International Business Machines Corp (IBM) 2014 Q3 法說會逐字稿

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.

This is Patricia Murphy, Vice President of Investor Relations for IBM.

I want to welcome you to our third-quarter earnings presentation.

I'm here with Martin Schroeter, IBM's Senior Vice President and CFO, Finance and Enterprise Transformation.

Today, we're also joined by Ginni Rometty.

As you know, Ginni is the IBM's Chairman, President, and Chief Executive Officer.

First, Martin will go through our prepared remarks, and then Ginni and Martin will take your questions.

The prepared remarks will be available in roughly an hour and a replay of the webcast will be posted by this time tomorrow.

I'll remind you that certain comments made in this presentation may be characterized as forward-looking under the Private Securities Litigation Reform Act of 1995.

Those statements involve a number of factors that could cause actual results to differ materially.

Additional information concerning these factors is contained in the Company's filings with the SEC.

Copies are available from the SEC from the IBM website or from us in Investor Relations.

Our presentation also includes certain non-GAAP financial measures in an effort to provide additional information to investors.

All non-GAAP measures have been reconciled to the related GAAP measures in accordance with SEC rules.

You'll find reconciliation charts at the end of the presentation and in the Form 8-K submitted to the SEC.

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

Thanks, Patricia.

We have a lot to cover today.

Our third quarter performance, actions that accelerate the transformation of our business, including important announcements that impact our results and the basis of our reporting, our 2014 guidance and what it means as we move into 2015.

Let me start with the top level results.

We reported revenue of $22.4 billion which is down 4% or 2% at constant currency, excluding our customer care divestiture.

We delivered operating net income of $3.7 billion and earnings per share of $3.68, all excluding the discontinued semiconductor manufacturing business.

These results fell short of our expectations, and I'd attribute the shortfall to three primary drivers.

First, our Software revenue was weaker than expected.

We had some sales execution issues and, in addition, we've made it easier for our clients to manage their IBM Software capacity across new and more traditional work loads as they invest in our platform for the longer term.

I'll expand on this later.

Second, we didn't get the productivity required in our Services business impacting both our profit and margin and, third, the environment, including currency, isn't helping.

With a sharp movement in currency rates in September, there was some effect in the quarter and we expect it to have a larger impact going forward, and for the business overall we did see a slowdown in September which had a particular impact on us given the skew of our transactional business.

I'll get into the details of the quarter shortly, but let me first describe the actions we are taking and put them into context.

For some time now we've been clear about our strategic direction and how we address the market shifts around data, cloud, and engagement.

All of this year we've been launching initiative and making significant investments to drive this shift.

We've been very successful with strong revenue growth in our strategic imperatives and you'll see in our third quarter results that the strategic imperatives again delivered double-digit revenue growth, but some of these fundamental shifts in the industry are happening faster than we planned, so we're putting in place a series of actions to accelerate our transformation.

I want to address these right up front.

First, we're continuing to remix to higher value.

We just took a bold step in our transformation going fabless with the divestiture of our semiconductor manufacturing business.

We have world-class technologists and intellectual property, but this is a capital intensive business which has been challenging for us without scale.

With future node progression and the potential transition to larger wafer sizes, the capital requirements will substantially increase.

Global foundries will acquire our Microelectronics business and will become the semiconductor technology provider for our future systems.

This agreement leverages the strength of each Company.

IBM's semiconductor and material science research, development capabilities, and leadership and high-end systems and global foundries leadership and advanced technology manufacturing at scale and commitment to delivering future semiconductor technologies, enabling them to address new business opportunities.

With global foundries operating at scale, we'll get supply at market-based pricing for the long term and we'll exit a business that was not only capital intensive but also a drag on our profit.

Clearly, this is the right move for our business for the long term.

Also, in January we announced the sale of our x86 business to Lenovo and earlier this month we completed the initial closing.

This was a $4 billion business for us in 2013 with effectively no annual profit.

With the transaction, IBM and Lenovo have formed a strategic alliance which includes an agreement for Lenovo to resell selected IBM Storage and Software products and to ensure a smooth transition for our clients, IBM will provide x86-related maintenance on Lenovo's behalf.

We'll continue to re-mix our portfolio by investing higher value areas and making decisions on businesses that no longer support our high-value strategy.

Second, we are implementing changes that make it easier to consume our capabilities and innovations and increase our agility.

We are creating vertically integrated units to address key growth areas.

As we did with Watson earlier this year, we're creating a dedicated business unit for cloud and other integrated units to address growth areas like security and smarter commerce.

This enables more focused investment and improves our integration speed in bringing solutions to the market and with our clients.

We're also providing more flexibility to clients in the way they buy our software.

Specifically, we're accelerating investments to make our software more directly consumable through digital channels, so we'll have an end-to-end digital sales and marketing channel which will improve our reach.

Third, we're taking additional actions to simplify our structure and accelerate productivity.

For example, to improve productivity in Services while at the same time providing greater value and innovation to our clients, we're implementing a number of actions.

These include accelerating the use of automation in our data centers and being more aggressive in our use of global delivery skills and intellectual property across our service lines.

Let me tell you what these actions do for our financial model.

In the near term, our revenue will be down, not surprising since the three divestitures this year represent about $7 billion of revenue with pre-tax losses of about $500 million, so clearly we'll have an improved margin profile.

These actions also free up our spend and capital to be reinvested to areas that will accelerate our transformation, and these allow us to continue to provide very strong returns to our shareholders through dividends and share repurchases.

All of this is consistent with our strategic direction and while there are impacts in the short-term, we improve our position for the longer term.

I want to spend a minute on the high-level financial implications of the two most recent transactions.

We've posted additional information in two articles on our investor portal.

For the System x business, as I mentioned this was over a $4 billion business for us last year.

Though the business is breakeven on an annual basis, the transactional skew would have driven profit in the fourth quarter.

Starting in the fourth quarter this year, we'll no longer have the System x Hardware revenue and profit, and the related maintenance will be at a lower revenue and profit level reflecting the new relationship.

At an IBM level this will result at about a 4 point impact of revenue growth over the next four quarters, but an improved margin profile.

Our fourth quarter results will include the gain on sale associated with the countries closed net of related transaction and performance-based cost.

This net gain, as well as the operational profit we lose in the fourth quarter, will be included in our view of the full year, which I'll talk about later in the call.

Free cash flow will be impacted by two items.

Accounts payable for the balances at closing as well as future procurement IBM will perform on Lenovo's behalf, and for cash tax payments made in 2015.

We estimate this will be a use of cash of approximately $0.5 billion in the fourth quarter and another $0.5 billion in 2015.

Turning to the Microelectronics business, the 2013 OEM revenue associated with the divested business was $1.4 billion and our STG segment included pretax losses for this business of over $700 million.

This is being reported as a discontinued operation.

In the third quarter, disc ops will include both losses from the ongoing operations of about $90 million after-tax and a one-time after-tax charge of $3.3 billion associated with the transaction.

The transaction had no impact of free cash flow in the third quarter.

Now, let me spend a minute on the reporting structure.

All of our results obviously start with GAAP, which is in the middle of the chart.

To the left is a reference to our prior definition of operating results which we introduced a few years ago to provide a better perspective on the operational performance of our business.

This presentation excluded non-operating retirement-related and acquisition-related items.

Operating results is the basis of our 2015 road map objective, and we have provided a review of our results on this basis since 2011.

This definition of operating results no longer exists.

Now, moving to the right side of the chart, with the reporting of our Microelectronics business as a discontinued operation, all of the financial impacts of that business are lifted out of each line of our P&L and reported in one line, loss on discontinued operations net of tax.

Starting in the third quarter, our GAAP P&L will be on a continuing operations basis.

We'll make the same non-operating adjustments to determine our operating results, though our operating results definition will now be on a continuing operations basis.

This is the basis for our third quarter and year-to-date results, all historical periods presented, and our guidance for the fourth quarter and full year.

Now, let me get into the third quarter results and, again, these are all operating results which exclude the discontinued operations.

We delivered $3.7 billion of operating net income on revenue of $22.4 billion.

Revenue was down 4%, or 2% at constant currency excluding the divested customer care business.

On that constant currency basis Services was flat, our Software segment declined 2%, and Systems and Technology revenue was down double digit.

Ninety days ago we expected the currency would be a modest help to our revenue growth, but in September we saw a sharp move in the currency markets.

I'll talk more about currencies later.

Our margins were down with weak Hardware performance and insufficient productivity in Services.

We had a tax headwind of 3 points year-to-year and we generated $3.7 billion of net income in the quarter.

On the bottom line, we reported operating EPS of $3.68, which is down 10%.

Looking at our free cash flow, we generated $2.2 billion, which is relatively flat year-to-year.

Turning to revenue by geography.

When you look at the year-to-year performance at constant currency, major markets decelerated 2 points from last quarter and growth markets 1 point.

These results aren't normalized for the customer care divestiture.

Both major and growth markets are impacted by a point of growth consistent with last quarter.

As I mentioned earlier, we saw deceleration in September.

This is true in nearly all regions and was most pronounced in our growth markets that have a higher transactional content.

Within the growth markets, we again had double-digit growth in Latin America, lead by Brazil, and good growth in the Middle East and Africa region.

I think it's important to understand the impact of the System x divestiture on the geographic results going forward.

Given the geography mix of that business, major markets growth will be impacted by about 3 points and growth markets by about 9 points.

Reporting our divested semiconductor business as a discontinued operation will adjust the OEM revenue but not impact the geographic results.

Turning to the segment perspective, I'll cover the revenue drivers when we get into the segment discussions.

Looking at the gross profit in total, our operating gross margin was down 90 basis points, driven by margin declines in Systems and Technology and in both of our Services segments.

The 6 point decline in Systems and Technology was due to a combination of lower margin across the brands and a mix away from higher margin Z due to the product cycle.

In Global Technology Services, we did get the savings from the workforce rebalancing actions we took earlier in the year and we continue to make investments in capacity and skills, but we didn't get the base productivity we had planned through automation and the transition on some new contracts took longer than expected.

In Global Business Services we had strong growth with good margin performance in the strategic imperatives, but in the more traditional back office implementations we continue to see price pressure.

Our total operating expense and other income was up 2% year-to-year.

Acquisitions over the last 12 months drove 2 points of expense growth and currency drove 1 point.

The base expense, which is total expense less the impact of acquisitions and currency, was essentially flat.

Within our base expense we've been shifting our spending to drive our strategic imperatives and differentiated offerings and with the actions we're taking, we'll accelerate that shift.

There are a few items that are impacting the year-to-year expense dynamics.

First, we increased our accounts receivable reserves which impacted expense by over $70 million year-to-year.

This coverage is now at 2.2%, which is up from a year ago but not as high as 2009 levels.

Second, as you would expect, our accrual for 2014 variable compensation is down relative to where we were at the end of the first half; however, the reduction in the quarter was not as substantial as last year and so across cost and expense, the settlement was up $230 million year-to-year.

Finally, I want to spend a minute on the impact of currency.

The dollar appreciated dramatically in the last several weeks of the quarter and, as you know, when the dollar appreciates broadly against other currency it impacts our revenue and earnings.

What is unusual about this is not just the sharp move but the movements were nearly all in an unfavorable direction for our business profile.

We hedge a portion of our cross border cash flows which, as you know, defers the impact of the currency movement but doesn't eliminate it.

While our hedges are designed to provide stability around the receipt of cash, there is no year-to-year benefit in the income statement when a currency's direction is sustained over a longer period.

Looking at the third quarter, we had a modest impact of profit from currency; however, at current spot rates we would expect a significant impact to fourth quarter and into 2015.

Now, let's turn to the segments and we'll start with Services.

This quarter, combined Services generated $13.7 billion in revenue which was flat year-to-year at constant currency, adjusted for the customer care divestiture.

Services pretax profit was down 13% year-to-year.

Total backlog was $128 billion.

Adjusting for the divested business and currency total backlog was down 2% year-to-year.

Global Technology Services revenue was $9.2 billion, down 3% as reported but up 1% at constant currency adjusted for the divestiture.

In the third quarter we wrapped on the Software acquisition and it continues to attract new workloads to the platform.

We are expanding our footprint and in the third quarter we opened cloud data centers in London and Toronto as well as two federal data centers outside of Dallas and Washington D.C. We also added cloud capacity in Singapore.

GTS outsourcing grew 2% at constant currency, adjusted for the divestiture.

That growth was driven by IT outsourcing performance from the substantial new contracts we brought on in 2013.

GTS pretax profit declined 11% in quarter.

While we continue to benefit from the rebalancing action earlier this year, this was more than offset by the investments across our portfolio in areas like new resiliency centers, additional security skills, and the soft layer cloud hub expansion, the lost profit associated with the divested customer care business and we didn't get sufficient productivity in the base.

Part of this is due to the large deals we signed last year which have lower margins in the early stages and we didn't execute those transitions as rapidly as expected.

Global Business Services revenue was $4.5 billion, down 1% at constant currency.

Consulting and systems integration declined 1% year-to-year and was flat at constant currency.

We had strong double-digit growth in our practices that are highly differentiated in the market place which address cloud, analytics, mobile and social offset by declines in the areas that are becoming less differentiated such as the more traditional back office implementations.

During our last call we discussed our strategic partnership with Apple to deliver a new class of enterprise-ready mobile first business applications for IOS, combining mobility and analytics.

This quarter we will launch the first dozen applications.

Application outsourcing was down 6% at constant currency, reflecting modest sequential improvement.

Our performance continues to be impacted by pricing pressure and client re-negotiations as well as a reduction in elective projects.

GBS pretax profit was down year-to-year.

Here, too, we got the benefit from the previous workforce rebalancing actions, but it was more than offset by a couple of factors.

Lower revenue on a relatively fixed cost base and where we have strong differentiation such as our solutions that address the strategic imperatives we get good growth in margin performance, but in the parts of our portfolio that are not as well differentiated we're continuing to see price and profit pressure.

These are the areas where we will be more aggressive on the use of global delivery centers and applying intellectual property for faster time to value for our clients and improve business results for us.

Software revenue of $5.7 billion was down 2% and middlewear was flat.

We had solid growth in many of our solution areas like security and mobile and cloud.

Across our software brands, software as service offerings were up nearly 50%, but overall Software results didn't meet our expectations.

First, we clearly had some sales execution issues.

Second, given our client's substantial investment in the IBM Software platform, we've been providing more flexibility on how they deploy our software with economics that enable their mobile and social workloads on our platforms.

This enables them to better manage their capacity and commit to our platforms for the long term.

This will drive higher utilization of our middlewear as these mobile and social platforms drive additional on-premise workload.

Looking in our results by brand, WebSphere had another good quarter up 7% lead by commerce, mobile solutions, and business integration offerings.

Both on-premise and SaaS offerings contributed to WebSphere growth, but the majority of growth continuing to come from our on-premise solutions.

In commerce, we saw broad-based growth with strong momentum in commerce as a service which includes our recent acquisitions such as Silverpop and Aspera.

Across Software and Services, IBM's mobile business more than doubled from the prior year.

Information Management Software was down 5% where we were impacted by our sales execution challenges and some product transitions.

Tivoli revenue was up 3% at constant currency driven by Security and Storage Software.

Security once again grew at a double-digit rate.

Workforce Solutions grew 1% with growth in our social and collaboration solutions mitigated by a decline in Notes.

Rational Software was down 12%, facing a tough compare.

Across Software, we are transitioning our portfolio to capture growth areas, we continue to drive innovation in our core franchises and will be accelerating investments to make our software more consumable through digital channels.

Systems and Technology revenue of $2.4 billion was down 15%.

This reflects the product cycle of System z and declines in Power, Storage, and System x though both Power and Storage improved sequentially.

We got a lot done recently, including the initial closing on the sale of our industry standard server business to Lenovo, an agreement to divest our semiconductor manufacturing business to global foundries, and the introduction of our first open powered based scale-out system.

Looking in our results by brand, System z revenue was down 35%, now in the ninth quarter of the current product cycle.

We continue to innovate on this platform and, as an example, we recently made available new analytics offerings for the mainframe to provide realtime customer insights.

With this, IBM adds new analytics capabilities to the mainframe platform providing clients with the ability to integrate Hadoop big data.

Power revenue declined 12%, which is a significant sequential improvement in the year-to-year performance.

We have repositioned Power.

We introduced scale-out systems based on Power8 in June, and earlier this month we announced high-end Power8-based enterprise systems.

These systems are highly scalable and can handle the most data intensive mission critical applications in the industry.

In addition, we saw continued expansion of the open power consortium, now with over 60 members.

Through the efforts of consortium members, we have for the first time introduced a system built on IBM's Power8 processor that tightly integrates IBM and other open power member technologies including NVIDIA's GPU accelerator technology.

Our System x revenue was down 10% and this of course was the last quarter before the divestiture.

Storage Hardware revenue was down 6%, sequential improvement from the rate in the prior quarter.

We again saw strong contribution from our FlashSystem and our Storwize portfolio.

This was more than offset by weakness in high-end disk and the continued wind down of our legacy OEM business.

We see value in the Storage business shifting to Software, and this quarter our Storage Software grew.

We will continue to expand our Software defined Storage portfolio.

So, across our Systems and Technology business, we have taken significant actions to reposition our portfolio and maintain our commitment to driving innovation in our high-end Systems and Storage.

We committed $3 billion of investment in the next era of chip technology as we strengthen our semiconductor research and development and systems innovation with future chip supply coming from an at-scale provider.

We repositioned Power through creation of our own Power8 systems which are built for cloud and big data, and also made available to Power8 architecture through the open power consortium to build an open ecosystem and an IP play.

We are repositioning Storage to capture value through Software-defined environments and we divested our low-end System x business.

Moving on to cash flow in the quarter.

We generated $3.2 billion of cash from operations, excluding our Global Financing receivables.

We invested $1 billion in CapEx and we generated $2.2 billion of free cash flow which was down $60 million year-to-year.

This includes a $300 million year-to-year increase in cash tax payments.

Through the first three quarters of the year, our net cash from operations, excluding Financing receivables of $8.6 billion, was down $700 million year-to-year.

Within that, our cash tax payments were up $1.5 billion year-to-year.

We invested $2.8 billion in capital expenditures which was up about $100 million from last year.

This includes about $350 million investment in Software, so this is a good example of where we're shifting spending in the base to new areas.

The free cash flow was $5.8 billion, down $800 million or up $700 million excluding the impact from cash tax.

Turning to the balance sheet we ended the quarter with a cash balance of $9.6 billion.

Our total assets reflect a reduction of more than $1.5 billion associated with the semiconductor transaction.

This includes a non-cash charge for fixed assets and an increase in deferred tax assets.

Total debt was $45.7 billion which includes just over $28.5 billion in support of our financing business.

We target Global Financing leverage to be in the range of 7 to 7.2 to 1, and we do not have plans to change this model; however, the late quarter impact of foreign exchange on equity was the main driver of the leverage being slightly elevated to 7.4 versus our model.

Our non-financing debt was $17.1 billion and our non-financing debt-to-cap was 62%.

While the semiconductor manufacturing divestiture does not affect debt levels, it does impact equity by approximately $3.3 billion resulting in a 7 point impact to the debt-to-cap ratio.

At these levels, we continue to have the financial flexibility to support our business over the long term.

Before we wrap up, I want to spend a minute on the performance of our strategic imperatives that address the areas of data, cloud, and the way our clients are engaging.

We have a broad analytics portfolio that helps our clients to extract value from their data.

This is a large business for us with revenues last year of nearly $16 billion.

Through September, our Business Analytics revenue was up 8% this year with the strongest growth coming from GBS.

Our cloud portfolio supports the full scope of enterprise client cloud requirements, including solutions for private clouds, hybrid clouds, and public clouds.

Our revenue was up over 50% year-to-date.

Our as a service component was up over 80% and we exited the third quarter with an annual run rate of $3.1 billion.

Addressing engagement on a year-to-date basis, our mobile revenue more than doubled, our social offerings returned to growth with double-digit growth in the third quarter, and our Security revenue was up over 20% marking the eighth consecutive quarter of double-digit growth in Security.

Together, the revenue in our strategic imperatives was up double digits and about half of the content was in Software.

So, let me bring all of this back together.

As I mentioned earlier in the call, we're driving the shift toward our strategic imperatives.

Earlier this year we created a Watson unit and committed $1 billion to bring Watson cognitive capabilities to the enterprise.

We launched the Bluemix, we're globally expanding our soft layer cloud data centers and we formed a partnership with Apple for enterprise mobility.

Now, as we exit the third quarter we're making it easier to do business with us, including creating vertically integrated units to address key growth areas in making our software more consumable through digital channels.

We're taking additional actions to drive more productivity and increase the agility of our Company and while we invest to drive to the growth areas we're also aggressively moving away from the businesses that don't fit our strategic profile.

The sale of our x86 business and the divestiture of our Microelectronics business are the two most recent examples.

Earlier this year we divested our customer care BPO business and, as I mentioned, the revenue from these three businesses was $7 billion in 2013 and in aggregate they incurred a pretax loss of more than $500 million, all supporting the shift to higher value.

Let me spend a minute on our view of the full year.

As I said earlier, our operating results are moving to a continuing operations basis, so they exclude the financials associated with the semiconductor business in the current and prior periods.

When we reflect the discontinued operations in the base, our full year 2013 operating EPS was $16.64 versus $16.28 based on the prior definition.

Within this new operating definition, we've considered a number of items in our guidance for 2014.

First, we've completed the initial closing of the sale of our System x business and, as we said, we will no longer have the revenue and profit associated with that business, but in the fourth quarter we will report a gain on the sale net of related deal and performance-based cost.

That net gain will contribute about $0.75 of earnings per share but that does not reflect the lost profit in the fourth quarter.

Additionally, as we execute some of our plans to drive simplification and accelerate productivity in our business, we expect to take a Workforce rebalancing charge in the fourth quarter.

We're starting to work through our plans but at this point we would expect to take a charge of up to $600 million.

We've also had a dramatic move in currencies and we've taken into account an impact based on current spot rates.

We'll see how that plays out.

And of course, we've considered the rate and pace of business coming out of the third quarter, including the environment.

As I noted, we saw slow down in September and the fourth quarter as our largest transaction quarter.

Put all of this together and we expect full-year 2014 operating EPS to be down between 2% and 4%, and that's off of last years comparable base of $16.64.

Given that reduced outlook for earnings, we see a comparable impact to free cash flow for the year.

As I mentioned, we can estimate the x86 divestiture impact at about $0.5 billion in the quarter and so with that included, we see free cash flow for the year between $12 billion to $13 billion at this level of income.

Of course this doesn't include the gain from the divestiture.

Looking forward to 2015, we've always considered a few factors as we look at the progress toward our 2015 objective.

The trajectory of the business, including the macro environment, the investments we need to be successful over the longer term in enterprise IT, and our return of capital to shareholders.

Two of these have now changed, the trajectory of the business and the timing of investments we need to make.

Of course it remains a priority to return significant value to our shareholders through dividends and share repurchases.

Given our third quarter performance, the actions we're taking and with only 15 months to the end of 2015, we no longer expect to deliver $20 of operating earnings per share in 2015.

As is our practice, we'll provide our view of 2015 in January.

In the meantime, we have a clear and compelling strategy and we're accelerating our implementation.

We will continue to manage our business for the long term and we will absolutely continue to return significant value to our shareholders.

Ginni and I look forward to your questions.

Thank you, Martin.

Before we begin the Q&A, I'd like to mention a few items.

First, we have supplemental charts at the end of the slide deck that provide additional information.

As Martin mentioned earlier, we've also posted articles to our Investor website that contain additional information on the two transactions discussed today.

Second, I'd ask you to refrain from multi-part questions and, finally, I want to remind you that Ginni Rometty is joining today's Q&A.

Operator, please open it up for questions.

Thank you.

(Operator Instructions)

The first question comes from Bill Shope with Goldman Sachs.

Can you hear me now?

Yes, Sir, go ahead.

Okay, great thanks.

I have a bit of a broader question.

Obviously there's a lot of new info here, so I'm trying to understand or clarify how we should think about the unifying theme here for the shortfalls you're seeing.

The challenges that really began in 2013 were primarily centered on the growth markets.

Can you talk about how much of your current challenges are still centered on that issue and how much of it is now well beyond just a geographic problem at this point?

And I guess related to that, how are you thinking about the potential for stability growth markets and what that would do for your turnaround potential in 2015?

Thanks.

Sure, thanks, Bill.

From a unifying theme perspective, the theme that we've been talking about since 2013 is both the secular and cyclical challenges we've had in our hardware business, and we talked about the profit loss year to year last year.

Now, relative to the growth markets, that hardware business has a sort of an outsized effect because it does represent more of the business there than what we see in the major market, so that theme within our current results continues despite the actions we've taken within the hardware business to reposition that we are not yet seeing benefits, all of the benefits, of that repositioning.

So, as we've talked about, we repositioned power.

We have divested of the X series business.

We will wrap on the Z series cycle, if you will, that's the cyclical element of this.

So, the ongoing theme of the hardware business continues and it does have an outsize impact on the growth markets.

Now, relative to the growth markets specifically the one other point I'd make is that there is not a homogeneity around the performance of these growth markets.

What we saw in the growth markets is a continuation of what I'd call disparate revenue performance, so Brazil continues to do well, China continues to decline as that hardware business affects them fairly substantially, India declined in the quarter.

What we see in the third quarter was where we have heavy transactional content we tended to have a much bigger decline in that September month so, again, the unifying theme around hardware continues and specifically within the growth markets we're seeing disparity of performance continue and September impacted those transactional businesses much more dramatically.

Thanks, Bill.

Can we go to the next question please?

The next question comes from Katie Huberty with Morgan Stanley.

Yes, thanks, good morning.

Beyond what's already been announced, what are the paths to accelerated transformation going forward?

Are there additional asset sales on the table, and also how likely is it that we see more transformative acquisitions going forward?

Well, I guess I'd say a couple of things, Katie.

First, we do invest at a high level every year already.

We spend, as you know, about $4 billion in capital.

We spend $5.5 billion in research and development as examples, and we remain acquisitive.

We've had a number of acquisitions this year to solidify, if you will, the core capabilities we've built around our strategic imperatives.

So, when we think about accelerating the shift, think about it from a SoftLayer perspective.

For instance, we said earlier in the year we would put about $1.2 billion into capital into SoftLayer to expand their footprint around the world.

Now, we're aren't going to add over $1 billion to our overall capital bill.

We'll probably wind up adding just a few hundred million year to year but, again, we're shifting that into the SoftLayer business and that shift happens over time, and we think we have a pretty good set of facts around why and how that's working.

So, you saw again this quarter solid double digit growth in our strategic imperatives.

So, as that shift happens over time, we've been able to shift, now we're going to accelerate that and rebalancing our skills is an element or a means by which we can accelerate that shift so, yes, we will remain acquisitive.

We still believe we have the core capabilities for our view of enterprise IT around data and cloud and engagement built, and so we'll continue to add capabilities around those, but our core capabilities are in place.

We do invest at a very high level and so we'll just accelerate the means by which we're shifting.

Okay, thank you, Katie.

Can we please go to the next question?

The next question comes from Toni Sacconaghi with Sanford Bernstein.

Yes, thank you, I have a question for Ginni.

IBM is missing its free cash flow goal this year by $3 billion to $4 billion which certainly in an investor eyes is a really significant margin.

The announced actions feel not that different quite frankly from what IBM has been doing for the last 10 years, ongoing restructuring, organizational changes, and select dispositions and a migration to a higher margin businesses.

So I guess my question for you is do you think this time is different in the sense that do you view the current results as effectively a crisis at IBM and how do you gauge this magnitude of disappointment and given that, do you believe that your responses should be out sized and different from what you've done historically and do you believe they are because certainly at the surface they feel somewhat consistent with what you've done before?

Okay, Toni, look, let's just back up one second.

First let me get the context.

As you said, does this time feel different?

And so as you and we and I've talked with all our investors, this time in this industry is different, right?

With these three shifts all going on at once, so it is unprecedented change which then leads to your question.

There is no doubt, look in this quarter, and part of the reason I'm on the call, obviously we were disappointed in this quarter, but when we talk about what we're doing for the long term and these actions, these actions go on the heals of what has been a series of what I think are very bold actions from the entire year with a very clear strategy, one that's around moving to the enterprise IT to the era of cloud.

One that's around data and analytics for transforming our client's industries and professions, and then social, mobile and I can't underscore enough security.

So when you step back and look at the full year when we've said these will reorder our industry and therefore we've got to reinvent ourself like we've done in prior generations but it will be around these things and just go back to January.

Watson, $1 billion investment to start the group.

As Martin just talked about $1.2 billion to extend our data centers, 25-40 for cloud, then $1 billion for blue mix.

It is a platform, a platform as a service that will provide a platform for innovation for many years to come, not to mention the Power8 having been redone developed bottom up for data and cloud and then $3 billion of research and development for semiconductors that secure our long-term future, not to mention what we did with Apple, with SAP which are really a fundamental change in partnering strategy that not only apply to Apple and SAP, they really point to us being the go-to enterprise that people come to on how to change and how to enter into the enterprise business along with having divested, as you just heard, as you well know, $7 billion of revenue which, by the way, was at a loss, $500 million loss, right?

So, empty calories as some of my investors would say.

And then the re-profiling of the STG business.

So, on the heals of those bold actions, these are three more that continue and I consider them quite bold.

The idea of cloud altogether, integrated verticals, and then not to underestimate this point about speed and what we are doing.

In fact, I want to really sort of punctuate this point on speed.

These divestitures do give us an opportunity to go ahead and simplify the business and remove layers.

Make no mistake, that's important because the strategy is correct and now it's our speed of execution that needs to continue to improve.

Thank you, can we please go to the next question?

The next question comes from Benjamin Reitzes with Barclays.

Yes, thanks a lot.

A question I guess for both of you.

I wanted to talk about earnings power.

I'm an old free cash flow guy, call me antiquated, but the free cash flow has been averaging let's call it between $12 and $14 last two years.

Your guidance now is about $12.40 if I take the mid point, and you're still reporting EPS and guiding for EPS that's $16 plus and we've just had obviously a major setback here and usually when we're dealing with IBM we have a road map and all those things to kind of guide us, but in my training, free cash flow -- EPS usually migrates towards free cash flow, so it seems like you have a lot of increased investments and what not that are going to keep free cash flow low for some time, so I guess I wanted your view of earnings power and could we see flat to down EPS for several years now as these two numbers meet in the middle or is the EPS set to have growth from this $16 level despite free cash flow being significantly below?

Thanks a lot.

Sure, Ben.

Thanks for the question.

A couple of points.

First, from a free cash flow standpoint and your data that you just quoted, I won't rehash it but with the cash tax headwind this year, which we've talked about in the past, that's obviously an impact and the way the Lenovo transaction is structured it has a free cash flow impact not only in the fourth quarter of this year but that will carry through a little bit to next year as well.

In terms of capital investment requirements and what we need going forward, as I mentioned on Katie's question, we'll grow capital where we see opportunity and the SoftLayer example is a good one, but in total I would expect our capital requirements to be fairly flat to up a little bit.

They won't change dramatically going forward and so once we get through some of these impacts, if you will, some of these headwinds on the cash line, I think we'll have a relationship that is more like what you're used to from us.

Now, there are some other impacts that will affect if you will the ratios as opposed to the free cash flow alone so, as an example, you noted the earnings number on an earnings per share.

That has obviously the gain from the Lenovo transaction but that goes into the investing section of free cash flow.

It doesn't go into the free cash flow area, so there are some other impacts or some other dynamics around free cash flow in the near term that are going to impact those ratios.

The balance sheet itself, when we look at the balance sheet itself it looks as though it's tracking, when you start once you make some of these -- once you recognize some of the adjustments that we made it was the balance sheet itself is continuing to track to the profitability and we would expect that to continue as well.

Thanks, Ben.

Christine, please take the next question?

The next question comes from David Grossman with Stifel Nicolaus.

Thank you.

Martin, I can appreciate the comments you were making earlier about the hardware business and the impact that it's had on earnings and cash flow; however, you obviously have two very big, important businesses beyond that, both services and software, and I guess specifically in software, you had a pretty easy comparison this year and I'm wondering if you could just better help us understand exactly what the issues are in software and what you mean by making software more consumable through digital channels and how that's going to impact the business?

Sure, David.

A couple things on software.

First, when we say more consumable through digital channels, when we look at how the world is evolving in terms of how our clients will then try, will then buy, a lot of that is moving into a model where they essentially have it through like what we have with our blue mix through our store, if you will, our platform that allows them to try and get access to blue mix.

So, if you haven't looked at our blue mix content yet, I would encourage you to get a sense of what we mean by moving to a more digital engagement.

On software, specifically on performance, we did see, as I mentioned in the prepared remarks, we did see a slowdown in September and that was true in software as well, and obviously the software performance has a pretty profound impact on our profit given the margin.

Within software, when we looked at our performance you saw that our Webster business continued to grow.

It did reasonably well.

Our SaaS business, software as a service business, across all of software continued to do well where we had a bit of a struggle was in our IM business, in our information management business.

Some of that's due to product transitions and some of it, as we said on the call, is the way we're providing flexibility around our clients as they engage in these enterprise license agreements as they engage to try to manage their capacity requirements so, again, the software performance impacted certainly in September but not uniformly.

We did have pretty good growth in, as I mentioned, in WebSphere and some challenges in the IM business, but a disappointing -- as we said a disappointing quarter for us in software.

Okay, thank you, David.

Can we please go to the next question?

The next question comes from Steven Milunovich with UBS.

Thank you.

Ginni, thanks for joining us today.

Question for you.

I believe you recently took some of your executives out to the Valley, and I know when I go out I generally come back pretty depressed.

They all argue of course they are going to disrupt the large companies, that the large companies basically have to break up.

There's an inevitability to the difficulties that companies like IBM face.

I'm curious what you took away from that, if you feel better or worse about IBM's ability to come back, and conversely, our survey suggests a lot of your customers do want IBM to help them move forward, but I think investors are concerned that you won't get a lot of these new companies who do start out with a different kind of infrastructure.

I wonder if you could comment on that?

Okay.

That's a great question, Steven.

From a couple different perspectives.

First, I've been out there many times actually, so not even just one, and you take a look at our SoftLayer business and I think this is actually an important point as we have moved not only Watson but SoftLayer itself to be a platform for innovation for many companies, and so what we are finding is that many are very interested SoftLayer, and SoftLayer runs some of the most interesting start-up companies that there are.

So, on one hand it's about providing them with infrastructure but then blue mix in this platform as a service and then the idea that Watson as a platform which, as you know, is a very different approach we've taken already 3000 of those partners are in line to get on to Watson, many of those from the West Coast, so that's one set of messages that I pick up that pertain from what I would call the start ups.

But to your other question I think as well and equally interesting to our current client base, I was with 30 CIOs of our biggest clients just at the tail end of last week and to me it was very interesting to hear them talk about what they really need and are going to need even more of our help from.

And it was a role one of them called being a navigator, that there are many of these start ups out there and that's interesting for innovation and I agree, every company will do some innovation in many of these are cloud companies and the like, but at the end of the day this gets integrated with how their businesses operate today and you can see this now peeking into a point to say, hey, look, you're the ones that understand how an enterprise operates and how we should pull all of this together.

This is a wonderful opportunity for us and it really matches and I believe we have placed the right bet when we said in cloud one of the most important attributes would be hybrid and that's this idea of all of us will build businesses part on the cloud, in fact you'll see most of that around things that need to move fast and then you'll have your systems of record.

You'll need to integrate them, that's the word hybrid, and we're seeing that play out.

That's what people are looking for and that's, as you know, where we doubled down in creating a lot of capabilities around hybrid in the cloud, about data, we said at the end of the day it's going to be all about data and it's going to be about security, and I believe sure enough all three of those are coming to pass.

Thank you.

Can we please go to the next question?

The next question comes from Tenjin Wong with JPMorgan.

Thanks so much.

I just wanted to ask a big picture question on people, labor and culture and things like that.

I heard words like workforce, rebalancing.

It sounds like you're shifting more to global delivery, more automation and sales and processes.

So what does this all mean for headcount, can we with see a big change in headcount and more importantly impact on culture?

Thanks.

Thanks, Tenjin.

It's a good question.

So, a few things.

We have been reducing headcount just as a function of some of the divestitures that we've been in so as an example when we divested of our customer care business our head counts come down and when we've finished the X series divestiture again same kind of pattern.

So our overall head count is obviously down.

From a culture perspective around the shift to global delivery centers, quite frankly we're -- we have not been as aggressive here as others have been, so we think we have an opportunity -- we have an opportunity to move more of that work to where we can put it into a more common platform so, yes, the overall head count is coming down and yes we will be moving more aggressively into global delivery centers but, again, we have not been as aggressive as others.

And then the other thing I'd point out is that reduction in overall head count also allows us now to think about how we simplify our business, and some of what you heard in my prepared remarks were around trying to simplify the business.

So, yes, overall head count is coming down and I think what we would expect is not a dramatic shift, if you will, in the employee base, but just a reflection of what you've seen us publicly announce.

Tenjin, let me go ahead and add.

I really want to talk about this point on culture because this is something that we have been working on and I think that it's again important as part of any reinvention of any company.

You have to go and match the culture with it, and I think of a couple defining characteristics of the culture we are building here.

One is speed.

The second is the word engagement, and the third Martin just mentioned around simplification.

And so make no bones about it on speed with the whole team and as many of you know I've been on this and with our teams and it's not enough to tell teams that you need to go faster.

The point is you point them to where we're going to go.

We've been very clear about the strategy, and then it's also how you work and many people call that agile or dev ops.

It's this kind of speed that comes with you try things, you fail, you correct them, you keep moving forward and that in fact is what we are building around the Company and many of the places where we have done that already, great results and we're going to continue down that path.

So, I underscore speed.

And then the second is this idea about engagement which really are you social and mobile within our own Company.

Think of that as a production engine that makes things go faster and it's also, by the way, what we do with commercial clients, but we have done a great deal of work on this topic to allow the IBMers across 170 countries to both move to the future and move there with speed, this idea of engagement and then, as I said, Martin mentioned simplify.

And part of you simplifying is this idea of taking layers out which is what I just talked about a minute ago.

So, culture is paramount.

Take away the word speed and engagement.

Thank you.

Please go to the next question.

The next question comes from Jim Suva with Citi.

Thanks very much and Ginni appreciate you coming on the call giving the change and challenges that's going on.

Maybe if you could just help us understand a little bit when we look at the results geographically, it looks like all geographies were down, so some may say that it's more of an industry situation but then when we look at IBM's results and compare them to the peers and competitors who are maybe are unique individual companies they are all seeing a lot better growth so then when they say that it's actually IBM focused or challenges, can you help us better understand if you view this more as industry or IBM not being nimble enough, or how we should view it as trying to paint the culture within IBM to adjust to this new age in these new three focus areas?

Yes, so Jim first, when I think about revenue in our Company, I think first and foremost about moving us to higher value and so when you think of higher value as we've clearly staked out these ideas around data and analytics, around cloud, and around social, mobile, and security.

I want to take you back and just remember that in this quarter, and in fact by the way those collectively grew almost 20% and it's improved every quarter grown every quarter a higher number, and you take a look at them and they are not small businesses.

Big data and analytics which ended last year at what were we?

$16 billion.

$16 billion and now this quarter, year-to-date, 8% and you take a look at cloud already greater than 50% year-to-date and I think of how we ended last year, what, we were about $4.4 billion and the as a service was about $2.1 billion.

That's right.

On a run rate.

We just now let or exited a $3.1 billion run rate.

If these were individual businesses, they would be very highly applauded for their growth rates and then on social, mobile, and security again eight quarters double digit and so these are in and of themselves large businesses with very high growth rates.

So, I view those compared to their peers in those areas.

They're doing quite well.

Now, when I take a look and you say what do I see overall, now we do have core franchises.

Core franchises that we said they do mission critical work in many cases.

We need to keep innovating on them to improve their margin, but they may not be in growth Markets and, as you know, we just as well added to the growth challenge and no apologies for divesting a revenue that is not high value, not core.

We need to redeploy that capital to other things.

This announcement this morning of global foundries is a great example of that, right?

That is a business that requires a fair amount of capital but requires even more going forward as you look at what happens as you go from 20 to 10 to 7 nanometers let alone the larger wafer size, and so that is someone else's business.

They're going to do that well.

We're going redeploy that capital into those growth areas.

So, when you think of growth I want you to keep -- we keep saying the word mix.

We're mixing into what we believe are the areas that are aligned with the shifts in the marketplace and then managing for high value.

Just one last question or one point I'd make kind of on macro that might be of interest.

I mean I take a look and, as Martin said, I can only speak to what happened in our September, what we saw was both broad-based across the world, but clearly in the areas where we were high transaction revenue impacted more but as well I did see when you look by different industries I see different industries doing different things so, as an example, financial services very focused on things like OmniChannel, cyber security as you might expect.

In fact, I had done a dinner with some of the largest CEOs of all of the clients in France and there were two topics.

We talked about data analytics and security the entire four-hour dinner, and so this topic and certainly in cyber itself and then married with when you do OmniChannel and the impact you have with channel reach, big in financial services, same in retail.

So, you see some industries pointed more one way, others pointed more toward efficiency so I do see differences around the world but again, back to that September, just based on what we saw and time will tell whether what we saw is pure execution.

We're treating it that way.

Or time will tell whether it was something broader.

Thank you.

Can we please go to the next question?

The next question comes from Keith Bachman with Bank of Montreal.

Hi, thank you.

My question relates to services and it's a two part question.

Can you grow services?

Outsourcing is about 45% of revenues, services revenues, and outsourcing backlog is down about 8% in constant currency.

Outsourcing signings in constant currency declined 17%.

Coupled with that maintenance is about 13% of services revenue continues to decline, so when you think about that question I wanted to add on to why is IBM under performing Accenture so dramatically?

Is this part of the organizational structure so it really -- Ginni you mentioned speed and engagement.

It seems like IBM continues to under perform.

Would IBM be better off with a different organizational structure, perhaps even breaking up the Company further that allowed for greater speed in an organization, so the two part question is can you grow services and why is IBM underperforming market leader-like Accenture showed dramatically?

Thank you.

Sure, Keith.

A couple things.

So in terms of services, we did not have the signings performance that we were looking for.

Now, we have some pretty big deals.

I wouldn't say that those deals are gone.

Those deals are still out there and the teams continue to work them.

There are -- as always, there are a series of complexity and regulatory environments and things.

So we had a large pipeline and when we entered, unfortunately because we did not get them done, fortunately, maybe we have a large pipeline as we exited the quarter as well, so we did not get the signings done we wanted.

Now, as we've talked about in the past within any given quarter but if I look at it over a longer term about 70% of our revenue growth is driven by the backlog that we enter a year with and our backlog now adjusted for the divestiture of our customer care BPO business is down about 2%, but what we've been seeing is better yield out of that backlog than what we've seen in the past.

And so a few dynamics, backlog down a little bit but with better performance in terms of what we're getting out of the backlog we've done a bit better.

And then on the in-quarter signings what we have in the past talked about in terms of base growth which the way to think about that is sales into existing customers where we already have contracts, there are generally two what I call forms of that.

One form is where we are adding more work, so deploying more servers on their behalf or something of that sort, and we did not see that as much as we expected in this quarter, and also there are -- some of our contracts have more volume related metrics tied to their performance and we didn't see the volume levels we expected.

Now, that could be again macro related, so from a services signings perspective and how it feeds in, I would say that we are not relying on in our guidance a dramatic turnaround.

That business, however, does have some pretty strong underpinnings in it with regard to what we saw in kind of the base strategic outsourcing business very good signings growth.

Bear in mind that with the divestiture of our customer care BPO business that GPS business is going to be down obviously because we're not in that business anymore.

So across services not the quarter we wanted in signings, but some metrics and some dynamics underneath it that are kind of consistent with what we saw coming out of the third quarter.

On our GBS business, very good performance when we move and where we've moved to the new areas, including front office digitization and things we've talked about, so very strong performance in the GBS elements of the business where we see the future and in fact the pipeline now is more than half of that future business.

And also we'll start to see the benefit of -- some of the benefit of our partnership with Apple in the GBS business as well as they start to deploy those mobile apps that we're going to announce this quarter.

So the GBS business is kind of a mix between very strong performance where we move to the future and continued price pressure and profit pressure in that more traditional packaged applications business.

It is very price competitive.

The incumbents in an account are protecting those accounts and obviously to break in we're having to be more aggressive, so it's a pretty aggressive environment.

Yes, I would just add a couple points here in that, one, that comment about versus Accenture, now remember managing for high value.

So, when you look at that from a margins point of view you'd say something different.

And so a couple things, as Martin just described, where we grow I think it's important to see in their business the team has aligned across where the growth areas are and then aligned in other areas where they need to really just focus on efficiency and productivity.

That will allow them to continue to grow faster so, as an example, the team is aligned around strategy and analytics together.

We just talked about that result.

They've aligned around what they call mobile and interactive.

In fact, we put another $100 million into these mobile studios, interactive design studios, around the world.

We are now the largest digital agency as measured by ad age, not ourselves, the largest digital agency out there, so their strategy in analytics, big practice, big practice around mobile and interactive.

Both of those with very good growth and then I'll just complement it where Martin said.

The other two practices, ERP and then the other is application development maintenance, and between those you saw pricing pressure on application packages and you saw it as well as you just described it on the application maintenance area, but I believe the right way to grow, they've actually aligned themselves, two different formulas and that is the right focus because remember again, it's about managing for higher value.

Thank you.

Please go to the next question?

The next question comes from Sherri Scribner with Deutsche Bank.

Hi, thank you.

Martin, I was hoping you could give us a little more detail on the FX impact, specifically you said it was going to get worse in the fourth quarter and continue into 2015, so just hoping you could give some detail on the magnitude and how that runs through the P&L?

Thanks.

Sure.

So, as we've talked about in the past and I mentioned on my prepared remarks as well, as currencies have kind of a one directional long-term trend here, our hedging programs to help us manage our cash position really have no benefit to the INE anymore, so it was -- the sharp move in the third quarter was relatively small.

It was an impact in the quarter but relatively small to what we see coming in the fourth and next year.

Now, this is all based on the most recent exchange rates and we don't know where this is going to wind up, but in the fourth quarter alone as an example FX could be up to $0.25 in EPS on a year-to-year basis just for the moves to date, so it has a pretty profound impact on our profitability in the near term and again the hedging programs don't have an INE benefit, if you will, on a year-over-year basis as the currencies continue to move.

Now next year, we'll talk more about next year when we get together in January, but that magnitude of impact is consistent with what we see in the fourth.

Again it's a pretty substantial impact to us.

And as I noted in the prepared remarks it wasn't just that it was a sharp move, it was that interestingly each of the currencies seem to work against us.

Most of the time we see some benefits from some of the crosses, some of the cross FXs, but we just did not see that this quarter.

Thanks, Sherri.

Can we go to the next question, please?

The next question comes from Amit Daryanani with RBC Capital Markets.

Good morning, guys.

So, maybe just want to talk a little bit on the free cash flow usage as you go forward.

You're obviously talking about a down tick on the free cash flow number, but I'm curious.

How do you think about the buyback program as you go forward?

It decelerated in the last few quarters.

And when you talk about (inaudible) initiatives into the newer IT markets, does that suggest that maybe you start to look at more deals or bigger deals?

So maybe just start on the buyback and M&A side of the equation as we go forward.

Sure, Amit.

So, maybe I'll address the acquisition side of this first.

We do continue to see ourselves being active.

Now, our acquisition model which we think is a powerful one that works quite well for us is really built around a couple of basic principles.

One is that we are not looking to acquire to change, if you will, who IBM is.

We have a very good position in enterprise IT and our acquisition strategy is to supplement our view of where we see enterprise IT moving around data, cloud, and engagement.

Two, we need to -- in order to drive the economics out of these acquisitions, we need to find things that we can put into our distribution channel immediately and start to get the returns immediately, and what that tends to mean for us then is that acquisitions tend to be smaller because they have not yet fully globalized and we want to take advantage of that by bringing those products out to our clients.

And then, three, the basics here and my boss sitting next to me is going to remind me as well, we don't do what I would call strategic and I'll do the air quotes, strategic acquisitions.

They have to make sense economically and we'll continue to make sure that our acquisition content is on a sound economic basis.

In terms of share repurchase, we have been quite aggressive and the share repurchase and the resulting reduction in shares is fairly linear.

It's something we've been doing for a long time.

We've been returning capital to shareholders.

The result or the impact is I've mentioned fairly linear, so if you were to reduce, if we were to reduce our share repurchase going forward it would have a commensurate reduction in how many shares we take out obviously.

That's not going to surprise you but remember since we've been aggressive we can still have going forward we can still have a very meaningful share reduction even if we were to reduce our levels going forward and we feel very comfortable with the capacity and the flexibility we still have to continue to return capital to shareholders both through share repurchase as well as through dividend.

Okay.

We've run a little bit late here so, Christine, why don't we take one last question.

Thank you.

The last question comes from Brian White with Cantor Fitzgerald.

Yes, good morning.

I just wanted to be clear.

What did the chip business lose in 2013 and what are the expectations for loss in 2014?

Thank you.

Hi, Brian.

I think we have provided this detail in the portal article, but just to go through the data, 2013 we had a loss of $700 million on a pretax basis.

And 2014 is basically flat to what we saw in 2013.

Maybe slightly better than that.

A little bit better, so 2013, $700 million loss; 2014 a little bit better and again the details are in the portal.

Okay?

So, look, let me -- I think it's probably a good time for me to wrap up here and I'd like to make a couple comments.

The first I'd like to just really summarize for everyone why I thought it was important to join the call today.

As many of you referenced in your comments, we had two strategically important announcements that we made.

One was this divestiture of the micro electronics business.

It's an important strategic move and very important to us.

Martin just commented about some of the financials around it, but it is more than that.

It is about strategy.

The second is, and the second important reason I wanted to join, is we no longer expect to deliver that 2015 EPS objective which we have talked about and as you know, it has been in place for some time.

But these two things do come together and they're underpinned by what I believe is a singularly important message to our investors in that we are reinventing and we are managing this Company for the long term.

So while -- make no mistake, our results this quarter were disappointing and we don't want to minimize that.

We had though been very clear that this industry is shifting and we have been executing a strategy that moves this Company to the future.

Now, I am absolutely convinced that we are over the right targets.

We see the evidence of it.

You see it in the results and analytics, in cloud, in mobile, social, and security and we have taken, as I was going through, very big steps and bold moves to move this Company to higher value and that does include, it does include divesting businesses that really don't fit our strategic profile, including today's divestiture of micro electronics.

In fact I've asked you to just keep remembering that the divestitures this year alone represent $7 billion of annual revenue, but revenue that is absolutely with considerable losses, all right?

So our Company, it is fundamentally better positioned than it was a few years ago but, as I have said, we have more to do and we need to do it faster.

Now, while many things are changing, as I always say to our team they're changing because they must.

There are some things though that will not change and they have not changed and I want to end our call on those couple points.

We are going to continue to shift this Company and this business to higher value.

We're going to continue to manage this business for the long term and we will continue to deliver significant value to shareholders.

In the end, I believe these are the principles that are the hallmark of the IBM Company.

So, on behalf of Martin and I, let me thank you for joining us today.

Thank you for participating on today's call.

The conference has now ended.

You may disconnect at this time.