使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主
Operator
Welcome and thank you for standing by.
At this time, all participants are in a listen-only mode.
Today's conference is being recorded.
(Operator Instructions)
Now I will turn the meeting over to Ms. Patricia Murphy, Vice President of Investor Relations.
Ma'am, you may begin.
Patricia Murphy - VP of IR
Thank you.
And good afternoon, good evening, good morning depending on where you are.
This is Patricia Murphy, Vice President of Investor Relations for IBM.
I'm here today with Martin Schroeter, IBM Senior Vice President and Chief Financial Officer.
I'd like to welcome you to our fourth-quarter earnings presentation.
The prepared remarks will be available within a couple of hours and a replay of the webcast will be posted by this time tomorrow.
I'll remind you that certain comments made in this presentation may be characterized as forward-looking under the Private Securities Litigation Reform Act of 1995.
Those statements involve a number of factors that could cause actual results to differ materially.
Additional information concerning these factors is contained in the Company's filings with the SEC.
Copies are available from the SEC, from the IBM website, or from us in investor relations.
Our presentation also includes certain non-GAAP financial measures in an effort to provide additional information to investors.
All non-GAAP measures have been reconciled to the related GAAP measures in accordance with SEC rules.
You will find reconciliation charts at the end of the presentation and in the Form 8-K submitted to the SEC.
So with that, I'll turn the call over to Martin Schroeter.
Martin Schroeter - SVP & CFO
Thanks, Patricia.
As is typical in January, I'll start out with some top-level comments on the quarter and the year, discuss the details of the quarter, and then conclude with our view of 2017.
In the fourth quarter, we delivered revenue of $21.8 billion, operating net income of $4.8 billion, and operating earnings per share of $5.01, which is up 3.5%.
There are significant opportunities and shifts in our industry and we believe that to be successful with enterprise clients, you need to bring together cognitive technologies, on cloud platforms that create industry-based solutions to solve real-world problems.
So with that very brief context around our point of view, let me comment on what we achieved in the full year of 2016.
We made progress in building new businesses and creating new markets and continued to deliver strong results in our strategic imperatives.
We invested at a high level and remixed our skills to address these new opportunity areas.
We also continued to innovate in the businesses that we have traditionally provided to our clients.
We returned capital to our shareholders and we achieved the earnings and free cash flow expectations we set last January with $13.59 of operating earnings per share and free cash flow of $11.6 billion, which is 97% of GAAP net income.
So we did what we said we would do in a year not only with a lot of change in the industry, but also a year with a number of macro conditions and events, particularly in countries that are meaningful to our results.
I'll cover our expectations shortly, but right up front I'll say that we are exiting 2016 in a stronger position than we entered it, and that is reflected in our 2017 guidance.
Looking at some of the highlights of the fourth quarter, we had terrific growth in cloud, with revenue up 33%.
We also had good growth in our analytics, security, and mobile solutions.
We are continuing to grow our substantial technology services business, reflecting the work our clients are demanding to help modernize and transform their infrastructures.
And we had really good performance in our z Systems business, reflecting the value of differentiated high-value solutions running important parts of our clients' infrastructure.
There were some macro challenges in the quarter in certain countries like Brazil, the UK, and Germany, as well as the impact of a stronger dollar.
As always, my comments throughout will be based on constant currency.
Our results for the quarter and the year reflect the success we are having in our strategic areas and the investments we have been making to drive that shift.
We delivered 14% revenue growth in our strategic imperatives for the year, led by cloud.
We finished the year with $13.7 billion of cloud revenue, which was 17% of IBM's revenues.
Our strategic imperatives together generated $33 billion of revenue in 2016 and now represent 41% of our revenue.
To put this in perspective, when we first established the strategic imperative, we said they would grow to $40 billion and represent over 40% of our revenue by 2018.
The growth we achieved in 2016 keeps us ahead of track to the $40 billion.
In fact, a growth rate of 10% to 11% from here gets us to the $40 billion in 2018.
We are moving into a new phase.
The debate about whether artificial intelligence is real is over.
And we are getting to work to solve real business problems.
As we move into this new era, it's important to understand what enterprise clients are looking for.
They need a cognitive platform that turns vast amounts of data into insights and allows them to use it for competitive advantage.
They need access to a cloud platform, not only for the capability, but for speed and agility.
And they need a partner they trust and who understands their industry work and process flows.
This is where we are clear and confident about our point of view.
Yes, we have world-class cognitive technology, but that's table stakes.
We are building data sets by industry that we either own or we partner for.
Importantly, we have designed Watson on the IBM Cloud to allow our clients to retain control of their data and their insights, rather than using client data to educate a central knowledge graph.
And we're using our tremendous industry expertise to build vertical solutions and train Watson on specific industry domains.
We are amassing these capabilities because you need more than public data and automation algorithms to solve real problems, like improving healthcare outcomes or navigating the banking regulatory environment.
So in this new phase, data and the business model around data matters.
Industry matters and time matters.
And that's why Watson is the AI platform for business.
Let me give you a couple of examples of the progress we made in 2016, bringing together cognitive, the IBM Cloud, and our industry expertise.
Watson Health provides cognitive insights on our enterprise grade Watson Health Cloud and leverages broad data sets that we own, including 100 million electronic health records, 200 million claims records, and 30 billion images.
We now have 7,000 Watson Health employees, including doctors, nurses, health policy experts, and 1,000 data scientists.
We brought this together because you can't change the way healthcare works or work on curing cancer with public data alone.
You need clinical data, payor data, images, all of which is private.
You need the expertise of the leading oncologists and geneticists.
And you need to do this work within a quality management system that is HIPAA compliant.
So Watson Health was our first vertical.
Late in the year, we launched Watson Financial Services to provide targeted solutions, bringing together cloud, cognitive, industry, and ecosystem capabilities.
In the fourth quarter, we acquired Promontory, a leader in regulatory compliance and risk management consulting.
We acquired Promontory because you can't help banks navigate regulatory environments by scraping the web or automating keystrokes.
You need top industry specialists that understand the complexity and can train Watson to deal with risk management requirements that are specific to financial services.
Because who trains your AI platform matters.
So bringing together cognitive technology, private data, a cloud platform, and industry expertise is what you need to do real work in the enterprise.
What is also becoming very clear is that as IT moves to the cloud and as business processes are delivered as digital services, it is essential they are enterprise strength and that the transactions are trusted by all parties involved.
That's where the Blockchain comes in.
It's a technology that brings together shared ledgers with smart contracts to allow the transfer of any asset, whether a physical asset like a shipping container, a financial asset like a bond, or a digital asset like music, across any business network.
Blockchain increases transparency, auditability, and trust.
It reduces risk and it can drive tremendous efficiencies.
Bottom line, Blockchain will help to fundamentally reengineer business processes and improve outcomes.
We are building a complete Blockchain platform and we have already worked with over 300 clients to pioneer Blockchain for business.
Many are in financial services to handle foreign exchange settlement, smart contracts, identity management, and trade finance.
Just last week, we announced securities clearing and settlement with DTCC.
But the application for Blockchain is well beyond financial services.
For example, we are collaborating with Walmart to improve the way food is tracked, transported, and sold to consumers across China.
And with Everledger, who is using a cloud-based Blockchain to track the providence of diamonds and other high-value goods as they move through the supply chain.
Here, too, the data needed to improve food safety or track diamonds isn't on the web, it's private data owned by enterprises who want to work with a partner they trust.
So in 2016, we built Blockchain platforms and services, and in 2017, we expect to start scaling Blockchain networks.
I'll touch on a few more examples in the segment discussions, but first, I'll walk through our financial metrics for the quarter.
Our revenue for the quarter was $21.8 billion, which is down 70 basis points.
Over the course of the year, we've had growth in our annuity businesses and some growth pressure in the transactional content.
In the fourth quarter, even with a seasonally higher transactional content and a little less contribution from acquisitions, our constant currency revenue performance was similar to third quarter.
With the strengthening of the dollar, currency returned to a headwind.
In fact, with a change in rates since mid-October and the seasonal skew of our business toward the back end of the quarter, revenue was impacted by nearly $300 million.
On a geographic basis, we had sequential improvements in both the Americas and Asia-Pacific, while EMEA decelerated.
Performance by country would generally be what you would expect, based on macro and geopolitical trends.
We've all read about various issues in countries such as the UK, Germany, Brazil, Russia, Turkey, and so our performance in these countries reflects that reality.
Some of these countries, the UK, Germany and Brazil for instance, have a meaningful impact to our results.
Collectively, these three countries had over a 1 point impact on our revenue performance in the quarter.
Others, like Russia, Turkey and Egypt, were also a drag on our growth, though less of an impact given their size.
We had really good results in China.
In fact, China grew strong double-digits in the fourth, which resulted in revenue growth for the full year.
This strength was in the banking sector, where our largest clients are upgrading to our latest technology to continue to run their infrastructure.
I should mention that we also had good revenue performance in the US, where we returned to growth.
Our gross margin reflects the impact of our investments, including the acquisitions we've made, and the mix to as-a-service businesses that aren't yet at scale.
Our expense overall is down 7% versus last year and our expense to revenue ratio was down about 1.5 points.
This includes a 5-point year-to-year impact from the acquisitions we've closed over the last year and a modest impact from currency.
Since early 2015, we've been talking about ramping the level of investment in the business in areas like cognitive and cloud.
Our year-to-year expense dynamics reflect the fact that we've ramped on that higher level of investment.
We are also seeing the yield from some of the workforce rebalancing actions earlier in the year.
As we've discussed in the past, some of this is being reinvested in other areas, including cost.
Our expense dynamics also reflect the success we've had in rebuilding our intellectual property income base through IP partnerships.
This is a model we have developed for some of our high-value technologies that are more mature, but not necessarily in a priority investment area for us.
Though it made sense to work with partners who will invest and build businesses around some of the software assets, it's good for them, and it's good for IBM.
We license the intellectual property to these partners, resulting in IP income for us.
They take on the development mission, drive future innovation, and ultimately expand the client base as they take the product to market.
As we generate revenue from our own sales, we pay our partner a royalty for the development mission they have assumed.
As the partner expands their client base, they pay us a royalty because we retain ownership of the IP.
So with this model, we continue to own the product and our revenue stream but shift our spending profile to a more variable cost structure while extending the life of these assets.
This is another way of monetizing our research and innovation while allocating our resources to where we see our best opportunities.
This quarter, our IP income reflects licenses for several software products, and we have a pipeline that will continue into 2017.
Our pre-tax margin in the quarter was down 20 basis points.
Our tax rate for the quarter reflects an ongoing effective tax rate just under 16% for the year.
This is in line with the expectation we discussed at the beginning of the year of 18% plus or minus a couple of points.
We generated $4.8 billion of operating net income in the quarter, which is up 1.5%, and net income margin expanded by 60 basis points.
With a share reduction of 2%, our EPS of $5.01 was better by 3.5%.
We generated $4.7 billion of free cash flow in the quarter and $11.6 billion for the year, which is 97% of our GAAP net income.
We returned three-quarters of our annual free cash flow to shareholders through dividends and share repurchases.
So summing up the metrics for the quarter, we had strength in our strategic areas, with a growing annuity base, an improving expense trajectory, PTI margin that was essentially flat, and net margin that was up.
Modest growth in operating earnings per share and free cash flow realization and shareholder return for the year that was in line with our longer-term model.
Moving to our segments, cognitive solutions revenue was up 2% and pre-tax income was up 1%.
Our solution software revenue was up, while transaction processing software declined.
Within solution software, growth was again led by analytics, including our Watson offerings such as Health and Security.
We continue to innovate the Watson platform and extent cognitive across our solution offerings.
We saw strong SaaS performance, with double-digit growth again this quarter.
Our cognitive solutions margin profile reflects our continued investment into strategic areas, including acquisition content and the ramp in our SaaS business.
Let me talk about the progress we are making in parts of the portfolio.
In analytics, we are helping clients move data to the cloud and deliver actionable insights from the data with our cognitive capabilities.
This quarter, we introduced new offerings, like the Watson Data Platform, Watson Discovery Service, and Trade Surveillance for financial services, spanning our core analytics platform, Watson platform, and industry platforms.
Our Watson platform, which underpins our cognitive strategy, continues to gain momentum in the market place.
Natural language processing has long been at the core of Watson.
The last quarter, we added new cognitive capabilities for conversation, and the demand has been strong.
We've seen significant growth in our API calls this year, especially around conversational services, where API calls increased 50fold year to year.
Let me give you an example.
In Latin America, Prodesco deployed a Portuguese solution based on Watson across more than 5,500 branches to assist employees in assisting customers' questions.
Watson had already learned over 300,000 words in the Portuguese language, more than twice the number linguists say is necessary to be fluent.
But this isn't just about language translation, this is about understanding business.
Watson was trained to answer questions on over 50 of Prodesco's retail products.
And since going live in October, Watson is now helping to answer nearly 9 out of every 10 questions every day.
As I mentioned, we are combining cloud and cognitive with industry expertise.
In Watson Health, we are building scale and bringing real-world benefits to researchers and clinicians.
With our offerings across five areas, including oncology and genomics, government, life sciences, value-based care, and imaging, Watson is helping over 45 million people globally.
Our oncology clients alone span more than 35 hospital systems.
And with our acquisitions of Explorys, Phytel, Truven, and Merge, we have over 10,000 clients and partners.
Genomics is another area where we are building scale.
We announced partnerships with both Quest Diagnostics and Illumina, where both companies will leverage IBM Watson for genomics, a new service that integrates Watson's cognitive services into genomic sequencing applications.
Through partners, we will make Watson's genomic analysis available to oncologists who treat 70% of cancer patients in the United States.
In the area of life sciences, Barrow Neurological Institute is an example of where we are seeing real-world benefits today.
Barrow reported using Watson for drug discovery to help identify five never-before-linked genes associated with ALS, or Lou Gehrig's disease.
This work gives researchers new insights that will pave the way for the development of new drug targets and therapies to combat ALS.
Without Watson, researchers predicted the discovery would've taken years rather than only a few months.
We had growth in our Watson IoT this quarter, where our clients are putting the power of Watson to work across the immense data pool created by the Internet of Things.
We launched new industry solutions targeting manufacturing and insurance, and new collaborations with clients like BMW.
We more than doubled both the number of new clients and the number of developers on our IoT platform.
We also had good results from our weather platform.
Here, too, we've demonstrated our tremendous scale this quarter.
During Hurricane Matthew, our platform served as a critical resource for over 100 million people.
Our platform delivered 350 million video streams over that week.
Roughly 1.6 petabytes of data were delivered through a total of 141 billion API calls.
With weather information, you have to be able to deliver that kind of scale, particularly when recognized as the most accurate forecaster.
Security also contributed to growth in the quarter, driven by areas such as data security and security intelligence.
We announced a major expansion of our incident response capabilities, including the industry's first cyber range for the commercial sector at our new security headquarters in Boston.
Cyber range uses live malware, ransomware, and other real-world hacker tools culled from the Dark Web to deliver realistic cyber attack experiences.
Our clients learn how to prepare for and handle cyber attacks.
And Watson for Cyber Security is providing insights on live cyber attacks to 40 clients, including, as you would expect, several large financial institutions and universities who are participating in our beta program.
So for the cognitive solutions segment, we grew revenue and profit in the quarter, while we continued to embed cognitive into our offerings, scale our platforms, and build industry verticals.
Turning to global business services, our performance reflects continued declines in the businesses we are shifting away from, such as large ERP engagements.
From a line-of-business perspective, our consulting results were fairly consistent with our performance throughout the year, while application management decelerated.
We continue to aggressively shift our investments and resources to our digital practices.
And growth in our strategic imperatives accelerated to 19% this quarter.
Our cloud practice was up over 70%, mobile nearly 30%, and analytics was up 10%.
On a global basis, we continued to build out our digital design agency, the IBM Interactive Experience, which now has more than 30 global studios.
In the fourth quarter, we announced a partnership with General Motors to bring the power of OnStar and Watson together to create the auto industry's first cognitive mobility platform.
Watson will learn the driver's preferences, apply machine learning, and sift through data to recognize patterns in their decisions and habits.
This information will allow branded marketing professionals working with OnStar to deliver personalized interactions that directly impact their target audiences.
The solution brings together our cognitive technology with IBM differentiated data, such as the rich weather data and IBM IX's industry expertise in experience in mobile design.
As clients are looking to create new business models with our cognitive technologies, our industry experts in GBS are helping them scale.
This quarter, we announced a new global Watson IoT consulting practice to help clients introduce IoT innovation into their businesses.
This will include 1,500 consultants, data scientists, and security experts with deep domain and industry expertise.
We also announced that IBM MobileFirst for iOS apps can now be integrated with a broad set of Watson capabilities to increase the productivity and improve decision-making for enterprise employees.
Turning to profit, GBS profit and margin were down.
In the more traditional engagements, we continue to have some price and profit pressure.
We continue to shift away from these areas to our digital businesses, adding nearly 8,000 resources to these practices in 2016.
This impacts productivity in the near term.
We are investing in enablement, hiring top talent, and bringing in new skills through acquisitions.
Profit this quarter also continues to reflect additional spending in some accounts to deliver on our client commitments.
So for global business services, we accelerated growth in our digital practices while managing a shift from the more traditional businesses.
And we are continuing to invest to build out capabilities and deliver on client commitments.
Technology services and cloud platforms revenue was up 2% year to year, and pre-tax income was up 4%.
Within this segment, our GTS revenue and backlog continues to grow.
And this quarter, we signed 16 deals greater than $100 million.
We are modernizing our offerings and helping our clients move to the cloud.
Our strategic imperatives for the segment were up over 35%, with cloud up 50%.
We continue to invest to build out our cloud infrastructure and we now have more than 50 cloud centers globally.
In the fourth quarter, we acquired Synovi Technologies, a cloud-native company that will enable us to deliver disaster recovery as a service to clients undergoing digital and hybrid cloud transformation.
This adds to our leading resiliency capabilities.
Looking at the lines of business, infrastructure services grew 3%.
We built the IBM Cloud for the enterprise.
Clients can mix bare metal servers, virtual servers, storage, and networking to find the right balance for their workloads.
Our enterprise workloads on our public cloud continue to scale, contributing to growth in our as-a-service content.
Clients continue to turn to us for enablement of their new digital businesses.
These digital businesses require IT infrastructure that is always on, available everywhere, and of course secure.
Clients often struggle with the complexity of sourcing and integrating IT services, such as multiple cloud platforms, on-premise data centers, and mobile environments.
As a services integrator, we help clients navigate the complexity of their hybrid cloud environment and deliver the needed end-to-end infrastructure services solutions in an integrated and unified way.
For example, at a large Australian bank, we partnered with the client to build an IT architecture for the future.
We are helping the bank design, build, and manage a flexible hybrid cloud infrastructure.
The solution automatically brokers, deploys, integrates, and orchestrates across multiple environments and services.
When the bank has a business need, such as a new digital banking service, their IP is ready to support it immediately with a secure, integrated, and optimized solution.
We are the premier partner when it comes to hybrid cloud services integration.
Our depth of capability and experience is unmatched in the industry.
Technical support services was flat year to year and continues to generate substantial revenue and profit for our model.
We are seeing growth in multivendor services, leveraging our global scale and deep technical skills.
We have expanded our multivendor services into industries like banking, retail, and healthcare, and into technologies, including ATMs, mobile, point of sale, and Internet of Things.
Think of this as providing wall-to-wall support for our clients.
Integration software grew again this quarter as we continue to see momentum in our hybrid cloud integration capabilities and WebSphere Application Server, which grew double-digits.
We continued to scale our Bluemix platform, which has grown rapidly to become one of the largest open public cloud deployments globally.
Based on open standards, it features a robust set of high-value services, including our cognitive, weather, and Blockchain APIs.
American Airlines named IBM as its cloud provider for greater enterprise flexibility and scale.
As part of the partnership, they will move enterprise applications to the IBM Cloud, leveraging a wide range of application development capabilities through Bluemix.
At Majesco, a global provider of core insurance software and services, we announced a five-year partnership where we will contribute cognitive APIs that will allow insurance companies to better analyze, price, and understand business risk using new data sources, such as the weather and social media.
We will also add an engaging and personalized cognitive interface to their services.
And one of the largest banks in Thailand tapped Bluemix to build a new secure Blockchain network to transform their credit approval process.
Turning to profit, gross margin is down 1.4 points.
Infrastructure services margins were flat year to year, but technical support services and integration software margins declined.
In TSS, we are shifting more of the business into multivendor services.
And in integration software, we are shifting more capability to SaaS.
This is impacting margins in the near term.
The IP partnerships are a headwind to gross profit margins in integration software, though a tailwind to pre-tax margin this quarter.
Pre-tax profit for the segment is up, with margins expanding 40 basis points.
We continue to focus on investing in our strategic areas while innovating and driving productivity in our more traditional businesses.
So for technology services and cloud platforms, we grew backlog, revenue, and profit in the quarter, with continued strength in our hybrid cloud capabilities across services and software.
These results reflect our success in modernizing the services that we provide to our clients.
Our systems revenue reflects growth in z Systems, offset by declines in power and storage as we continue to address shifting markets.
Z Systems gross margins was up year to year due to both improvement in z margins and the relative strength in that higher-margin business.
In z Systems, we delivered 4% revenue growth, double-digit growth in MIPS, and we expanded our margins.
These results reflect our continued success in driving innovation in our core systems.
The mainframe is optimized for mobile and security, and is constantly being redesigned to drive new workloads, including instant payments and the emerging Blockchain.
8 quarters into the cycle, we added 8 new clients in the quarter, 29 for the year and 80 since inception.
New client adoption at this stage in our cycle further validates our clients' perceived value and their ongoing commitment to the IBM platform.
Clients are investing heavily to meet the demands for future growth.
I mentioned earlier the strength we had in China.
We closed significant z Systems deals in the quarter, including two large Chinese banks, migrating their mainframe install base to our latest z13 technology.
And in Europe, we are helping our clients manage new requirements in their rapidly evolving area of financial services modernization.
We had four wins in the quarter on instant payments.
Given the critical nature of the European financial services backbone, TARGET2-Securities, or T2S, has been deployed on IBM z Systems to provide the necessary reliability, scalability, and IT security.
Overall, the mainframe continues to deliver a high-value, secure, and scalable platform that is critical in managing our clients' complex environments.
Our power performance reflects our ongoing shift to a growing Linux market while continuing to serve a high-value but declining UNIX market.
Linux workloads continued double-digit growth and faster than the market, while the traditional UNIX base declined.
We have been shifting our platform to address Linux, and with fully expanded Linux offerings, our Power on Linux represents over 15% of our overall portfolio.
Supporting this is our success in HANA on Power.
The power platform is critical to the workloads a cognitive world will demand.
And in the fourth quarter, we saw this in the US Department of Energy deployment of hundreds of IBM's open power servers.
When complete, these two supercomputers will be among the world's largest scientific and AI computing systems.
Storage hardware was down 10% this quarter, which reflects the shift in value toward software-defined environments.
Storage revenue declines were mainly driven by midrange and high-end disk.
However, we are now benefiting from a full suite of all-flash array offerings, and this portfolio grew double-digits in the fourth quarter.
We also continue to see double-digit revenue growth in software-defined storage, particularly in our Spectrum Suite and Cloud Object Storage offerings, which is not reported in our systems segment.
Storage gross margins are down as hardware continues to be impacted by both volume and price pressure.
So for systems, our revenue and gross profit performance were driven by growth in z Systems, offset by power and storage declines.
These results reflect the reinvention of our core systems for work in a new era of computing.
We have optimized our systems to drive new types of workloads, like Blockchain and instant payments.
We are expanding our footprint, building new capabilities, and solving new types of problems for our clients.
And though we are facing some shifting market dynamics and product transitions in both power and storage, our portfolio overall remains optimized to address the demands of an era of cognitive and cloud computing.
Now let me touch on our software performance across our segments.
Our total software revenue was over $7 billion, up 1%.
Software was up 1% for the year as well.
From a business area perspective this quarter, we had growth in cognitive solutions and integration software, while operating systems continued to be a drag, in line with the long-term secular trend.
Software annuity revenue was up mid-single digits, led by our SaaS offerings.
Our software transaction revenue declined mid-single digits, which is a significant improvement from the performance in the first half.
Given the seasonality in our software business, transactional revenue has a bigger impact on our total software performance in the fourth quarter.
So moving onto cash flow, in the quarter, we generated $5.6 billion of cash from operations, excluding our financing receivables.
We invested $900 million in CapEx and generated $4.7 billion of free cash flow.
For the full year, we generated $15.3 billion of cash from operations.
We invested $3.7 billion in CapEx this year, with over $1 billion in support of our cloud and solutions businesses as well as a significant portion going to support our services backlog and our upcoming hardware cycles.
And so we generated free cash flow of $11.6 billion, and as I mentioned earlier, our cash realization remained strong at just over 97% of GAAP net income, consistent with our longer-term model of realization in the 90%s.
So our cash performance is right in line with our profit levels, as we talked about all year, and include significant cash payments related to the workforce rebalancing charge taken earlier in the year as well as lower cash taxes.
We did see an uptick in our working capital as we closed the year, which we attribute to timing and mix of substantial transactions in December.
Looking at uses of cash, we continued to strengthen our portfolio by investing $5.7 billion in acquisitions.
We have acquired 15 companies in 2016, including three in the fourth quarter.
The acquisitions added to our capabilities in cognitive and analytics, cloud and security.
And significant transactions included The Weather Company, Truven Health, Promontory, and three digital marketing agencies.
Over the course of the year, we've returned almost $9 billion to shareholders, including dividends of over $5 billion and $3.5 billion in gross share repurchases.
We bought back over 23 million shares, reducing our average share count by just under 2.5%, which is in line with our longer-term model.
At the end of the year, we had $5.1 billion remaining in our buyback authorization.
Moving onto the balance sheet, we ended the quarter with a cash balance of $8.5 billion.
Total debt was just over $42 billion, of which about two-thirds was in support of our financing business.
The leverage in our financing business is 7 to 1, and the credit quality of our financing receivables remain strong, at 52% investment grade, a point better than September.
I'll come back to a change we will be making to the structure of our financing business starting in 2017.
Our non-financing debt of $14.3 billion was $2 billion lower than September, resulting in a non-financing debt to cap of just under 50%, 5 points lower than September, and more importantly, 5 points lower than a year ago.
Our debt to cap ratio was impacted again this year by a reduction in equity due to a pension remeasurement, a $1.6 billion reduction to equity or about 3 points to the ratio.
Looking at our pension plans, as you know, the US plan has been frozen for some time.
And the asset mix reflects that with a relatively low-risk, low-return profile.
The result of that is low odds of any required funding in the US, regardless of the interest rate environment.
Our funding levels remain solid, with the US and worldwide tax-qualified plans at 102% and 98%, respectively, a modest increase from last year.
Information on the performance of our retirement-related assets and return and discount rate assumptions at year-end are in our supplemental charts.
Importantly, our balance sheet continues to have the strength and flexibility to support our balance over the long term.
So now let me spend just a minute on our financing business.
As part of our own transformation, we saw an opportunity to derive some operational benefits by changing the structure of our financing business.
First, let me say that the structure of the global financing segment that we report is unchanged.
We have reorganized our client and commercial financing business as a wholly owned subsidiary, IBM Credit LLC.
This combined corporate structure will over time meet its funding requirements by issuing debt directly to the market.
This will drive operational benefits by consolidating the operations of our financing business.
We will issue debt directly out of the new entity and expect the entity to be able to access the capital markets later this year.
And will increase our financing business leverage from 7 to 1 to 9 to 1, which represents an increase of about $600 million in global financing debt.
But as I said, our global financing segment is unchanged and will continue to include our client and commercial financing business as well as our hardware remanufacturing and re-marketing business.
So let me wrap this up.
We have a very clear point of view on what it takes to be successful with enterprise clients in this new era.
I'll shorthand it as cognitive plus cloud plus industry.
And what differentiates IBM is the ability to bring all three together to change real business processes and outcomes.
Enterprise clients rely on us to help them run their processes.
We have the relationships, we know their process and workflows, and importantly, we have their trust.
This incumbency positions us very well to take our clients to the new era.
In 2016, we continued to make a lot of progress in the transformation of our own business.
We had strong growth in our strategic imperatives: cloud, analytics, security, and mobile.
These offerings generated $33 billion in revenue and now represent over 40% of our revenue.
And they are high-value offerings, with a gross margin that raises overall IBM.
We also invested at a high level through organic investments, acquisitions, and partnerships.
In 2016, we spent nearly $6 billion in R&D, nearly $4 billion in capital expenditures, and nearly $6 billion to acquire 15 companies.
We are amassing a unique set of assets to build our cognitive solutions and cloud platforms, like the digital assets of The Weather Company, healthcare data sets from Truven, and risk and compliance experts of Promontory.
In 2016, we continued to remix our skills to new opportunities while continuing to deliver innovation in our more traditional areas, like positioning z Systems as the ideal platform for Blockchain or power for cognitive.
We're utilizing our intellectual property partnerships to extend some of our stuff software assets.
So we will take all these capabilities into 2017, even recognizing the shifts in our industry, some country-specific challenges and opportunities, and some macro effects of currency and potential tax reform.
As I said upfront, we feel that we are exiting 2016 in a stronger position than we entered it.
This confidence is reflected in our view of 2017.
To simplify, we expect to stay on track in our strategic imperatives.
We will continue to invest at a high level, though as you saw in the fourth quarter, after ramping investment from 2015 through late 2016, we have wrapped on that higher level.
And we expect to grow our pre-tax income, and while there are a number of scenarios for tax, in all cases, we expect tax to be a year-to-year headwind to our book rate in 2017.
Put it all together, and we expect to deliver operating EPS of at least $13.80 in 2017.
If you remember the first quarter of last year, we had a few larger items in our earnings, but they offset at the net income level.
That first quarter was about 17% of our 2016 operating EPS.
We expect a benefit from discrete tax again in the first quarter of this year, though smaller in size.
And like last year, other actions will offset some portion of the benefit.
With this, we expect a similar skew for 2017, with about 17% of the full-year expectation of $13.80 in the first quarter.
Looking at cash flow for the year, we expect free cash flow realization in excess of 90% of GAAP net income.
And we will return 70% to 80% of our cash flow to shareholders, both in line with our longer-term model.
Bottom line, we feel good about the progress we made in 2016 and our prospects for 2017.
And now we will take your questions.
Patricia Murphy - VP of IR
Thank you, Martin.
Before we begin the Q&A, I'd like to mention a couple of other items.
First, we have supplemental charts at the end of slide deck that provide additional information on the quarter and the full year.
And second, I'd ask you to refrain from multipart questions.
So let's please open it up for questions.
Operator
(Operator Instructions).
Katy Huberty, Morgan Stanley.
Katy Huberty - Analyst
Just quick clarification and I have a question.
The clarification is just it would be helpful if you gave a little more insight as to what you're expecting in terms of the range of outcomes for the tax rate, both normalized rate and how much discrete items could be in the year.
And then similar for IP income, just because those were so significant in 2016.
And as it relates to my question, which is on Watson, from the outside, it seems this business gets pretty significant share of the press.
But not contributing to revenue.
Do you have visibility yet as to when we should expect an inflection in revenue recognition from Watson?
Or should we just not think about this as a contributing factor or moving the needle in our models over the next couple of years?
Martin Schroeter - SVP & CFO
Okay, thanks Katy.
A couple things.
On tax, when we look at -- as I said in the prepared remarks, we do see tax as a headwind year to year.
But remember, we had last year a $1 billion -- we won a tax case in Japan, so over $1 billion, which was in last year.
That drives, by the way, the bulk of the year-to-year headwind.
On a rate basis, we finished this year -- we said 18% plus or minus 2 and we finished kind of at the bottom end of that range for the full year on an operating base.
Obviously with the -- on all-in base with that Japan benefit from the first quarter in there, it's much lower, but we finished at the bottom end of that range.
When we looked at 2017, as I said in the prepared remarks, all scenarios point to a headwind.
We are right now thinking it's about 15% plus or minus 3. And the reason we widened the range is because we are getting ready for a tax reform here in the US.
We don't know yet what that looks like, we read the same things you do, but we are going to start now to prepare for tax reform.
So we have widened the range this year to 15% plus or minus 3. That doesn't have discretes in it.
On IP income, as we've said a number of times, we are trying to rebuild that base of business.
It's always been part of our income stream; it is a business where we've now had a fair bit of success in rebuilding it.
And while we don't -- we are not relying on a big growth year to year, we do have in that particular line a lot of this is already done, quite frankly, because we have these agreements in place that pay us royalties.
And then we have a pretty good pool of opportunities that could get this back to, again, the same level that we printed this year.
We are not relying on that within our guidance.
Within our guidance, I'd say we could be down year to year a little bit, but again, a lot of this is already done and we have a good pool of opportunities to drive IP again for what will be -- what, 18 or 19 years of doing this.
So we got I think a pretty good track record.
And then on Watson, Watson is in -- you can see it in the solution software business, which accelerated again.
Watson, our solution software is what's being driven -- where Watson is what's driving that.
Now, Watson is a silver thread: it runs through the platform, it runs through Watson Health, it runs through Watson IoT, it's in security now.
Watson is embedded in security.
And as we announced at the end of last year, Watson Financial Services will now embed the regulatory expertise of Promontory into Watson.
So Watson will be part of that financial services industry solution content as well.
So Watson is firmly, firmly established as the silver thread that runs through those cognitive solutions.
And you can see all of that in the solution software performance.
Operator
Wamsi Mohan, Bank of America Merrill Lynch.
Wamsi Mohan - Analyst
Thank you.
Your free cash flow conversion of 90%-plus in 2017 leads to about $10.2 billion at least in free cash flow, which is substantially down year on year.
Can you help bridge the puts and takes here or what are the largest moving pieces to that conversion rate (multiple speakers)?
Martin Schroeter - SVP & CFO
No, I mean -- I guess the way I look at free cash flow conversion, as you know, we guide on a conversion metric, but we see free cash flow basically flat year to year in 2017.
Not down.
Now again, we give a range and that's consistent with the model we have of being north of 90% -- 90% to 100%, but we see free cash flow for the year to be flat.
Now within that, as you know, again we got our money back from Japan last year when we won our tax case, so we've got that is a headwind.
And within that -- and we will overcome that with the rest of the operations.
But the other side of this is we also holding (sic), if you will, an ability to grow our capital investments within that flat as well.
So it was not -- you shouldn't interpret that 90% is a down.
We see free cash flow flat with a tax headwind, which we'll overcome, and room to grow CapEx.
Operator
Amit Daryanani, RBC Capital Markets.
Amit Daryanani - Analyst
My question broadly, and we get this a fair amount, is IBM's gross margin profile over the last several quarters.
Especially across the cognitive segment specifically, but broadly has degraded pretty consistently.
I realize you guys have a lot of investments that offset -- [is a drive] organic.
But just talk about when do you think gross margins start to stabilize?
And at what point do you think, at least on the cognitive side, the [exoservers] business starts to become more in line to the cognitive segment margin profile.
Martin Schroeter - SVP & CFO
Thanks.
Okay, sure.
So on cognitive solutions, it's been a year that you really have to go back to understand where we finished in the fourth.
And I'm going to talk specifically about the fourth in a moment, but you have to go back to what we've been talking about within cognitive solutions all year.
So in the first quarter, we saw the steepest year-to-year decline in margins, driven by heavily by our investments, heavily by our need to remix our skills, and also by we had acquisitions.
And while currency was a big headwind in dollars for us last year, it was also an impact to our margin.
So as we progress through the year, when we get to fourth, on a gross profit margin basis, we were down about 3 points, which I would put in currency and acquisitions is all of that 3. And so on a PTI margin basis in the fourth, we were down about 1 -- less -- about half, a little bit less than half, about 1.4 points.
And within that, again, currency and acquisitions drove 3 points.
So everything else in cognitive solutions within the PTI margin -- the mix of the annuity business, the ramp of our as-a-service business, the benefit we get from licensing our IP, and the offsetting of royalties that are coming in -- everything else improved operating PTI margin in the fourth quarter.
And so what you saw in 2016 in cognitive segment margins on PTI was an operating margin that went up pretty dramatically as we went quarter to quarter, like 17 points from first all the way to fourth.
And next year, I don't know when currency is going to ramp, but we do know it's much less of a headwind next year than it was this year, at least at current rates.
And we also know that we ramp on the acquisitions.
So those things that have dragged us -- dragged our margins down are starting to go away.
And while gross profit -- we don't see that; I don't see that deteriorating by 3 points like it did in the fourth anymore.
And in fact, PTI margins I think are much, much more stable going forward.
Which is what we are assuming.
Now, they don't have to be flat.
We are still going to drive our as-a-service performance; we are going to continue to drive these IP deals, which throw a little bit of royalty into the GP stream.
But I see a much improved cognitive segment PTI margin from what we experienced in the fourth.
And again, you saw in the fourth, we ramped on our heavy investment levels here as well.
Operator
Tien-Tsin Huang, JPMorgan.
Tien-tsin Huang - Analyst
Thank you so much.
Just wanted I guess better understand this global financing change and what's driving that.
Are you increasing your leverage to support client financing needs in 2017?
Or is it just a tool to [lie] to increase your debt overall leverage and efficiencies?
Just trying to better understand that.
Martin Schroeter - SVP & CFO
There are some really important benefits here as we align kind of the legal and the capital structure of our financing business.
That just by itself will drive pretty substantial operational benefits.
It gives us better capital structure flexibility in each of the countries in which IGF operates.
IGF, by the way, doesn't operate in 172, like all of IBM does.
It's more like 45.
But it allows for better capital structure in that more limited set of countries in which they operate.
It gives us better efficiency of cash allocation.
So what we are really doing here is we are taking the interest-earning parts of IGF, the client financing and the commercial financing.
We've put those into a subsidiary.
We will provide -- be providing more information externally so you can see -- everyone can see what the capacity for them to borrow.
And that's really the borrowing capacity of IGF.
The remarketing business does not support a borrowing capacity.
At very high margin, it's very high return, but the interest-bearing portion of IGF is really what supports the debt.
And so we are going to issue debt directly out of that entity.
It will allow us to add $600 million or so of debt because that portfolio is high enough quality that it can run at higher leverage.
That's, by the way, more consistent with what we see in other entities of this nature.
So we will run at slightly higher leverage; that will improve the ROE.
That will free up basically some equity, if you will, that we have in IGF.
It will free up some equity in mainline.
But it's not a change necessarily to the overall debt levels, it's really a change to IGF and its efficiency, the operational benefits we get, and our ability then to pull a little bit of capital out IGF, but also manage it better in the countries in which it operates.
But again, importantly, the segment that you see won't change.
So this really is a change in how we access the capital markets externally.
Operator
Toni Sacconaghi, Bernstein.
Toni Sacconaghi - Analyst
Thank you.
Martin, if I think about 2016 in total relative to your guidance at the beginning of the year, it benefited about $1.20 in EPS from IP gains and lower tax rate, not including the Japanese tax settlement.
So on a fundamental basis, earnings went from about $14.02 in 2015 to about $12.50 in 2016.
So as we look to 2017, you're guiding for an improvement in earnings from $13.50 to $13.80.
And you've said tax is going to be a headwind.
You've said IP income is not going to help, but if anything, it might hurt.
So the last three years, you've actually had fundamental erosion if we take out tax and IP in your business.
And you are calling for an inflection point in 2017.
So I'm wondering if you can talk through what are the key things that drive that improvement.
And perhaps you could also be explicit about what your expectation for acquisitions is and their contribution for restructuring expense and whether that will be a net -- will have any net impact on results.
And what your assumption is for cash tax versus accrued tax in 2017 as well.
Thank you.
Martin Schroeter - SVP & CFO
Okay, sure.
Thanks, Toni.
So a couple of things.
When we entered 2016, as I said earlier on a prior question, we said tax would be 18% plus or minus 2, and we came in again at the bottom of the range.
And so now when we look at tax, yes, we had $1 billion improvement from Japan, which we are not -- obviously we are not going to win another tax case in Japan, by the way, but we do have discretes this year.
When we look at where we finished, we finished at the bottom of that range.
And as I said, with us going into now 15 -- into 2017 at a 15% rate plus or minus 3, we have to overcome, if you will, the headwind from the Japan, but we are going to -- as we plan for tax reform, we don't see a fundamentally different operating tax picture than we saw last year in our I&E.
We saw an inflection point -- and it's probably -- maybe that's the right way to think about it.
We saw an inflection point in intellectual property income this year.
And I can tell you that yes, we see an inflection point in profitability; our PTI we expect to improve, that's embedded within our earnings.
So we saw an inflection point in IP income, but then you get to the end of the year and you want to take it all out.
So we hit an inflection point in IP last year.
We did better than we had the prior year, and it's always been a part of our model.
And again, we see while it may not continue exactly, we are not relying on all of that for the year.
We will have IP income, a substantial amount of IP income, as we always have for the last, I don't know, 18, 19 years.
You have the history as well.
So we do see an inflection point in our margin profile.
Remember that we have gotten a lot done this year in terms of getting margins stabilized.
We see that, for instance, in our infrastructure services business, which grew margins for the year.
We did get a wrap, if you will, on the higher levels of investment in spending, and you see that in our cognitive solutions, and I talked about that earlier.
And you see it on in our [E2R] performance on SG&A, for instance, in the fourth quarter alone.
As we get into 2017 and all of the work we got done, plus we've got a better base on which our as-a-service margins are still continuing to grow.
Because we are not where we want to be yet, but we did improve throughout the year.
We have a momentum, if you will, on our cognitive solutions business, and again those are high value.
And we will get all of the -- whatever savings, if we have, from workforce rebalancing, both as we continue to remix our workforce.
So yes, I am saying that PTI margin and PTI growth this year is what is implied in our guidance.
Now, with the tax headwind, it doesn't translate as much to EPS growth, but we do see the inflection points in parts of our business, including our margin profile.
Operator
Lou Miscioscia, CLSA.
Lou Miscioscia - Analyst
Great, thank you.
Can you maybe go into more detail on GBS?
The last quarter, you had said that over 50% of the revenue transitioned into the digital practice area, and that was growing in double digits.
So and looking at this quarter, obviously, it seems like it's fallen back a little bit.
Many others are growing application management.
If you could help us out what's going on under the covers there, why it seems that it should have improved and obviously didn't.
And what you think about that going forward.
Martin Schroeter - SVP & CFO
Thanks, Lou.
So the dynamics in GBS were similar to what we've talked about in prior quarters.
We've said a couple things.
One: we are continuing to remix our skills.
And while we have good performance in our strategic imperatives in those digitized offerings, we still do have a pretty large book of business that is in a part of the marketplace that has very heavy price pressure as all of us are competing to get kind of that foothold, if you will, or competing for certain kinds of opportunities in some of these accounts.
So we've got price pressure in parts of the business, and again, we are remixing our skills, which as we've said, will have an impact, a shorter-term impact on productivity.
Now shorter term, we invest in businesses for long, long periods of time, so I don't define shorter term as every 90 days.
Although this business, this business should start to improve when we -- as we've talked about last time, when we see a couple of things.
So the backlog in GBS is down, and so our first focus has to be to take the skills we are building and get a good signings, a good consistent signings performance in order to grow the backlog.
Once you grow the backlog, then obviously you deliver in an efficient and effective way, and you start to improve your margins.
And we still view GBS as being able to get that done.
In fact, we would say we will grow signings in the first quarter this year.
So maybe we will start that position now.
But we still see this business and these skills as such a key differentiator in the marketplace that we are unwilling, if you will, to reduce our capacity or our capabilities in the marketplace.
We really -- this is the third leg, if you will, between cognitive and a robust cloud.
Industry skills are going to -- what brings it all together.
So GBS is in a similar dynamic.
I do think we will grow signings in the first, which will be the start to having that business improve.
But it's going to take a little while longer to get through these same dynamics of remixing skills and moving our skills away from these heavily price-pressured opportunities.
Operator
Brian White, Drexel Hamilton.
Brian White - Analyst
So it sounds like the PTI margin will expand in 2017.
Maybe just look at gross margins, you think gross margins will expand.
And if you could just give us a view in the major business segments, where should we expect improvement in PTI margin in 2017?
Thanks.
Martin Schroeter - SVP & CFO
Sure.
Thanks, Brian.
So a couple things.
We have, as we always do, we have a bunch of scenarios on how a year might fold out -- roll out.
So I would say that as you pointed out, PTI margin expansion is in every scenario.
That's evidenced by the fact that profit is growing; it's implied to grow with a tax headwind and EPS, obviously, with a little bit of growth.
So PTI margin growth is in each of the scenarios.
GP margin is not necessarily required for us to grow PTI margin.
And that's for a couple of -- now I'm not saying that GP is necessarily going to go down, but we can maintain our GP margins.
We can even erode a little bit if we want to accelerate our move into as-a-service even faster.
As you saw, we had very good growth in our as-a-service business in the fourth.
Overall, those margins are below our IBM margin, so there's a little bit of margin pressure as you make that shift.
But we can deliver 2017 -- push as-a-service margins really hard, either maintain or you can contract GP margins a little bit and still grow PTI margins, given that we've wrapped on, again, this heavy level of investment.
And we've gotten a lot done on structure, both the overall IBM structure, the infrastructure of what runs IBM as well as each of the business have taken another good look at structure.
So from a segment perspective, we saw good performance in our global technology services business.
When you look at the infrastructure services piece, growth in margins for the full year.
And I would say that we can see opportunity to continue to grow margins there.
The technical support services, the TSS business, is where the margin pressure was in 2016, but I think we have a way to stabilize that margin performance.
It very much is a mix shift from as we drive the multivendor services business in TSS.
So margin improvements in the infrastructure services business.
I see relatively flat profit margins and systems.
Now we are coming off of a high point in the mainframe at the end of the cycle; margins tend to be higher.
As you go into a new cycle, they tend to be a little bit lower.
But we also have an opportunity to improve in the other businesses.
So systems margins relatively flat.
We see, again, an opportunity to improve margins in GBS.
As we get some of the work that I've described done and get kind of the bow of the ship through the wave, we can see improvements in GBS.
And I talked earlier about cognitive solutions, so I won't cover that again.
So again, PTI, we do see growing.
GP, not necessarily.
We don't need GP to grow in order to produce PTI margin growth.
Operator
Steve Milunovich, UBS.
Steve Milunovich - Analyst
Martin, I think you talked about $2 billion of savings from the workforce rebalancing and so forth a year ago.
I was curious how much of that did you see last year, how much of it is going to be seen in 2017, and how much of that in 2017 may you take to the bottom line.
Because that strikes me that is a big part of this PTI improvement.
And I also just wanted to ask, and you might want actually respond to this, that where are you in the innings in your transformation?
It's been a number of years now.
How far into it are you?
And just qualitatively, what surprised you positively and what's been very difficult to change in terms of changing IBM?
Martin Schroeter - SVP & CFO
There was a lot there, Steve.
So first, on the workforce rebalancing savings, we said for last year, for 2016, that we would see a bit more than $500 million, and we absolutely got that.
And we said we would free up then $2 billion of total spend, some of which will get reinvested, some of which will go to the bottom line.
You saw from our view of 2017 now that we've wrapped, we are not obviously reinvesting all of that, now that we've wrapped our higher levels of spending.
So obviously, some of that is going to wind up in the profit.
And with mid-single-digit profit growth, it's a fair bit drives that profit growth in 2017.
In the innings, IBM is always transforming.
So I don't know how to pick an inning.
Other than to say that we have established a few years ago, we established this idea that the strategic imperatives were the path for revenue growth to resume, and those continue to grow quite well.
Then last year, we changed the segment structure and said: Look, we are going to now report not only more detail on the strategic imperatives, but we are going to talk to you about cognitive solutions, which has all the Watson content.
We're going to talk to you about a cloud platform business, and we are going to talk to you obviously about the industry dimension.
And so that part of the transformation continues.
And I don't think that the transformation of IBM ever ends, quite frankly.
We are back now, as we put in our guidance, we are back to our model level of pre-tax income growth we have in our model right now.
Now, if you say that pre-tax income growth or the model -- achieving the model is the definition of when the transformation is done, then I would say that we see that this year for pre-tax income.
Now, we've got a lot of other elements of our financial model as well.
We have been returning cash to our shareholders consistently.
We have generated our free cash flow as a percentage of our net income has been on model.
So we've had a number of elements that are on model.
Pre-tax income growth I think is a good one that says this structure, this strategy, is working and it will drive the financial model we set out to achieve.
At least on the pre-tax income growth, which had been missing.
Operator
Joe Foresi, Cantor Fitzgerald.
Joe Foresi - Analyst
I thought I'd ask that progress question a little bit differently.
Can you give us some thoughts on your expectations for growth in the strategic imperatives and decline in the core business in 2017?
Thanks.
Martin Schroeter - SVP & CFO
Sure.
So we said a few years ago that strategic imperatives would be $40 billion and 40% by 2018.
And as you just saw, we finished 2016 when they're 41%, so obviously we made the mix piece of this early.
But from here, if we grow, say, 10% to 11%, we'd get to 40 by 2018.
And so with such a substantial part now of our business at $30-billion-plus, with such a substantial part of our business to grow that at that continued double-digit says that we have the right offerings in the right spaces with the right skills to deliver them, and that they are robust, powerful solutions.
And so we see that kind of growth in order to get to the 40 we still think we are quite confident.
We are ahead, actually, of track, but we are quite confident in getting to the 40 still.
The core business, or the rest of the business, if you will, is always -- has a few components in it.
One, at our very core, remember that we are delivering productivity to our clients.
And so they use that productivity that we deliver to reinvest.
As we've said before, that's the dynamics you see in our revenue stream.
We deliver productivity through parts of our business and they reinvest, and that's how you get the revenue dynamic that we have.
The core was down double-digit two years ago, and down 9% in the fourth, if you do the math, roughly down 9%.
And when we get into this year, I would say that we will see kind of a similar dynamic.
But that's what we're -- that's what is sort of embedded within our guidance for 2017.
So continued good performance in strategic imperatives, continued focus on delivering productivity for our clients, and we will have that revenue dynamic into 2017.
Operator
David Grossman, Stifel.
David Grossman - Analyst
Thanks.
Actually, Martin, if I could just ask two questions really quickly.
One is just on your last answer.
So if you're growing 11% in the strategics and you're pretty close to 50-50 -- I think you were at 44% in the fourth quarter -- and the quarter is declining 9%, wouldn't that imply that we are reasonably close to getting to a crossover on the top line?
Martin Schroeter - SVP & CFO
Did you want to ask your second question first, or do you want me to answer that one?
David Grossman - Analyst
Why do you answer that first and I'll go to the second one.
Martin Schroeter - SVP & CFO
When you say we're reasonably -- we are down -- on a constant currency basis, we are down 70 basis points in the fourth.
So I think we were reasonably close; we are reasonably close in the third.
Yes, this is the structure we are in.
And we are focused on driving value in those strategic imperatives, not just grabbing a little bit of revenue to have some math workout differently.
And our margins in the strategic imperatives continue to be higher than overall IBM and higher obviously than the core.
So our focus on delivering value hasn't changed.
And whenever that crossover point happens to be -- yes, we are already close.
So when you say wouldn't it imply we're -- yes, we are close.
We were close in the fourth, but we are focused on delivering value, and for 2017, we are focused on obviously PTI margin expansion.
David Grossman - Analyst
Right.
And the second piece is if historical trend repeats itself, you are due for a mainframe product cycle in the back half of the year.
And I believe the way you break it out, at least some of that mainframe revenue is in strategic imperatives.
So that said, how should we be thinking of the potential financial impact of the next mainframe cycle vis-a-vis prior cycles, particularly given some of the secular shifts that you've talked about in your prepared remarks and response to some of the other questions.
Martin Schroeter - SVP & CFO
Sure.
We -- if you follow a mainframe cycle, then it would say sometime late this year we would have another mainframe.
But again, we wouldn't see the impact of that until late in the year.
What drives the mainframe, as it always has, is our ability to make it relevant to the workloads that our clients need.
So when we were together, when we announced the last mainframe, and two years ago, we talked a lot about the shift to mobile, we talked a lot about security and we talked within those two elements -- and there's a lot more to it, but within those two elements, we talked about how the mainframe was built particularly with those two kinds of workloads in mind.
And that drove the growth we saw in the mainframe through the cycle.
That's still, by the way, part of the growth we see in the mainframe and it's still why -- that's why big enterprises continue to put their most important work on mainframes.
Now, the set of workloads that are going to drive the next incantation of the mainframe are going to be things like Blockchain.
And so all of that is still ahead of us.
We added, and we said in the prepared remarks, we added a number of new clients throughout the cycle, but we added more again in the fourth quarter as well.
And while I haven't talked to every one of them, I think what they are thinking, what many of them are thinking is, yes, I need mobile and, yes, security is more important than ever.
But I also need to be ready for the next workload drivers.
And Blockchain is a good example of a workload driver that is ideal -- ideally suited for the most robust enterprise platform there is.
So I think that if I had to pick just one that drives the mainframe, Blockchain would be my first top of my list for what drives the next mainframe cycle.
So let me wrap up the call by saying again that we are really pleased with the progress we made in 2016, and how we are positioned for 2017.
Of course, there's plenty for us to work on; we are not confused by that.
But we are looking forward to continuing this dialogue at our investor briefing later in the quarter.
So with that, thank you for joining the call.
Patricia Murphy - VP of IR
Sam, can I have you close out the call, please.
Operator
Thank you for participating on today's call.
The conference has now ended.
You may disconnect at this time.