Patricia Murphy – Vice President-Investor Relations Martin Schroeter – Senior Vice President and Chief Financial Officer.

Katy Huberty – Morgan Stanley Wamsi Mohan – Bank of America Merrill Lynch Amit Daryanani – RBC Capital Markets Tien-tsin Huang – JPMorgan Toni Sacconaghi – Bernstein Lou Miscioscia – CLSA Brian White – Drexel Hamilton Steve Milunovich – UBS Joe Foresi – Cantor Fitzgerald David Grossman – Stifel.

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

Thank you. Good afternoon, good evening, good morning, depending on where you are. 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.

So with that, I’ll turn the call over to Martin Schroeter..

Thanks Patricia. As is typical in January, I’ll start out with some top-level comments on the quarter and the year, discuss the details of the quarter, and then conclude with our view of 2017. In the fourth quarter, we delivered revenue of $21.8 billion, operating net income of $4.8 billion, and operating earnings per share of $5.01, which is up 3.5%.

There are significant opportunities and shifts in our industry, and we believe that to be successful with enterprise clients, you need to bring together cognitive technologies on cloud platforms, that create industry-based solutions to solve real-world problems.

So with that very brief context around our point of view, let me comment on what we achieved in the full-year of 2016. We made progress in building new businesses and creating new markets and continued to deliver strong results in our strategic imperatives. We invested at a high-level, and remixed our skills to address these new opportunity areas.

We also continued to innovate in the businesses that we have traditionally provided to our clients. We returned capital to our shareholders and we achieved the earnings and free cash flow expectations we set last January, with $13.59 of operating earnings per share, and free cash flow of $11.6 billion, which is 97% of GAAP net income.

So we did what we said we’d do, in a year not only with a lot of change in the industry, but also a year with a number of macro conditions and events, particularly in countries that are meaningful to our results.

I’ll cover our expectations shortly, but right up front I’ll say that we are exiting 2016 in a stronger position than we entered it and that is reflected in our 2017 guidance. Looking at some of the highlights of the fourth quarter, we had terrific growth in cloud, with revenue up 33%.

We also had good growth in our analytics, security, and mobile solutions. We’re continuing to grow our substantial technology services business, reflecting the work our clients are demanding to help modernize and transform their infrastructures.

And we had really good performance in our z Systems business, reflecting the value of differentiated, high-value solutions running important parts of our client’s infrastructure. There were some macro challenges in the quarter in certain countries like Brazil, the UK and Germany, as well as the impact of a stronger dollar.

As always my comments throughout will be based on constant currency. Our results for the quarter and the year reflect the success we’re having in our strategic areas, and the investments we’ve been making to drive that shift. We delivered 14% revenue growth in our strategic imperatives for the year, led by cloud.

We finished the year with $13.7 billion of cloud revenue, which was 17% of IBM’s revenues. Our strategic imperatives, together generated $33 billion of revenue in 2016, and now represent 41% of our revenue.

To put this in perspective, when we first established the strategic imperatives, we said they’d grow to $40 billion, and represent over 40% of our revenue by 2018. The growth we achieved in 2016 keeps us ahead of track to the $40 billion. In fact, a growth rate of 10% to 11% from here gets us to the $40 billion in 2018. We’re moving into a new phase.

The debate about whether artificial intelligence is real is over, and we’re getting to work to solve real business problems. As we move into this new era, it’s important to understand what enterprise clients are looking for.

They need a cognitive platform that turns vast amounts of data into insights, and allows them to use it for competitive advantage. They need access to a cloud platform not only for the capability, but for speed and agility. And they need a partner they trust, and who understands their industry work and process flows.

This is where we’re clear and confident about our point of view. Yes, we have world-class cognitive technology, but that’s table stakes. We are building datasets by industry that we either own, or we partner for.

Importantly, we’ve designed Watson on the IBM Cloud to allow our clients to retain control of their data and their insights, rather than using client data to educate a central knowledge graph. And we’re using our tremendous industry expertise to build vertical solutions and train Watson on specific industry domains.

We are amassing these capabilities, because you need more than public data and automation algorithms to solve real problems like improving healthcare outcomes or navigating the banking regulatory environment.

So in this new phase, data and the business model around data matters, industry matters and time matters and that’s why Watson is the AI platform for business. Let me give you a couple of examples of the progress we made in 2016, bringing together cognitive, the IBM Cloud and our industry expertise.

Watson Health provides cognitive insights on our enterprise-grade Watson Health Cloud, and leverages broad datasets that we own, including 100 million electronic health records, 200 million claims records, and 30 billion images. We now have 7,000 Watson Health employees, including doctors, nurses, health policy experts and 1,000 data scientists.

We brought this together because you can’t change the way healthcare works, or work on curing cancer with public data alone. You need clinical data, payer data, images, all of which is private. You need the expertise of the leading oncologists and geneticists. And you need to do this work within a quality management system that is HIPAA-compliant.

So Watson Health was our first vertical. Late in the year, we launched Watson Financial Services, to provide targeted solutions, bringing together cloud, cognitive, industry and ecosystem capabilities. In the fourth quarter, we acquired Promontory, a leader in regulatory compliance and risk management consulting.

We acquired Promontory because you can’t help banks navigate regulatory environments by scraping the web or automating keystrokes. You need top industry specialists that understand the complexity and can train Watson to deal with risk management requirements that are specific to financial services, because who trains your AI platform matters.

So bringing together cognitive technology, private data, a cloud platform and industry expertise is what you need to do real work in the enterprise.

What is also becoming very clear is that as IT moves to the cloud and as business processes are delivered as digital services, it is essential they are enterprise-strength and that the transactions are trusted by all parties involved. That’s where the blockchain comes in.

It’s a technology that brings together shared ledgers with smart contracts, to allow the transfer of any asset, whether a physical asset like a shipping container, a financial asset like a bond, or a digital asset like music, across any business network. Blockchain increases transparency, auditability and trust.

It reduces risk, and it can drive tremendous efficiencies. Bottom line, blockchain will help to fundamentally reengineer business processes and improve outcomes. We’re building a complete blockchain platform and we have already worked with over 300 clients to pioneer blockchain for business.

Many are in financial services, to handle foreign exchange settlement, smart contracts, identity management and trade finance. Just last week, we announced securities clearing and settlement with DTCC. But the application for blockchain is well beyond financial services.

For example, we’re collaborating with Walmart to improve the way food is tracked, transported and sold to consumers across China, and with Everledger, who is using a cloud-based blockchain to track the provenance of diamonds and other high value goods as they move through the supply chain.

Here too, the data needed to improve food safety or track diamonds isn’t on the web. It’s private data, owned by enterprises, who want to work with a partner they trust. So in 2016 we built blockchain platforms and services, and in 2017 we expect to start scaling blockchain networks.

I’ll touch on a few more examples in the segment discussions, but first I’ll walk through our financial metrics for the quarter. Our revenue for the quarter was $21.8 billion, which is down 70 basis points. Over the course of the year, we’ve had growth in our annuity businesses, and some growth pressure in the transactional content.

In the fourth quarter, even with a seasonally higher transactional content and a little less contribution from acquisitions, our constant currency revenue performance was similar to third quarter. With the strengthening of the dollar, currency returned to a headwind.

In fact, with the change in rates since mid-October and the seasonal skew of our business toward the back end of the quarter, revenue was impacted by nearly $300 million. On a geographic basis, we had sequential improvements in both the Americas and Asia Pacific, while EMEA decelerated.

Performance by country would generally be what you’d expect, based on macro and geo-political trends. We’ve all read about various issues in countries such as the UK, Germany, Brazil, Russia, Turkey, and so our performance in these countries reflects that reality.

Some of these countries, UK, Germany, and Brazil for instance, have a meaningful impact to our results. Collectively, these 3 countries had over a one point impact on our revenue performance in the quarter. Others, like Russia, Turkey and Egypt were also a drag on our growth, though less of an impact given their size.

We had really good results in China. In fact, China grew strong double-digits in the fourth, which resulted in revenue growth for the full year. This strength was in the banking sector, where our largest clients are upgrading to our latest technology to continue to run their infrastructure.

I should mention that we also had good revenue performance in the U.S., where we returned to growth. Our gross margin reflects the impact of our investments, including the acquisitions we’ve made, and the mix to as-a-Service businesses that aren’t yet at scale.

Our expense overall is down 7% versus last year, and our expense-to-revenue ratio was down about a point and a half. This includes a 5 point year-to-year impact from the acquisitions we’ve closed over the last year, and a modest impact from currency.

Since early 2015, we’ve been talking about ramping the level of investment in the business in areas like cognitive and cloud. Our year-to-year expense dynamics reflect the fact that we’ve wrapped on that higher level of investment. We’re also seeing the yield from some of the workforce rebalancing actions earlier in the year.

As we’ve discussed in the past, some of this is being reinvested in other areas, including cost. Our expense dynamics also reflect the success we’ve had in rebuilding our intellectual property income base through IP partnerships.

This is a model we’ve developed for some of our high value technologies that are more mature, but not necessarily in a priority investment area for us. So it made sense to work with partners who will invest and build businesses around some of these software assets. It’s good for them and it’s good for IBM.

We license the intellectual property to these partners, resulting in IP income for us. They take on the development mission, drive future innovation, and ultimately expand the client base as they take the product to market. As we generate revenue from our own sales, we pay our partner a royalty for the development mission they’ve assumed.

As the partner expands their client base, they pay us a royalty because we retain ownership of the IP. So with this model, we continue to own the product and our revenue stream, but shift our spending profile to a more variable cost structure, while extending the life of these assets.

This is another way of monetizing our research and innovation, while allocating our resources to where we see our best opportunities. This quarter, our IP income reflects licenses for several software products and we have a pipeline that will continue into 2017. Our pre-tax margin in the quarter was down 20 basis points.

Our tax rate for the quarter reflects an ongoing effective tax rate just under 16% for the year. This is in line with the expectation we discussed at the beginning of the year, of 18%, plus or minus a couple of points. We generated $4.8 billion of operating net income in the quarter, which is up 1.5% and net income margin expanded by 60 basis points.

With a share reduction of 2%, our EPS of $5.01 was better by 3.5%. We generated $4.7 billion of free cash flow in the quarter and $11.6 billion for the year, which is 97% of our GAAP net income. We returned three-quarters of our annual free cash flow to shareholders through dividends and share repurchases.

So summing up the metrics for the quarter, we had strength in our strategic areas with a growing annuity base, an improving expense trajectory, PTI margin that was essentially flat, and net margin that was up, modest growth in operating earnings per share, and free cash flow realization and shareholder return for the year that was in line with our longer-term model.

Moving to our segments, Cognitive Solutions revenue was up 2%, and pre-tax income was up 1%. Our Solutions Software revenue was up, while Transaction Processing Software declined. Within Solutions Software, growth was again led by Analytics, including our Watson offerings such as Health, and Security.

We continue to innovate the Watson Platform and extend cognitive across our solution offerings. We saw strong SaaS performance, with double-digit growth again this quarter. Our Cognitive Solutions margin profile reflects our continued investment into strategic areas, including acquisition content, and the ramp in our SaaS business.

Let me talk about the progress we’re making in parts of the portfolio. In Analytics, we are helping clients move data to the cloud and deliver actionable insights from the data with our cognitive capabilities.

This quarter we introduced new offerings, like the Watson Data Platform, Watson Discovery Service and trade surveillance for Financial Services, spanning our core analytics platform, Watson platform, and industry platforms. Our Watson platform, which underpins our cognitive strategy, continues to gain momentum in the marketplace.

Natural language processing has long been at the core of Watson. Last quarter, we added new cognitive capabilities for conversation and the demand has been strong. We’ve seen significant growth in our API calls this year, especially around conversational services, where API calls increased 50 fold year to year. Let me give you an example.

In Latin America, Bradesco deployed a Portuguese solution based on Watson across more than 5,500 branches to assist employees in answering customers’ questions. Watson had already learned over 300,000 words in the Portuguese language, more than twice the number linguists say is necessary to be fluent.

But this isn’t just about language translation – this is about understanding business. Watson was trained to answer questions on over 50 of Bradesco’s retail products. And since going live in October, Watson is now helping to answer nearly 9 out of every 10 questions every day.

As I mentioned, we’re combining cloud and cognitive with industry expertise. In Watson Health, we are building scale and bringing real-world benefits to researchers and clinicians.

With our offerings across five areas, including oncology and genomics, government, life sciences, value based care and imaging, Watson is helping over 45 million people globally. Our oncology clients alone span more than 35 hospital systems. And with our acquisitions of Explorys, Phytel, Truven, and Merge, we have over 10,000 clients and partners.

Genomics is another area where we’re building scale. We announced partnerships with both Quest Diagnostics and Illumina, where both companies will leverage IBM Watson for Genomics, a new service that integrates Watson’s cognitive services into genomic sequencing applications.

Through partners, we will make Watson’s genomic analysis available to oncologists who treat 70% of cancer patients in the United States. In the area of Life Sciences, Barrow Neurological Institute is an example of where we’re seeing real-world benefits today.

Barrow reported using Watson for Drug Discovery to help identify five never-before linked genes associated with ALS, or Lou Gehrig’s disease. This work gives researchers new insights that will pave the way for the development of new drug targets and therapies to combat ALS.

Without Watson, researchers predicted the discovery would have taken years, rather than only a few months. We had growth in our Watson IoT this quarter where our clients are putting the power of Watson to work across the immense data pool created by the Internet of Things.

We launched new industry solutions targeting manufacturing and insurance and new collaborations with clients, like BMW. We more than doubled both the number of new clients and the number of developers on our IoT platform. We also had good results from our Weather platform. Here too, we’ve demonstrated our tremendous scale this quarter.

During Hurricane Matthew, our platform served as a critical resource for over 100 million people. Our platform delivered 350 million video streams over that week. Roughly 1.6 petabytes of data were delivered through a total of 141 billion API calls.

With weather information, you have to be able to deliver that kind of scale, particularly when recognized as the most accurate forecaster. Security also contributed to growth in the quarter, driven by areas such as data security and security intelligence.

We announced a major expansion of our incident response capabilities, including the industry’s first Cyber Range for the commercial sector, at our new Security headquarters in Boston. Cyber Range uses live malware, ransomware and other real-world hacker tools culled from the dark web to deliver realistic cyber attack experiences.

Clients learn how to prepare for and handle cyber attacks. And Watson for Cyber Security is providing insights on live cyber attacks to 40 clients, including as you would expect several large financial institutions and universities, who are participating in our beta program.

So for the Cognitive Solutions segment, we grew revenue and profit in the quarter, while we continued to embed cognitive into our offerings, scale our platforms, and build industry verticals. Turning to Global Business Services, our performance reflects continued declines in the businesses we are shifting away from, such as large ERP engagements.

From a line of business perspective, our consulting results were fairly consistent with our performance throughout the year, while application management decelerated. We continue to aggressively shift our investments and resources to our digital practices, and growth in our strategic imperatives accelerated to 19% this quarter.

Our cloud practice was up over 70%, mobile nearly 30%, and analytics was up 10%. On a global basis, we continue to build out our digital design agency, the IBM Interactive Experience, which now has more than 30 global studios.

In the fourth quarter, we announced a partnership with General Motors to bring the power of Onstar and Watson together to create the auto industry’s first cognitive mobility platform. Watson will learn the driver’s preferences, apply machine learning and sift through data to recognize patterns in their decisions and habits.

This information will allow brand and marketing professionals working with Onstar to deliver personalized interactions that directly impact their target audiences. This solution brings together our cognitive technology with IBM differentiated data such as the rich weather data and IBM iX’s industry expertise in experience and mobile design.

As clients are looking to create new business models with our cognitive technologies, our industry experts in GBS are helping them scale. This quarter we announced a new global Watson IoT consulting practice to help clients introduce IoT innovation into their businesses.

This will include 1,500 consultants, data scientists, and security experts with deep domain and industry expertise. We also announced that IBM MobileFirst for iOS apps can now be integrated with a broad set of Watson capabilities to increase the productivity and improve decision making for enterprise employees.

Turning to profit, GBS profit and margin were down. In the more traditional engagements, we continue to have some price and profit pressure. We continue to shift away from these areas to our digital businesses, adding nearly 8,000 resources to these practices in 2016. This impacts productivity in the near term.

We’re investing in enablement, hiring top talent, and bringing in new skills through acquisitions. Profit this quarter also continues to reflect additional spending in some accounts to deliver on our client commitments.

So for Global Business Services, we accelerated the growth in our digital practices, while managing a shift from the more traditional businesses, and we’re continuing to invest to build out capabilities and deliver on client commitments. Technology Services and Cloud Platforms revenue was up 2% year-to-year, and pre-tax income was up 4%.

Within this segment, our GTS revenue and backlog continues to grow. And this quarter we signed 16 deals greater than $100 million. We are modernizing our offerings and helping our clients move to the cloud. Our strategic imperatives for this segment were up over 35%, with cloud up 50%.

We continue to invest to build out our cloud infrastructure and we now have more than 50 cloud centers globally. In the fourth quarter, we acquired Sanovi Technologies, a cloud-native company that will enable us to deliver disaster recovery as a Service to clients undergoing digital and hybrid cloud transformation.

This adds to our leading resiliency capabilities. Looking at the lines of business, Infrastructure Services grew 3%. We built the IBM Cloud for the enterprise. Clients can mix bare metal servers, virtual servers, storage and networking to find the right balance for their workloads.

Our enterprise workloads on our public cloud continue to scale, contributing to growth in our as-a-Service content. Clients continue to turn to us for enablement of their new digital businesses. These digital businesses require IT infrastructure that is always-on, available-everywhere, and of course secure.

Clients often struggle with the complexity of sourcing and integrating IT services such as multiple cloud platforms, on premise data centers, and mobile environments.

As a Services Integrator, we help clients navigate the complexity of their hybrid cloud environment and deliver the needed end-to-end infrastructure services solutions in an integrated and unified way. For example, at a large Australian bank, we partnered with the client to build an IT architecture for the future.

We are helping the bank design, build and manage a flexible hybrid cloud infrastructure. This solution automatically brokers, deploys, integrates and orchestrates across multiple environments and services.

When the bank has a business need such as a new digital banking service, their IT is ready to support it immediately with a secure, integrated and optimized solution. We are the premier partner when it comes to hybrid cloud services integration. Our depth of capability and experience is unmatched in the industry.

Technical Support Services was flat year-to-year and continues to generate substantial revenue and profit for our model. We are seeing growth in multi-vendor services, leveraging our global scale and deep technical skills.

We’ve expanded our multi-vendor services into industries like banking, retail and healthcare, and into technologies including ATMs, mobile, point of sale, and Internet of Things. Think of this as providing wall-to-wall support for our clients.

Integration Software grew again this quarter as we continue to see momentum in our hybrid cloud integration capabilities and WebSphere Application Server, which grew double digits. We continue to scale our Bluemix platform, which has grown rapidly to become one of the largest open public cloud deployments globally.

Based on open standards, it features a robust set of high value services including our cognitive, weather and blockchain APIs. American Airlines named IBM as its cloud provider for greater enterprise flexibility and scale.

As part of the partnership, they will move enterprise applications to the IBM Cloud, leveraging a wide range of application development capabilities through Bluemix.

At Majesco, the global provider of core insurance software and services, we announced a five year partnership where we’ll contribute cognitive APIs, that will allow insurance companies to better analyze, price, and understand business risk using new data sources such as the weather and social media.

We’ll also add an engaging and personalized cognitive interface to their services. And one of the largest banks in Thailand tapped Bluemix to build a new secure blockchain network to transform their credit approval process. Turning to profit, gross margin is down 1.4 points.

Infrastructure Services margins were flat year to year, but Technical Support Services and Integration Software margins declined. In TSS we are shifting more of the business into multi-vendor services and in Integration Software we are shifting more capability to SaaS. This is impacting margins in the near term.

The IP partnerships are a headwind to gross profit margins in Integration Software, though a tailwind to pre-tax margin this quarter. Pre-tax profit for the segment is up, with margins expanding 40 basis points. We continue to focus on investing in our strategic areas, while innovating and driving productivity in our more traditional businesses.

So for Technology Services and Cloud Platforms, we grew backlog, revenue and profit in the quarter, with continued strength in our hybrid cloud capabilities across services and software. These results reflect our success in modernizing the services that we provide to our clients.

Our Systems revenue reflects growth in z Systems, offset by declines in Power and storage as we continue to address shifting markets. Systems gross margin was up year to year due to both improvement in z margins, and the relative strength in that higher margin business.

In z Systems, we delivered 4% revenue growth, double-digit growth in MIPs, and we expanded our margins. These results reflect our continued success in driving innovation in our core systems.

The mainframe is optimized for mobile and security, and is constantly being redesigned to drive new workloads, including instant payments and the emerging blockchain. Eight quarters into the cycle, we added 8 new clients in the quarter, 29 for the year and 80 since inception.

New client adoption at this stage in our cycle further validates our clients’ perceived value and their ongoing commitment to the IBM platform. Clients are investing heavily to meet the demands for future growth. I mentioned earlier the strength we had in China.

We closed significant z Systems deals in the quarter, including two large Chinese banks migrating their mainframe install base to our latest z13 technology. And in Europe we are helping our clients manage new requirements in the rapidly evolving area of financial services modernization. We had four wins in the quarter on instant payments.

Given the critical nature of the European financial services backbone, TARGET2-Securities, or T2S, has been deployed on IBM z Systems to provide the necessary reliability, scalability and IT security. Overall, the mainframe continues to deliver a high value, secure and scalable platform that is critical in managing our clients’ complex environments.

Our Power performance reflects our ongoing shift to a growing Linux market while continuing to serve a high value, but declining, UNIX market. Linux workloads continued double-digit growth, and faster than the market, while the traditional UNIX base declined.

We have been shifting our platform to address Linux, and with fully expanded Linux offerings, our Power-on-Linux represents over 15% of our overall portfolio. Supporting this is our success in HANA on Power. The Power platform is critical to the workloads a cognitive world will demand. And in the fourth quarter we saw this in the U.S.

Department of Energy’s deployment of hundreds of IBM’s OpenPOWER servers. When complete, these two supercomputers will be among the world’s largest scientific and AI computing systems. Storage hardware was down 10% this quarter, which reflects the shift in value towards software-defined environments.

Storage revenue declines were mainly driven by midrange and high-end disk. However, we are now benefitting from a full suite of all flash array offerings and this portfolio grew double digits in the fourth quarter.

We also continued to see double-digit revenue growth in Software-Defined Storage, particularly in our Spectrum Suite and Cloud Object Storage offerings, which is not reported in our Systems segment. Storage gross margins are down, as hardware continues to be impacted by both volume and price pressure.

So for Systems, our revenue and gross profit performance were driven by growth in z Systems, offset by Power and Storage declines. These results reflect the reinvention of our core systems for work in a new era of computing. We have optimized our systems to drive new types of workloads like blockchain and instant payments.

We’re expanding our footprint, building new capabilities, and solving new types of problems for our clients. And though we are facing some shifting market dynamics and product transitions in both Power and Storage, our portfolio overall remains optimized to address the demands of an era of cognitive and cloud computing.

So now let me touch on our software performance across our segments. Our total software revenue was over $7 billion, up 1%. Software was up 1% for the year as well.

From a business area perspective this quarter, we had growth in Cognitive Solutions and Integration Software, while Operating Systems continued to be a drag, in line with the longer-term secular trend. Software annuity revenue was up mid-single digits, led by our SaaS offerings.

Our software transaction revenue declined mid-single digits, which is a significant improvement from the performance in the first half. Given the seasonality in our software business, transactional revenue has a bigger impact on our total software performance in the fourth quarter.

So moving on to cash flow, in the quarter, we generated $5.6 billion of cash from operations, excluding our financing receivables. We invested $900 million in CapEx, and generated $4.7 billion of free cash flow. For the full year, we generated $15.3 billion of cash from operations.

We invested $3.7 billion in CapEx this year, with over a $1 billion in support of our cloud and Solutions businesses, as well as a significant portion going to support our services backlog and our upcoming hardware cycles.

And so we generated free cash flow of $11.6 billion, and as I mentioned earlier, our cash realization remained strong at just over 97% of GAAP net income, consistent with our longer-term model of realization in the 90’s.

So, our cash performance is right in line with our profit levels as we talked about all year, and includes significant cash payments related to the workforce rebalancing charge taken earlier in the year, as well as lower cash taxes.

We did see an uptick in our working capital as we closed the year, which we attribute to timing and mix of substantial transactions in December. Looking at uses of cash, we continued to strengthen our portfolio by investing $5.7 billion in acquisitions. We’ve acquired 15 companies in 2016, including three in the fourth quarter.

The acquisitions added to our capabilities in cognitive and analytics, cloud and security, and significant transactions included The Weather Company, Truven Health, Promontory, and three digital marketing agencies.

Over the course of the year we’ve returned almost $9 billion to shareholders including dividends of over $5 billion and 3.5 billion in gross share repurchases. We bought back over 23 million shares, reducing our average share count by just under 2.5%, which is in line with our longer-term model.

At the end of the year, we had $5.1 billion remaining in our buyback authorization. Moving on to the balance sheet, we ended the quarter with a cash balance of $8.5 billion. Total debt was just over $42 billion, of which about two-thirds was in support of our financing business.

The leverage in our financing business is seven to one and the credit quality of our financing receivables remains strong at 52% investment grade, a point better than September. I will come back to a change we’ll be making to the structure of our financing business starting in 2017.

Our non-financing debt of $14.3 billion was $2 billion lower than September, resulting in a non-financing debt-to-cap of just under 50%, five points lower than September, and more importantly five points lower than a year ago.

Our debt-to-cap ratio was impacted again this year by a reduction in equity due to pension re-measurement, a $1.6 billion reduction to equity, or about three points to the ratio. Looking at our pension plans, as you know the U.S. plan has been frozen for some time, and the asset mix reflects that, with a relatively low risk, low return profile.

The result of that is low odds of any required funding in the U.S. regardless of the interest rate environment. Our funding levels remain solid with the U.S. and worldwide tax-qualified plans at 102% and 98% respectively, a modest increase from last year.

Information on the performance of our retirement-related assets, and return and discount rate assumptions at year-end are in our supplemental charts. Importantly, our balance sheet continues to have the strength and flexibility to support our business over the long term. So now let me spend just a minute on our financing business.

As part of our own transformation, we saw an opportunity to drive some operational benefits by changing the structure of our financing business. First, let me say that the structure of the Global Financing segment that we report is unchanged. We have reorganized our client and commercial financing business as a wholly owned subsidiary, IBM Credit LLC.

This combined corporate structure will, over time, meet its funding requirements by issuing debt directly to the market. This will drive operational benefits by consolidating the operations of our financing business. We will issue debt directly out of the new entity, and expect the entity to be able to access the capital markets later this year.

And, we will increase our financing business leverage from seven to one to nine to one, which represents an increase of about $600 million in Global Financing debt.

But as I said, our Global Financing segment is unchanged, and will continue to include our client and commercial financing business as well as our hardware remanufacturing and remarketing business. So let me wrap this up. We have a very clear point of view on what it takes to be successful with enterprise clients in this new era.

I’ll shorthand it as cognitive, plus cloud, plus industry. And what differentiates IBM is the ability to bring all three together, to change real business processes and outcomes. Enterprise clients rely on us to help them run their processes. We have the relationships, we know their process and workflows, and importantly, we have their trust.

This incumbency positions us very well to take our clients to the new era. In 2016 we continued to make a lot of progress in the transformation of our own business. We had strong growth in our strategic imperatives, cloud, analytics, security and mobile. These offerings generated $33 billion in revenue, and now represent over 40% of our revenue.

And they’re high value offerings, with a gross margin that raises overall IBM. We also invested at a high level, through organic investments, acquisitions and partnerships. In 2016 we spent nearly $6 billion in R&D, nearly $4 billion in capital expenditures, and nearly $6 billion to acquire 15 companies.

We’re amassing a unique set of assets to build our cognitive solutions and cloud platforms, like the digital assets of The Weather Company, healthcare datasets from Truven and risk and compliance experts of Promontory.

In 2016 we continued to remix our skills to new opportunities, while continuing to deliver innovation in our more traditional areas, like positioning z Systems as the ideal platform for blockchain, or Power for cognitive, or utilizing our intellectual property partnerships to extend some of our software assets.

So we’ll take all of these capabilities into 2017. Even recognizing the shifts in our industry, some country-specific challenges and opportunities, and some macro effects of currency and potential tax reform, as I said up front, we feel that we’re exiting 2016 in a stronger position than we entered it. This confidence is reflected in our view of 2017.

To simplify, we expect to stay on track in our strategic imperatives. We’ll continue to invest at a high level, though as you saw in the fourth quarter, after ramping investment from 2015 through late 2016, we’ve wrapped on that higher level.

And we expect to grow our pre-tax income, and while there are a number of scenarios for tax, in all cases we expect tax to be a year-to-year headwind to our book rate in 2017. Put it all together, and we expect to deliver Operating EPS of at least $13.80 in 2017.

If you remember the first quarter of last year, we had a few larger items in our earnings, but they offset at the net income level. That first quarter was about 17% of our 2016 operating EPS. We expect a benefit from discrete tax again in the first quarter of this year, though smaller in size.

And like last year, other actions will offset some portion of the benefit. With this, we expect a similar skew for 2017, with about 17% of the full year expectation of $13.80 in the first quarter.

Looking at cash flow for the year, we expect free cash flow realization in excess of 90% of GAAP net income, and we’ll return 70% to 80% of our cash flow to shareholders, both in line with our longer term model. Bottom line, we feel good about the progress we made in 2016, and our prospects for 2017. And now, we’ll 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 the full year. And second, I’d ask you to refrain from multi-part questions. So let’s please open it up for questions..

Thank you we will now begin the question-and-answer session. [Operator Instructions] Our first question is from Katy Huberty with Morgan Stanley. Please go ahead with your question..

Thank you, good afternoon. Just quick clarification and then I have question.

The clarification is just it would helpful if you gave a little more insight as to what you’re expecting in terms of the range of outcomes for the tax rate both normalized rate and how much discrete items could be in the year and then similar for IP income just because those were so significant in 2016? And then as it relates to my question which is on Watson, from the outside it seems this business gets pretty significant share of the press, but not contributing to revenue.

Do you have visibility at as to when we should expect an inflection in revenue recognition from Watson, or should we just not think about this as a contributing factor or moving the needle in our models over the next couple of years?.

Okay, thanks Katy. A couple of things, on tax when we look at, as I in the prepared remarks, we do see tax as a headwind year-to-year, but remember we had last year a $1 billion, we won a tax case in Japan, so over $1 billion, which was in last year. That drives, by the way the bulk of the year-to-year headwind.

On a rate basis we finished this year we said 18 plus or minus 2, and we finished kind of at the bottom end of that range for the full year on an operating base obviously with on all in base with that Japan benefit from the first quarter and there it’s much lower, but we finished at the bottom end of that range.

When we look at 2017, as I said in the prepared remarks all the scenarios point to a headwind. We’re right now thinking it’s about 15 plus or minus 3, and the reason we widened the range is because we are getting ready for tax reform here in the U.S.

We don’t know yet what that looks like, we read the same things you do, but we are going to start now to prepare for tax reform, so we’ve widened the range this year to 15 plus or minus 3. That doesn’t have discretes in it.

On IP income as we said a number times we are trying to rebuild that base of business, it’s always been part of our income stream, it is a business where we’ve now had fair bit of success in rebuilding it and while we’re not relying on a big growth year-to-year, we do have in that particular line.

A lot of this is already done quite frankly because we have these agreements in place that pay us royalties. And then we have a pretty good pool of opportunities that could get this back to again the same level that we printed this year. Again we’re not relying on that to within our guidance.

Within our guidance I’d say we could be down year-to-year little bit. But again a lot of this is already done and we have a good pool of opportunities to drive IP again for what will be what 18 or 19 years of doing this. So we got, I think, a pretty good track record.

And then on Watson, Watson is in and you can see it in the Solutions Software business which accelerated. Again Watson, our Solutions Software is what’s being – or Watson is what’s driving that.

Now Watson is a silver thread, it runs through the platform, it runs through Watson Health, it runs through Watson IoT, it’s in security now, right Watson is embedded in security.

And as we announced at the end of last year at Watson Financial Services, we will now embed the regulatory expertise of Promontory into Watson, so Watson will be part of that Financial Services industry solution content as well.

So Watson is firmly, firmly established as the silver thread that runs through those cognitive solutions and you can see all of that in the solution software performance..

Thanks Katy let’s go to the next question please..

Thank you. Our next question is from Wamsi Mohan with Bank of America Merrill Lynch. Your line is now open..

Yes, thank you. Martin, your free cash flow conversion of 90% plus in 2017 leads to about $10.2 billion at least in free cash flow, which is substantially down year-on-year. Can you help bridge the puts and takes here or what are the largest moving pieces to that conversion rate….

No, I mean. Thanks, Wamsi. I guess the way I look at free cash flow conversion. As you know we guide on a conversion metric. But we see free cash flow basically flat year-to-year in 2017, not down. Now again, we give a range and that’s consistent with the model we have of being north of 90%, 90% to 100%. But we see free cash flow for the year to be flat.

Now within that, as you know again we got our money back from Japan last year when we won our tax case so we’ve got that as a headwind. And within that and we’ll overcome that with the rest of the operations. But the other side of this is, we also holding if you will an ability to grow our capital investments within that flat as well.

So it was not I mean you shouldn’t interpret that 90% is down, we see free cash flow flat with a tax headwind which will overcome and room to grow CapEx..

Thanks, Wamsi. Sam.

Can we go to the next question, please?.

Next question is from Amit Daryanani with RBC Capital Markets. You may ask your question..

Thanks a lot. Good afternoon guys. I guess my question broadly and we give this a fair amount is IBM’s gross margin profile over the last several quarters. Especially across the cognitive segment specifically, but broadly has degraded pretty consistently.

I realize you guys have a lot of investments but also is it organic but just talk about when do you think gross margins start to stabilize. And at what point do you think at least on the cognitive side the acts as-a-service business start to become more in line to the cognitive segment margin profile..

Yes, thanks. Okay, sure. So on cognitive solutions, its been a year that you really have to go back to understand where we finished in the fourth. And I’m going to talk specifically about the fourth in a moment but you have to go back to what we’ve been talking about within cognitive solutions all year.

So in the first quarter we saw the steepest year-to-year decline in margins, driven by a heavily by our investments – heavily by our need to remix our skills. And also by we had acquisitions and while currency was a big headwind in dollars for us last year was also an impact to our margin. So as we progressed through the year when we get the fourth.

On a gross profit margin basis we were down about three points which I would put in currency and acquisitions is all of that three. And so on a PTI margin basis in the fourth we were down about less about half, little bit less than half about 1.4 points.

And within that again currency and acquisitions drove three points so everything else in cognitive solutions within the PTI margin. The mix of the annuity business the ramp of our as-a-service business, the benefit we get from our licensing our IP and the offsetting royalties that are coming.

And everything else improved operating PTI margin in the fourth quarter. And so what you saw in 2016 in cognitive segment margins on PTI was an operating margin that went up pretty dramatically as we went quarter-to-quarter like 17 points, right from first all the way to fourth.

And next year, I don’t know when currency is going to ramp but we do know it’s much less of a headwind next year than it was this year at least at current rates. And we also know that we ramp on the acquisitions. So those things that have dragged us dragged our margins down are starting to go away and while gross profit.

We don’t see that I don’t see that deteriorating by three points like it did in the fourth anymore. And in fact PTI margins I think are much, much more stable going forward, which is what we’re assuming.

Now they don’t have to be flat, we’re still going to drive our as-a-service performance we are going to continue to drive these IP deals, which throw a little bit of royalty into the GP stream but I see a much improved cognitive segment PTI margin from what we experienced in the fourth.

And again you saw in the fourth we ramped on our heavy investment levels here as well..

Thanks Amit.

Can we go to the next question, please?.

Thank you. Our next question is from Tien-tsin Huang with JPMorgan. Your line is now open..

Thank you so much. Just wanted to – I guess better understand this global financing change and what’s driving that. Are you increasing your leverage to support clients and anything needs in 2017 or is it just a tool to lie [ph] to increase your debt overall leverage and efficiencies just want to better understand that..

Sure. Thanks Tien-tsin. So there are some really important benefits here as we align kind of the legal and the capital structure of our financing business that just by itself will drive pretty substantial operational benefits. It gives us better capital structure flexibility in each of the countries in which IGF operates.

IGF by the way doesn’t operate in 172 like all of IBM does its more like 45 but it allows for better capital structure in that more limited set of countries in which they operate. It gives us better efficiency of cash allocation.

So what – we are really doing here as we are taking the interest earning part of IGF, the client financing and the commercial financing, we put those into a subsidiary. We will provide – be providing more information externally.

So you can see everyone can see what the capacity for them to borrow and that’s really the borrowing capacity of IGF the remarketing business does not support a borrowing capacity its a very high margin, it’s a very high return but the interest bearing portion of IGF is really what supports the debt.

And so we’re going to issue debt directly out of that entity. It’ll allow us to add $600 million or so of debt because that portfolio was high enough quality that it can run at higher leverage. That’s by the way more consistent with what we see in other entities of this nature.

So we’ll run it slightly higher leverage that will improve the ROE, that will free up basically some equity if you will that we have in IGF it will free up some equity in mainline.

But it’s not a change to necessary to the overall debt levels it’s really a change to IGF and its efficiency the operational benefits we get and our ability then to pull a little bit of capital out of idea. But also manage it better in which in the countries in which it operates. But again importantly the segment that you see won’t change.

So this really is a change in how we access the capital markets externally..

Thanks Tien-tsin.

Sam, can we take the next question, please?.

Thank you. Next question is from Toni Sacconaghi with Bernstein. Please go ahead with your question..

Yes, thank you. Martin if I think about 2016 in total relative to your guidance at the beginning of the year it benefited about $1.20 in EPS from IP gains and lower tax rate not including the Japanese tax settlement. So on a fundamental basis, earnings went from about $14.02 in 2015 to about $12.50 in 2016.

So as we look to 2017, you’re guiding for an improvement in earnings from $13.50 to $13.80. And you said tax is going to be a headwind, you’ve said IP income is not going to help if anything it might hurt. So the last three years you’ve actually had fundamental erosion if we take out tax and IP in your business.

And you’re calling for an inflection point in 2017.

So I’m wondering if you can talk through what are the key things that drive that improvement and perhaps you could also be explicit about what your expectation for acquisitions and their contribution for restructuring expense and whether that will be a net, we’ll have any net impact on results and what your assumption is for cash tax versus accrue tax in 2017 as well? Thank you..

Okay, sure. Thanks Toni. So a couple of things when we entered 2016 as I said earlier on a prior question, we said tax would be 18 plus or minus two and we came in again at the bottom of the range.

And so now when we look at tax, yes, we had $1 billion improvement from Japan, which we are not – obviously we’re not going to win another tax case in Japan by the way. But we do have discrete this year. When we look at where we finished, we finished at the bottom of that range.

And as I said with us going into now 2015 into 2017 at a 15 rate plus or minus three we have to overcome if you will the headwind from the Japan. But we’re going to as we plan for tax reform we don’t see a fundamentally different operating tax picture than we saw last year in our I&E.

We saw an inflection point it’s probably you know maybe that’s the right way to think about it. We saw an inflection point in intellectual property income this year. And I can tell you that yes, we see an inflection point in profitability our PTI we expect to improve that’s embedded within our earnings.

So we saw an inflection point in IP income but then you get to the engineer and you want to take it all out. So that we hit an inflection point in IP last year, we did better than we had the prior year. And it’s always been a part of our model and again we see while it may not continue exactly we’re not relying on all of that for the year.

We will have IP income a substantial amount of IP income as we always have for the last I don’t know 18, 19 years you have the history as well. So we do see an inflection point in our margin profile remember that we have gotten a lot done this year in terms of getting margins stabilized.

We see that for instance in our infrastructure services business which drew margins for the year. We did get wrapped if you will on the higher levels of investment and spending and you see that in our cognitive solutions and I talked about that earlier. So and you see it on in our E2R [ph] performance on SG&A for instance in the fourth quarter alone.

So as we get into now – as we get into 2017 and all of the work we got done plus we’ve got a better base on which our as-a-service margins are still continuing to grow because we’re not where we wants to be yet but we did improve throughout the year. We have a momentum if you will in our cognitive solutions business and again those are high value.

And we’ll get all the – whatever savings if we have from workforce rebalancing both as we continue to remix our workforce.

So yes, I am saying that PTI margin and PTI growth this year is what is implied in our guidance now with the tax headwind it doesn’t translate as much to EPS growth but we do see the inflection points in parts of our business and including our margin profile..

Thank you.

Can we go to the next question?.

Thank you. Our next question is from Lou Miscioscia with CLSA. Your line is now open..

Okay, great. Thank you. You maybe go into more detail in GBS like the last quarter you had said that over 50% of the revenue has transitioned into the digital practice area and that was growing in double-digits.

So looking at this quarter obviously it seems like it’s fallen back a little bit, many others are growing application management just if you can help us out what’s going on under the coverage there why it seems that which should have improved in – obviously it didn’t and what you think about that going forward..

Sure. Thanks, Lou. So the dynamics in GBS were similar to what we talked about in prior quarters we said a couple of things. One we are continuing to remix their skills and while we have a good performance in our strategic imperatives and that those digitized offerings.

We still do have a pretty large book of business that’s in our part of the marketplace that has very heavy price pressure as all of us are competing to get kind of that foothold if you will or competing for certain kinds of opportunities and some of these accounts.

So we’ve got price pressure in parts of the business and again we’re remixing our skills which as we said will have an impact the shorter term impact on productivity. Now shorter term we invest in businesses for a long, long periods of time. So I don’t define shorter term is every 90 days.

Although this business this business should start to improve when we – as we’ve talked about last time when we see a couple of things.

So the backlog in GBS is down and so our first focus has to be to take the skills we’re building and get a good signings, a good consistent signings performance in order to grow the backlog once you grow the backlog then obviously you deliver in an efficient and effective way.

And you start to improve your margins and we still view GBS is being able to get that done in fact. We’d say we will grow signings in the first quarter this year. So maybe we’ll start that position now but we still see this business and these skills at such a key differentiator in the marketplace that.

We’re unwilling if you will to reduce our capacity or our capabilities in the marketplace. We really this is the third leg if you will between cognitive and a robust cloud. Industry skills are going to – what brings it all together so GBS is in a similar dynamic.

I do think will grow signings in the first which will be the start to having that business improve. But it’s going to take a little while longer to get through these same dynamics, our remixing skills and moving our skills away from these heavily priced pressured opportunities..

Thank you, Lou.

Sam, can we please take the next question?.

Thank you. Next question is from Brian White with Drexel Hamilton. You may ask your question..

Hey, Martin. So it sounds like the PTI margin will expand in the 2017, maybe just look at gross margins. You think gross margins will expand and if you can just give us a view on – the major business segments where should we expect improvement in the PTI margin in 2017? Thanks..

Sure. Thanks Brian. So a couple of things, we have is as we always, do we have a bunch of scenarios on how a year might fold out, roll out, right. So I would say that as you pointed out PTI margin expansion is in every scenario.

That’s evidenced by the fact that profit is growing, it’s implied to grow with the tax headwind and then EPS obviously with a little bit of growth. So PTI margin growth is in each of the scenarios. GP margin is not necessarily required for us to grow PTI margin and that’s for a couple.

Now I’m not saying that peak that GP is necessarily going to go down but we can maintain our GP margins, we can even erode a little bit if we want to accelerate our move into as-a-service even faster. As you saw we had very good growth in our – as-a-service business in the fourth.

Overall those margins are below our IBM margin, so there’s a little bit of margin pressure as you make that shift, but we can deliver 2017 push as-a-service margins it’s really hard either maintain or you can even contract GP margins a little bit and still grow PTI margins given that we’ve ramped on, again this heavy level of investment and we’ve gotten a lot done on structure both the overall IBM structure, the infrastructure of what runs IBM, as well as each of the business have taken another good look at structure.

So from a segment perspective we saw good performance in our global technology services business. When you look at the infrastructure services piece growth and margins for the full year and I’d say that we can see opportunity to continue to grow margins there.

The technical support services, the TSS business is where the margin pressure was in 2016, but I think we have a way to stabilize that margin performance, a very much is a mix shift from as we drive the multi vendor services business in TSS.

So margin improvements in the infrastructure services business I see relatively flat profit margins and systems. Now we’re coming off of a high point in the mainframe. At the end of the cycle margins tend to be higher. As you go into a new cycle they tend to be a little bit lower. But we also have an opportunity to improve in the other businesses.

So systems margins relatively flat and we see again an opportunity to improve margins in GBS. As we get some of the work that I’ve described they are done and get kind of the power to shift through the way, we can see improvements in GBS. And I talked earlier about cognitive solutions, so I won’t cover that again. So again PTI we do see growing.

GP not necessarily, we don’t need GP to grow in order to produce PTI margin growth..

Thanks Brian.

Can we go to the next question, please?.

Thank you. Next question is from Steve Milunovich with UBS. Your line is now open..

Thank you very much. Martin, I think you talked about $2 billion of savings from the workforce rebalancing and so forth a year ago.

I was curious how much of that did you see last year, how much of it is going to be seen in 2017, and how much of that in 2017 May you take to the bottom line because that strikes me, that’s a big part of this PTI improvements.

And also just wanted to ask and you might want to actually respond to this that where are you in the innings in your transformation. It’s been a number of years now. How far into it are you? And then just qualitatively what surprised you positively and what’s been very difficult to change in terms of changing IBM..

Okay. Well, that’s a lot there Steve. So first on the workforce rebalancing savings, we said for last year, for 2016 that we would see a bit more than $500 million and we absolutely got that. And we said we would free up then $2 billion of total spend, some of which will get reinvested, some of which will go to the bottom line.

You saw from our view of 2017 now that we’ve ramped, we’re not obviously reinvesting all of that although we ramped on our higher levels of spending, so obviously some of that’s going to wind up in the profit. And with mid single-digit profit growth it’s a fair bit drives that profit growth in 2017.

In the innings, you know what, IBM is always transforming. So I don’t know how to pick an inning other than to say that we have established a few years ago, we established this idea that the strategic imperatives were the path for revenue growth to resume and those continue to grow quite well.

Then last year we changed the segment structure and said, look, we’re going to now report not only more detail on the strategic imperatives, but we’re going to talk to you about cognitive solutions which has all the Watson content.

We’re going to talk to you about a cloud platform business and we’re going to talk to you obviously about the industry dimension. And so that part of the transformation continuous and I don’t think that that transformation of IBM ever ends quite frankly.

We are back now as we put in our guidance; we are back to our model level of pre-tax income growth as we have in our model right now. Now if you say that pre-tax income growth – if for the model – achieving the model is the definition of when the transformation is done, then I’d say that we see that this year for pre-tax income.

Now we’ve got a lot of other elements of our financial model as well. We’ve been returning cash to our shareholders consistently, we have generated our free cash flow as a percentage of our net income has been on model. So we’ve had a number of elements that are on model.

Pre-tax income growth I think is a good one that says this structure, the strategy is working and it will drive the financial model we set out to achieve, at least on the pre-tax income growth which had been missing..

Thank you, Steve.

Can we please go to the next question?.

Thank you. Our next question is from Joe Foresi with Cantor Fitzgerald. Your line is now open..

Hi, I thought I’d ask that progress question a little bit differently. Can you give us some thoughts on your expectations for growth in the strategic imperatives and the decline in the core business in 2017? Thanks..

Sure Joe. So, we said a few years ago that strategic imperatives would be $40 billion and 40% by 2018 and as you just saw we finished 2016 when they’re 41%. So obviously we made the mix piece of this early. But from here if we grow, say, 10% to 11% we get to 40% by 2018.

And so with such a substantial part now of our business at $30 billion plus with such a substantial part of our business to grow that at that continued double-digit says that we have the right offerings in the right spaces with the right skills to deliver them and they are robust powerful solutions.

And so we see that kind of growth in order to get to the 40%. We still think we’re quite confident; we’re ahead actually of track, but we’re quite confident in getting to the 40% still. The core business or the rest of the business if you will is always has a few components in it.

One, at our very core, remember, that we are delivering productivity to our clients, and so they use that that productivity that we deliver to reinvest. And as we said before that’s the dynamic you see in our revenue stream. We deliver productivity through parts of our business and they reinvest and that’s how you get the revenue dynamic that we have.

The core was down double-digit two years ago and down 9% in the fourth, if you do the math roughly down 9%. And when we get into this year, I’d say that we’ll see a kind of a similar dynamic but that’s what we are – that’s what is sort of embedded within our guidance for 2017.

So continued good performance in strategic imperatives, continued focus on delivering productivity for our clients and we’ll have that revenue dynamic into 2017..

Thanks Sam.

Why don’t we take one last question?.

Certainly. Our last question is from David Grossman with Stifel. Your line is open..

Thanks. Actually Martin if I could just ask two questions really quickly. One is just into your last answer. So if you are growing at 11% in the strategic and you are pretty close to 50-50, I think you’re at 44% in the fourth quarter and the core is declining 9%.

I mean wouldn’t that imply that we’re reasonably close to getting to a crossover on the top line..

Did you want to ask your second question first, or do you want me to answer that one?.

Well, the second – Why do you answer that first and then I will go to the second one..

Okay. So when you say we were down on a constant currency basis, we were down 70 basis points in the fourth. So I think we are reasonably close in the third. Yes, this is the structure we are in. And we are focused on driving value in those strategic imperatives not just grabbing a little bit of revenue to have some math work out differently.

And our margins in the strategic imperatives continue to be higher than overall IBM and higher obviously than the core, so our focus on delivering value hasn’t changed. And whenever that crossover point happens to be, yes, we’re already close. So when you say wouldn’t it imply, yes, we’re close, we were close in the fourth.

But we’re focused on delivering value, and for 2017 we’re focused on obviously PTI margin expansion..

Right. And the second piece is, if historical trend repeats itself, you’re due for a mainframe product cycle in the back half of the year. I believe the way you break it out at least some of that mainframe revenue is in strategic imperatives.

So that said how should we be thinking of the potential financial impact of the next mainframe cycle vis-a-vis prior cycles, particularly given some of the secular shifts that you’ve talked about in your prepared remarks and in response to some of the other question?.

Sure. So, yes, I mean, we – if you follow a mainframe cycle then it would say sometime late this year we’d have another mainframe. But again, we wouldn’t see the impact of that until late in the year. What drives the mainframe as it always has is our ability to make it relevant to the workloads that our clients need.

So when we were together when we announced the last mainframe, and two years ago we talked a lot about this shift to mobile. We talked a lot about security. We talked within those two elements and there’s a lot more to it.

But within those two elements we talked about how the mainframe was built particularly with those two kinds of workloads in mind and that drove the growth we saw in the mainframe through the cycle.

That’s still by the way part of the growth we see in the mainframe and it’s still why – that’s why big enterprises continue to put their most important work on mainframes. Now the set of workloads that are going to drive the next incantation of the mainframe are going to be things like Blockchain, and so all of that is still ahead of us.

We added and we said in the prepared remarks, we added a number of new clients throughout the cycle but we added more again in the fourth quarter as well.

And while I haven’t talked to every one of them, I think what they’re thinking, what many of them are thinking is yes, I need mobile, and yes, security is more important than ever, but I also need to be ready for the next workload drivers.

And Blockchain is a good example of a workload driver that is ideally suited for the most robust enterprise platform there is. So I think that if I had to pick just one that drives the mainframe is Blockchain. It would be my first top of my list for what drives the next mainframe cycle.

So let me wrap up the call by saying again that we’re really pleased with the progress we made in 2016 and how we’re positioned for 2017. Of course there’s plenty for us to work on, we’re not confused by that. But we are looking forward to continuing this dialogue at our investor briefing later in the quarter.

So with that, thank you for joining the call..

Sam, can I have you close up the call please?.

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