International Business Machines Corp (IBM) 2013 Q4 法說會逐字稿

Welcome, and thank you for standing by.

(Operator Instructions)

Today's conference is being recorded.

If you have any objections, you may disconnect at this time.

Now, I will turn the meeting over to Ms. Patricia Murphy, 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 with Martin Schroeder, IBM's Senior Vice President and CFO, Finance and Enterprise Transformation.

I want to welcome you to our fourth quarter earnings presentation.

The prepared remarks will be available in roughly an hour, and a replay of the webcast will be posted to our Investor Relations website 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'm pleased to turn the call over to Martin Schroeder.

Thank you for joining us today.

What I'll do over the next hour or so, is take you through our fourth quarter results, a wrap-up of the year, and our view of 2014 earnings per share, and then we'll take your questions.

A month or so ago, before I assumed the CFO job, I met with a number of investors and analysts.

And one of the things I took away is that it's important for me to be clear on IBM's 2015 road map objective, and our ability to achieve the earnings per share.

So I want to start out by saying that we continue to expect to deliver at least $20 of operating EPS in 2015.

We'll talk about 2014 a little later, and you'll see that our view of 2014 keeps us on track to that objective.

As we get into the fourth quarter results, you'll see that our software, services, and financing businesses are all on solid ground.

But in hardware, as you know, we've entered the back end of the mainframe product cycle, and we're dealing with some challenges in other areas.

Together, these are impacting our overall results.

IBM does have a resilient model, based on continuous transformation, and we're investing substantially in key opportunity areas.

You've seen evidence of that in announcements we've made in the last two weeks, and we're right sizing and repositioning businesses where the market is shifting.

This enables us to move to higher value and lead in enterprise IT.

As always, we're positioning our business for the future.

And as I noted, we continue to expect to achieve at least $20 in 2015 along the way.

So now let me get into the results.

In the fourth quarter, we delivered revenue of $27.7 billion, and operating EPS of $6.13, which is up 14% year-to-year.

We had a good quarter in software.

The performance was broad-based, with constant currency growth in all brands.

We had strength in several of the areas where we've been targeting our investments; like analytics, cloud, and security.

Our software revenue was up 4% at constant currency, and profit was up 6%.

Services year-to-year revenue performance was consistent with our third quarter.

GBS, again, had strong performance driven by our offerings that addressed the digitization of the front office.

And we had continued improvements in the year-to-year performance of strategic outsourcing in GTS.

Services revenue was up 1% at consistent currency, and profit up 2%, and we enter the new year with a solid backlog.

Hardware continued to impact our overall performance.

We're dealing with some challenges in our hardware business model specific to power, storage, and x86.

As expected in System z, we're impacted by the product cycle as we ramped on very strong performance from a year ago.

Together, these dynamics significantly impacted our revenue growth and profit.

In fact, our hardware segment profit was down over $750 million in the quarter, and $1.7 billion for the year.

From a geographic perspective, performance in growth markets was mixed, though disappointing overall.

Looking at our two largest regions, Asia-Pacific was down, primarily driven by China, while again we had good performance in Latin America.

All together, we posted EPS growth of 14%, which we achieved through the combination of continued momentum in key growth areas which drove a mix to higher value software in GBS, yield from productivity initiatives, a modest improvement in our ongoing tax rate, along with substantial benefits from tax audit settlements, and the effective use of cash to repurchase shares.

The full year had similar dynamics and similar drivers.

So for 2013, we delivered $99.8 billion in revenue, expanded gross and net margins, and increased our operating EPS 7% to $16.28.

Software, services, and financing all expanded margins and grew profit, while hardware declined.

Across our businesses, we had strong performance in big data analytics, cloud, mobile, social, and security.

Looking at our financial metrics for the quarter, IBM's revenue was down 5% or 3% at constant currency.

We had constant currency growth in software, services, and financing, which was more than offset by a decline in systems and technology.

The currency impact to revenue was 2 points, and currency also impacted our profit performance.

As we've discussed in the past, a weakening yen drops largely to the bottom line.

This quarter, we improved gross and net margins.

Our operating gross margin expanded by 30 basis points, driven by services and an improving mix.

Our pretax income of $7.4 billion was down 8%, and pretax margin down 80 basis points, with the declines driven entirely by our hardware business.

Net margin expanded reflecting a lower tax rate.

The fourth quarter rate was significantly lower than our normal operating tax rate, and includes the settlement of our US tax audit for the three-year period from 2008 to 2010.

We accrue taxes for uncertain tax matters in our normal operating rate.

This particular tax audit commenced in late 2011, and concluded with the receipt of the Revenue Agent Report in late November of 2013.

The conclusion of the audit resulted in a reduction of tax expense, which was previously recorded in our operational tax rate.

While the audit closure had the most significant impact, there were additional discrete items impacting the rate in the quarter.

Bottom line, we delivered operating EPS of $6.13, again, up 14% year-to-year.

Looking at the cash metrics, we generated free cash flow of $8.4 billion in the quarter, and returned substantial value to shareholders.

For the year, we generated $15 billion in free cash flow, which was down over $3 billion year-to-year.

The decline was driven by our operational performance, higher cash tax payments, and changes in working capital.

I'll talk more about cash flow later in the call.

We ended the year with a cash balance of over $11 billion, consistent with year-end 2012.

So now I'll get into the details of the quarter, starting with revenue by geography, and on a constant currency basis.

Americas revenue was down 2% year-to-year.

We had strong growth in software.

The deceleration in year-to-year performance from last quarter was driven by the impact from the mainframe product cycle, predominantly in the US.

We grew in Canada.

And once again, we had good performance in Latin America, led by Brazil.

Our EMEA revenue was down 2%, consistent with last quarter.

Western Europe performed in line with the market, and here too, we had good software performance.

In Asia-Pacific, revenue was down 6%.

Within that, we had another good quarter in Japan, where revenue was up 4%.

Japan is a great example of how we've shifted our investment and redirected our go-to-market focus to significantly improve our performance.

This is now our 5th consecutive quarter of revenue growth in Japan.

Asia-Pacific outside of Japan declined.

In total, major markets were down 2%, while the growth markets were down 6%.

Within the growth markets, we continued to gain share and deliver growth in Latin America and in the Middle East and Africa region.

Our performance in LA and EMEA has been consistently strong, and in particular, Latin America had a difficult compare, up 18% last year.

In Eastern Europe, the declines moderated, while revenue from the Asia-Pacific countries declined at a double-digit rate primarily driven by China.

Our revenue in China was down 23%, so very similar to last quarter.

The largest declines in China were in our hardware business.

We continue to be impacted by the process surrounding the implementation of a broad-based economic reform plan.

While there is more clarity on the overall plan, we continue to believe that it will take some time for our business in China to improve.

So to wrap up the discussion of the growth markets, we had good performance in Latin America and the Middle East and Africa.

And while we're disappointed with our performance in certain regions of the growth markets, we continue to see good opportunity in all regions over the long term, and we're continuing to invest in these key markets.

Turning to the segment perspective.

I've already commented on the revenue drivers.

Looking at the gross profit, in total, our operating gross margin improved 0.3 of a point.

We expanded margins in both services segments, and the relative strength in our software business drove an improving mix.

The improvements are mitigated by a 5.5 point decline in systems and technology.

System z margin is up, as you would expect at this point in the product cycle.

The other hardware brands are down, reflecting business model challenges.

I'll get into this in the STG section.

Our total operating expense and other income was better by 1% year-to-year.

Acquisitions over the last 12 months drove 2 points of expense growth.

For the last 2.5 years, acquisitions contributed between 1 and 3 points of expense growth each quarter.

Currency contributed 2 points of decline, driven almost entirely by translation.

So our base expense was better by a point.

Within our base expense, we're continuing to shift our spending.

We're driving productivity across the business, primarily through our enterprise productivity initiatives.

Much of the savings is reinvested into the business to drive our growth areas.

So what you see here is the net effect of these actions.

Turning to the categories of expense that had year-to-year impacts, there is just one area to point out.

Our accounts receivable provision was up nearly $60 million year-to-year.

Our reserve coverage is up less than 20 basis points, though flat versus September.

And finally, I want to comment on the impact of currency this quarter.

In the fourth quarter, the hedge activity across cost and expense was neutral in the period, and there was little year-to-year change in the impact from our hedges.

For the last few quarters, we've been significantly impacted by the depreciation of the yen.

Because our business in Japan is dominated by local services without cross-border cash flows to hedge, the impact falls largely to the bottom line.

This was the case again in the fourth quarter and at current spot rates, would continue through next year.

So unfortunately, we'll be dealing with another year of currency impacts to the bottom line.

Now let's turn to the segments, and we're start with services.

This quarter, the combined services segments generated $15 billion in revenue, which was down 2% as reported, and up 1% at constant currency.

Pretax profit was up 2%, and pretax margin expanded by 0.9 of a point.

Total backlog was $143 billion, up 2% at spot rates, and up 5% at constant currency.

Backlog grew in both the transactional and the outsourcing businesses.

Turning to the two segments.

Global Technology Services revenue was $9.9 billion, down 4% or down 1% at constant currency, in line with the last quarter's year-to-year performance.

Major markets returned to growth at constant currency for the first time since the first half of 2012, led by Europe, while our growth market's performance lagged.

With revenue down 1% at constant currency, our GTS outsourcing performance improved from the third quarter.

We're starting to benefit from several of the large transformational contracts we signed earlier in 2013.

At the same time, we continued to see a decline in revenue from sales into existing base accounts.

This activity tends to be more transactional in nature, and can be economically sensitive.

ITS revenue was flat year-to-year at constant currency.

We continue to shift the business toward higher value managed services, such as business continuity, security and cloud.

Within our cloud offerings, SoftLayer contributed 1 point of revenue growth to total GTS.

SoftLayer provides unmatched performance, flexibility, and breadth for public and hybrid cloud workloads, and we've just made a commitment to significantly expand our global cloud capacity.

Turning to GTS profit.

Pretax profit declined 2% in the quarter, and our growth markets performance contributed to the profit decline.

In addition, we're continuing to make investments in key growth areas such as cloud, mobility, and security.

While these initiatives are starting to contribute to the top line, we'll get better profit results as they get to scale.

GTS pretax margin expanded by 0.4 of a point.

The margin improvement was driven by tough-minded spend actions and benefits from the second quarter workforce rebalancing activity.

Turning to global business services.

Revenue was $4.7 billion, up 1% as reported, and up 4% at constant currency.

This was a good quarter for GBS, and they again gained share this quarter.

From a geographic perspective, we had growth in each region at constant currency, led by North America and the growth market countries.

Japan continued its solid performance, and Europe grew for the second consecutive quarter.

Looking at the GBS business by offering, growth was driven by the practices that address the digital front office.

We delivered double-digit growth in each of our strategic growth initiatives, Business Analytics, Smarter Planet and cloud.

We've been investing to build capabilities, and now have nearly 20,000 resources in GBS focused on the growing digital front office opportunity.

For example, in the era of big data, our capabilities span from BAO strategy through front office analytics, to fraud and regulatory compliance, and risk management.

And within our back office solutions that address the globally integrated enterprise, we again grew in implementation services that support the traditional packaged applications.

Looking at GBS profit, pretax profit was up 12% year-to-year, and PTI margin expanded by 2 points.

The main year-to-year profit drivers were continued benefit from our enterprise productivity initiatives, and the second quarter workforce rebalancing.

The savings from these actions fuel the investment in our key initiatives.

Now let me take the discussion back up to the total services level.

We enter 2014 with a services backlog of $143 billion.

And as we've said in the past, approximately 70% of revenue in any year is driven by the opening backlog.

Looking to 2014, the projected revenue from the backlog is up 1%.

The divestiture of our customer care business is expected to close in the first quarter.

That will reduce our backlog, and impact revenue growth from the backlog by about 3 points.

So overall, we expect revenue from backlog to be down 2%.

Now the balance of the revenue, the other 30% or so, comes from yield from current year signings, as well as sales and volumes in our existing client base.

It also includes SoftLayer and some of our cloud services, which generate in period revenue that isn't reflected in the backlog.

So to wrap up services, in the fourth quarter, we grew revenue, pretax profit, and expanded margins.

We continued to see the strength in the areas of cloud, Business Analytics, and Smarter Planet, and we're investing to extend our capabilities.

Our software revenue of $8.1 billion was up 3% or 4% at constant currency.

And our software revenue continues to mix toward our key branded middleware.

But with 6% constant currency growth in branded middleware, we gained share.

Looking at the results by brand.

We had great performance in WebSphere.

Revenue was up 15% at constant currency, and we gained share.

We had good growth in both our on-premise application server business, and newer cloud-based offerings.

We continued strong growth in mobile.

Mobile First is our comprehensive portfolio of mobile software and services extending value to our clients to reach new markets and gain competitive advantage.

And our core WebSphere offerings of business integration and commerce delivered strong growth.

We're continuing to add capabilities in this space.

Last week, we closed the acquisition of Aspera, which provides best-in-class transfer speeds for movement of big data.

Information management software grew 5% at constant currency, and gained share.

We had our strongest growth of the year in our Business Analytics software offerings, led by business intelligence and Netezza appliances.

And distributed database was up double-digits again this quarter.

And Tivoli, our security business, once again delivered another great quarter with double-digit growth.

The transformation driven by mobile and cloud computing is raising the importance of security for enterprise customers everywhere.

We've been building our capabilities, and across software and services we now have 6,000 security experts worldwide.

We have 3,000 patents in security, and we have 25 security labs worldwide.

Our software value proposition remains strong for enterprise clients.

Our customers continue to increase deployment of our middleware products, and we're investing and gaining share in social, mobile, analytics, cloud and security.

Some of this is delivered in a SaaS model, and we now have over 100 SaaS offerings in our software portfolio.

In 2013, software revenue grew 3% at constant currency, with key branded middleware up 6% year-to-year.

And our software pretax income of over $11 billion was up 3%, and we expanded pretax margins.

Systems and technology revenue of $4.3 billion was down 26% year-to-year.

System z was down 37%, against a very strong quarter a year ago when revenue was up 56%.

This quarter, we entered the back end of the mainframe cycle, and as expected, we delivered a higher gross margin on a lower base of revenue.

MIPS declined 26% following the largest MIPS shipment in mainframe history a year ago.

Let me put the performance of the current mainframe cycle into perspective.

In the current cycle, we've shipped 28% more MIPS, a measure of capacity, compared to the same period in the prior cycle.

The revenue and gross profit in the current cycle are each about 99% of the previous cycle, net of currency.

Mainframe provides the highest levels of availability, reliability, efficiency and security, which positions it as the ideal platform for high volume, mission critical workloads.

This additional capacity that I mentioned is a reflection of the ongoing relevance of the mainframe to our clients, and provides IBM with financial returns consistent with past cycles.

In our power business, revenue declined 31%.

We continue to ship significant capacity into the Unix market; however, this has been more than offset by significant price performance resulting in lower revenue.

As we've said in the past, we've been very successful in the Unix market, and we're taking two actions to improve our business model here.

First, we're making the platform more relevant to clients.

And to achieve this, in the fourth quarter, we introduced a new integrated facility for Linux offering, which enables our clients to run Linux workloads in their existing servers.

This mirrors the successful strategy we executed on our System z platform.

We'll expand our Linux relevancy even further with POWER8 later this year, which will provide additional big data and cloud capabilities.

Through our open power consortium, we're making power technology available to an open development alliance, building an ecosystem around our power technologies.

Just yesterday, the Suzhou PowerCore Technology Company announced their intention to use IBM's power architecture to provide customized chip design solutions for the China server market.

These effects will take some time.

Secondly, even with these additional capabilities, we recognize that the size of the power platform will not return to prior revenue levels.

We will take action in this business to reflect the new business model.

System x was down 15% at constant currency.

Within that, Pure Systems continues to gain momentum.

Across our hardware products, Pure revenue was up more than 30% sequentially.

Globally, we shipped over 2,500 systems in the fourth quarter and over 10,000 systems to date.

Storage hardware revenue was down 12% at constant currency.

Our flash solutions continue to gain momentum, and contributed a few points of growth this quarter.

Our Storwize product again delivered double-digit growth, which was offset by declines in our legacy OEM mid-range offerings.

We also had declines in the high end, driven by significant pricing pressure.

Profit in systems and technology segment was down over $750 million in the quarter, and over $1.7 billion for the year.

About half of the fourth quarter decline was driven by System z, due to the product cycle, though the platform is secularly strong with a solid business model.

Our other hardware businesses are dealing with business model issues due to market shifts.

We will make these products more relevant, while right-sizing these businesses to meet the new value proposition.

Turning to cash flow.

We generated $8.4 billion of free cash flow in the quarter, which is up $6.2 billion quarter-to-quarter, but down $1.1 billion year-to-year.

This is a similar quarter-to-quarter increase to what we saw in the third to fourth quarter of 2012, despite the fact that this year we didn't have the benefit of the Z cycle.

Historically, over half of our annual cash flow is generated in the fourth quarter.

In 2013, we generated 56% of the full year in the fourth quarter, and this is the highest percentage in several years.

On a full year basis, we generated $15 billion of free cash flow, which was down $3.2 billion year-to-year.

There were three key drivers of the year-to-year decline: our operational performance, higher cash taxes, and changes in sales cycle working capital.

This was mitigated by lower capital expenditures, and the fact that we had prepaid certain retiree medical payments in 2012.

As for the uses of cash for the year, we spent $3.1 billion to acquire 10 companies, including three in the fourth quarter: Now Factory, Xtify, and Fiberlink.

We also returned almost $18 billion to shareholders in 2013, including over $4 billion in dividends, and we bought back 73 million shares for approximately $14 billion.

On a net basis, our cash outflow for share repurchases was $12.8 billion, and at the end of the year we had $14.7 billion remaining in our buyback authorization.

Turning to the balance sheet.

We ended the year with a cash balance of $11.1 billion.

Total debt was $39.7 billion, of which $27.5 billion was in support of our financing business, which is leveraged at roughly 7 to 1. Our non-financing debt was $12.2 billion, and our non-financing debt-to-cap was 39%.

We had good performance in our pension plans in 2013.

The interest rate environment resulted in higher discount rates at year end, particularly in the US, and the pension liability remeasurement resulted in an increase to our equity.

Our defined benefit qualified plans had solid asset returns, and continue to be well-funded, and importantly our cash requirements remained stable.

We continue to have a high degree of financial flexibility, and our balance sheet remains strong to support the business over the long term.

Let me start to wrap up with a discussion of the full year from a few perspectives, starting with performance in some key growth areas.

We've been continuing to shift our investments to address the key trends in IT like social, mobile, big data analytics, and cloud.

A few years ago, we identified and established objectives for three growth initiatives, Smarter Planet, Business Analytics, and Cloud that capture much of these trends.

I've talked about how these growth areas have contributed to our performance within the segments, and I want to report on how they've done at an IBM level for the year.

Smarter Planet grew about 20% year-to-year, with strength across all areas, including smarter commerce, industry solutions, smarter cities, and social business.

We believe that data as a natural resource will drive demand going forward, and big data analytics will provide the basis for competitive differentiation.

In 2013, we grew Business Analytics revenue 9%, led by GBS and by software.

This is now nearly a $16 billion business for us, which you'll recall was our original target for 2015.

We've already taken our 2015 objective for business analytics revenue up to $20 billion.

And our cloud solutions addressed the full scope of customer requirements: private clouds, public clouds, and hybrid clouds, as well as platform and SaaS-based solutions.

For the year, we delivered $4.4 billion of revenue for cloud-based solutions.

That's up 69% year-to-year, and within that, $1.7 billion was delivered as a service.

As we said in the past, there's overlap between these initiatives.

In total, software makes up about half of that combined content.

This improves our business mix, and contributes to our margin expansion.

Now looking at 2013 from a segment perspective, our software business continued to grow, fueled by these key areas.

We returned to revenue growth in GBS, leveraging the investments we've made in the digital front office, and our GTS revenue trajectory improved and is stabilizing.

In software, services, and financing, we grew profit and expanded margin.

Clearly, we do have some underperforming areas.

First, we have a business model issue in parts of our hardware business, which we'll address through targeted investments in areas like flash and power Linux, and by right-sizing for the demand characteristics we expect; and second, we've had recent declines in some of the growth markets, where we'll continue to invest to capture the longer term opportunity.

And keep in mind, we're dealing with a currency headwind and at current spot rates, this will continue into 2014.

In 2013, we continued the transformation of the portfolio, shifting to higher value.

We maintained high levels of investment, including $6 billion in R&D, $4 billion in capital, and $3 billion in acquisitions, adding significant capabilities to support key areas of growth.

At the same time, we announced the divestiture of our customer care business, which we expect to close in early 2014.

We're continuing to add to our capabilities and improve our position for the future.

Let me give you a couple of examples.

Last week, we announced a significant investment to expand our global cloud footprint.

We've committed $1.2 billion to double our SoftLayer centers.

And with 40 cloud data centers in 15 countries, IBM will have cloud centers in every major geography and key financial center.

And earlier this month, we announced a $1 billion investment in Watson and established a new Watson Group.

This new unit is dedicated to the development and commercialization of cloud-delivered cognitive innovations.

Completing the wrap-up of the year, we also improved our ongoing effective tax rate, we've benefited from discrete tax items, and we returned a significant amount to shareholders.

All together, we continue to position our business for the long term, while dealing with some significant business model issues in hardware.

As we look forward to 2014, we'll continue our transformation, shifting our investments to the growth areas, and mixing to higher value.

We'll acquire key capabilities.

We'll divest businesses, and we'll rebalance our workforce as we continue to return value to shareholders.

Our current view of all of this is included in our expectation of at least $18 of operating EPS in 2014.

That's up 10.5% from $16.28 in 2013.

Some of the actions will be early in the year.

For example, in the first quarter we expect the initial closing of the sale of our customer care business, and to take the bulk of our workforce rebalancing actions, which we're currently working on.

We'll see the benefits of the first quarter rebalancing action later in the year.

As a result, we expect our first quarter EPS to be about 14% of the full year, reflecting the modest gain, workforce rebalancing charge, and continued impact from currency.

For these reasons, our first quarter skew in 2014 should be lower than our historical skew, which has been about 18% of the full year over the last few years.

And importantly, we expect to grow our free cash flow in 2014 by about $1 billion.

That's faster than net income, even after absorbing another significant cash tax headwind, and growing capital expenditures.

All of this keeps us on track to our 2015 objective of at least $20 of operating EPS.

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.

And second, I'd ask you to refrain from multi-part questions.

Chris, please open it up for questions.

(Operator Instructions)

Ben Reitzes with Barclays.

Thanks a lot, Martin, I really appreciate you talking about the first quarter, which looks like it equates to $2.50 versus the consensus of $3.27.

I was just hoping you could confirm that.

I think I got the math right.

But my question is with regard to a bridge from 2013 to 2014.

If I look at 2013, you had about $1.50 or so benefit due to tax rate year over year, and my calculations are $1.10 and a hit in 2014.

So considering that, it seems like you have to have a significant gain, maybe $1 to $2 of gains to get to $18.

So again, my question is, can you just confirm the $2.50 or so number for the first quarter, and then do you mind bridging us from 2013 to 2014 and tell me what's missing?

Because there's a big chunk missing, and I think it's the gains from the sales.

Thanks a lot.

Okay, sure.

Thanks, Ben, and thanks for the question.

So I guess a few things I'd say.

I think your skew math is consistent with how we would see it as well, so we'll put that aside for now.

On the full year, there are I think a number of issues that we should render explicit when we look at going from 2013 to 2014.

So first, in our 2014 guidance, we do assume a gain from the sale of our customer care business which was announced last year, and we expect that to close.

Now that will close in stages, some in the first, some in the second quarters.

And that will be in total about $150 million of pretax gains.

So that is in our guidance.

There is not, however, another substantial gain or gain assumed in our guidance of at least $18 for 2014.

So, but let me talk a little bit about how we see 2014 relative to what we faced in 2013.

First, as you saw in our full year results and obviously really clearly in fourth quarter, we had a substantial year-to-year profit headwind in STG.

The STG business on a year-to-year basis for 2013 was down $1.7 billion worth of profit, and of that $750 million was in the fourth quarter.

So, the fourth quarter was obviously some of it was mainframe, the cycle, and we're not at all worried about the cycle.

As we talked about in the prepared remarks, we are very confident in the secular strength of the mainframe and the cycle.

But we do have these business model issues in our P business, and our X and our storage business.

So on a year-to-year basis, $1.7 billion of impact in STG.

Now, within our guidance, we are going to get that profit impact neutralized, back to a zero on a year-to-year basis.

So we would hold the year-to-year profit that we saw in STG neutral in the year.

I'm going to come back to that point at the end again, because there's another important point to be made.

We also had, in 2013, we had a pretty substantial currency headwind, and we think this could have been as much as $600 million on a pretax basis.

Now, we've talked in the past, some of these things get offset through sourcing decisions and overall by the flows that we experienced within the business, but it could have been as much as $600 million.

Now, we still see as we noted in the prepared content, we still see a headwind in profit from currency, but it is not at that same level at the current spot rates.

We don't expect it to be the same level.

And then finally, on a year-to-year basis, I think we have one other unique item which is, last year, as you know, we had a substantial workforce rebalancing charge in the second quarter.

And that is paying back now, right, we didn't get all of it out, all of the payback in 2013.

So they will be some additional benefit from 2014 in that as well.

And a as we noted in the call, because we're going to be taking our workforce rebalancing charge earlier than we did last year, it will be in the first quarter.

So on a full year basis, there won't be any year-to-year impact.

We do expect that will be about $1 billion, again, same as last year, plus or minus $100 million.

We're still doing the work.

But on a year-to-year basis, we would suggest that that's about the same and therefore no year-to-year impact and then obviously we get the payback within the year.

So not only do we get the tailwind from last year's, but we get everything this year paid back.

And then in addition to that, which benefits the whole business, we still have our ongoing workforce productivity initiatives, which are driving productivity across the business.

We have our software business going pretty well.

We have our GBS business going pretty well.

We see GTS on a profit base, and that segment improving.

I already talked a little bit about STG getting back to no profit impact on a year-to-year base, and then we have our share repurchase program which will also deliver some EPS on a year-to-year base.

So, the first answer to your question is we think your math is where we would put it, and then on a year-to-year base we feel like we have a pretty good game plan for 2014.

Thanks, Martin.

Sorry, Ben.

Just one more thing.

Before we get off STG, our game plan for STG is flat profit year-to-year.

That is not our ongoing model for STG.

So we will improve and we do expect that we will improve that model position of STG over time.

2015, we'll see another Z cycle, so there will obviously be a bit of tailwind there.

But I don't want to leave you with the impression that when we get this to zero profit impact, that that's where we're stopping.

We are going to get that business back to grow profit.

Thanks Ben.

Can we go to the next question, please.

Toni Sacconaghi with Sanford Bernstein.

Yes, thank you, and good afternoon, Martin.

I just wanted to follow up on that last question, and I really appreciate the color.

I think as was mentioned before, tax rate has been a huge benefit for IBM in 2013.

I think at sort of your normalized tax rate of 23%, earnings would have been up only about 2% year over year to about $15.60.

Obviously, you reported much higher than that.

So if I think about your earnings on a normalized tax rate in 2014, they need to go from normalized $15.60 to $18, which is a 15% increase.

And so, I understand that hardware is going to be flat.

That made no money this year.

But that implies that software and services are going to have to grow EPS at 15% year-over-year, which neither did this year.

And so, again, if I look at it through that reality check lens, I guess the question is particularly with a very difficult quarter at the beginning of the year, how is it realistic that you get to 15% plus EPS base, EPS growth off a normalized tax rate, and can you be explicit about what you expect your actual accrued tax rate to be in 2014?

You've said normalized is 23% but it's been dramatically lower than that for three of the last four quarters.

So what's your operating assumption for tax rate in 2014?

Sure.

Thanks, Toni, and good afternoon to you as well.

So I guess I'd say a few things.

So our view of the tax rate is 23%.

That's our operating assumption.

That's our practical assumption.

That's what we think the tax rate is for 2014.

Now that does not have discrete items, but we don't have a plan, if you will, for discrete items.

We have an operating tax rate assumption of 23%.

And as you point out, therefore, we do expect that we will have to refill, if you will, the net income required to get there.

And I went through a little bit of the bridge with you as you pointed out on STG, for instance.

I guess I'd say a few other things.

One, in terms of how we see the year rolling out, as you noted, first quarter will be with the charge will obviously be down pretty dramatically with the charge in it, and that will pay for itself as I mentioned through the year.

Second quarter, without the charge now will be up dramatically.

And so when we finish the first half, we would see with those two elements in, we would see about low double-digit growth in EPS when we exit the first half.

Now we get to the second half, and the second half also has some interesting dynamics.

Third quarter, one, in the third quarter, we've got quite frankly an easier compare, and we don't have a lot of noise if you will from the tax rate in the third, certainly not as much as we have in the fourth.

So we would see third quarter growth and fourth quarter growth to be combined to high single-digit to get us to the at least $18.

But on top of that, we know that in the fourth we do have this -- that we have to get through this discrete tax benefit if you will that we got in the fourth.

So as we get through the fourth, again, we have the rest of last year's actions that we see continuing to help us, and obviously the benefit of the actions we'll take in March.

And then on a segment-by-segment basis, we do see our way to the guidance of at least $18, even with software performing at its historic levels.

So we feel very good about the investments we've made in the software and its profit growth trajectory as we enter 2014, and we see and feel very good about both the book of business we have and the backlog run-out we have in GBS.

And they've been delivering double-digit profit growth, and we think they are on track.

Now GTS, we think we get some improved margin as we get through the year and our productivity has a bigger impact on their margin content.

And then as you pointed out, STG we hope to hold neutral or I guess we're planning to hold neutral within this 2014 time frame.

And again, we do have the share repurchase.

So with a very weak first, very strong second, we finish the first half about a little bit ahead of the run rate we need for the year.

And then we have to obviously offset these discrete tax items in the second half, and we feel like we've got a good operational plan to do that.

And just to clarify, Martin, do you, for the restructuring expenses that you expect in Q1 and any others throughout the year, you don't expect any offsetting gains either concurrent in that quarter or at any other part of the year?

Well again, just to clarify, in the first quarter, we do have the gain from the he sale of our customer care business that will be in the first and some in the second as well.

And so -- but that's it.

That's all that's assumed in our guidance of the at least $18.

Thank you.

Thanks.

Can we please go to the next question?

Steve Milunovich with UBS.

Thank you.

Hey, Martin, you talked about financial flexibility.

Could you expand on that a little bit?

You've obviously got some cash on the balance sheet, but you do have a 39% debt-to-cap ratio excluding the financing business.

Which would, to me, seems like there's not a lot of room to go there.

And you've got certainly commitments to investors on dividends and share repurchase.

Some are talking about the need for you to do more M&A, given all the technology changes.

But whenever I've talked to IBM execs, it seems like you're still very much looking at doing smaller deals that you can really leverage through your global sales force.

Do you anticipate any change in M&A, and what's the financial flexibility that you refer to?

Sure.

I guess I'd say a few things.

So first, as we've talked about for quite a while on our M&A -- our strategy and our approach, we find that the financial returns and the economics of smaller deals, once we've put that sort of that core competency, that core capability in place, we find that attaching smaller capabilities to those do drive exactly as you said, we do -- we are able to take advantage of those through our global distribution network, our global sales force.

And we get very good returns on those, and we are very pleased with the way we run and the disciplined approach we have around acquisitions, and we are going to continue to do exactly that.

It's worked out quite well for us, and we will continue to run a disciplined process.

And we'll continue to run a process that looks to acquire content that fits around a set of capabilities that we have and that we want to extend, and drive that through our global sales and distribution network to earn returns.

So that's been the model that's worked quite well for us, and we will continue on that.

Now, sometimes those deals are larger, sometimes they're smaller.

A large deal, we still think that a few billion dollar deal is still a pretty big deal.

You still have to get these integrated into the business, and that means teams and skills on the ground.

We do have capacity to integrate any number of those deals at a single time.

That's really one of the beauties of the skills we've built is we're able to do this five or six or seven or eight times simultaneously, so we're not constrained in our acquisitions by the number of teams we can put on the ground.

We can do a series of small deals that will have a terrific set of financials, and we have the skills to integrate them and get those to work for us.

So that is not at all an issue.

And we, again, feel really good about our acquisition policy process, approach, discipline, and the results we get out of it.

Now, from a financial flexibility standpoint, I think one way to look at it is our debt to cap.

And we're in a range that we're not uncomfortable in at all.

Now, this even may -- when we look forward, we can operate even at a higher debt to cap, quite frankly.

But the other way that we think about our financial flexibility, particularly as we think about it with regard to acquisitions, is our EBITDA multiple and how close we can push our uses of cash, if you will, and our debt levels against our EBITDA multiple.

And remember, when we are acquiring something, we have with our disciplined process and our ability to get that integrated, we are assuming and we've been right most of the time, we are assuming we're going to get our cash back pretty quickly.

Sometimes it takes a little longer, sometimes it's very fast.

But those are all contributing to the operational performance so that debt to cap, while it's a way to think about our financial flexibility, it is only one way.

And quite frankly, I think given the cash generating natures of our acquisition activity, I think that EBITDA multiple may be slightly more appropriate because it's a better reflection of how hard you can push your balance sheet, and still integrate the content that you know is going to pay off.

So I don't feel as though at this debt to cap or at this EBITDA ratio that we have relative to our debt levels, that we feel constrained in any way from doing any just about any reasonable size deal.

And we do have, like I said, we do have a disciplined process.

Thanks, Steve.

Can we go to the next question, please.

Peter Misek with Jefferies.

Thank you.

Just a question on Watson, and some of your other Smarter Planet and analytics offerings.

There's been a high profile, at least The Journal reported, recommitment or reinvestment.

How should we think of that in the context of the $20 EPS bridge?

What percentage of that EPS should we be banking on from these higher growth initiatives, just to get a sense for what kind of growth rate we should be backing into?

Okay.

So I guess I'd make a few points.

What we announced last week, was the creation of a Watson Group.

And the Watson Group will have investment of a bit more than $1 billion focused on the development and the research around bringing these cloud-delivered content of applications and services to the market.

Now this is all delivered as a service, so you can't call us and say I want to buy a Watson.

This is a service delivered through the cloud.

We also announced that we would invest up to $100 million in venture investments to help support that ecosystem as the developers around the IBM Watson developers cloud build out their capabilities.

So we announced those two things.

It's a couple thousand people.

This is not a -- it's not a small effort.

It's a pretty substantial effort.

Now, with regard to the 2015 road map, I think it's important to note that like a lot of things in IBM, these are long-term investments.

We do manage the business for the long term.

And while we've been clear that we believe we'll achieve at least $20 of operating EPS in 2015 along the way, a lot of what we're doing is paying off down the road past that.

And I you would put Watson into that category.

So the Watson Group will be -- is part of, if you will, if you wanted to stick it into the road map, the Watson Group is within that overall Business Analytics content.

Now, Business Analytics for us is, it hit nearly $16 billion.

It hit $15.7 billion of revenue in 2013.

Now the original time when we first started talking about our 2015 road map, we said that would be a $16 billion business.

So we have since taken that up.

We got there about two years early.

We've since taken that up to $20 billion, and the Watson Group will certainly be part of that $20 billion of revenue in the 2015 road map.

But it is not going to be the thing that drives Business Analytics in that short time period.

This is a much longer term investment, and it's consistent with the way we manage the business.

We see trends over the longer term.

We have to obviously invest in those trends, and this is a good example.

So the Watson Group will deliver in the new field of cognitive computing.

It does it through the cloud, because it's going to be an as-a-service kind of offering.

And we think building out this ecosystem with the right amount of investment is the right thing to do now, even though it's not going to be a big part of the 2015 road map.

So, the Business Analytics bridge remains the same, $20 billion is what we expect by 2015.

I guess that was the more specific question as it related to 2015?

Yes.

Perfect, thank you.

That's correct.

Thanks, Peter.

Can we go to the next question, please.

Jim Suva with Citi.

Thank you very much.

Martin, the signing that you had of 17.5% this quarter, when you look at the full year it rolls up to about 11% year over year, which is very impressive.

Can you just help us understand a little bit about the last few quarters have been down year over year, so the first half of the year is very strong on your signings, then they were soft in the second half of the year?

As that 11% rolls forward next year, should we look the to start to see some healthy growth or is there a little bit of margin headwind from it, or how should we think about it especially how the first half of the year was so positive year over year, and second half is slowing?

I assume a lot of it has to do with the BRIC or growth countries, but maybe you can shed some light.

Thank you.

Sure, Jim.

Thanks for the question.

So, I think there are a couple of points to be made here.

First, signings, as you know and you could hear it within the data you were quoting, signings can be volatile in any given quarter.

And backlog is another element that we've been sharing, because that signings content all goes into a backlog and then it drives obviously the future revenue opportunity.

And I'm going to come back to that in a second, because your question I think about the future is more going to be around the backlog we see as opposed to maybe the signings in any given quarter.

Now backlog, we finished up 5% year to year, and full year services signings were pretty strong growth on a constant currency basis.

In fact, it's about the best growth we've seen in the past five years.

Now in the fourth quarter, the signings were up 1% at constant currency versus the third.

And maybe this is to your point of how volatile they are, the third was down 4%.

So we went from down 4% to up 1%.

The dynamic we saw in going from third to fourth was interesting in that, in the third, our long-term signings were down double digit.

While in the fourth, they swapped to up double digits.

So a very good performance in the longer term more transformational kind of content in the fourth.

And then in the shorter term contracts, they were up single digit in the third, and they've moved to down double digit in the fourth.

And some of that is because the -- we're mixing our signings.

We're mixing our delivery to higher value managed services like business continuity, and security, and cloud.

So you're exactly right, signings obviously volatile.

There is a bit of a shift that we see in our bookings in third going to fourth, again, driven by very good acceptance and pretty strong growth in our longer term, more transformative kind of content outsourcing.

And those tend to be bigger deals.

In fact, our larger deals, say greater than $100 million in the fourth were up -- sorry, for the full year were up 40% versus the prior year.

So we're seeing very good growth in those bigger deals.

Now, when we talk about backlog, again, backlog, we finished the year up 5% at constant currency.

There are a couple things to note about -- I think that are worth noting about backlog.

First, we are going to close on the sale of our customer care business, and that's going to have an impact to the backlog.

So while the revenue from the backlog that we see coming out of the total is -- would drive us to a positive growth rate, the loss of the backlog and the loss of the revenue out of that customer care business is going to drive it to a small negative.

And we're obviously prepared for that.

And we know we have that covered in our guidance for the year.

But we are going to see an impact from the sale of that business, within that specific element that you mentioned, which is revenue coming out of the backlog.

Now, the whole year isn't driven out of the backlog.

70% of our revenue in any given year might be out of the backlog, but the other 30% is coming from our in year or in quarter shorter term signings, and we've seen volatility there as well.

Our base business outside of the backlog struggled a bit in the fourth.

We saw single digit decline out of that.

So we will see growth out of the backlog on an adjusted basis, if you will, without the customer care business.

And then the rest of the growth will have to come from our base business.

Now within that base business, we do have things like our cloud offerings.

And cloud grew very well.

And while it doesn't show up in the backlog necessarily, it does provide growth within that other 30%.

Thank you, Jim.

Could we go to the next question, please.

Scott Craig with Bank of America Merrill Lynch.

Hey, thanks.

Good afternoon.

If I could get one clarification in there.

The workforce rebalancing in the first quarter, is that included as an expense in the $18?

And then my second question is around the cash flow.

You did a great job of providing the bridge to kind of get to the $18 in 2014.

Can you maybe go into a little more detail on some of the free cash flow pushes and pulls for 2014?

Thanks.

Sure, absolutely.

So first, just for clarification, our at least $18 of guidance is all in.

So it has workforce rebalancing charges in it.

It has the small gain that we expect.

It's all in.

It's at least of $18, all-in basis.

And like the road map, is an all-in road map of at least $20.

So, if we were to just hit the bottom end of our current guidance of at least $18, we'd have another $2 to go to achieve -- to finish out that road map.

So yes, it's on an all-in basis.

On cash flow, so we had a difficult cash flow year in 2013.

As you heard in the prepared remarks, we were down year to year a bit over $3 billion.

And if we were to kind of split up the attribution for that as we did on the call, operational performance, as I mentioned, we lost $1.7 billion of profit year-to-year just in the STG business, which had a profound impact on our cash.

So operational challenges, we had a cash tax headwind in 2013, and then we had a slightly less efficient balance sheet, working capital if you will in 2013 as well, which drove the year-to-year decline in 2013.

Now as we go to 2014, we said we'll grow free cash flow by about $1 billion, a little bit faster than net income, but by about $1 billion.

And within that $1 billion, we still have a cash tax headwind of about $2 billion this year.

So a larger cash tax headwind.

But I want to talk about cash -- so that's -- and the bridge by the way comes from improved operational performance within the business, and we will improve our working capital position if you will.

That will drive the year-to-year improvement in 2013 to 2014.

But I'd like to also spend a minute on free cash flow from a model perspective.

And from a model perspective, we finished last year -- if I were to look at free cash flow on a ratio basis, say to net income, on a free cash flow realization basis, we finished the year in the low 90%s on a realization basis.

And as I mentioned, this $1 billion would -- a little bit faster than net income, so obviously the math says we'll improve that a little bit in 2014.

But we'd still be we think in the low 90%s, even in 2014.

And then in 2015, we would see another improvement when cash tax isn't as big a headwind, and we'd see an improvement back to kind of the mid-90% level.

Now, that mid-90% level, relative to what we've seen in the past on a realization basis, is below where we've been when it was north of 100%.

We ran the free cash flow realization north of 100% for many years, and a big chunk of this is the difference between the cash tax and the book tax.

Now when we go forward on a model basis, we are very comfortable that in the mid-90%s, our model holds over the long term.

And by model, I mean our model of being able to continue to invest, to either build or acquire capabilities that we need, to continue to pay the dividend, and if I oversimplify all this in terms of uses of cash, invest to grow, pay the dividend, and then return cash, excess cash if you will to shareholders.

Now in the past when we were north of 100% on a realization basis, that share repurchase element could drive 5, 6, 7 points of EPS growth year to year.

That's not what our model would say we need.

And on a model basis if we were to be in that mid-90%s, we would still deliver 3 to 4 points of EPS growth just on a -- from the share repurchase.

So on free cash flow, again, I know you asked a 2014 question, but 2014 we will grow again and we will improve that realization.

But even when we look out longer term on a model basis, we are comfortable that in the mid-90%s which we'll get back to by 2015, in the mid-90%s the model in a simplified view, the model from a uses perspective, the model will hold.

Okay.

Thank you.

Can we take the next question, please?

Katy Huberty with Morgan Stanley.

Thanks.

Good afternoon.

Coming into the fourth quarter, you expected better sales execution in China, which doesn't appear to have come through.

So can you just talk about what you've learned over the past three months around the drivers of weakness in China, and what you now think it takes, and what the right time line is to return to growth?

Sure.

Thanks, Katy, and good afternoon.

So I'll just go through a couple of data points here.

As you saw, we did degrade to minus 3 on a constant currency base in the fourth from minus 2 in the third on a global basis.

That 1 point degradation, when you look at the majors, was really centered in the Z cycle and centered in the US.

So I'll leave that off to the side, because again, we're comfortable with the Z cycle and where we are.

When we look in GMU, which was the nature of your question, we did see that same 1 point degradation, and it is not what we wanted to get done.

Now, we continue to struggle in hardware.

We were still down double digits in hardware.

A little better sequentially from third to fourth, but still down double digits.

And services across those growth market areas went from a small positive to a small negative in GTS.

GBS, in fact, went from low-single digit growth to high-single digit growth.

So they actually did quite well.

But, it's a smaller part of the business, so it doesn't have as profound an impact on the overall.

So when we looked at third quarter to fourth quarter, China is still an issue.

Now, let's recognize that China is going through a very significant economic set of reforms.

So in March of 2013, and it's history that everyone knows, but in March of 2013, a new leadership team in November that they announced some pretty significant structural changes.

And we referred to those in the last call and we were waiting to see what they were, and they looked -- our opinion is they looked quite significant.

Now, many of those changes will affect the state-owned enterprises, and those state-owned enterprises are quite frankly some of our largest accounts.

So to go from that view of the world down to what did we learn.

Well we actually always knew this, but we have to continue to make progress.

We are centered pretty heavily in state-owned enterprises, and so it has a pretty profound impact on our business when they slow their purchasing.

And so from an execution standpoint, we know we have to spread more into other elements of the buying patterns that we see in China, and we will get that done.

But it's not surprising, I guess to us, given our concentration in state-owned enterprises that it's having an impact on us.

In many ways, yes we're in state-owned enterprises, but it's exactly where we want to be.

When you think about building an infrastructure for a country, if you will, the IBM platform is critical to do that.

So of course we want heavy reliance or to be in those accounts, and when they slow down, then we also see an impact.

So from an execution standpoint, we recognize that we have to widen if you will our clients.

So on the state-owned enterprises, and others, while they have slowed, we don't think that this opportunity has gone away, if you will.

There is still opportunity.

In fact, our interpretation of some of the structural changes they announced suggest that we'll have expanded opportunities, particularly in regional banking and some privately owned enterprises.

So as we expand our footprint in China, we do still see good long-term opportunity.

In fact, we continue to invest in China to try to capture that opportunity.

But it will take some time to come back.

It's not going to rebound immediately.

Now, the other thing, just math, we do get easier compares in the first and the second and the third quarter obviously, so that provides a bit of a tailwind.

Could you grow in China by the fourth quarter of this year, or will it take longer than that?

It's hard to tell.

China's hard to tell, because we don't -- I don't have a good sense of how those reforms work their way through the system, and the decision making that goes all around it.

This is a pretty complex, as I'm sure you appreciate, a pretty complex environment.

And it is difficult to gauge exactly what's going to happen on a roll-out basis.

Now, if we look at the growth markets in total, we are comfortable that we're on a trajectory to growth.

We'll be on a trajectory to growth as we exit 2014, and we're comfortable that we get back to mid-single digits across the growth market regions by the end of the year.

But again, second half statement more than an immediate statement.

Thank you very much.

Can we go to the next question, please?

Mark Moskowitz with JPMorgan.

Yes, thanks.

Good afternoon, Martin.

Appreciate the color today.

I just want to come back to the tax rate.

If we kind of adjust 2013 and 2014 for the tax rate, it really implies your business has to improve substantially moving through 2014.

With China still kind of in this holding pattern, hardware still struggling, the high end seems to be more of a secular challenge or technology challenge.

What should investors think about as kind of the top three pivot points that you're really looking to really have this confidence that you can reiterate both the $18 EPS target as well as the $20 target for 2015, notwithstanding the tax rate?

Right.

So I guess we did obviously get a substantial tax benefit in the fourth.

But it really is -- it's not the tax rate, I think, it's really the underlying business that is what we're obviously focused on improving.

And, again, as I said earlier, that hardware impact has been dramatic in all of 2013.

The currency impact has been dramatic in 2013.

And so when we look at the other elements of our business, including in software, we will grow software very consistently with what we grew in prior years.

And that assumption is obviously within the $18, but within the at least $18, but it also is an assumption that we feel very comfortable with to get to the guidance for 2014.

On services, we do see good momentum in GBS.

We finished the second half of the year with double-digit profit growth in GBS.

In GTS, we see, based on the contracts we have and the time that those contracts have been in place and the productivity, therefore, that we believe we can drive out of services, we see services back at a model level of growth.

And then with, again, share repurchase and the overall enterprise productivity initiatives, we expect that at least $18 is right in line with what we should be able to deliver.

The other element of this is we don't have a year-to-year impact from restructuring in 2014.

It was about -- it was $1 billion last year, it will be about $1 billion again this year.

So we get -- we eliminate that year to year.

And without the year-to-year impact from hardware, that allows that software and that services profit growth to show up in the bottom line.

So without the hardware profit growth impact, less of an impact from currency as we stated, services performing at model if you will and software at its historical growth rate along with EPS, we'll refill that tax impact and get back to $23.

But importantly, we're comfortable with the at least $18.

Okay.

Just a-follow-up.

If I --

Can we go to the next question, please.

Brian White with Cantor Fitzgerald.

Yes, hello, Martin.

Just a clarification, in the March quarter, you expect a $1 billion restructuring charge from rebalancing activities and $150 gain from the sale of assets.

Is that correct?

I think the $150 is --

The $150 is the first -- it will close over the first half.

The $150 closes -- it's not all in the first quarter.

Okay.

Because I think when you're saying 14% of the year's EPS, of the $18, is in the first quarter.

This is really a number that includes a massive restructuring charge that is normally allocated over a year's time.

So my question is, why don't we back out when we restructure, restructuring charge which is non-operating and back out gains, when we have gains which are not operating?

I think investors would like that, because it gives them a view on the operating performance of IBM.

Well, I guess I'd say a few things.

So first, just to make sure you're clear, the first quarter, we would expect a substantial charge.

About the same as last year, plus or minus $100 million.

And we have the gain, but not all of $150 is in the first sum of it.

The road map we have laid out, the road map is a way for us to allocate capital, and a way for us to describe to investors how we shift the portfolio.

That shift of the portfolio includes acquisitions, includes divestitures, it includes rebalancing the workforce, and all of that translates to an EPS at the end.

That EPS is reflective of all those activities.

It's got the workforce rebalancing.

It's got the gains, if there are any.

It's got the shift of investment.

So the road map is on an all-in basis, if you will, and our guidance is also on an all-in basis.

So I think the right way to look at our business, is to keep it on the basis in which we've described our longer term performance.

Now we're only two years away from the end of the road map now.

But our longer term performance is one where, as we shift to value, we acquire, we divest, and it's important I think to look at the totality of that earnings power.

And that's the way we, again, that's the way we built our road map.

It's the way we built the guidance.

Okay.

So if there was a gain later in the year, that would be incremental to the $18, because it's not currently in your guidance, outside of the $150 million?

Well the only gain, as I said, the only gain is we have is this first half, it's $150 million, around $150 million gain.

That's what we have in our guidance.

Thank you.

Can we please take one more question.

David Grossman with Stifel Nicolaus.

Thank you.

Hello, Martin.

I was wondering if we could just go back to the services numbers just for a minute.

And my recollection from the third quarter call was that there was an expectation is that sequentially the year-over-year growth rates would improve for both GBS and GTS.

Can you help us understand what items may be impacting the services growth other than the GMUs?

And how we should think about the trajectory of that business in 2014, particularly given the headwind to backlog from the sale of the customer care business?

Sure, David.

So GBS -- GBS grew 4%, which was in line with its prior quarter and we think even within that we took share.

Within that GBS content, we continued to move capability toward our digital front office offerings, and those have been very successful.

And so from a -- what's driving the growth in GBS, it's both our success in the digital front office and the momentum coming from business we've booked into the backlog in prior quarters.

And we see that continuing on the GBS side into 2014.

In GTS, the growth markets were an impact in GTS in the fourth.

Now, we think when we look at that business and its trajectory change to fourth from the third, we do see a continued investment required in some of our growth market clients, which is driving some of that content.

And we see a -- because we signed some big contracts during the year, we see us in a early stage of some contracts where the productivity quite frankly as you would expect is not as high.

So as we get into 2014, and those contracts specifically mature and the investments we've made in some of those GMU clients pay off, we do see a bit of a tailwind.

Now on the revenue side in GTS, as you pointed out, we do see growth in the backlog.

But we are going to lose the impact of the customer care business, which we think, again, knocks the revenue side of that down to a small negative.

Okay.

Thanks, David.

I want to thank you all for your questions, and now I'm going to turn it back to the operator.

Thank you for participating on today's call.

The conference has now ended.

You may disconnect at this time.