be clear, obviously, the services is pretty important to your '18 outlook. And while both segments continue to face headwinds, the growth dynamic underlining the tech services and cloud is probably more opaque. So can you just talk about -- or you had talked about customer losses in the first half of '17, and you just mentioned the backlog and that opening up as we migrate into the first half of next year. So with that said, other than typical execution risk, is there any reason to believe that the growth rate of that business should not reaccelerate as the year progresses and maybe even get through some kind of slope dynamic as we anniversary the tough compares in the back half of the year?

Yes, thanks, David. I appreciate the question. So as I -- as you indicated -- let me give you a little bit more color around our Services and, in particular, about our Services backlog runout. If you take our GBS business, our GBS business enters the year with a backlog that should yield in fiscal year of about 2/3 of its revenue. Still has about 1/3 of the revenue that we need to go do sell and bill and translate that backlog into revenue yield throughout the year, but that 2/3 of that backlog shows a significant improvement versus where we were beginning 2017. And that shows sequential improvement as we move throughout the year. Now the focus in GBS, we've already transformed our Consulting business. As Martin talked throughout the year, signings lead to backlog, lead to revenue growth. We've now gotten two quarters in a row of Consulting growth in revenue. And we finished the year, I'll remind you, growing GBS signings four quarters in a row. The area of focus that we need now is around our AMS business. And that is around an area where we're helping our clients migrate to the cloud and also how we need to capitalize on leveraging the incumbency value of AMS overall. So I definitely see GBS improving its trajectory as we move throughout the year. And if we execute on the pipelines we got in place, I definitely see that we can grow by the end of the year in our GBS business. In GTS, which has much longer durations, the GTS business, the opening backlog is somewhere around 75% to 80% or maybe a little bit higher as you enter the year. So again, similar, we still got about 20% of work to do in the year to go get that revenue yield, but that 80% backlog is actually in a much better shape than what it was at the beginning of 2017, as we spoke about all year long, with some ending -- contract conclusions. So with that, let me wrap up the call in by saying again, we're very pleased with the work we have done over the last year to reposition our business. And I hope what you took away from today's call is that we're entering with a stronger revenue and margin profile. Now as always, there's more work to do, and I look forward to sharing our progress and continuing this dialogue as we move through 2018. Thank you all for joining the call.

Lawrence, let me turn it back to you to close out the call.

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