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 objection, you may disconnect at this time. Now, I will turn the meeting over to our host 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 fourth 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 will find reconciliation charts at the end of the presentation, and in the Form 8-K submitted to the SEC.

Now, I’ll turn the call over to Martin Schroeter..

Thanks, Patricia. Let me start by saying we’re pleased with the progress we made again this quarter. We delivered revenue of $22.1 billion, operating net income of $4.7 billion, and operating earnings per share of $4.84.

As we get in to our results, you’ll see that our fourth quarter and full year performance reflects the transitions in our business as we address the significant shifts in our industry, as well as some of the cyclical challenges of the global business environment.

So as always in January, I’ll start out with some comments on the year, show you the progress we’ve made in our transformation, discuss the details of the quarter, and then wrap up with our view of 2016.

For the full year, we delivered nearly $82 billion of revenue, and $14.7 billion of operating net income and our operating earnings per share were $14.92.

As we’ve said, this transformation will play out over time, and with revenue down 1%, for the second consecutive year we’ve had modest improvement in our year-to-year revenue performance, excluding the impact of currency and divestitures. I’ll comment on year-to-year revenue performance on this basis throughout.

Our strategic imperatives continued strong performance, up 26% for the year. This now represents 35% of IBM’s revenue. Our profit and margin reflect our portfolio actions as we shift to higher value, as well as the level of investments we’re making to drive our transformation. We generated over $13 billion of free cash flow, which is up year-to-year.

This is 98% of our GAAP net income, in line with our expectation that free cash flow realization will be in the 90s. A couple of years ago, we laid out our strategic imperatives around big data and analytics, around cloud, and around mobile and security, the areas where our clients are looking to us to help move them to the future.

I want to spend a minute on the progress we’ve made since then in shifting our business toward these strategic imperatives, and in the investments we’ve been making, which aren’t yet reflected in our revenue streams.

We have said, we expect these strategic imperatives to deliver double-digit revenue growth, and in 2015, our performance in our strategic imperatives accelerated. Together, cloud, analytics, mobile, social and security grew 26% and delivered $29 billion in revenue. As I mentioned they now represent 35% of IBM, which is up from 22% two years ago.

With 57% revenue growth over the last year, cloud is now a $10 billion business for us. This made us the largest cloud provider in 2015, which is what you’d expect, given our extensive relationships in enterprise IT and incumbency in the data center, positioning us to help our clients implement hybrid cloud environments.

Revenue from our as-a-Service offerings increased about 60% to $4.5 billion for the year, and we exited 2015 with an annual run rate for our as-a-Service business of $5.3 billion.

The $10 billion also includes $5.6 billion of revenue from our foundational offerings where we provide software, hardware and services so clients can build their own clouds. In either case, what we’ve been saying for some time is that clients are utilizing a cloud not just to reduce costs, but to gain agility and enable innovation.

And whether they’re consuming as-a-Service, or through their own clouds or as in the case of most enterprise clients who are implementing a hybrid environment, we’re leading that move.

To address opportunities we see in this space, in 2015 we made seven cloud acquisitions including Cleversafe for object storage, Gravitant for cloud brokerage services, and Clearleap for cloud video services. We also invested nearly a billion dollars in capital expanding our global cloud data center footprint to 46.

We already have an ecosystem of millions of developers globally, and our Bluemix Platform-as-a-Service has already expanded to over a million users, adding 15,000 developers a week.

With nearly $18 billion of analytics revenue, we’re also the largest analytics provider, and we’ll extend that lead by moving into new areas including Watson Health and Watson Internet of Things. In Watson Health, we are integrating our own organic capabilities with content acquired through Merge, Phytel, and Explorys.

Healthcare is a new revenue and profit opportunity for us as we change the face of healthcare through our cognitive platform to provide value to providers, payers, and partners. We’re also addressing the IoT market.

Our Weather Company acquisition not only gives us tremendously valuable data and digital content, but a high volume, cloud-based, insight-driven platform that we’ll integrate with Watson to address significant new opportunity spaces. We’ll talk about how we’re addressing these opportunities at our investor briefing at the end of February.

And while we are investing in capabilities for the future, we’re also returning significant value to shareholders. We paid out nearly $5 billion in dividends, and we reduced our average share count by 2.7%. So we got a lot done in 2015.

To sum it up, our revenue for the year was down 1%, we expanded gross margin, we invested heavily for the future, and we returned capital to shareholders, all while transforming the business.

The progress we’re making gives us confidence that we’re on the right strategy, and the actions we’ve taken not only advance our transformation, but also will contribute to our growth rate in the future. I’ll come back to the full year, and 2016 after going through the details of the quarter starting with the financial metrics.

Our revenue for the quarter of $22.1 billion was down 2%, reflecting the transition we’ve been describing. I’ll spend just a minute on currency, which continues to be a headwind. Currency impacted our reported revenue by over 6 points or $1.5 billion, which is about $350 million more than the spot rates suggested 90 days ago.

For the year, currency translation reduced our revenue by over $7 billion. That by itself is the revenue of a Fortune 500 company and currency was also a headwind to our profit performance. We estimate it impacted our profit growth by about $300 million in the fourth quarter and over $1 billion for the year.

At current spot rates, we would expect a significant impact to revenue and profit again in 2016 not just from the translation, but from the year-to-year cash flow hedging dynamics. I’ll come back to this.

Our margin performance reflects some ongoing dynamics in the business, like higher levels of investment, and an impact from the mix of contracts and resource shifts in our services business. But it also reflects some unique items in the fourth quarter of last year, the largest of which was $1.4 billion gain from the sale of our x86 server business.

This prior period gain represents effectively all of the year-to-year decline in PTI margin. I’ll talk more about the margin drivers in the segment discussions. Our underlying effective tax rate was 20%, and this quarter the rate also reflects the recent U.S. tax legislation, and the settlement of our U.S.

tax audit, which we have talked about throughout 2015. And so bottom line, we delivered $4.84 of operating earnings per share. We generated over $6 billion of free cash flow in the quarter, and $13 billion for the year, and as I mentioned, this is 98% of GAAP net income.

We returned about three quarters of our free cash flow to shareholders in 2015 through dividends and gross share repurchases. Now turning to the revenue by geography, we had good performance across many of the major markets. Europe returned to growth, led by continued growth in Germany, France, and the UK.

In fact, Germany posted double-digit growth and in December, we announced Munich as the headquarters for our new Watson IoT business, as well as our first European Watson innovation center. In Asia Pacific, Japan continued to post growth, led by services.

In the AP growth markets, we had double-digit growth in India and Australia though China declined. Our U.S. revenue was down. We had strong growth in the U.S. in all hardware platforms – zSystems, Power, and storage, but it was offset by weak services and transactional software performance.

The growth markets in total were down 4%, roughly in line with the last two quarters, and from a regional perspective, growth in Latin America and the Middle East and Africa was offset by declines in Asia Pacific. Turning to the segment perspective, our total revenue was down 2%, and gross margin declined about a point.

Our Global Technology Services revenue grew, as we help our clients transition to a hybrid cloud services platform bringing in more cloud, mobility and security to infrastructure services. This contributed to our backlog growth for the year.

Our GTS gross margin decline is driven by investments in cloud data centers and the ramp of new contracts, which generally have lower up-front margins. In Global Business Services, we’re adding resources and growing quickly in strategic areas, while transitioning away from some of the more traditional areas.

This shift of resources impacts productivity in the near-term, which puts pressure on margin. In Software, our annuity content grew, but transactional performance has been impacted by the flexibility we’ve been providing in ELAs with our larger clients. The transactional performance in the fourth quarter was consistent with what we saw in September.

But a larger transactional mix in the fourth quarter drove a deceleration in the overall software growth rate. Our Systems Hardware revenue was up, driven by zSystems and Power. This caps a very strong year in our Systems business, reflecting that our leading edge servers run the most contemporary workloads.

The Systems margin is driven by the lower mainframe margin, as is typical at this point in the cycle. Turning to expense, our Operating Expense and Other Income is up 9%. There a few large items that impacted the growth rate this quarter.

As I mentioned earlier, we closed the sale of our System X business in the fourth quarter of last year, resulting in a gain of $1.4 billion in that period. And this quarter we took a charge of about $85 million for the write-down of the equity component received as consideration. So together, these were $1.5 billion year-to-year impact to our expense.

We also had a year-to-year reduction in workforce rebalancing. We had $580 million of workforce rebalancing charges in the fourth quarter of last year, with essentially none this year, so this reduced expense growth by 10 points. And currency reduced expense growth by 8 points.

Between the translation of non-dollar spending, and the cash flow hedging gains that are reported in other income and SG&A. This is pretty consistent with what we’ve seen all year. Outside of these larger items, our expense dynamics have been consistent throughout the year.

We’re accelerating shifts within our operational expense base driving productivity and efficiency in some areas, while increasing investment in support of our strategic imperatives. This year, we shifted $5 billion of spend to our strategic imperatives, that’s across cost, expense and capital expenditures.

Now let’s turn to the segments, and we’ll start with services. We ended the fourth quarter with a services backlog of $121 billion, which grew for the third consecutive quarter. We continue to see momentum in our services offerings that modernize our clients IT systems and move their operations into the cloud-based mobile world.

We’ve seen reports that suggest the adoption of cloud it means shrinking deal sizes, but this is not what we are seeing. Clients are looking to transform their most critical systems into hybrid cloud environments, and the complexity of these partnerships in many cases results in larger engagements.

In fact, this quarter we have signed 26 services deals greater than a $100 million, and for the full year we signed over 70 of these substantial transactions, which is 40% more than last year. So with a growing backlog and a 40% increase in large deals during the year, we are not seeing shrinking deals.

Now about 70% of those transactions feature hybrid cloud content, which reflects both the value our clients see in hybrid, and the reality that not all of their workloads will be optimized for the cloud. Just recently, we signed a $1.4 billion expansion in the scope of our relationship with European Bank BNP Paribas.

This is a joint GBS and GTS engagement, and as part of the agreement, we'll operate two of the bank's data centers in Belgium as hybrid cloud centers, providing cloud infrastructure and a full suite of business transformation services spanning applications testing, business intelligence, security and core banking solutions.

Global Technology Services delivered $8.1 billion of revenue, and grew for the third consecutive quarter. Our strategic imperatives including our hybrid cloud services in GTS grew strong double digits this quarter, and for the full year. This includes strong demand for Softlayer, which again grew double digits this quarter.

This Infrastructure-as-a- Service cloud platform provides our clients with a full range of cloud services including virtual and bare metal servers along with a dedicated dark fiber network infrastructure. As clients evaluate their technology roadmap, they are looking for agility and innovation and to gain insight into data from all sources.

Our hybrid cloud stack is an open platform that enables this innovation. Our clients can choose from public, private, and dedicated environments based on their needs, such as workload, performance, data sovereignty, and regulatory requirements.

Entire industries and value chains are being disrupted, and our clients are looking to us for competitive advantage. To expand our Cloud capabilities, this past quarter we announced the acquisition of Gravitant.

Gravitant develops cloud-based software to enable organizations to easily broker software and computing services across multiple suppliers and cloud environments from a single screen. We also announced the acquisition of Clearleap, a premier provider of cloud-based video services.

This will provide our enterprises with a fast and easy way to securely manage, monetize, and grow user video experiences. The Clearleap video platform is optimized for massive scalability, which enables clients to ramp up and support millions of concurrent users within seconds to support special events.

The innovations have attracted leading brands such as HBO, A&E Networks, the NFL, and Sony Movie Channel. Finally, our maintenance business continues to contribute significant revenue and profit by delivering a wide range of support services to maintain and improve our clients’ IT infrastructure.

We continue to see strong demand for our Multi-Vendor Support services where clients can leverage our global distribution and inventory capabilities. Our GTS PTI margin is up about two points year to year.

This was driven by lower workforce rebalancing charges and savings from actions taken throughout the year to drive efficiency in our delivery model. Mitigating these savings, we continue to invest to contemporize our clients IT systems, transforming them into digital enterprises.

We’re scaling our Softlayer footprint with 46 cloud data centers opened around the world. Finally, as we’ve talked about throughout the year, currency is impacting margin, and remains the largest impact on year-to-year profit growth given the strong dollar environment. Turning to Global Business Services, revenue was $4.3 billion in the quarter.

We continue to transform our GBS business, and our signings were up double digits this quarter driven by our digital offerings. Revenue from our strategic imperative practices was again up strong double digits. Our analytics practice grew over 20%, our cloud services were up over 60%, and our mobile practice more than doubled.

Our revenue continues to be impacted by the wind down of traditional enterprise application implementations. Clients are moving away from ERP engagements to initiatives that focus on digitizing their business with analytics, cloud, and mobile technologies.

In December we announced that as part of our partnership with Apple, we’ve now delivered over 100 MobileFirst for iOS applications.

This unique partnership brings together the simplicity of design and ease of use of the Apple mobile device, with our ability to build applications that scale securely and efficiently to the enterprise helping to transform the way work gets done across 14 industries and 65 professions.

These apps allow our clients to securely access their most critical data and processes, so that they can redesign workflows and drive productivity. Since we announced the partnership with Apple, we’ve generated over $1 billion in signings from the program. GBS profit margin was flat year to year. Let me talk about some of the dynamics within that.

We have a benefit from lower workforce rebalancing charges. In parts of the portfolio where the market is declining, we are seeing price and profit pressure and we are taking actions to optimize our cost structure. We continue to invest in our analytics, cloud, and mobility practices.

We’ve hired and shifted significant resources to these areas, which impacts productivity and margin in the near term. We are also scaling a new cognitive consulting practice launched last quarter that is focused on helping our clients unlock the transformative value of cognitive business. Our Software revenue was $6.8 billion in the fourth quarter.

Our annuity content grew year to year, while transactional content declined. Our Software profit performance continues to reflect the revenue trajectory, a higher level of investments in areas like Watson, Watson Health, IoT and Bluemix, and an impact from currency translation Let me spend a minute on the revenue dynamics.

Looking at the transactional content, recalling our last earnings call, we talked about weaker transactional performance at the end of September, which impacted the third quarter. Our fourth quarter transactional performance was very similar to what we experienced in September.

Given the much higher transactional mix in the fourth quarter, this had a larger impact on our total software performance, resulting in a deceleration in software growth in the fourth. Looking ahead to first quarter, which has a lower transactional mix, we will see an improvement in our revenue trajectory.

We’ve said in the past that our performance reflects that many of our large clients with multi-year contracts are utilizing the flexibility on deployment of their software, as they build out their environments with our broad portfolio, and this is continuing.

Outside of our top 250 clients our software revenue was up low single digits in the fourth quarter, and for the full year. On an annual basis, about 70% of our software business is annuity-like, including Software-as-a-Service, and subscription and support.

Our renewal rates are steady, our SaaS business is growing, and our overall annuity revenue grew in the fourth quarter and the full year. Middleware serves the purpose of integrating different environments – on prem, and cloud.

To enable hybrid environments, our key capabilities have now been delivered on Softlayer, or as part of our IBM Bluemix platform. IBM’s middleware remains the number one integration platform in the world, and now integrates across cloud environments.

To put it simply, this allows clients’ existing apps to access the cloud, and new “born on the cloud” applications to access clients’ existing assets.

To accelerate the integration of middleware in a hybrid cloud environment, we made an organizational change at the beginning of this year, moving a portion of our middleware business into our cloud business, reflecting the importance of our middleware in the hybrid cloud marketplace.

We are also adding substantial new capabilities into our software and solutions portfolio. One example is the Weather Company acquisition, which will provide the basis for our IoT platform. This acquisition brings with it a high-volume platform that can ingest sensor data at scale.

This platform can handle enormous complexity, taking in four billion weather forecasting points and 26 billion queries in its cloud service each day. This is the fourth most-used mobile app, handling seven times more transaction volume than the world’s leading search engine.

Some of this has been running on our cloud already and of course we will move all of this to IBM cloud. And then we will layer in Watson to give it the cognitive capability to apply machine learning at scale. This then gives us the ability to expand this platform capability to industries beyond weather, like health.

The power of the platform is its ability to use Watson cognitive capabilities to gather new insights by connecting data at scale from multiple industry domains. Our Systems Hardware segment revenue was $2.4 billion. This was the fourth consecutive quarter of growth in both z Systems and Power.

We have continued to deliver innovation to our systems to enable them to run the most contemporary workloads. In fact, about half of our systems segment revenue in 2015 was to address analytics workloads, or hybrid and private clouds. This quarter z Systems revenue was up more than 20%.

Since the launch of z13 in the first quarter of 2015, we have delivered growth of 35%, with strong double-digit growth in every quarter since the launch. z13 was contemporized for the workloads around mobile, hybrid cloud and analytics, which continues to resonate well with our existing customers, and bringing new customers to the platform.

For the year we added 50 new clients across 25 countries. Power revenue grew 8%, which is the strongest performance of the year. In Power we are serving a high value market, while adding capabilities and finding new economic models to grow over time. Unix is a declining market, but we continue to address it because it is very a high value space.

At the same time, we introduced low-end Linux-based Power systems to capture the growing Linux market, and are building an IP stream through the OpenPOWER ecosystem. Even though the Unix market is declining, by delivering innovation and repositioning the platform, our Power systems have grown four quarters in a row.

This is a good example of how we transform ourselves. The growth in our servers was mitigated by a 7% decline in Storage hardware, which continues to be impacted by weakness in traditional disk and tape.

As we have said, value in the storage market continues to shift to software and offering requirements that are driving demand for flash and object-based storage. We are well-positioned in these new areas, with growth in flash, and our recent acquisition of Cleversafe.

Looking back at 2015, our Systems results reflect a successful transformation and repositioning of the business. Revenue was up 8% for the year, and profit up about $600 million. This performance reflects our solid mainframe product cycle and the successful Power transformation, with Power revenue growing for the first time since 2011.

So moving on to cash flow, in the quarter, we generated $7.1 billion of cash from operations, excluding our financing receivables. We invested $1 billion dollars in CapEx, and generated $6.1 billion of free cash flow. For the full year, we generated $17 billion of cash from operations.

We invested almost $4 billion in CapEx this year, with a significant amount going to support our growing services backlog, and for cloud as we build out cloud data centers. And so we generated free cash flow of $13.1 billion, an improvement of almost $700 million year to year.

The primary driver of this improvement was lower cash tax payments of about $3 billion. Our cash and tax book rates for 2015 were fairly consistent, and so the year-to-year benefit to cash flow was driven by a much higher cash tax rate in 2014. We also had over a $1 billion of improvement in our sales cycle working capital.

This was partially offset by a decline in our profit performance, and payments of performance-based compensation. Looking at uses of cash, we’ve invested over $3 billion on acquisitions this year. We’ve acquired 14 companies, including seven in the fourth quarter. The Weather Company acquisition I mentioned earlier will close in the first half of 2016.

Over the course of the year we’ve returned $9.5 billion to shareholders including dividends of nearly $5 billion and $4.6 billion in gross share repurchases. We bought back 30 million shares, reducing our average share count by 2.7%. At the end of the year, we had $5.6 billion remaining in our buy back authorization.

Turning to the balance sheet, we ended the quarter with a cash balance of $8.2 billion. Total debt was nearly $40 billion, of which $27 billion was in support of our financing business. The leverage in our financing business remains just over seven to one.

The credit quality of our financing receivables remains strong at 55% investment grade; you can see this in our supplemental charts. The year-to-year reduction in investment grade was driven by rating changes to our existing portfolio, not by changing our approach to the market.

Our non-financing debt of $12.7 billion was almost a $1 billion lower than September, and up just over $1 billion year-to-year. Our non-financing debt-to-cap was 54%, four points lower than September, and five points lower than a year ago.

Our debt-to-cap ratio was impacted again this year by a reduction in equity due to currency translation, and pension re-measurement. Together, these impacted our equity by about $3.5 billion. The performance of our retirement-related assets, and return and discount rate assumptions at year-end are in our supplemental charts.

You can see our funding levels remain solid with the U.S. and worldwide tax-qualified plans at 101% and 97% respectively. And importantly, our balance sheet continues to have the financial flexibility to support our business over the long term.

So now let me wrap up where I started the call by saying that we’re pleased with the progress that we made again this year in the transformation of our business. We’re continuing to invest and add capabilities to drive the transformation.

In 2015, we spent over 6% of our revenue in R&D, we invested about $4 billion in capital, and over $3 billion to acquire 14 companies. We are integrating acquired content with our organic capabilities, and leveraging partnerships and a broader ecosystem to build new high value platforms.

And we’re applying our cognitive capabilities to more of what we do. Within our spend, we’re shifting to key opportunity areas, and we’re seeing the returns in our strategic imperatives results. With $29 billion of revenue, these now make up 35% of IBM.

In 2015, we had a successful mainframe cycle, and Power grew as we repositioned it to address a broader opportunity. Our services backlog was up and we exited the year with a $121 billion book of business. Our software annuity base, which is about 70% of our software revenue also continued to grow.

Our overall Software performance reflects reduced transactional levels as our largest customers utilize flexibility we’ve provided and commit to our platform for the longer term. The macro environment, as always, is mixed, and currency continues to be a significant headwind.

While we are focused on remaining competitive in local markets, the translation impact is significant. It was an 8 point impact to revenue growth in 2015, and at current spot rates, currency would be another 2 to 3 point impact this year.

The profit impact is substantial as well, and given the sustained period of dollar strengthening, the profit impact in 2016 will in fact be greater than 2015, both because of the translation impact, and the roll-off effect of cash flow hedging gains.

At current spot rates, we expect currency to impact pre-tax profit growth in 2016 by about $1.3 billion with nearly three quarters of that coming from a year-to-year reduction in cash flow hedging gains. So now as we look forward to 2016, we’ll continue to deliver strong growth in our strategic imperatives.

We expect some modest expansion in gross margin, and will continue to invest at high levels. And we’ll continue to return value to shareholders, through share repurchases and dividends. Taking all of this into consideration, we expect Operating EPS of at least $13.50.

This reflects an impact from currency of over a dollar of EPS, which is about a seven and a half point impact to the growth rate. Our free cash flow will follow our profit performance, and we continue to see our free cash flow realization in the nineties.

Looking at the quarterly skew, as you know the first quarter represents the smallest quarter in terms of contribution to our full year earnings. At this point in prior years our first quarter view has been from 14% of the full year to a few points higher than that.

Given the magnitude of the currency headwind and the skew of our investments this year, we would expect the first quarter of 2016 to come in at about 15% of the $13.50. Bottom line, we remain confident in our strategy, and in our ability to execute. And we look forward to continued progress in our transformation in 2016.

Now Patricia and I will take your questions..

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 year. And second, I’d ask you to refrain from multi-part questions. Operator, let’s please open it up for questions..

Thank you. At this time, we will begin to question-and-answer session of the conference.[Operator Instructions] First question is from Toni Sacconaghi from Bernstein. Sir, you may ask your question..

A) what happened and B) while there should be some improvement next quarter because of less transaction and I gather the weather channel will be added into that division.

How do we think about software in 2016, should we be expecting a business that’s down low single-digit at constant currency again? And perhaps you can talk about kind of the forces that play both again what happened in terms of deterioration in the second half and how we should think about the forces that play in 2016? Thank you..

Sure thank you, thanks Toni. A few comments on software, so as we said in our prepared remarks, the deceleration third to fourth really was driven by this – by the mix shift and the continuation of the transaction closing rates that we saw in September.

So we talked about – coming out of September we talked about a slower rate of closing in some of our larger deals and that’s what we experienced as well in the fourth quarter.

And as I mentioned in my prepared remarks, because of the mix shift alone we see an improvement and as you point out the weather company another acquisitions by the way to the extent that they are – have software in them they will obviously bolster that growth rate. A few things, I think are important to note within software.

First, as we said in our prepared remarks and the phenomena is really no different in the fourth and what we’ve seen all year, our annuity business within the software business. So that’s about 70% of our overall software stream. Our annuity business continues to grow.

So that has a service in it, it has our subscription and support business in it as well, so that continues to grow.

And then outside of our largest clients and this is a phenomena that we’ve been talking about, outside of our largest clients where they don’t have as broad access to our software portfolio, we continue to see growth as well, both transactionally and they’re obviously part of the asset service stream.

Within the large clients as I mentioned earlier and as we talked about in our prepared remarks, we provide flexibility, it gives them – it gives our clients an ability now to manage their projects and they deploy maybe differently than they anticipated at the beginning of the year.

From my discussions with our clients, a lot of that depends on the visibility they have both of their demand patterns and the visibility they have to sort of the – kinds of projects they might have to implement in the near-term. So I don’t think that’s any different than what we’ve experienced in the past.

I would say that one of the things we look at closely, particularly with regard to the usage of our software and how it’s getting deployed, is our ability to maintain these renewal rates on our subscription and support. And our renewal rates around the world remain very high in the mid-90s globally. And if we look in the U.S.

where we had a weaker software transactional performance, actually our renewal rates in the U.S. are even higher than that, they are higher than they are in Japan, they are higher than they are in Europe, they are higher than they are in Australia.

So our renewal rates continue in a very good track and that suggests that our annuity business within software has some good growth prospects. But as we said in our prepared remarks again, just from the mix benefit of having more of that annuity mix in the first quarter, we will see an improvement.

And then as you noted the acquisitions will sit on top of that..

Thanks, Toni. We can go to the next question please..

Thank you. Our next question is from Katy Huberty from Morgan Stanley. Katy, you may ask your question..

On a high note in servers both mainframe and power, how are you thinking about growth rates in 2016 as you move into the latter half of the cycle and how might that influence gross margins? It looks like it had an intact to the fourth quarter? Thank you..

Sure. Your question actually cut off a little bit. I think you said, finishing at a high note in the fourth quarter, I’m going to assume that was the question, Katy. So, I’ll answer for mainframe and for power and how we’re entering 2016.

So first on mainframe, another very good cycle in mainframe, so as you know we announced that in the first quarter, the growth rates have been pretty consistent throughout, that we doubled in the first, growth in the second, good third quarter, again fourth quarter we finished at about 20% year-to-year of constant currency.

And the adoption rates are consistent with what we would expect. So for the full year the mainframe is up 35%. And as is typical in the mainframe cycle, margins in the announcement year tend to be a little bit lower. And we will see margin improvement as we get to the latter half of the – or the latter part of the mainframe cycle in 2016.

From a power perspective, well I’ll tell you, the power team has done a wonderful job of transforming a business. And I think it’s a really good example of how IBM transforms its businesses.

So since as we put in the prepared remarks we have not grown since 2011 and in 2015, we grew each of the four quarters in the power business, finishing the fourth at plus eight.

And I think what’s underpins that and what’s important to note is we continue to serve a decline in market for part of that Power business, the UNIX market is declining, it has been declining, but it’s still high value and it’s still serves a very important role in our clients environment and does some other most important works.

So it – continues to be an important market place.

But at the same time, the team has been able to reinvent the platform, make it relevant in the Linux space so we’re seeing very good Linux placements in Power and the applicability of that POWER8 platform in Cloud spaces for instance and running other ERP type missions has been a terrific boost to the overall growth rates.

And then keep in mind that we’ve also – the team is also put in play from a business model perspective, the OpenPOWER Foundation, which is an intellectual property play. So that will also boost margins.

So the Power, again the Power team has done a terrific job of repositioning a product which had a very strong acceptance and that’s delivering high value in a declining market space into now a business that has grown four quarters in a row with a lot of leverage from here as our OpenPower consortium members start to deliver their own systems into that Linux space..

Thanks, Katy.

Rovena, can we go to the next question?.

Thank you. Our next question is from Mr. Tien-tsin Huang from JPMorgan. Sir, your line is open..

Great. Thank you. Good afternoon. Just wanted to ask on services if we can expect some improvement in growth in 2015 given the backlog chime you talked about that Martin. And also your confidence in services margin, expansion in 2016, because, if I heard correctly, no workforces were down saying in the fourth quarter.

Is that a signal that you’re on a good place with your offshore delivery right-sizing? Thanks..

Thanks Tien-tsin. So a couple of comments and I’ll disaggregate, I guess I’ll talk about GTS and GBS separately. So first, we did, as we said in our prepared remarks, we finished with a very good backlog growth of 1% ex-currency. Now that is $121 billion book of business.

So even, 1% growth is a lot of additional business that we feel quite good about the backlog, we’re entering with – and even when we look at the signings progress throughout the year, for the full year GTS, global technology services grew signings and GBS grew signings and in fact GBS exited fourth quarter with double-digit signings growth in the quarter.

So a very strong return to growth which put them into growth for the year, so from a backlog perspective and from a relevance of our offerings perspective, I think those signings numbers suggest that there are substantial deals out there, there are deals that play well to – our high value view and our ability to move our clients into hybrid environment and our ability to continue to grow – to continue to grow that backlog.

From a margin perspective in GTS, keep in mind that at a total GTS level we have very good margins. But we also have a maintenance business in there which has a lot of margin within it. When you pull out the maintenance margin and just look at DSO business, we still see opportunities to expand margins in that area.

And keep in mind, with regard to workforce rebalancing while we didn't have a charge in the fourth. We’ll continue to remix our skills and we'll continue to move our work to where global delivery centers can best do it. So that will not be a year-to-year impact in the first quarter.

But we will continue to remix skills and so as we bring on new contractors as an example and we've seen a lot of contract growth in Europe, we've seen a lot of contract growth in Asia. We will have an opportunity, we do have an opportunity to continue to expand our margins as we globalize some of that work.

Our movement of work into global delivery centers, it varies by geography and quite frankly its varies by country. In the U.S. we were in pretty good – we are in a pretty good spot here but where we sign new contracts obviously we take on a lot of people and we've got to figure out how do we optimize those delivery platforms.

And then in GTS as we've talked about we continue to work our way through a transformation towards higher value and what we see from the margin perspective is that the work we're doing to digitize our clients front office the work we're doing to provide a cognitive solution to our clients which is just starting now to roll into our consulting results.

That is all high margin and we see a lot of opportunity continue to generate those kinds of margins. In the work we're transitioning out of, that is pretty price competitive and then and so we're seeing declining margins but more importantly as we shift the resources and as we move those skills there is a productivity hit to the overall business.

So we're not relying on a dramatic net back if you will and our GBS margins going into the year but we do see a very good opportunity on the other side as we finish that transition..

Thanks, Tien-tsin. Let's go to the next question please..

Thank you. Our next question is from Brian White from Drexel. Sir, you may ask your question..

Yes, Martin, if we look at the different business segments in 2016, what businesses do you think have an opportunity to actually grow in constant currency and what businesses have an opportunity to expand margins in 2016? Thanks..

Sure, Brian thanks.

So a few comments, I think what we're going to see in 2016 is really the phenomena that we’ve been talking about now for a couple of years which is our clients are investing heavily in these growing areas of cloud of analytics, of mobile, social and security and as you saw in the full year of 2015, we grew that 26%, right now it’s 35% of our business.

So our client discussions today are still built around those that shift into those parts of the business. We’ll also see a continued discussion around parts of a business where they’re focused on us delivering productivity to them, now productivity to your clients means reduced revenues for us, but that’s the phenomena we’ve been in.

And so when we look at 2016, I think we'll see a continuation of both of those. As you know in 2015, we ended the year with a revenue base it was about 1% smaller than it was the prior year given those two dynamics strong growth in the strategic imperatives and delivering productivity to our clients in the rest.

So that probably – that trend is what we’re going to see now the mix obviously be different the strategic imperatives are representing a larger part of the business than they did in then where they started in 2015, but that trend will continue.

On a segment-by-segment basis, GTS has grown now three quarters of the year and as I said with pretty good backlog growth and we think that trajectory continues to hold. GBS improved in the fourth, relative to the third, so a sequential improvement in its year-to-year growth rate.

But we’re not relying on that bouncing back rapidly as we know we’re going through a transition there, and we want to get through that transition as rapidly as possible. But having said that, about half of their business now is in strategic imperatives, but half isn’t so we’re going to continue that transition.

The systems business will continue to see momentum as I mentioned in the power business where the team has done a terrific job of repositioning the platform. But the mainframe is coming into the back half of the cycle and so we won’t see the same growth levels that we saw.

And then software as I mentioned in response to the prior question that transactional mix will not play as bigger role in the first quarter as it did in the fourth and so obviously we’ll see how we transition through the year, but bolstering that software growth will also be some of the acquisitions.

So I think there are discussions with our clients, as I started with the discussions with our clients are going to reflect these two halves of our business which is discussions around moving to the future and the other discussion are helping them drive productivity..

Thanks, Brian.

Rovena, can we go to the next question please?.

Sure, Ma’am. Thank you. Our next question is from Steve Milunovich from UBS. Sir, you may ask your question.

Great, thank you. Could you talk a bit about free cash flow you said free cash flow will follow profit.

Does that literally mean you expect about $13.50 in free cash flow per share? I would think maybe not given that you had a $3 billion positive swing on the cash taxes and maybe you could go through cash taxes, pension, working capital, CapEx, some of the swing factors and where you think that I’ll come out on free cash flow this year..

Sure, Steve, and you’re right. We – what my reported remarks or my remarks we’re not intended to say, we’re going to do $13.50 in free cash flow per share. That was not the intent. But what I – we do want to say is that our free cash flow performance in absolute terms will follow the profit performance.

So a few comments, first we did have a year-to-year reduction in our cash taxes. But keep in mind that in 2015 our cash tax rate and our book rate were pretty similar. And so the relationship you see in 2015 is the right relationship, yes, year-to-year there was a benefit, but that’s because we had a very high cash tax rate in 2014.

So the 2015 relationship, which we – where we produced 98% of our debt net income was the realization per free cash flow is the one we’re talking about for 2016 as well we see that relationship. Now within that – the guidance that $13.50 – at least $13.50 we translate the free cash flow kind of in the $11 billion to $12 billion range.

And within that we have assumed some growth in CapEx for the year, as we continue to drive our cloud platform and our investments in there and our system, our services business. The operational performance that’s embedded within that obviously will have an impact. Then the rest and I’ll give you a few pluses and minuses here.

The rest kind of translates to basically flat. So really is the profit performance. So we’ll have slightly higher income tax payments as an example. We’ll have a less – a little bit of a less benefit of working capital. We have slightly lower pension payments, we have slightly lower workforce rebalancing payments assume.

So you put all that together and what I meant by free cash flow will follow profit is that free cash flow at $11 billion to $12 billion of free cash flow roughly translates to what we see in profit performance at that at least number. Bear in mind that, as we talked about on profit.

There’s about $1.3 billion impact of profit year-to-year from currency. And while the dynamics are a little bit different in cash flow that does translate roughly to the impact to free cash flow as well. So what you’re seeing in here in our guidance, which was a big impact from currency, is also a big impact in free cash flow for next year..

Thanks Steve.

Rovena, can we go to the next question please?.

Thank you. Our next question is from David Grossman from Stifel Financial. You may ask your question sir..

Thank you. So Martin, if I read the press release right, it said the strategic imperatives decelerated through about 16% growth year-over-year at constant currency. That’s obviously down from where you were in the first three quarters.

What were the primary components driving the deceleration? And what would be a reasonable target for growth in those strategic imperatives in 2016?.

Sure. Thanks, David. So a couple of things, as we said for the year we were at – we had very good growth of $29 billion. What we saw in the quarter was about $1.7 billion sequential increase in strategic imperative revenue. And that’s better than it was first to second, better than second to third.

So we did see kind of a typical seasonal sequential improvement in our strategic imperatives from third to fourth. When we talk about our strategic imperatives at Investor Day, we said they’ve been growing kind of in this uncanny rate of 18, 18, 19, 19, 19 very steady over the last few years.

And we said that our model assumes that we will transition to those areas at a similar kind of rates, I think we had 15 to 19, think of it as high-teens if you will. As we went through this year and as we said at the beginning, first quarter we printed over 30, and as we said we’re not relying on that throughout the year.

So we finished the year on a full-year basis, now relative to that 15 to 19 range, where we finished at 26% growth year-to-year. So we’re ahead of what we expected. We’re transitioning into those areas faster than we had expected back at Investor Day. And so we finished at 35% of the revenue streams.

And again in Investor Day, we said by 2018 we get to about 40 or at least 40. We think we’re in good shape to make it there, but 26, we’re pleased with, because we’re transitioning faster than we have over the last four years or five years. And again, it’s on a higher base.

So we’re pleased with the progress we’re making and continuing to grow these strategic imperatives..

Thanks, David.

Can we go to next question please?.

Thank you. Our next question is from James Schneider from Goldman Sachs. You may ask your question..

Jim, we can’t hear you if you are on mute..

Thanks for taking my question.

Can you hear me now?.

Yes..

We can..

Okay, sorry. Just in terms of the software performance during the quarter, can you maybe talk about the impact and quantify the impact you saw from the ELA, because there is no weakness in Q4.

And then can you maybe give us some kind of bracketing for 2016 about what impact you expect from ELAs to the extent you can see it going forward over the next couple of quarters?.

Well, sure, Jim. So a few things, one, and I’m not saying you implied this, but ELAs are very – ELAs are Enterprise License Agreements for all of our listeners.

ELAs, Enterprise License Agreements are very powerful – a very powerful way for our clients to consume our software, gives them broad access to the portfolio we offer like our middleware platform, which is quite valuable to them as they think about their hybrid cloud environment.

So we do more ELAs, more Enterprise License Agreements, we did more in 2015 and we did in 2014. We haven’t seen a dramatic change in the length of time our clients commit to the platform for those.

As I mentioned on an earlier question, our renewal rates for the subscription and support that underpins their deployment of those continues at very high rates. So the ELA structure is one that we think is – and our client think as a terrific way to consume our portfolio.

Now parts of our portfolio will continue to – will continue to be consumed on an EL basis – ELA basis. And as you saw us, maybe you saw us, earlier this year we moved parts of our middleware portfolio into our cloud business. That’s really a reflection of the importance our middleware places in these hybrid cloud environment.

So some of that could get start to get consumed in different models from ELAs that – maybe they get consumed on a more individual basis, maybe they get consumed on an as-a-Service basis, but the ELA construct remains quite powerful.

As I noted earlier, the big difference we saw was in the breath of the access that some of our clients have and they – because they don’t have the visibility they need to their demand environment or because they don’t have visibility to the most immediate need they might have, they’ll move around the deployment of those licenses into different areas.

But again with our renewal right staying high, we know that they are still consuming those. So the ELA construct quite powerful. It’s the right way I think for our clients to consume our software and the right way to give them flexibility to deploy it..

Thanks, Jim.

Can we go to the next question please?.

Thank you. Our next question is from Lou Miscioscia from CLSA. You may now ask your question..

Hey thanks. Hey, Martin, Lou here.

So just sticking on the software, if you go back to the second half of 2014 when the flexible pricing started to hit software growth in a meaningful way and then obviously it hit it all through 2015, when are we going to get the grandfathering position where we can get half the flexible price in which – I know that when we talked about this before you’ve said that it was the right thing to do for the customer.

But customers want everything for free and I assume you are not trying to move through an open source type of model.

So I’m just wondering when we can get passed and what else you can do to try to get software growth in your most profitable area in the company?.

Sure, Louis. So a couple of things that I’d say. First, this is the right thing to do to offer our clients flexibility as they try to get insights into their demand environments and as they try to deploy their projects. So it is absolutely the right thing to do.

We felt that way when we started talking about, and I think it’s still the right thing to do. Again, what’s important to us is that they commit to the platform, number one.

Number two that they are actually deploying the software and we see that as I mentioned in our renewal rates where as long as our renewal rates are staying high we know they’re using our software. So all of that is good for the model. And in the long-term, we think that we will benefit from all this.

Now, bolstering our software growth this year and our software performance this year will be some acquisitions we made, so those will certainly help as we go through the year, but this is – again, it’s the right thing to do for our clients.

And as we continue to move our software into a broader and broader ecosystem, we’ll continue to see growth in those clients that that don’t have access to so much, so that will continue. But from an overall perspective with the acquisitions, which will help a bit, and again our renewal rates staying high.

Over the long-term, this is a terrific business for us..

Thanks. We’ll go to the next question please..

Thank you. Our next question is from Keith Bachman from Bank of Montreal. Sir, you may ask your question..

Hi, many thanks. I also wanted to focus on the software area. I think on the last call you mentioned that Software-as-a-Service was a small part of your existing portfolio, I think around 5% of revenues.

As you think about 2016, could you address how you see the growth of as-a-Service impacting your software both revenue growth and profitability? And more specifically, I don’t think we’ve gotten a specific answer on can you grow software in 2016 and will your margins be up down or flat? Thank you..

Sure, Keith. So, a few things. So, our SaaS revenue overall as a percentage of our total software business is still fairly small percentage, but it is growing and is growing quite well and we are always releasing new SaaS and acquiring new SaaS opportunities. So we see continued very strong growth in our SaaS portfolio into 2016.

Now, it’s small and so relative to the total, it’s not going to drive a ton at the top-line, but over the long-term this will be a good economic model for IBM. Additionally, the new businesses we’re building have this strong SaaS component or as-a-Service component to them. So, Watson for instance is an as-a-Service offering.

Our new Watson Health business has built heavily on an as-a-Service offerings. And other as well are moving into much more heavily weighted to our as-a-Service. So the as-a-Service fees, which is part of our overall as-a-Service exit run rate $5.3 billion has pretty good growth in it.

In terms of profitability, we talked in our prepared remarks about continued margin expansion in 2016. And part of that quite frankly is going to be driven by additional volumes on our as-a-Service platform, that’s both Software-as-a-Service, infrastructure-as-a-service and our platform-as-a-service, our Bluemix property.

So we will see as those revenues climb, we will see profitability in fact margin expansion out of those – excuse me as-a-Service properties. Within SaaS specifically, our margins and software are quite high while the move into a SaaS model is not accretive to margins in software.

It’s not a big impact and it is accretive to margins and total IBM because we don’t have a lot of these SaaS properties. So, in 2016, we see margin improvements across our as-a-Service properties. Margins within SaaS specifically are accretive to IBM and we see that continue in 2016..

Okay. Thanks.

Rovena, can we please take one last question?.

Yes, ma’am. Thank you. Our last question is from Amit Daryanani with RBC Capital Markets. Sir, you may ask your question..

Thanks. Thanks for taking my question guys. I guess – Martin just in the strategic imperatives revenue stream that you guys have, you absolutely have a fair bit of scale over the margin right now, especially in Analytics and Cloud.

Can you explain and talk about what do you think the margin and the free cash flow profile of the strategic imperatives assets is versus overall IBM, I think that would be helpful for people to understand? And then is the mix of strategic imperatives, software service and hardware change a whole lot from the last analyst have you guys talked about it?.

Sure, Amit, a few things. I will answer the strategic imperative revenue part of your non-multipart question first. So on the strategic imperative revenue, I guess, the margin profile of that for the bulk of that business, which is focused on again Cloud or on our Analytics business, for a lot of that it just looks like our existing margin profile.

So, where we’re selling our hardware, where we’re selling our software in for our clients to build an Analytic solution or for them to build their own Cloud then the margin profile looks like IBM’s. And as you know IBM is a high margin solution company. For the as-a-Service component of that, the margins are a little bit lower than that.

Now a lot of that is because we don’t yet have the scale that we’d like or is it’s that differently we’re investing very heavily in order to drive that platform into our clients’ environment. And so, we’ll see margin improvement as we go into 2016 as we add more scale or take advantage if you will of the investments we have made.

So in total the strategic imperative revenue over time will not have a dramatically different margin profile than what we see today.

Again, because most of it has what is our margin profile today and the rest will continue to improve margins as our investment rates or as our revenue growth rates meet up and the capacity meets up with the investment rates.

Relative to the mix, our software mix within our strategic imperatives is still at about twice as high as the rest, if you will, the rest of the business. So as you know in across services, hardware and software, if you look at the mix of those, the software piece in the strategic imperatives twice as high as what we see in the rest of the business.

Now, it is down a little bit year-to-year as we in any given year or any given quarter, we have a different mix. We have certain programs that roll in, but it remains on – in total at about twice as high a mix as what we have in our core business. Thanks, Amit..

So let me just wrap up the call with a couple of comments, first, and I think we have been clear about this. We manage our business for the long-term. And in 2015, we made a lot of progress, a lot of very good progress in transforming the IBM company.

You see this not only in the growth rate in the strategic imperatives, but importantly you see it in the big steps we’ve taken to address some of these new opportunities. We had an opportunity last year to invest quite a bit of capital. We bought 14 companies. We will continue to be acquisitive.

So with the returns we’re seeing on our investments, we are more and more encouraged that the strategy is right and that we’re executing to transform IBM. In 2016, we’ll have our Investor Day in February. We’re going to talk more about both the transformation of IBM.

We’re going to talk about how we present their information to the financial community to help understand IBM, particularly as we emerge as a cognitive solutions and Cloud platform company. I think it’s very important to understand what IBM is emerging as and again we’ll talk about that in our Investor Day.

So, thank you very much for joining the call today, and we’ll see you in February..

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