Q4 2019 Earnings Call

January 21, 2020

[laughter] [noise].

Welcome and thank you for standing by at this time all participants are in no 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 Miss Patricia Murphy with I'd be ma'am you may begin.

Thank you. This is Patricia Murphy, Vice President of Investor Relations Friday, I want to welcome you to our fourth quarter 2019 earnings presentation.

I'm here with Jim Cavanaugh, I'd be M., senior Vice President and Chief Financial Officer.

Well post today's prepared remarks on the idea of Investor website within a couple of hours and the replay will be available by this time tomorrow.

Some comments made in this presentation, maybe considered forward looking under the private Securities Litigation Reform Act of 1995. These statements involve factors that could cause our actual results to differ materially.

Permission about these factors is included in the company's FCC filings.

Our presentation also includes non-GAAP measures to provide additional information to investors for example, consistent with last quarter's format. We present revenue growth at constant currency throughout the presentation. In addition to provide a view consistent with our go forward business will focus on constant currency growth adjusting for the divested.

Businesses for the impacted lines of total revenue cloud and our geographic performance.

We have provided reconciliation charts for these and other non-GAAP measures at the end of the presentation and in the 8-K submitted to the FCC.

I also want to remind you that Ivy EMS revenue profit and earnings per share reflect the impact of purchase accounting and other transaction related adjustments associated with the acquisition of Red hat. These adjustments and charges are primarily non cash.

So with that I'll turn the call over to Jim.

Thanks, Patricia and thanks to all of you for joining US we had a solid finish to 2019 in the fourth quarter. We grew revenue at actual rates and it was up 3% at constant currency excluding divestitures.

Our operating gross margin was up over two points, which is the best margin expansion in some time.

We delivered $4.2 billion of operating net income and $6 billion of free cash flow.

And we had $4.71 of operating earnings per share.

We also reduced our debt balance by another $3 billion in the quarter for a total reduction of $10 billion since the end of June .

This caps off for your with $77 billion of revenue.

$12, an 81 cents of operating earnings per share at about $12 billion or free cash flow inline with our expectations.

In 2019, we took a number of actions to strengthen our foundation for the next chapter of our clients digital Reinventions.

We acquired Red hat, what's the number one Linux operating system Roe.

In the leading hybrid cloud platform Openshift, we modernize our software portfolio, making a cloud native and optimize for Openshift, we announced the industry's first public cloud designed specifically for financial services.

We expanded our services offerings and skills for the cloud journey, including consulting and technology services for Red hat and multi cloud management.

We expanded the reach of our Watson AI offerings, and we are leading the industry and our approach to trust and transparency for data in AI.

We continue to deliver innovation in areas like our Newsy 15, mainframe and quantum.

And we divested select software and services businesses as we continue to prioritize our investments and optimize our portfolio.

With 3% revenue growth, we started to see the benefits in our fourth quarter results.

Cloud and COGNA to software revenue was up 9%, we had growth in all three lines of business, reflecting demand across our software portfolio.

We had good adoption of our cloud packs continued growth of security and Red hat again posted strong performance.

In global business services, we had continued growth in consulting and application modernization projects as we help our clients on their digital journeys. We're also seeing this in our GBS signings this quarter, including acceleration in new Red hat engagements.

Global Technology services revenue was down 4% inline with the expectations, we discussed last quarter.

We expanded global technology services gross margin consistent with our focus on managing the business from margin and profit.

And then systems, we had a good start to our Z 15 cycle and growth in high end storage, resulting in double digit revenue growth and gross margin expansion in this segment.

Across our segments, our cloud revenue growth improved to 23% this quarter.

And our cloud revenue for the year was $21 billion by leveraging our technology incumbency and expertise to help our clients where third journeys to cloud. It now represents 27% of our revenue.

We know there's a lot of interest in our hybrid cloud approach, including Red hat saw focused on that upfront.

As we've said the next chapter of cloud will be driven by mission critical workloads managed in a hybrid multi cloud environment.

This will be based on a foundation of Linux with containers and kubernetes.

This quarter, we had strong performance in well and Openshift.

Red Hat's normalized revenue was up 24% eclipsing a billion dollars in a quarter for the first time.

In August we introduced cloud Pecs cloud native software that simplifies deployment reduces operational costs and allows clients to build once and run anywhere.

Cloud packs bring together IB EMS middleware, AI management and security.

And Red Hat's Openshift platform.

Our strong performance in cloud packs. This quarter is an example of this synergy from the IB EM and Red hat combination.

As we look forward the largest hybrid cloud opportunity is in services advising clients on architectural choices moving workloads building, new applications and of course managing them.

With that would be services expertise in digital Reinventions and managing mission critical workloads, we are well position to help our clients on this journey.

And now into fourth quarter demand for our cloud capabilities continue to ramp and we're starting to realize the synergies across I B M and red hat.

We see it in our total cloud revenue, which as I said was up 23% and we see it in our combined software revenue growth of 9% across GBS and GPS we nearly doubled the number of new services engagements leveraging red hat versus last quarter.

We're continue to expand our client base and now have over 2000 clients using red hat and IBCM container solutions and we doubled the number of red hat large deals versus the previous quarter with 21 customers with deals greater than $10 million.

And as I said Red Hat's normalized revenue is up 24%.

Within that infrastructure revenue, which is predominately ROE was again up double digits and a point higher than last quarter's rate.

We're continuing to take share with rail as clients put more of their enterprise workloads on Linux.

Revenue in application development and emerging technologies was up over 50% this quarter driven by Openshift and ansible.

As I mention I'd be EMS cloud packs include the Openshift platform and so as we sell cloud packs. This drives additional red hat Openshift revenue.

The transactional nature of club pack sales accelerated the revenue growth of Openshift, and total red hat, reflecting IBCM seasonally strongest quarter.

Our partners also see the value of IBM and Red hat.

For example, we're expanding I'd be EMS partnership with Workday.

One of our most important enterprise wide business platform providers.

As workday grows it is committed to using the red hat portfolio as a key component of a service delivery infrastructure.

Workday is also expanding its use of the IBM cloud.

We're also extending our partnership with box boxes chosen red hat to help power, it's I T infrastructure and Watson as its preferred AI provider for intelligent business processes.

I am a box are also working together to deliver joint solutions focused on governance security and AI.

And so we're off to a great start with Red hat with solid revenue trajectory and expanding client base. Both good indicators of our clients confidence in the value of IB EM and Red hat together.

So let me turn IB EMS key financial metrics similar to last quarter I'd be EMS revenue profit and operating earnings per share reflect the impact of Red Hat's noncash transaction related activity and adjustments.

Our revenue of $21.8 billion was up more than $3.7 billion sequentially. That's above the high end of the range we discussed in October .

Strong transactional performance drove our 3% year to year revenue growth.

With the contribution from our high value software and systems, our operating gross margin was up 230 basis points and our gross profit dollars were up 5%.

Our operating expense was up 15%.

Reflecting the impact of Red hat and significant investments, we're making to strengthen our foundation for chapter two and deliver sustainable revenue growth.

The majority of the increase 10 of the 15 points is driven by acquisitions and divestitures.

This includes red hats operational spending and higher interest expense associated with the incremental debt we took on.

The 10 point increase also reflects a year to year benefit from divested businesses, including a gain of about $135 million associated with a divestiture completed in the fourth quarter.

But to be clear the benefit from the divestiture gain is more than offset by the investments we're making in innovation and then go to market capabilities over the last couple of quarters, we've had higher spending for our Z 15 launch for the containerization of our software and for research and.

In areas like quantum and you see that in higher base expense across SGN, a research and development, which together with lower IP income drove four points of our expense increase.

Our operating tax rate in the quarter reflects a full year rate of about 9%.

Versus the all in operating tax rate of 9% to 10% we previously discussed.

Looking at our free cash flow as I said earlier, we generated $6 billion in the quarter and nearly $12 billion for the year.

That's a 126% of GAAP net income.

Our strong cash generation and focus on capital allocation leaves us with a stronger balance sheet ending the year, where the cash balance of about $9 billion and approved debt profile with $10 billion of debt reduction in the second half.

So now I'll turn to the segment results starting with cloud in cognitive software, which was up 9% this quarter.

We had growth across all three lines of business of cloud and data platforms cognitive applications and transaction processing platforms and cloud revenue in this segment was up over 75%.

Demonstrating good adoption of our hybrid cloud solutions, including Red hat and cloud packs.

Looking at the business areas cloud and data platforms revenue was up 20% this quarter.

This is one area, we're starting to see the synergies a bringing IB EM and Red hat together, we had broad based traction across a suite of cloud packs that addresses workloads from automation to data to integration.

Clients are realizing the benefits of hybrid cloud with this containerized middleware and data platform software portfolio, including faster deployment and approved automation.

Cognitive applications grew this quarter, reflecting the strength of our AI led software solutions, including areas like security and Aiotv.

We're continuing to drive new innovation in these areas in November we launched a cloud pack for security and early client reaction has been positive.

This offering allows clients to integrate their security tools and connect to existing data sources, enabling them to resolve security incidents more quickly using open standards.

This is the way, we believe companies will effectively handle security and the hybrid cloud era and get more value for what they've already invested in cyber security.

And I O T, we announced Maximo asset monitor.

This is a new AI powered monitoring solution designed to help maintenance and operations leaders better understand and improve the performance of their high value physical assets.

This new offering extends the maximo sweet deployed and nearly 100 countries and recognized by I'd see as a leader for enterprise asset management applications.

And then in transaction processing platforms revenue also grew this quarter.

This performance reflects the value we provide clients managing critical workloads and their preference for predictability and I T span.

While not directly correlated do innovation like the Z 15, mainframe bolsters clients confidence and drives commitment to our platform for the longer term.

Looking at profit for this segment the decline in pre tax margin was driven by the purchase accounting impacts from the Red hat acquisition.

We're pleased with the momentum and cloud and cognitive software in 2019.

Revenue was up 6% for the year driven by the hybrid cloud strategy modernization of our software portfolio and the strength of IB EM and Red hat together.

Moving to global business services, our revenue was flat in a quarter and up for the year.

In GBS, we bring together industry and technical expertise to help clients with their digital Reinventions as we enter chapter two clients are making architectural choices and embarking on application led transformations we.

We've been investing in offerings and capabilities to help advise clients and move their applications to a hybrid multi cloud.

Against this backdrop, our consulting revenue grew 4% driven by services that enable each phase of our clients digital journey.

We again had growth in application modernization and development.

Our next generation enterprise applications like as far Hannah and Salesforce and in offerings that use AI to unlock new opportunities and realized productivity improvements.

We see this Exxon Mobil, we're GBS I acts partnered with the client to create it's recently announce Exxon Mobil rewards plus.

So all in one loyalty and payment application, which is hosted on the IBM cloud.

Our application management performance reflects continued revenue growth across the offerings that build and manage cloud applications.

The year to year decline in A.M. us reflect strong prior year performance driven by the achievement of significant milestones across a few accounts.

In global process services revenue declined as demand is shifting from traditional BPL offerings to new business platforms around intelligent workflows.

Overall, we had good signings performance across all three lines of business in GBS with strong demand in digital strategy and I ex cloud application development and monetization and offerings around intelligent workflows.

We more than doubled our red hat, signing sequentially and had 50, new client engagements in the quarter with companies such as Honda Toyota and Vodafone.

Turning a profit GBS gross margin was 27%.

While this is flat year to year, we had margin contribution from yield on our contract delivery improvements mix shift to higher value content and currency benefit from leveraging our global delivery resource footprint.

This was offset by investments, we're making and capacity and offerings to capture the market opportunity.

Overall GBS set another solid year with full year revenue growth to 2% and gross margins expanding by almost <unk> point.

In global Technology services revenue declined 4% consistent with our expectations as we came into the quarter.

We again had year to year declines due to lower client business volumes impacting some of the more traditional labor based managed services.

We are taking actions to accelerate the shift to higher value segments of the market opportunity.

We are introducing new managed services offerings for public and private cloud in areas like cyber security data management and hybrid orchestration.

We are investing in joint services offerings across GBS, and GPS and deploying joint go to market capability as clients look for solutions across applications and infrastructure.

We are expanding our cloud data center footprint, and we are taking structural actions to improve our cost competitiveness, while deploying a more asset based delivery model.

Our come and see as a huge differentiator as the shift of mission critical workloads to the cloud accelerates given our intimate knowledge of our clients industry business and regulatory requirements. And example is the first financial services ready public cloud that I mentioned earlier.

We develop this in collaboration with Bank of America, leveraging our knowledge of the financial services industry environment to address the requirements for regulatory compliance security and resiliency.

We continue to have solid growth in our cloud offerings, and GTS with 13% growth in cloud revenue and double digit growth in cloud signings.

This quarter clients, such as Banco Sabadell at Broadridge are turning to IBCM to enable their transition to cloud.

At Banco Sabadell, I'd be more modernize the banks I T environment.

We're bringing together IB M. services, and Red hat Openshift to deploy new cloud native applications and modernize existing ones, while meeting that bags security and regulatory requirements.

And at Broadridge, we're moving their mission critical workloads to the cloud.

This solution will leverage our deep financial services industry expertise and open source capabilities to allow broadridge to provide industry leading solutions.

Turning to profit we had good gross margin performance and GTS.

Our year to year gross margin expansion of 20 basis points was driven by continued scale out of our public cloud the mix of our portfolio and our productivity actions, we had the largest sequential improvement in pre tax margin in some time.

In systems revenue was up 16% this quarter.

Growth in IB M. Z and storage was mitigated by decline in power.

I am Z was up a strong 63% to.

The performance reflects our first full quarter of Z 15, and demonstrates the client demand for technology that addresses data privacy and resiliency across hybrid cloud.

We shipped the highest mips in history this quarter driven by growth in new workloads.

We've already seen broad adoption of the new mainframe across a number of industries and countries. For example, we see large financial institutions migrating their global mainframe footprint to Z 15, as a critical backbone of their environment and cloud native strategy.

Cloud native developments simplifies building, new applications and modernizing existing ones. This gives developers a consistent way to deploy their applications across public and private clouds, while taking advantage of the underlying performance resiliency and security of IB EM.

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And in October we announce red hat Openshift for IB MZ, bringing together the industry's most comprehensive enterprise container and kubernetes platform with the enterprise server platforms of IBCM busy analytics one.

With these unique innovations I'd be MZ continues to deliver a high value secure and scalable platform for our clients.

In the fourth quarter power declined.

I'll remind you that last year, we launched our next generation power nine processors in the high end as well as completed the rollout of our supercomputers for the U.S. Department of energy.

Storage revenue was up 3% led by growth in the high end.

In November we launched the next generation high end storage system DS 8900.

This new system tightly integrated with the Z 15, mainframe offers industry, leading response times availability and pervasive end to end encryption.

Looking at profit our systems pre tax margin was up more than five points, reflecting the benefit from new hardware launches.

New innovation is fundamental to the segment and we've accomplished a lot this year with the release of both the Newsy 15, mainframe and DS 8900 high end storage.

Now turning to cash we generate $6.7 billion of cash from operations, excluding our financing receivables and $6 billion of free cash flow.

This capped off a year were $14.3 billion of cash from operations also excluding financing receivables.

Our net capital expenditures were $2.4 billion the year to year decline reflects our strategy to deemphasize lower value content across our services and financing portfolios.

It also includes a benefit from real estate sales, which reduced our net capex, we generate free cash flow of $11.9 billion in 2019 inline with our view from the beginning of the year and our free cash flow realization was 126% I'll.

Remind you our free cash flow reflects a few headwinds we've discussed including the headwind and cash taxes predominately in the second half the impact from Red hat, including pre closing financing costs and the impacts of actions we've taken on our portfolio.

Looking at uses of cash of course, our largest was the acquisition of Red hat.

We also return over $7 billion to shareholders. This year.

This includes $5.7 billion in dividends, we've now increased our dividend per share for 24 consecutive years, and we remain committed to growing our dividend.

We also spent $1.4 billion on share repurchases prior to the closing of Red hat.

Looking at the balance sheet, we ended the year with a cash balance of $9 billion.

That's down $3 billion from a year ago.

When we were increasing our cash balance in advance of the Red hat acquisition.

Now, let me spend a minute on our debt profile.

With the additional debt we took on to fund the Red hat transaction, we had $73 billion in debt at the end of June a combination of global financing debt.

And non financing or what I'll call core debt.

We suspended our share repurchases at the time of the Red hat acquisition, allowing us to focus our strong cash generation on debt repayment.

In the fourth quarter, we reduced our debt by $3 billion contributing to a $10 billion reduction and I'd be EMS core debt since June .

Our total debt now stands at $63 billion of which core debt is $38 billion. This puts us on track to achieve a leverage ratio consistent with the mid to high single a rating within a couple of years.

I also want to comment on our global financing debt, which is fully supported by financing assets with a leverage ratio of nine to one.

While there is no meaningful change the debt levels in the second half, we reduced our global financing debt by $6.5 billion since the beginning of the year.

In February we announced the wind down of our OEM commercial financing operations, which we essentially completed by the ended a year.

In addition to reducing our debt levels. This improved the overall credit quality of our receivables, which ended the year at a 62% investment grade.

And as we typically do in January I want to provide an update on the performance of our retirement related plans.

Our U.S. plan has been frozen since 2008 and over the last several years, we moved our asset base to our lower risk lower return profile.

We had strong returns this year with just under 50% return on assets well ahead of our expected returns.

At the end of 2019 in aggregate our worldwide qualified plans are funded at 102%.

With the U.S. at 107%, that's up three and two points respectively from a year ago, you can see our retirement related plans continue to be well funded.

Now, let me wrap up with a few comments on 2019 and how this positions us for 2020.

We've been focused on the next chapter of our clients digital Reinventions.

Upfront I talked about what we've done in 2019 to strengthen our foundation for chapter two.

We acquired Red hat modernize our software portfolio and brought these together to create the leading hybrid cloud platform.

We are introducing joint GBS and GTS offerings to help clients on their cloud journeys, we brought new innovations to market I mentioned, the cloud packs the financial services public cloud Z 15, and high end storage. We also have a leadership position in quantum.

And again, we're the leader in US patents at the same time, we divested some businesses that weren't importance to our success in chapter two.

And now in the fourth quarter, we had good transactional performance across our high value software and systems, we're starting to realize the synergies from the combination of IBCM and Red hat in cloud packs in services engagements and in Red hat itself and its services, we're seeing good growth.

Both across GBS and GTS in the services to advise migrate build and manage hybrid cloud environments, along with some pressure in the traditional labor based services altogether, we delivered revenue growth of 3% this quarter.

With our high value mix and focus on productivity, we expanded our gross margin and we had strong free cash flow generation.

With this trajectory in 2020, we expect to grow revenue operating earnings per share and free cash flow and expand operating gross margin.

Within that will maintain a high level of investment focused on hybrid cloud and data and AI capabilities will drive productivity. It takes structural actions, especially in our GTS business and remember well continue to face year to year headwinds from the divested businesses.

Especially in the first half and our PML will also still have an impact from the red hat noncash purchase accounting adjustments so less than 2019.

Looking at tax we expect an operating tax rate in the range of 7% to 9%.

By 2019, that's an all in rate, including an estimate of discrete items, putting all this together, we expect to deliver at least $13.35 of operating earnings per share for the year.

Turning to free cash flow, we expect about 12 and a half billion dollars in 2020.

Within that we're expecting growth in Capex as we continue to build out cloud capacity.

And as we set back in August we expect red hat to be accretive to free cash flow and that's net of the incremental interest expense with that let me turn it back over to Patricia for the QNX.

Thank you Jim before we begin acumen, a I'd like to mentioned a few items.

First I'll remind you that the year to year growth rates were providing today for red hat or normalized to provide comparability to red Hat's historical performance.

Second we have supplemental charts at the end of the slide deck that provide additional information on the quarter and the full year.

And finally as always I'd ask you to refrain from multi part questions.

So Sheila let's open it up for questions.

Thank you.

Time will begin to question answer session at the conference to ask a question. Please press star one and record your name clearly if you need to withdraw your question Press Star Q I can kill ask a question. Please press star one our first question comes from Wamsi Mohan with Bank of America. Your line is open.

Yes. Thank you.

Jim Nice to see the strong overall revenue performance and Red hat performance as well.

I know you don't explicitly guide revenues, but can you help at a high level bridge the big items that we should be thinking about and 2020 relative to 2019 for revenues and then do the same for free cash flow I know you touched a little bit on capex, but if you could maybe break it down between core business Red hat tax pension.

What are some of the larger puts and takes like we should think about embedded in that 500 million increase year to year that would be great. Thank you.

Okay. Thank you Wamsi and I appreciate the complement to all the I'd be numbers around there we've been working hard let me start out. It is we always talk about our guidance. This the first time, we're coming out with 2020 guidance overall and as we always do we take into account multiple scenarios trajectory of our business.

Sop racial indices business plans et cetera, and all that gives us confidence in the expectation. We went out with with regards to 13 35 at least on E. S and approximately 12 and a half billion, but there are a couple things underneath that in some of them, which you talked about let me just share some of the color. So first around.

Currency.

Currency, we expect on a full year to be pretty de Minimis between zero and one point of a headwind little bit different what we've been a challenge with the last few years, but most of that's going to be here in the first half and in the first quarter at current spot rates second we've done a.

Lot of work around our portfolio optimization divesting noncore assets that is going to be about a one point impact on the year and a two point impact in the first half very similar to what we just finished in second half of the year three we're continuing to deal with the deferred revenue impairment and we were very transfer.

Sparing on Investor Day, we gave you the four quarter rollout and that's predominantly a first half statement second half its lesson and for embedded in our results as we talked about her prepared remarks, you know it will go through and GTS, we are going to take aggressive structural actions the re.

Positioned the business overall I would tell you for look at the last few years that will probably beyond the high end of that.

And when you take a look at our guidance on tax, which again to be fully transparent 7% to 9% that is all in including Discretes. We expect a tax discrete benefit in the first quarter that will pretty much offset the charge and on a full year basis be immaterial. So that's some of the color.

Our behind the overall now when you talk about the full year I mean, you look at our guidance in a full year. We will grow revenue, we will grow operating earnings per share, we will grow free cash flow and we will continue to expand margins nicely and embedded in that will be continued acceleration of our cloud.

Business and continued good growth out of the IB Mplus Red hat together.

Okay Wamsi, let's go to the next question. Please.

Thank you. Our next question comes contingent along with JP Morgan Your line is open.

Hi, Thanks, Good afternoon to you guys just the I guess that muscle intrigued by the revenue growth outlook or for 20 and again they can't get too much on segment does go GTS.

And signings down the short cycle stuff was was an issue last quarter.

I'm curious to see your visibility your confidence in in delivering revenue growth against that which you see with GTS again, recognizing that you on system structural actions to do.

Yeah, well you know, let's talk about since we asked twice in the getting them to engine. Thank you for the question.

Overall as I said at the I'd be on level, we expect to grow revenue earlier operating earnings per share free cash flow and continue to expand margins within that you know when you look at up by segment, let me give us some of the colors from from a segment number one we continue to have a very strong portfolio and offering lineup.

But our software base of business complementing now with the Red hat acquisition, you're seeing in our results. This the synergistic value, we're bringing to our clients upbringing, IBM and red hat together and we see consistent performance in that segment GBS overall, we actually finished pretty strong.

Wrong in GBS very strong signings in the quarter, we return that business for the first time in years back the backlog growth and we're pretty optimistic about accelerated growth in 2020 GTS to your question. You know we talked about 90 days ago fourth quarter played out pretty consistent.

With the guidance, we gave 90 days ago and what do you look at our backlog position, where we ended and you look into 2020, you know we are going to take actions around high value portfolio optimization around offerings around go to market models around incentives and changing our.

Operating model in light of what we're seeing in the marketplace and I would see an improving trend in GTS as we move through the year predominantly in the second half and then if you look at systems. You know we're off to a very good start that segment has always been predicated based on bringing new innovation and value to market.

Our Z 15, and new high end storage, which we brought the market both grew nicely value proposition resonating, we expect a very strong first half and both of those and we'll see as we get into the second half how the cycle plays out.

Thank you to engine for the question actually elegantly. Please go to the next question.

Our next question comes from that coupled with credit Suisse. Your line is open.

Yes. Thank you Wonder you talk a little bit more about the performance in GBS and in particular dig into what's driving the divergence between consulting apps management and then related to that you'd give you can walk through what drove the pressure on Pts margins for the segment in the fourth quarter and how we should think about profitability there going forward.

Sure. Thanks, Matt I appreciate the the questioned GBS overall first of all.

We talked about 90 days ago, we were facing a very difficult compare when you look at fourth quarter last year, I think I'm going off of memory. We grew high single digit overall, we were double digit consulting growth we return apps.

Application management, the mid single digit growth and we talked at that time that we had done a lot of work about improving the quality of our delivery and we had achieved significant milestones that we are contributing to fourth quarter last year in all by the way if I remember correctly, our pretax income was up 30 to 40.

Percent fourth quarter last year. So we knew what we were entering here in the fourth quarter, but I'll tell you overall I couldn't be more pleased with the GBS space the business for the full year second you're in a row consistent revenue growth we grew up.

Operating gross profit margins by 90 basis points, we continue to reposition this business to capture the growth in our clients digital Reinventions and journey to cloud, we're seeing nice acceleration in both a and as I just said on the prior question. We finished the year pretty strong and in GBS.

With regards to signings growth returning to overall backlog back to growth and we see an accelerated GBS positioning going into 2020 and to your question that's really led by.

No we've talked about the rationale of chapter two around hybrid cloud around a large portion of mission critical workloads that are going to move to cloud as we move forward and hybrid is gonna be that destination I think what you're seeing is the natural early innings of that playing.

Now and that is represented more so in project based businesses around cloud advisory cloud application migration and advisory services. So consulting is leading the way but to me that's the tip of the arrow that's going to lead then amas.

And then eventually as that matures, our GTS managed services going forward.

Thanks naturally please go to the next question.

Our next question comes from Toni Sacconaghi with Bernstein. Your line is open yes. Thank you for the question you talked a lot about the very strong transactional performance in the corner I think better than your expectations is there are risks that that pulled forward any revenue from 2020.

And I think you talked about 4% to 5% revenue growth on your August call for 2020 is that something we should still be thinking about and then on cash flow I know a number of people have asked but maybe you can just drive bridge between this year and next year, how you're up about half a billion I think you've said red hat alone will contribute half a day.

Billion that implies that everything ex red hat is flat. Despite the fact that margins appear to be going up and you seem quite confident and some of the businesses. So maybe you can also just help with that bridge as well. Thanks so much.

Thanks, Tony I appreciate the questions overall, let me try to take each of these in piece parts first of all fourth quarter. Yes. If you. If you dial back 90 days ago, we talked about our seasonality in our business and we were looking for a transactional quarter that would take our sequential growth up.

<unk>, three and a half the $3.7 billion and we achieved above that high end now truth be told all transparency currency got a little bit better in the quarter, but even with that we still beat the high end of our guidance overall and most importantly return IBCM back to revenue growth now when you look underneath the transactional performance.

I would tell you one our mainframe we're off to you know our normal cycle here in the quarter. We had a very good start our first full quarter grown 63% highest mips shipping history. So I would tell you that less about a pull forward from 2020, that's kind of normal cycle and when you get underneath software.

We've got good momentum, we spent a lot to invest and modernize our software portfolio containerized, our offerings make them cloud native.

And optimized on Openshift with Red hat to play out the synergistic value of IP Mplus Red hat and I think we're seeing very good momentum in adoption in our cloud packs a here in the fourth quarter. The only area I would call out and we've talked about this many times and that is our transaction processing platforms.

We run mission critical workloads on our systems for our clients, it's high value for our clients, it's high value for IBCM and there's always volatility in that portfolio on when clients choose to commit to our platform for the long term and you saw in the fourth quarter, we actually did better than ours.

Internal expectation so were taken a prudent view of that in 2020, but I think that's another instantiation of the innovative value we bring to the marketplace with our systems offerings. Overall, so that's what I would say two with regards to your first question I'm trying to remember all of them. Let me go to free cash flow.

Very important we spent approximately 12 and a half billion and when you look underneath that yes. During the Investor day, We said over the next two years of Red hat niobium will deliver one of the half billion dollars or free cash flow and all by the way.

Red hat will be free cash flow accretive in year, one and we are well on our path for that so when you look at the dynamics of our free cash flow. It's really in a couple different buckets a couple of headwinds a couple tailwinds on the tailwind side, we're going to have operational profit and we're going to have red hat contribution all in net of.

Incremental interest expense retention et cetera will be accretive in year, one on that on the tailwind or excuse me the headwind side, we are going to invest in 29 team. Our capital we were driving a balanced capital allocation process driving efficiencies out of that that will.

Wrapping 29, Sina, we will have a headwind and capex and the investing in our business and we will also have a headwind and cash tax overall and when you take a look to your last question around revenue.

And I would tell you right now we set in August that Red hat IB Mplus Red hat together would deliver four to five points when I look at where the current estimate is in consensus in the street I think the streets pretty reasonable it's 3% overall you add at constant currency with a with the.

Headwind on on the currency had a stronger dollar and you look at our divestitures were at mid single digit growth. So I think the current estimates out there are reasonable.

Great. Thanks couldn't get to the next question. Please.

Our next question comes from a net Daria money with Evercore ISI. Your line is open.

Thanks, taking my question guys up I guess, Jim when I look at that calendar 20 E. P. S guide in the past you kind of talked about how does a contribution fall out for Q1 in the first half broadly on an E gifts on rate basis. I was wondering if you just touch on.

Skewing a time for 17, 18% of full year, Cps again or does that not change a little bit with Red hat and then secondly on the tax rate just so I get this clear the delta between 8% tax rate that you're guiding for versus the 11 told I think people how to model. That's essentially all the discrete benefit you get in Q1 is that fair.

Yes. Thanks Summit I appreciate the question and let me take each of them. You know just quickly net you're right on color a first quarter. It is a little different just given the red hat and if you go back to how we were transparent and hopefully everyone. Appreciates. This as I go out and talk to investors. A you know we've given you the deferred revenue.

New impairment charge for the first four quarters after the closure of the Red hat transaction, but really when you look at our first quarter first on S., we expect Dps form a skew perspective to be between 14 and 15% of the full year underneath that.

That is basically on the higher historical trajectory.

Yes, the red hat deferred revenue impairment, which as we told you is about $400 million, so pretty normal skew take into account the red hat differ deferred element in terms of revenue. We look at revenue and we see again can't predict currency were calling currency between a small impact.

So about a point impact right now all that varies depending on our geographic and product mix, but we're seeing right now at a constant currency level accelerated growth of about a half a point.

I hear from fourth quarter to first quarter at constant currency and when you take a look at tax rate very good question.

We printed in 2019, 8.5% all in we guided pretty much right between that 7% to 9% overall that does include a discretes as we're trying to give you increase transparency and what's in our expectation, but very important to note as I talked about we will be taken.

Structural actions to reposition our GTS business from a cost competitiveness perspective in light of what we're seeing in the marketplace and unlike last year, where we had a funding event with regards to a gain that offset a charge. This year were taken a charge and we're going to absorb that through the return of that.

So we really don't see a benefit overall as we go forward.

Great. Thanks, Let's go to the next question please.

Next we'll hear some Katy Huberty with Morgan Stanley Your line is hoping.

Yes. Thank you add two quick questions first Jim you mentioned the possibility of taking structural actions and in GTS. This year, what might that entail and then back in August you had outlined at that 1.65 billion a potential revenue synergies post red Hot any.

Contacts around how much of that you have captured should we think about the four point acceleration in red hat pro forma gross adds signaling that that type of revenue synergies that you've been able to capture thank you.

Yes, So let me take the second one first and we'll talk about synergy. So obviously as I stated the upfront.

We're very pleased with the first six months here a bring in IB M. and Red hat together and I think you could see based on the performance in the acceleration that we are truly better together, we're delivering the synergistic value to to our clients. Overall, you know the best way when I look at it.

First of all the accelerated revenue in Red hat up 24% a year over year is one instantiation the second and I know many of you out there or have had been writing and they have different models of trying to figure out what's IB Ams organic revenue number.

And so forth and I've been spent a lot of time with our investors and let me give you the way we look at it and how we're managing to ensure that we drive the synergistic value of the technology architecture decisions, we're making and the go to market leverage of our scale and large enterprise presence, which kids.

At your 1.6 plus billion dollars is synergistic effect when we look at our business overall, we're looking for the the lift and the growth in the acceleration of our overall software business and when we look at the operational performance of this segment, we look at it on an all in.

Historical normalized basis and at that level, our software growth accelerated all into 3%.

Now what does this reflect to your question. It reflects on my opinion, the true demand of our software demand from our clients, including Red hat.

Then adjusting out the deferred revenue impairment impact and Red hat Standalone revenue last year. So when you look at what we talked about in Investor day, we talked about sell more blue IB EM and we've talked about sell more read the sell more read was our global price.

Since and our scale to accelerate Red hat overall and as I said in the prepared remarks, we're seeing great progress, we had 21 deals above $10 million up to FX year over year and a half over half of those deals were large I.B.M. enterprise clients. So we are seeing me.

Standardization of the leverage of the IBCM site and around sell more IB I. Just told you about accelerating software revenue. We have now over 2000 clients and open shipping cloud packs and around services, we've signed hundreds of services Red hat engagement deals.

Overall, including several design wins in network cloud providers around Fiveg that will play out as we go through 2020.

Great. Thanks can you go to the next question. Please.

Next question comes from David Christmas Stifel Nicolaus <unk>. Your line is open.

Thank you good afternoon.

Jim.

Give us a little better insight into the specific issues that are impacting GTS, including the bookings performance and what underlies your confidence that growth.

Should improve as the year progresses, given that the GTS turnaround really truth be told is probably eight or nine quarters in are ready and taking longer than you anticipated.

Okay. David Thank you very very much for the question and let me start with providing some overall context, because I think it's important to share or what are we seeing in the market and then how that informs our actions as you heard in the prepared remarks, we printed down 4% consistent with our expectations of what we talked about now.

90 days ago as were experienced slower client base business volumes, but it's important to note GTS, one has industry, leading market share position to as a global footprint and scale and three most importantly, as a very integral role into the integrated value proposition.

We have IB m. overall as we run the mission critical workloads for many of our clients overall and by the way you see that playing out in our cloud based performance in GTS were overly trailing 12 months, we got to over at eight half a billion dollar book of business, that's growing double digits.

And you heard the significant wins, we had in the quarter Broadridge Banco Sabadell Bank of America public Cloud. In addition to several red hat wins, including what I, just said about some design wins with network providers, but I'll tell you what we're seeing in the marketplace. David to your point is clients are making.

An architectural choices. They are embarking on application led transformation and we see this opportunity really playing out as I said earlier and project based services. The advised to build the migrate which is very aligned to our GBS business and by the way that's why we.

I feel pretty confident and where we ended 2019 and our opportunity in 2020 around GTS now.

If you look at as client adoption matures in it wounds through the advisory phase and the application modernization phase. This will naturally extend to our GTS align managed services phase, which should scale up overtime and that's why said more of a second half players we.

Go forward so in light of that what we're seeing in the marketplace. We are going to take aggressive actions around our GTS business model we.

We are going to reposition this business for hybrid cloud investing jointly integrating GTS in GBS offerings around advise build moving manage we're creating a building skills and investing and where we see the growth right in front of us that's starting to scale around cyber sick.

Purity management trusting compliance services multi cloud management and of course managed services around Openshift and second we are going to integrate our go to market with GBS than our global account teams at the large enterprise level, we're going to take these integrated.

Brings leverage now the integrated value and breadth of IB that can play across the continuum as clients move to journey to the cloud and we're going to go drive that hard and in addition, I would tell you we're going to approve the cost competitive structure of this business with the actions were taken to take your early into.

2020.

Thanks, David how can they got to the next question. Please.

Next we'll hear some Jim Suva with Citigroup Your line is helping.

Thank you very much everything you talked about totally makes sense in jives and I have one question and it's probably because I'm just definitely not the smartest went out there and that's on the signings numbers you know that number appears if my number looks right and the calculations and was down year over year are there. Some features going on like maybe larger contracts.

Rolling off or something but timing, we should be aware of or at some point should that revert to be positive or if not why you're kind of what's going on about why everything else is going so well, but the signings number just looks like it just didn't materialize to be up.

Sure Jim Thanks for your question I appreciate it I know you get you got the numbers right. So let me talk a little bit about signings overall and more importantly, you know as I've always said before signings very there are not all equal how they impact backlog, how they impact realization, but if you look at our signings overall, we deliver 14.4 billion.

Dollars I would tell you internally that was actually above our expectations why to your point, we were coming off of a very difficult compare last year signings are down 9% overall and when you look underneath it to my point about all signings are not equal and you breakout large deals from.

Smaller deals and let me just use $100 million is I'd been.

For the last few quarters here are large deal signings greater than 100 million were down 34% that was coming off of last year, where we had 19 deals above $100 million predominately in our GTS base of business of which many of those were natural extensions and not new logos. That's the point about.

Signings not being equal but.

Our smaller deals less than 100 million by the way, which is still big were up double digits, both for the quarter and for the half and across both businesses GTS and GBS back to David Grossman's question, I think you're seeing the natural evolution of the early innings of this journey to cloud.

As we move forward now the interesting thing is underneath we posted over $112 billion worth the backlog.

And that backlog was actually up 5 billion quarter to quarter. That's one of our largest sequential threeq to Fourq you backlog increase by the way with and without currency that we've had in quite some time. So I would tell you that answer tough compare large deal focus but that help.

The the underlying portfolio growing substantially double digits, both GTS GBS and less than a hunter.

Great. Thanks, Sheila let's take one last question.

Thank you our last question comes from Jeffrey Cabal with Nomura Instinet. Your line is that pain.

Yes, thanks, very much I would like to clarify a a prior pointed and throw out a broader one and the clarification. If you could go once again through the Delta on EPS given the tax rate. It does seem as though many of us as expected.

Three year, so points higher on the tax and a you know thats works out to be 40 cents. So that's a big increase in Opex I just wanted to make sure I've tied that correctly.

Bigger picture to what extent do you think any of the.

How much of the changes in the in the macroeconomic picture affected your outlook for for 2020 and that could include trade or what have you. Thank you.

Thank you Jeffery.

I appreciate the question on the 2020 guidance.

Reiterated just to make sure does the absolute clarity here for everyone. When you look at our tax rate our tax rate in 2019, 8.5%.

Our tax rate in 2020, we said seven to nine pretty much right number right in the middle So tax year to year is not a benefit we're growing operating EPS year over year. When you look at that tax rate and I'm not going to talk to what each of you have in your own model, but underneath that we.

We as we said are going to take structural actions to reposition our GTS business for the hybrid cloud world those structural actions are going to flow through to profit.

And when I said those structural actions upfront I said, if you look at the last few years, we're gonna be at the high end of that range of that total charge. There is no coverage for that charge, we are going to absorb the return in our fiscal 2020 and still.

Grow operating earnings per share to through at least 13 35 coming off of what we just finished at 12 81. So that's the first question or was there are two macro environment I would tell you Jeffrey.

If you asked me from 90 days ago to today, we've obviously had.

Some clarity around some of the uncertainty was out there with regard to at least phase one on trade around Brexit a in a few other areas you know I I've always said when you have high value innovative technology that you can bring the market that.

Creates differentiated competitive advantage for your clients spending will occur if anything and by the way I don't think this is a change we've seen throughout 19, you know cfos that I talked to everyone's focus on more so productivity ROI and predictability of spend everyone's trying.

And a lock in what their spend rates are as they move forward, but when you have strong technology like the mainframe that brings differentiated value or people are buying that to actually deliver differentiation for them in a marketplace to win.

So as always let me make a few comments to wrap up the call 29 team was an important year for IB We had a good end to the year and we're pleased with the strength in the positioning exiting the year the acceleration in Red hat strong adoption of our cloud packs growth in our cloud based services all validate the.

Actions, we've taken to position us for growth in 2020, so I want to thank all of you for joining us today and we look forward to continue in the dialogue.

And then let me turn it back to you to close out the call.

Thank you and thank you for participating on today's call. The conference has now ended you may disconnect at this time.

Welcome and thank you for standing by at this time all participants are in listen only about 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 Miss Patricia Murphy with I'd be ma'am you may begin.

Thank you. This is Patricia Murphy, Vice President of Investor Relations Friday.

I want to welcome you to our fourth quarter 2019 earnings presentation.

I'm here with Jim Cavanaugh, I'd be M., senior Vice President and Chief Financial Officer.

Oh post today's prepared remarks on the idea of Investor website that a couple of hours and the replay will be available by this time tomorrow.

Some comments made in this presentation, maybe considered forward looking under the private Securities Litigation Reform Act of 1995.

These statements involve factors that could cause our actual results to differ materially.

Additional information about these factors is included in the company's does he see filing.

Our presentation also includes non-GAAP measures to provide additional information to investors for example, consistent with last quarter format. We present revenue growth at constant currency throughout the presentation. In addition to provide a view consistent with our go forward business will focus on constant currency growth adjusting for the divested.

Businesses for the impacted lines of total revenue cloud and our geographic performance.

We have provided reconciliation charts for these and other non-GAAP measures at the end of the presentation and an 8-K submitted to the FCC.

I also want to remind you that are the EMS revenue profit and earnings per share reflect the impact of purchase accounting and other transaction related adjustments associated with the acquisition of Red hat. These adjustments and charges are primarily non cash.

So with that I'll turn the call over to Jim.

Our operating gross margin was up over two points, which is the best margin expansion in sometime.

We delivered $4.2 billion operating net income and $6 billion of free cash flow and we had $4.71 of operating earnings per share.

We also reduced our debt balance by another $3 billion in the quarter for a total reduction of $10 billion since the end of June .

This caps off for your with $77 billion of revenue.

$12, an 81 cents of operating earnings per share at about $12 billion or free cash flow inline with our expectations.

2019, we took a number of actions to strengthen our foundation for the next chapter of our clients digital Reinventions.

We acquired read that what's the number one Linux operating system ROE and the leading hybrid cloud platform Openshift.

We modernize our software portfolio, making a cloud native and optimize for Openshift.

We announced the industry's first public cloud designed specifically for financial services.

We expanded our services offerings and skills for the cloud journey, and quoting consulting and technology services for Red hat and multi cloud management.

We expanded the reach of our Watson AI offerings, and we are leading the industry on our approach to trust and transparency for data and they are.

We continue to deliver innovation and areas like our Newsy 15, mainframe and quantum.

And we divested select software and services businesses as we continue to prioritize our investments and optimize our portfolio.

With 3% revenue growth, we started to see that benefits in our fourth quarter results.

Clouding COGNA to software revenue was up 9% we had growth in all three lines of business.

Reflecting demand across our software portfolio.

We had good adoption of our cloud packs continued growth of security and Red hat again posted strong performance.

In global business services, we have continued growth in consulting and application modernization projects as we help our clients on their digital journeys. We're also seeing this in our GBS signings this quarter, including acceleration and new Red hat engagements.

Global Technology services revenue was down 4% inline with the expectations, we discussed last quarter.

We expanded global technology services gross margin consistent with our focus on managing the business from margin and profit.

And it's systems, we had a good start towards the 15th cycle and growth in high end storage, resulting in double digit revenue growth and gross margin expansion in the segment.

Across our segments, our cloud revenue growth improved to 23% this quarter.

And our cloud revenue for the year was $21 billion.

By leveraging our technology incumbency and expertise to help our clients, where third journeys to cloud and now represents 27% of our revenue.

We know there's a lot of interest in our hybrid cloud approach, including Red hat saw focused on that upfront.

As we've said the next chapter of cloud will be driven by mission critical workloads manage in a hybrid multi cloud environment.

This will be based on a foundation of Linux containers and kubernetes.

This quarter, we had strong performance in Raul and Openshift.

Red Hat's normalize revenue was up 24% eclipsing a billion dollars in a quarter for the first time.

In August we introduce cloud packs cloud native software that simplifies deployment reduces operational costs and allows clients to build one and run anywhere.

Cloud packs bring together I'd be EMS middleware, AI management and security.

And Red Hat's Openshift platform.

Our strong performance in cloud packs. This quarter is an example of the synergy from the IB EM and Red hat combination.

As we look forward the largest hybrid cloud opportunity is in services advising clients on architectural choices moving workloads building, new applications and of course managing them.

With that would be services expertise and digital Reinventions and managing mission critical workloads, we are well position to help our clients on this journey.

And now into fourth quarter demand for our cloud capabilities continue to ramp and we're starting to realize the synergies across I B M and red hat.

We see it in our total cloud revenue, which as I said was up 23% and we fit in our combined software revenue growth of 9% across GBS and GTS, we nearly doubled the number of new services engagements leveraging red hat versus last quarter.

Or continue to expand our client base and now have over 2000 clients using red hat and IBCM container solutions and we doubled the number of red hat large deals versus the previous quarter were 21 customers with deals greater than $10 million.

And as I said Red Hat's normalize revenue is up 24%.

Within that infrastructure revenue, which is predominantly ROE was again up double digits at a point higher the last quarter's rate.

We're continuing to take share with rail as clients put more of their enterprise workloads on Linux.

Revenue in application development and emerging technologies was up over 50% this quarter driven by Openshift and ansible.

As I mention I'd be EMS club packs include the Openshift platform and so as we sell cloud packs. This drives additional red hat Openshift revenue.

The transactional nature of club pack sales accelerated the revenue growth of Openshift and total red hat.

Reflecting IBCM seasonally strongest quarter.

Our partners also see the value of IB M. and Red hat.

For example, we're expanding I'd be EMS partnership with Workday.

One of our most important enterprise wide business platform providers.

As workday grows it has committed to using the red hat portfolio as a key component of a service delivery infrastructure.

Workday is also expanding its use of the I.B.M. cloud.

We're also extending our partnership what box boxes chosen red hat to help power, it's IP infrastructure and Watson as its preferred AI provider for intelligent business processes.

I B M. A box are also working together to deliver a joint solutions focused on governance security and AI.

So after a great start with Red hat with solid revenue trajectory and expanding client base. Both good indicators of our clients confidence in the value of IB EM and Red hat together.

Our revenue of $21.8 billion was up more than $3.7 billion sequentially. That's above the high end of the range we discussed in October .

Strong transactional performance drove our 3% year to your revenue growth.

With the contribution from our high value software and systems, our operating gross margin was up 230 basis points and our gross profit dollars were up 5%.

Our operating expense was up 15%.

Reflecting the impact of Red hat and significant investments, we're making to strengthen our foundation for chapter two and deliver sustainable revenue growth.

The majority of the increase 10 of the 15 points is driven by acquisitions and divestitures.

This includes red hats operational spending and higher interest expense associated with the incremental debt we took on.

The 10 point increase also reflects a year to your benefit from divested businesses, including a gain of about $135 million associated what a divestiture completed in the fourth quarter.

But to be clear the benefit from the divestiture gain is more than offset by the investments, we're making in innovation and then go to market capabilities.

Over the last couple of quarters, we've had higher spending for our Z 15 launch for the containerization of our software and for research in areas like quantum and you see that in higher base expands across us DNA research and development, which together with lower IP income.

Joe four points of our expense increase.

Our operating tax rate in the quarter reflects a full year rate of about 9%.

Versus the all in operating tax rate of 9% to 10% we previously discussed.

Looking at our free cash flow as I said earlier, we generated $6 billion in the quarter and nearly $12 billion for the year.

That's 126% of GAAP net income.

So now I'll turn to the segment results, starting with cloud and cognitive software, which was up 9% this quarter.

We had growth across all three lines of business of cloud and data platforms cognitive applications and transaction processing platforms and cloud revenue in this segment was up over 75% demonstrating good adoption of our hybrid cloud solutions, including Red hat and cloud packs.

Looking at the business areas cloud and data platforms revenue was up 20% this quarter.

This is one area, we're starting to see the synergies upbringing IBCM and Red hat together, we had broad based traction across a suite of cloud packs that addresses workloads from automation to data to integration.

Clients are realizing the benefits of hybrid cloud with this containerized middleware and data platform software portfolio.

Putting faster deployment and approved automation.

Cognitive applications grew this quarter, reflecting the strength of our AI led software solutions, including areas like security and Aiotv.

We're continuing to drive new innovation in these areas in November we launched a cloud pack for security and early client reaction has been positive.

This offering allows clients to integrate their security tools and connect to existing data sources, enabling them to resolve security incidents more quickly using open standards.

This is the way, we believe companies will effectively handle security and the hybrid cloud era and get more value for what they've already invested in cyber security.

And I don't see we announced Maximo asset monitor.

This is a new AI powered monitoring solution designed to help maintenance and operations leaders better understand and improve the performance of their high value physical assets.

This new offering extends the maximo sweet deployed nearly 100 countries and recognize my IVC as a leader for enterprise asset management applications.

And then in transaction processing platforms revenue also grew this quarter.

This performance reflects the value we provide clients managing critical workloads and their preference for predictability and I T spend.

Well not directly correlated new innovation like the Z 15, mainframe bolsters clients confidence and drive commitment to our platform for the longer term.

Looking at profit for this segment the decline in pre tax margin was driven by the purchase accounting impacts from the Red hat acquisition.

We're pleased with the momentum and cloud and cognitive software in 2019.

Revenue was up 6% for the year driven by the hybrid cloud strategy modernization of our software portfolio and the strength of IBCM and Red hat together.

Moving to global business services, our revenue was flat in a quarter and up for the year.

In GBS, we bring together industry and technical expertise to help clients with their digital reinventions.

As we enter chapter two clients on making architectural choices and embarking on application led transformations.

We've been investing in offerings and capabilities to help advise clients and move their applications to a hybrid multi cloud.

Against this backdrop, our consulting revenue grew 4% driven by services that enable each phase of our clients digital journey.

We again had growth in application modernization and development.

Next generation enterprise applications like as far Hannah and Salesforce and in offerings that use AI to unlock new opportunities and realize productivity improvements.

We see this Exxon Mobil, where GBS IMAX partnered with the client to create it's recently announce Exxon Mobil rewards plus the all in one loyalty and payment application, which is hosted on the IB I'm cloud.

Our application management performance reflects continued revenue growth across the offerings that build and manage cloud applications.

The year to year decline in am us reflect strong prior year performance driven by the achievement of significant milestones across a few accounts.

In global process services revenue declined as demand is shifting from traditional BPO offerings to new business platforms around intelligent workflows.

Overall, we had good signings performance across all three lines of business in GBS with strong demand in digital strategy and I ex cloud application development and modernization and offerings around intelligent workflows.

We more than doubled our red hat, signing sequentially and had 50, new client engagements in the quarter with companies such as Honda Toyota and Vodafone.

Turning a profit GBS gross margin was 27%.

Well this is flat year to year, we had margin contribution from yield on our contract delivery improvements mix shift to higher value content and currency benefit from leveraging our global delivery resource footprint.