Q1 2020 Earnings Call

April 20, 2020

Okay.

<unk>.

Welcome and thank you for standing by at this time all participants are in 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 B M. Now.

You may begin.

Thank you.

<unk> Murphy, Vice President of Investor Relations for IB.

I want to welcome you to our first quarter 2020 earnings presentation.

I'm here with urban Krishna.

<unk>, Chief Executive Officer, and Jim Calvin off I'd be in senior Vice President and Chief Financial Officer.

We'll post today's prepared remarks on the IB I'm investor website within a couple of hours and the replay will be available by this time tomorrow.

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

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

Additional information about these factors is included in the company that SEC filings.

Our presentation also includes non-GAAP measures to provide additional information to investors. For example, we present revenue growth at constant currency throughout the presentation.

In addition to provide a view consistent with our go forward business.

We 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'd like to make two other comments regarding this quarter's presentation.

First consistent with our last two quarters I'd be 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 noncash.

Second our segment structure for 2020 remains consistent with 2019, so at the beginning of this year, we realigned a couple of offerings between segments, resulting in very modest adjustments.

Our results reflect this realignment and we're providing a view a first quarter 2019 on that recast basis in today's supplemental slides and two years of historical recast data on our website.

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

Hello, everyone.

As you all know we are in the midst of an unprecedented global public health crisis.

I'd like to Paul's photo moment, and see that fight hard goes out to all those dealing with go with 90.

One of the flows commitments I made most of your cross burden and open.

Not just we're going to employees about clients and bought knows what with arc investment community as well.

And that's but I will participate not just today, what an earnings calls from now on.

There are few topics I'd like to coupled with you today.

First.

I'll review the areas I've talked about.

Jim I'll tell you about what we've accomplished in the last two weeks.

And finally, I'll tell you about areas I intend to focus on in the near future and then I'll quickly touch up on our Q1 results.

Let's start with the area as I've talked about.

I have told our teams it is essential.

We deepened our understanding of our clients journey to hybrid cloud and they are.

Which will result in hybrid cloud as the fourth platform.

We remain obsessed with continually delighting clients.

And you further establish I began as the gold standard for good deck.

All these are underpinned by our culture, but false those growth on an entrepreneurial mindset.

I see these as our collective priorities.

I'll move on to what's been done in the last few weeks.

Despite the challenges we're facing as a result or the global crisis.

We remain steadfast in our commitment to employees clients.

Society at large.

More than 95% off our 350000 IB Imos are working remotely now.

In addition, about 8000 of them remain at a social sites to carry out mission critical work.

As our clients it just with this new normal they need a partner they can crossed.

I B M is that partner.

This isn't just about helping our clients navigate the prices what to ensure that they emerge stronger and more resilient.

To that then we have taken concrete steps to bundle existing offerings to address the shifting needs appliance.

Autos leveraging hybrid cloud.

Using AI for automation and enabling remote work.

Another area of baby and focusing on has been demobilized I b M and I'd be remiss to help with the global Bible against covered 90.

Here are some examples.

The computing power.

All 360, better flops that we have helped convene for researchers.

The weather channels over 19 County by County map, which saw more than 40 million visits to the first week of launch.

The AI assistance, that's going to answer citizens questions about covert 1921 of them live today, and nearly 90 being rolled out.

And the educational resources available to anyone anywhere.

We're doing great work, helping the city of New York, I don't delivering 300000 tablets.

Good morning software and free cellular data connections that can help students learn remotely.

Let me add this all up we've done the math.

Just a few weeks weve already committed over $200 million in terms of contribution and volunteer time.

I'm extremely proud of I'd be EMS response took over 90.

Now I want to tell you about some areas of focus for the near future.

I want to be clear.

Ultimate outcome that I am absolutely committed to is growth for our company as we emerged from the pandemic.

The key area of focus is to ensure that I'd be him leads in the two major transformational journeys our plans are on.

Cloud and AI.

Hi, Jim has already built three enduring platforms.

And frame.

Services and middleware.

The fourth one is hybrid cloud.

Clients, however need more than a platform they need a deep industry expertise.

This is why the services that flaws rely on to build and manage the hybrid cloud platform because a massive opportunity for I.B.M.. It's nearly half of the 1.2 trillion dollar hybrid cloud opportunity.

I B M together with Red Hot have unique sources of competitive advantage, we can leverage to win the architectural Bible for cloud.

There's our open source and security leadership.

Our deep expertise and crossed.

But also the fact that we give clauses that unique ability to build a mission critical applications, one and run them anywhere.

Together with Red hat, we are establishing Linux containers and kubernetes as the new standard.

This is winning the architectural Bible well high backlog.

Let's talk a little bit on how we take this declines.

I want to IB M. us to lead with a more technical approach I want our teams to showcase the value of for solutions as early as possible Likewise.

There must be a relentless focus on quality.

Our products must speak for themselves in terms of user experience design and ease of use.

My approach a straightforward.

I'm going to focus on growing the value of the company.

This includes better aligning our portfolio around hybrid thought an AI to meet the evolving needs or the market.

He will continue investing including acquisitions.

As you have seen we've divested parts of software and services that did not align with our focus areas. This will continue.

The past few weeks have catapulted us into the world of virtual selling and remote delivery.

These entails new ways of working.

This is a reminder, we should always be asking ourselves.

Is there a better way to do this.

You don't question, while you're doing things, you'll never evolve into something better.

What's clear is our confidence in our strategy and our portfolio, which is focused on hypercloud anyhow.

Before turning to Jim I want to comment on our results.

In the first quarter, we had modest revenue growth.

That's net of currency and divestitures, we entered the quarter in a good position with momentum from the end of last year.

However in the last few weeks, we face a shift in client prodigies.

Towards the preservation of capital.

This impacted software disproportionately.

And Jim will comment more on this later.

The other parts of our business maintained modest momentum.

We are entering this challenging environment from a relative position of strength.

Our clients are enterprises that run the most essential processes of the world.

Our balance sheet is strong and Jim is going to take you through that.

I believe that what we're going through today with the shift to remote work automation.

Implication modernization will accelerate our clients shift to hybrid cloud.

This gives me immense confidence in our future.

So I.

I will turn it over to Jim to take you through the quarter and then we'll come back at the end for Q any.

Thank you urban I want to start out by expressing my sympathy to all those who have been impacted by this health crisis.

And deep gratitude to the incredible people, who have been helping I'd be M. Our clients and the world to deal with this crisis, especially those on the front line.

Turning to our first quarter, we delivered $17.6 billion or revenue.

Modest growth net of currency and divestitures.

We had good gross margin expansion operating earnings per share of $1.84 cents and continued solid free cash flow.

Before I get into the specifics of the quarter in light of the current environment I want to take a step back and provide some perspective on a few areas.

First our client base, our portfolio and our financial profile, which you'll see provide some stability to our business.

Second what we saw at the end of the quarter and then finally add on to Urbans comments I'm, what we're doing with our own business to address the current environment.

I am a has always focused on the enterprise space and within that our business is more concentrated in large enterprises.

For decades, we have run our clients most critical processes by core banking systems supply chains and claims processing.

From an industry perspective, the majority of our revenue comes from clients in financial services Telecom and the public sector, including government and health care.

We have long term relationships with these clients in the form a multiyear services contracts recurring software streams and financing arrangements as a result, when you look at our business mix about 60% of our annual revenue is in recurring businesses.

While we're not immune in this environment to disruptions in the transactional content and volume reductions our client profile and annuity base provide some weibo stability not only in our revenue, but also in profit and cash as we manage through these challenging times.

Looking at the first quarter through February we were tracking roughly in line with our expectations.

As we got into March the health situation, and resulting social distancing became more widespread.

As you would expect we saw a noticeable change in client priorities.

With that there was effectively a pause as clients understandably dealt with their most pressing needs.

This was most pronounced in our software business, where the vast majority of transactions typically close in the last two weeks of the quarter.

For those clients that did engage at the end of the quarter. There was a noticeable change in priorities. We're focused very quickly shifted to the stability of their operations and preservation of cash.

They moved ahead with spending that addressed immediate and essential needs, including running mission critical processes and securing a remote workforce.

For example, we increased infrastructure capacity in services to meet unprecedented demand and critical banking functions for banks in countries, ranging from Italy, and Spain, because the United States to Australia in Singapore.

In Brazil, we developed a platform in a single week to connect patients to doctors via Tele medicine.

And at a major U.S. insurance company, we helped 40000 employees to work remote when they had absolutely no work at home capabilities, just two weeks earlier.

At the same time the last few weeks have only reinforce the need for clients to modernize their businesses for the new world.

And cloud and they are our at the core of their digital Reinventions.

With our hybrid cloud any I'd platforms, together with our expertise and running critical processes, where ideally positioned to guide clients on their journeys.

Anthem is a great example of a company accelerating their digital reinvention in today's cobot 19 environment.

We're helping them to operate with more agility and provide greater quality of service by leveraging data and deep insights to enhance the experience of their 41 million members. We're doing this on a secure open platform run on Red hat in the I'd be M. cloud.

Now when parallel we've taken actions within our own business to help I.B.M. better operate in this environment and emerged stronger.

For example, we're aligning investments to the key offering areas urban mentioned.

We took structural actions to improve the competitiveness of our global technology services business and enable new ways of working across our operations our actions will deliver annualized gross savings of nearly $2 billion.

We are accelerating our own digital transformation from demand generation to further ramping up our digital sales capability.

And then our supply chain, we are leveraging AI block chain and I O T technologies to drive faster and smarter decisions with our suppliers.

We also enhance health and safety measures at our sites to maintain our manufacturing operations at required capacity to meet our customers' needs.

This caps off a lot of work over the last few years to make our supply chain more flexible and resilient.

Well, we're supporting our clients in improving the flexibility in competitive position of our operations. We're also taking actions to enhance I'd be EMS balance sheet strength and liquidity position.

We accessed the debt market in early February with a 4 billion dollar issuance, while reducing four and a half billion dollars of current and 2021 refinancing needs.

In addition, while we do not relying a commercial paper for our funding needs. We thought it was prudent to take advantage of our access to the CP market.

We ended the quarter with two and a half billion dollars of commercial paper, which increased both our debt and cash balances.

As a result, we ended March with a cash balance of $12 billion, which is up $3 billion from year end.

Our total debt of $64 billion includes $22 billion, a global financing debt.

Which is in support of IBCM product and services and has a stable credit portfolio.

Finally, as we discussed in January our pension plans, we're well funded at the end of 2019.

With worldwide qualified plans funded at 102%.

While we typically don't provide a status during the year I can say that our overall pension funded status in March was fairly consistent with year end and we do not see a change to our expected plan contributions in 2020.

Bottom line, we have a strong cash position and ample credit available during these uncertain times to support and invest in the business.

We'll continue to be opportunistic and the capital markets, while remaining fully committed to our mid to high single a credit rating and our targeted leverage ratio.

I'll remind you we also have over $15 billion of unused credit facilities and while we have no plans to draw on the facilities. They are available as backup liquidity and our debt covenants are well within the required levels.

And with our share repurchase program suspended since the Red hat acquisition, our overall shareholder payout remains at a comfortable level and we remain fully committed to our dividends.

So with that as a backdrop, let me focus on a few highlights in the quarter before getting into the segments.

We had strong cloud performance again, this quarter with cloud revenue up 23%.

By bringing together, our technology and expertise to help our clients accelerate their journey is to cloud our cloud revenue has grown to $22 billion over the last 12 months.

Our been talked about winning the cloud architecture of Linux containers, and kubernetes and the acquisition and integration of Red hat bolsters, our position in hybrid cloud.

Red hat momentum continued this quarter with normalized revenue growth of 20% and strong bookings and backlog growth.

Well has proved to be mission critical for many customers, particularly in this environment and infrastructure revenue was again up double digits.

Application development and emerging technologies was up nearly 40% this quarter driven by Openshift and ansible.

The number of Red hat large deals was up from the fourth quarter and up about 50% over last year Red hat sign the two largest deals in its history, leveraging I'd be EMS deep client relationships.

This is a great proof point of the value of IBCM and Red hat together.

We see it in the larger red hat deals in the pipeline of I'd be I'm services engagements based on Red Hat's technologies and in the number of clients now using red hat and I'd be EMS container solutions. This has grown to over 2200 is red hat and IBCM have emerged as the leading container.

Platform.

The contribution of Red hat together with strong margin performance in our services businesses contributed to a 150 basis points about operating gross margin expansion.

Our pre tax income reflects charges of nearly $900 million, primarily for the structural actions to improve our competitiveness in GTS and accelerate our shift to a cognitive enterprise.

Charges for these actions were more than offset by noncash discrete tax benefits.

You'll recall I mentioned, both the structural actions and the discrete tax benefits back on our call in January and so these had been plan for some time.

Our cash and balance sheet strength, our fueled by healthy free cash flow.

This quarter, we generated $2.1 billion of cash from operations and $1.4 billion of free cash flow, both excluding our financing receivables.

There was a lot of seasonality in our free cash flow and over the last year, we generated $11.6 billion, which is about 125% of GAAP net income.

In a final comment on Red Hat's contribution to our free cash flow.

When we close Red hat back in July we expected Red hat net of interest expense to be accretive to free cash flow by the end of the first year.

With Red hat strong performance after three quarters, we've now achieved that milestone.

Now, let me turn to the segment results, starting with cloud and cognitive software, which grew 7% this quarter.

We had strong performance in Red hat, Aiotv and data in the eyes and in our security services.

This is I did for overall I B M. I'll start with a view of software dynamics as we move through the quarter.

We entered the year with a robust offering portfolio in solid pipeline and we had double digit revenue growth through February.

In March our software transaction installed nearly overnight.

As our clients shifted their focus to resiliency efforts.

We saw those dynamics play out most notably in cognitive applications, where many transformational deals were pause, especially in the retail industry.

And then transaction processing platforms, given cash concerns clients traded off Capex for Opex.

These are typically large engagements and in this environment clients elected to defer purchases impacting perpetual license sales late in the quarter.

More than offsetting that we continued to have good growth in cloud and data platforms led by Red hat in the synergies, we're realizing by bringing together red hat and I'd be M. software.

Given the shifting software demands we've seen in some parts of the business. We're focused on a number of initiatives heading into the second quarter.

We're doubling down on areas that facilitate the shift the cloud, including Red hat and other cloud and data platform offerings cloud packs were operational efficiency and Q radar on cloud for security threats.

Our go to market teams are accelerating their ships to digital channels.

And we're now leveraging our partner ecosystem to expand our reach into critical industries and markets.

To sum it up our portfolio in cloud and cognitive software is aligned with the hybrid cloud and AI opportunity.

We modernize our software to be cloud native and optimized on Openshift.

Which provides a compelling hybrid cloud platform for clients on their digital journeys to cloud.

While we expect near term pressure on transactions, we continue to invest in new development and innovation for our hybrid cloud and AI strategy.

Turning to global business services, we entered the year with a good momentum in revenue gross profit and signings and our backlog returned to growth.

This growing backlog and the revenue we expected to yield from it gave us confidence that GBS revenue performance would accelerate as the year progressed.

We had solid performance in GBS and the first quarter with revenue growth of 1% and gross profit margin expansion of 100 basis points.

Our consulting revenue grew 5% led by offerings that help clients with their digital reinventions, such as cloud advisory and application modernization.

And offerings that leverage AI to inject intelligence into business processes.

These offerings enable clients to reengineer their business processes, and ITM environments for speed flexibility and efficiency to better serve their end users.

We have standardize our cloud application modernization offerings on Openshift and.

And build the world's largest red hat consulting practice.

We're now working with over 100 clients on Red hat technologies, such as anthem, Procter and Gamble, USAA Santander and horizon healthcare just to name a few.

In the first quarter. We also had good growth in many of the transformational offerings like next generation enterprise applications.

But as the impact of Cobot 19 intensified in March clients began to de prioritize some of these projects.

In this environment, we are aligning our go to market and delivery resources to the near term opportunity.

Addressing challenges like engaging customers virtually modernizing and migrating applications to the cloud empowering a remote workforce and cyber security and resiliency.

Internally, we have shifted from a predominantly face to face engagement model to a virtual one now with almost 100% of our GBS delivery resources, not only working remotely while productively working to support our clients.

Over the last few weeks, we've gotten questions from investors on our ability to support clients given the shutdown in some countries I.

I can tell you that in India, we had over 98% of our practitioners working remotely within 48 hours of locked down.

As we look forward, we have a solid base of business and a growing backlog, though in the near term, we expect customers to continue to delay and Replan some projects.

We're going to continue to prudently managed the business by leveraging our variable and global delivery resource model to ensure utilization is balanced with a rate and pace of backlog consumption and new deals.

And we're going to continue to build skills and practices. So that as the demand returns to more normal levels, we're ready to address it.

Turning to global Technology services, our revenue decline of 4% was fairly consistent with last quarter's performance and we expanded gross profit margin by 30 basis points.

As I've said in the past, we're managing this business for margin and cash contribution.

Last quarter I talked about the actions to accelerate the shift to higher value segments of the market and improve our cost competitiveness. So let me start with a quick update on our progress.

A significant portion of the first quarter structural actions addressed GTS.

This improves our position for the future, but impacted our P.T.I. in the first quarter.

In this dynamic environment, we're going to continue to evaluate the cost competitiveness of this portfolio and we'll take further actions as required.

We also advanced our joint offerings and go to market capabilities with GBS as clients shift their mission critical workloads to the cloud, they're looking for integration across the application and infrastructure stack.

By more tightly integrating GBS and GTS, we're providing a differentiated solution. While we are in the initial stages of this work we see some early indications are progress and our signings this quarter.

Total signings and our cloud signings grew at a double digit rate. This includes significant engagement Acacia bank and anthem.

Strong signings contributed to an improved total services backlog, which is now roughly flat year to year.

Within that cloud now represents over 40% of our outsourcing backlog.

This fuels, our GTS cloud revenue, which was up 12% this quarter.

In the current environment enterprises are focused on infrastructure solutions, which enhance I.T. resiliency and business continuity address new cyber security risks and reconfigure there I T environments for cost efficiency and business agility.

We're prioritizing our resources and our management system to these opportunities focusing on offerings like unified communications business continuity, and resiliency workplace virtualization and enabling remote working.

At the same time, we're adapting alternative delivery models as we continue to support mission critical workloads without service interruption in fact, almost 100% of our employees and our GTS global delivery centers are now working remotely.

While in this environment, we expect to have some impact due to lower business volumes. This will ultimately lead to an acceleration in the shift a mission critical workloads to the cloud.

And as I've said this will be a hybrid multi cloud environment built on open standards I BM services will leverage our incumbency, our industry regulatory and business process expertise and of course red hat to capture this opportunity.

And so now looking at systems revenue was up 4% this quarter and gross margin expanded over 400 basis points.

In an environment, where client behavior shifted at the end of the quarter, our hardware portfolio held up well.

This reflects the importance of IBCM Z and high end storage for mission critical operations as well as product cycle dynamics. These are high end systems and client value. In this segment is driven by new innovation, we see that in this the 15 mainframe.

And we see it in storage with the high end DS 8900 introduce at the end of 2019 and more recently, a new and simplified distributed storage portfolio, which supports hybrid multi cloud deployments.

In the second full quarter of availability Z 15 proved to be a crucial backbone of enterprise operations, providing a stable secure and scalable platform.

Our financial services clients, we're able to scale up their capacity to meet this significant demands from unprecedented spikes in market volatility without touching their physical infrastructure.

And in high end storage, which is tightly integrated with the mainframe we had a good quarter, especially in support of mission critical banking workloads to.

The growth in C. In storage was partially offset by a decline in power.

This reflects where we are in our product cycle as well as the fact that power is more skewed the smaller enterprises, which were more impacted by the dynamics in March.

We're continuing to adapt our operations to meet the needs of clients, most effectively especially in this changing environment.

We're expanding the digital sales channel for both the storage and power business and we're leveraging technology to proactively manage our globally diversified supply chain.

Now after going through the segments I want to bring it back up to the IB m. level and talk about what this means going forward.

First and foremost we have confidence in our strategy and our portfolio, which is focused on hybrid cloud and AI.

Nothing we've seen over the last two months causes us to waiver from these priorities.

In fact is Arvind set up front, we believe the challenges clients are facing today will speed their transitions to digital that bodes well for us.

But there is obviously some dislocation in the near term.

In this environment, we've taken quick and prudent actions to manage our cost and expense further improve our liquidity position and focus on opportunities to emerge stronger.

Since the crisis began we've been stress testing our model and running a number of scenarios based on various assumptions.

Given the level of uncertainty around the duration of the health crisis, and the rate and pace of economic recovery, there's a wide range of outcomes for the year, which we are prepared for.

But to assign probabilities to the assumptions during these unprecedented times just is invaluable.

As a result, it is prudent to withdraw our expectations for full year 2020, and we will reassess at the end of the second quarter.

So to be clear under the various scenarios. We ran we have ample free cash flow and liquidity to support our business and secure our dividend.

Before turning back to Harbin I want to provide some perspective on how we're entering the second quarter.

Over the last few years, our software transactional content in the second quarter is about 20% to 25% of our software revenue.

We have a solid pipeline of deals but in the end our software performance will depend on how we yield against that pipeline.

If we continue to see the same client buying behavior, it's reasonable to expect the second quarter will be more challenging.

Systems hardware is essentially all transactional.

Your too we have a good pipeline and I'd be m. Z and storage while the current environment is expected to impact closure rates I would expect less of an impact disease and storage given the essential nature of the purchases and the additional capacity requirements, especially in certain industries.

In services, we've made real progress in the backlog and for the first time in a while we ended the quarter with services backlog essentially flat versus last year.

Thats, what GBS up and GTS down modestly.

About 80% of the GBS revenue and 90% of the GTS revenue in a quarter has historically come from the opening backlog so our contracts adjusts for flexible volumes in our clients businesses.

As mentioned earlier close to 100% of our people in our service delivery centers are working remotely.

Looking at our cost and expense were closely managing our spending and capitalizing on new and efficient ways of operating.

The savings from structural actions will start to yield in the second half.

We are likely to take additional actions in the second quarter.

Ill remind you that we are well positioned from a liquidity perspective and remain focused on driving our free cash flow, including robust working capital management.

For years, we've been talking about our high value portfolio and business model and in times like these that really matters.

This is why our liquidity position is nationally strong and our pension plan is well funded coming into this environment.

So we're prepared for this environment have a strong financial position and compelling value propositions for clients, but our near term performance will ultimately be influenced by client buying patterns in this economic environment.

Arvind I'll turn it back over to you.

Thank you Jim.

We have taken important for crohns guarantees seriously.

And so it was a tough decision to withdraw guidance.

But these are unprecedented times and this quarter is not the time to declare that we have quantity.

That does not benefit to us and it does not benefit to you as investors and analyst.

With vendor potty on the economic recovery, we will provide an update at the end of the second quarter.

But please note there's a difference between the ability to accurately predicted near term revenue or earnings per share number I'm confident in our business over the longer term.

And I have confidence in our business.

Under different scenarios.

Ample free cash flow and liquidity to support the business and secure our dividend.

We are entering this environment from a position of strength.

So what would the Patricia for the QNX.

Thank you Arvind before we begin to Q in a I'd like to mention a couple of items.

First you'll notice we updated our chart format to streamline the information presented during the webcast.

The content no longer presented in the mainline charts is now included in our supplemental information, which is at the end of the slide deck.

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

So operator, let's please open it up for questions.

Thank you at this time will begin the question and answer session at the constraints to ask a question. Please press star one had record your name clearly if you need to withdraw your question Prestart you again to ask a question. Please press star line.

Our first question will come from <unk>, sorry in line with Evercore.

<unk>.

Yes, thank spot dot gas for the crowd the opportunity in Arvind congrats on the spot a nice hanging in the queue and they.

Session.

You guys are when you spent a fair amount of time kinda talking about the areas, where you want to focus on as you go forward and you know maybe to put <unk> put aside the cobot discussion.

How do you think about the investments the company needs to do a outstanding how do you go about that organic was inorganic slipped to understand when you think of investments, which where you're going to skew as you go forward.

And maybe on the flip side of the coin are there things that you want to focus less on other things and opportunities to divest to for the potentially healthy balance sheet.

Okay. Thanks, Amit, let me start with the talking about the portfolio audio questions on investment.

So look.

Obviously, the portfolio something I value add deeply you do it all the time and continuously but I do want to caution that in the immediate period, which is right now we got a focus on put up audio supporting our employees on flights.

Now investment to off encompasses both encompasses both organic investments and inorganic or acquisitions, we been clear that we will acquire where do you find.

And refine properties at a both attractive but that fit our strategy.

And hybrid cloud and AI, all the focus of our business going forward, but when we talk about hybrid cloud. It is an all in and I'll just give a quick reflection on red hat, we add Linux or the core you had openshift surrounding it we put all of our middleware on Openshift, we have hundreds of GBS projects alright.

I'd.

Leveraging both the clock box and Openshift to make application modernization and then eventually we will find services also running those modernize applications for our clients you'll find that a many many properties and that in my broader definition of hybrid cloud that a fit that and did to on AI they actually below.

The bond as the way to get the value out of the data that people collect well that internal data and and external data.

Now I don't want to also comment a big or small size is not a strategy, it's about being caught full and strategic and so you should expect that over time more time meeting just out of get boss. The next few months, we will get back to an acquisition strategy.

Yep.

The thing I would add urban is our capital allocation strategy. Obviously is there to support the business design and the business and portfolio strategy that we have chosen to your point around hybrid cloud data AI, we've got enough.

Firepower with regards to a strong balance sheet solid free cash flow generation solid investment grade.

Hey, good access to market, which we talked about in the prepared remarks that gives us ample free cash flow and flexibility to invest in our business. While also returning value to our shareholder in securing that dividend that we talked about upfront and that acquisition pro component is a very big.

Important part of our capital allocation strategy and that hasn't changed.

Okay. Thanks, let Sheila coming into the next question. Please.

Yes. Our next question will come from ones email had with bank of America. Your line is open.

Yes. Thank you our wind congrats on the new role as well you mentioned some changes in go to market in your prepared remarks, leading perhaps with a more technical band I Wonder if you can elaborate there a bed and Jim appreciate you're not providing explicit guidance at this point, but maybe can you address the levers the company has.

In responding to the pandemic in the context of preserving cash flows you alluded to a few things.

Prepared comments as well, but last call you had mentioned several puts and takes so the cash flows this tailwind than had been than just wondering if you could maybe recast those again.

Hey, Wamsi a good to hear from you.

With respect to a more technical approach to selling its a journey we have been on what actually the cotton process in effect catapulted also accelerated won't be are doing.

And I'll touch on sort of three elements. We have always wanted to have have a product teams do a lot of demonstrations and proof of concepts that we and I'll go to do the virtually every stand the properties up on our public cloud and then allow the climbs to sort of play around with them and so you take away the weeks of doing it.

In a more traditional manner.

Second in our services teams, they're doing a lot of other calls virtual garage is a garage used to be they'd be would have all consultants and our implementers fit side by side with a client and go do those but when you do have social distancing and it's not just toss microns don't really want us on premise either there.

Now become a big big on virtual garage is but there's an advantage there by the way a big advantage is it allows you to actually get access to skills that around the globe not just those that baby physically cool resident out a client and that is a gain of it but not much more technical approach and then good with a lot of remote deliver.

Really happening and odd the GTS part of the business then also bringing a much more technical solution to bear through this so those are the elements that I mentioned, but you can expect us to do more and more of this has been going on and Jim I'll give it to you for the second part, yes, Hello Wamsi. Thanks for the question I mean, because this is important as you can imagine.

Given the unfortunate and an unprecedented situation everyone around the world is dealing with right here would cobot 19, we've been spending a lot of time on our business profile, our business model stress testing it running multiple scenarios as I said in the in the prepared remarks, but when you.

Look at it it's always been done around won the long term sustainability of the IBM company to deliver value for our clients and for our investors and that means you got to have a strong balance sheet, you've gotta have ample liquidity to give you flexibility they continue to invest so that we.

Emerge stronger as we get through this pandemic when we move forward and that really if you know simplistically. If you take a step back is two levers one is on the topline in revenue and the others on the fundamentals of your operating leverage in the business both of those deliver that free cash.

Cash flow net cash and then that latter part I would put put in there optimization of your balance sheet and we've looked at our revenue portfolio as we talked about in her prepared remarks. We believe we are differentiated although we're not immune from what's happening in the marketplace. We do have so.

Some level of stability and our revenue our profit our cash and that's driven by all of the work that we've done over time to transform this company transform and optimize our portfolio Weve went from in 2008 at the last recession, we were only about 45, 47% annuity we're now.

Now north of 60%.

We have always been focused on large enterprise versus consumer SMB and that is playing out well.

Our industry concentration as I said on the prepared remarks over 70% of our revenue sits in industries based on ITC and Gartner that are going to be either moderately our minimally impacted by covert 19th. So we are diversified along geographic dimensions Maher.

Hi, good dimensions industry dimensions client dimensions that gives us that and strong annuity content to to move forward and then on the margin and balance sheet, we're going to optimize as we've always done the portfolio shift in the higher value. The structural actions. We just got done here in the first quarter nine home.

Million that impacted our P.T.I. in the first quarter that by the way will give us say annualized return over two x. and we'll keep watching our credit portfolio on the quality our deferred revenue and also our depot NDS, So which is in very good shape. So none of that is.

We feel confident around ample financial flexibility ample liquidity to continue to invest in our business as we move forward and secure that dividends.

Thank you Ron can we please go to the next question.

Our next question will come from Toni Sacconaghi with Bernstein, you May go ahead.

AH yes. Thank you are up and welcome and creates a happy on the call I was wondering if you could.

Maybe define or articulate on a scale of one to 10, how different do you think IB EMS portfolio businesses will be two years from now I recognize change is not going to happen eminently, but want to 10 with 10 being extremely different where would you place that and then Tim if you could just very quickly.

You talked a lot about the stability of Ivy EMS portfolio, but it looks like year over year pre tax income went from over 2.2 billion to under 1.6 billion, if I back out the restructuring charge, so even though revenues weren't impacted P.T. guy.

Adjusted for the restructuring was down nearly 30% and this is your lowest transactional corridor is that how we should be thinking about changes to profit going forward or was there something unique about this quarter, where we saw more negative leverage. Thank you both.

Thanks, Tony.

Look Tony if we look at our industry, it's a fast moving industry with a lot of change that goes on all the time.

If I look at where vivo five years ago, and if our fast forward to today Red hat was not their cloud box, but not there our cloud backlog inside services was a tiny fraction of what it is today.

And I would look at all about and say it looks like in aggregate likely about half our business has changed in the last five to seven years.

That's I think the hallmark of successful company they begin to change it. It it takes advantage of the relationship the value. The incumbency, we have with our clients, but it also takes advantage of the fast move fast moving nature of technology.

Now the question you Didnt ask what I thought I put in there is the questions of the focus I think the focus is going to be much more around what we've been talking about as good of air on in the near term is going to be around hybrid cloud and AI, there's likely quantum coming down the road, which I do believe has a half trillion dollars worth of value.

To give back to offline since you gave me the five year horizon, not just a one or two year horizon.

So let me sort of begin with that and say that and it's hard to put that on a scale wanted them. Because you didn't tell me how much of a changes a dan but I gave you the sense that probably half half the things change Jim.

Yes, and Tony Thank you very much for the question because operating leverage.

It's obviously one of the core fundamental pillars of our high value based thesis and high value based business model overall, but let me just cut to the chase with regards to your question. Overall, you asked about a from a pre tax income I'll take it down to an S level, which was similar to net income we were down 18% overall.

That EPS was down 41 cents year to year, yes. It includes the $900 million worth of restructuring and and the structural change charges. Also includes as we guided back in January a discreet tax event, but the thing that you're missing in that equation is.

All of the Red hat integration and non cash related purchase accounting implications that are in our EPS in April in our profit number now as we close that transit that transaction by the way less than three quarters ago, and we feel very confident about that.

And the profile of our Red hat business overall, we took a substantial write down a with regards to that deferred revenue $2.2 billion overall, and we talked about red hat being free cash flow accretive year, one and began operating EPS accretive at the end of year too we already hit the mouse.

Going on the first metric and we're well on our way delivering the progress on the second metric and just to bring this all home the EPS of $1.84 down 41 person a sense year over year about 35 to 38 cents to that 41 is the red hat noncash.

Cash deferred revenue and integration why do I bring that up because as we said that will diminish over time and as we continue to replenish the backlog, which we are and we'll talk about and though we wrap around those expenses, that's where you're going to get even more substantial operating leverage going forward.

In the future.

Thanks, Tony Let's go to the next question.

Our next question will come from that.

Your line.

Yes, Thank you very much and welcome to the call Arvind.

Appreciate the commentary in the prepared remarks about what you guys saw during the month of March Wonder if you could extend that a little bit and just talk about what you've seen so far across the first few weeks of April across the segments in just the extent to which if any you had customers asking for price concessions new concern new terms either on the more recurring pieces of your business.

Okay. Thanks, Matt let me start for that because look from.

April tends to be a month there as Jim pointed out it's not just in the first quarter in every in every quarter or other transactions due to end took AD fund stop there. The ended the quarter I'd say that probably is more June than April.

He also asked a question on the and very side of the business, what our cost subscription.

We haven't seen a at least so far any big change into subscription side coming into April.

No no that is no doubt because both of us I pointed out.

We do tend to run our clients mission critical workload, it's not the workload that'll be the first a thought off if anything it will be amongst the loss to get impacted and so the subscription side, we feel quite good about.

Now the transaction side, so fun things are holding up but it's too early to tell that's one of the reasons you could both Jim and I talk about but drawing guidance because of a little bit off a progress is not enough to give us a full view into what will happen this quarter Jim.

Yeah, Matt. Thank you very much for the question. So our urban kind of gave a perspective of what we're seeing here for the first couple of weeks and as he stated just given the one transactional versus annuity nature second quarter like fourth quarter is our highest transactional quarter, particularly in our software base of business overall, but let me give.

Maybe a little perspective around.

The month the March versus February accorded they because I think it's important for investors to understand the value of our high value based business model and integrated business model because the unfortunate kobin 19 situation that's impacting economies around the world has a very.

Different profile across our business, whether its hardware software and services and as we've seen coming through February.

I'd be <unk> company was growing revenue through February led by strong double digit growth in software overall the month of March as I said in their prepared remarks as the healthcare crisis intensified, that's where we saw the fundamental shift in client buying behavior.

Appropriately so by the way as we've done in IBCM were first and foremost you wanted to focus on the operational stability in business continuity of your enterprise and second around the preservation of cash, but when you look at it it was more pronounced in our software and our GBS business, we actually had.

Substantially grew in the month of March in our hardware portfolio, but I would align that more around bringing new innovation to market. We're in the cycle of mainframe and we did very well with the attach of storage overall and our GTS business remember is a strong annuity base and it's running mission critical work.

In our outsourcing is business actually got better by about a point quarter to quarter. So that's pretty stable, but within GBS and software interesting around software, our cloud and data platform, 34% growth, yes, driven by red hat, but even on a normalized.

Just organic basis, we grew over 3% and that's really the instantiation of our hybrid cloud thesis with Red hat overall, so that port part of the portfolio is still executing well and I think thats part of what Arvind said clients are now even faster more accelerating their.

Journeys to cloud and it plays right to that now where we got hit was in cognitive applications, and then transaction processing platform to different phenomenon, it's across that portfolio. Our car gaps is much more centered around industry related content. We're industries that are getting more.

More impacted disproportionately like retail like industrial like automotive and in TPP that was a function of just the preservation of cash shifting away from Capex and Opex and just concluding GBS. Although we're very pleased remember 90 days ago, we talked about accelerating momentum.

In GBS return that business back to backlog growth, we actually delivered growth in the quarter strong growth in consulting strong signings and consulting, but we did see a pullback in the latter part of March, particularly in many European countries around project based.

Transformational base activity in next generation applications like S. Four Hannah Oracle Workday and other people are delaying and we expect that to continue here in the second quarter.

Thanks, Matt Silicon we go to the next question. Please.

Our next question will come from <unk> Morgan Stanley You May go ahead.

Thank you are then I'll add my welcome it's great to have you on the call I Wonder if you could start out by just commenting on what the one or two metrics are that you would like us to measure you and your team on over over the next couple of years and then I wanted to follow up and ask either either you or Jim can cause.

Then you talked about.

Mario like a range and scenarios for this year, obviously the minutes bearish would be so some distancing through the remainder of the calendar year and the most optimistic with the opening comment.

What does that translate to in terms of bad debt [laughter] bearish scenario, any P.S. and free cash flow and you know more optimistic scenario just any color as to how wide that that range may look like thank you.

Thanks, Katy So let me start to you said, what uptick Apia eyes, or what metrics should you use.

But I think I've been clear, we should look at growth as the metric, albeit once we began to emerge from the pandemic.

And it's impossible for me to predict how long. This is going to be you mentioned do scenarios, but I listen to all of you any appears and I don't have any particular crystal ball on this the estimates are all over the place in both the depth and the land off.

Of the impact.

Now the other one that I think you should hold us doing metric other than a revenue you ought to feel financial metric is the number of clients on which we are engaged on hybrid cloud engagements.

We talk about it from a product perspective, we talk about 20 to 100 bonds to date, but as you begin to wrap those also services engagements I think that's the second metric that is that effectively a leading indicator towards the overall revenue metric because that's the preconditioning bought that and that's why we're driving that our company do.

So that's what I'm focused on our on a waterfall month that every week and that's what our sales forces are incented to go get done.

So Jim I don't know, whether you want to add something no. They want to answer. The question. Those are the to the aligned to our business model volunteered to your second question Katie I'm not going to talk to specificity around there as I said in the prepared remarks, we have done a tremendous amount of work on stress testing running these scenarios.

Wide range of outcomes. The key here for investors I think our two questions. One in any of those scenarios do you still have the strength of your cashier liquidity position to ensure that you can one invest in your business to make it make sure as you come out of this you can emerged stronger.

Longer and too can you maintained your capital allocation and your commitment to our investors and with regards to the dividend and both of those Infat actually yes. The second question is around each of these scenarios how are we actually managing our businesses across the board and I would tell you.

You know if you break this into a product base business and the services based business starting with services. It is this the.

The safety around having an annuitize based model GBS entering the quarter is about 80% GPS is about 95% plus that does.

Come down as quarters and post one mpos to impose three go out but it provides us a very solid base to work with as far as stability that drives that profit that cash and that flexibility, but what are we looking at and how were manage a services business right. Now is were aravena here looking at daily is way.

One what's happening to the rate in consumption of our backlog.

What our clients still in around projects around offerings, what's happening to our utilization our chargeable billable rates our price realization each of those are fundamental keep you guys that were looking at in this environment right now to the health of the indicator a round out around a services based business.

Yes around a product base business much more transactional as Arvind said software is about 20% to 25% transactional here in a in the second quarter has a strong annuity base by the way Red hat subscription based model strong annuity base, but the dynamics or how we're managing that are looking at our pipe.

Fine our volume our deal sizes are yields are progression our renewal rates.

Our our demand capacity for our hardware products and where they're at within their cycle. So we are driving the operational discipline you would expect in this company as we move forward, but at the end we have enough for that financial flexibility in cash liquidity, which I think is the most important message for the investor.

Thanks, Katy can we please go to the next question.

Our next question will come from change in line with JP Morgan you May go ahead.

Thanks, So much I couldn't have you on a call Arvind Hope you guys are all safe and healthy I wanted to ask just a quick one acquisitions for you often just looking beyond the pandemic another.

Hard to do but.

Criteria size thinking on accretion dilution you're willing to accept there as you want to move quicker to Hypercloud and AI can you share your thoughts on that thank you.

Good thing in a good to hear from you see asked about criteria size accretion and this thing look I think a on all three this one that is easiest sized size is not a criteria. So I'm just going to put that to the side as Jim says that a couple of times you have enough and flex to do a fair.

A number of things and most things that we might I I think are possible for us to be able to get done.

So I put size aside and say that's not really an issue.

It's about accretion integration.

Given our clear we manage the business with a long term.

So if it becomes the accretive.

After the euro too as we described about Red hat, that's more than sufficient for us it doesn't have to be accretive on month, one on day, one as long as a healthy business provides us a growth profile and provides us the ability to get sufficient synergy both for I.B.M. and for the property itself well enough to be when other cannot.

Just be quantify otherwise, it's not that attractive.

And then he said about criteria the criteria as those things that make our clients value was even higher and the areas. We have chosen to be that trusted partner on his orbit, Bob and AI. So that's sort of the criteria, but please take a wide stands on hybrid cloud I heard about encompass.

Oh, we connect private and public it connects to includes all we might secure them invite include the data that is the inside those.

Properties provides more visibility and as we shift that out overtime that will widen.

Even more because the definition of what is the cloud market also tend to change over time.

So hopefully that answered your question, but if something we give a lot of talk too.

Okay. Thanks tension that's going to next question. Please.

Our next question comes from David Grossman Stifel. Your line is open.

Hi, Thanks, and congratulations nice to to heavy on the call.

This is I guess opponents have you.

Are there any components the business that are in transition whether that's GTS.

Our certain legacy software segments, where the current pandemic creates an opportunity to accelerate that transformation and perhaps you can tie that into the comments I think in your prepared remarks that telegraph that there may be some additional rebalancing actions in the June quarter.

I think David.

We're always looking at this at all because looking at portfolio optimization I.

I would not say because of the pandemic over 19 would we look at this.

As you so last year, we divested into software portfolio up quite a few things that will report to hybrid cloud they would around marketing properties.

And out of service properties around around many of our retail.

Clients, it didn't really necessarily fit or a full along about half synergy with that or hypercloud portfolios. So it made sense.

Lets them.

I think we're done with that drown just to be upfront now as we always look and say does this allows us not.

Bring value is that a reason for climbed to have both of the or hybrid cloud portfolio on something you go to reevaluate that all the time, but I don't have something to name for you at where trying to do right now as the quarter go along with a month ago, along we will do it but I also wanted to be clear that.

The next few months, we have to be focused on the stability of the business.

We have to be a focus on making sure that to preserve our liquidity and our at all about in sheets. So thats, what we kind of focused on but a very near to.

Okay. Thanks, David.

Well, let's take one more question.

Thank you.

She will come from Keith Bachman with BMO. Your line is open.

Hi, Thank you very much Arvind congratulation on her promotion as well as Jim Whitehurst congratulation on your promotions as well.

Wanted to ask a little higher level question is I think about I'd be m., there's many constituents, but probably three broad ones.

Shareholders employees, and then customers and as you think about the stock performance over the last I don't know five to seven years I think shareholders would conclude that they've been disappointed with IBM performance and even from a customer perspective, if you look at.

The EMS revenues relative to growth of the many markets you participate in probably some disappointment there. So as you think about your new leadership.

And perhaps focusing excuse me on the investor side.

What do you think you really need to do differently.

For I'd be eminent shareholders.

Versus what's happened over the last five to seven years. Thank you.

Area of thought a Keith and begin to do it look I think that.

I think we had to acknowledge the market's value growth of about a lot of things.

So while we have always selected on high value add to your point on clients. We measure a net promoter score NBS, which I think is widely regarded as being one of the best metrics of calc lines of value what they're getting from you.

That is actually improved substantially I think what what the endpoints if I remember over the last two years.

So given that the NPS is improving our clients are much more delighted love to get from us.

That said the overall portfolio has to be able to grow to return to to make investors happier and that's why we're clear you noticed me announced a lot of our management team at the beginning I think this is a team does it go to be able to deliver growth back back to the market has so Jim.

We have enough capacity out of talk about capital allocation and how he is going to use that could flex to enable both organic and ended up organic investment.

Jim why test, who many of you know well was a doubt really well both of crises. When he was a delta kind of growth when he was at Red hat.

Bridget Ventra Lincoln, who as a strong record of understanding client needs that are going to drive some of the go to market changes we mentioned our global that we're bringing in who was at bank of America was a deep empathy and understanding bought some of our largest client, but also drove a lot of efficiency when he was.

At the at the bank and he can bring those attributes to the bonds as well.

And Mark Falls to who has a services and who has a real pension for growth and for making so that he brings value to our grandson services. We put all that together and I think it is a team that can go to deliver growth, but that's also be clear.

We can talk about what is important is a growth already that only P.S. or is it only liquidity liquidities essential without that no companies go to survive through the next a period I don't know how long that period is going to be well I think are hot obsession with that is going to sell us well at this period, but what are you hearing me say is that.

Growth has to be an equal obsession Ah two other metrics that are there have you are going to go do that so may not be a completely a full line. So.

Keep up you'll probably get there as the month go on and we get more a more clarity. So I think that over the last question. If I remember so let me make a few comments are up the call.

These are truly unprecedented times over the coming weeks and months, you're going to continue to focus on our employees our clients and how big can help brought a society.

As difficult as this crisis as it presents an opportunity for IBM as a technology leader.

And as a trusted partner.

Personally, it's an interesting and exciting time to be taking on this roll.

I look forward to continuing this dialogue with all of you and we'll update you at the end of the second quarter. Thank you.

Great. Thanks, Arvind Thanks, Jim Thanks for all your questions here well, let me turn it back to you to wrap up the quest wrap the call.

Thank you.

Participating on today's call. The conference has now and you may disconnect at this time.

[music].

Welcome and thank you for standing by at this time all participants.

Today's conference is being recorded if you have any objections you may disconnect at this time.

I will turn the meeting over to Patricia Murphy.

You may begin.

Thank you.

Patricia Murphy, Vice President Investor Relations.

I don't want to welcome you to our first quarter 2020 <unk> earnings presentation.

Your with urban Krishna I'd be a chief Executive Officer, Jim Calvin.

Senior Vice President and Chief Financial Officer.

Post today's prepared remarks on the idea of Investor website within a couple of hours.

Replay will be available by this time tomorrow.

Comments made in his presentation, maybe considered forward looking on the private Securities Litigation Reform Act of 1995.

These statements involve factor.

Good cause our actual results could differ materially.

Information about these doctors is included in the company that you see filing.

Our presentation also include non-GAAP measures.

Right additional information to investors.

For example, we present revenue growth at constant currency throughout the presentation.

In addition to rely to view consistent with our go forward business.

We'll focus on constant currency growth adjusting for the divested businesses impacted lines of total revenue cloud and our geographic performance.

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'd like to make two other comments regarding this quarter's presentation.

First consistent with our last two quarters.

EMS revenue profit and earnings per share.

The impact of purchase accounting and other transaction related adjustments.

You'll see it with the acquisition of Red hat.

Judgments and charges are primarily non cash.

Second our segment structural 2020 remains consistent with 2019.

At the beginning of this year, we realigned a couple of offerings between segments.

Melting and very modest adjustment.

Our results reflect this realignment.

Providing of your first quarter 2019 on that recast faces in today's supplemental slides and two years of historical recast data on our website.

So with that ill turn the call over to Arvind.

Hello, everyone.

As you all know we are in the midst of an unprecedented global public health crisis.

I'd like to both for a moment.

Say that my heart goes out to all goals dealing with go with 90.

One of the fourth confidence I made most of your cross burden and open.

Not just we're going to employees at our clients and partners, what with arc investment community as well.

And that's but I will participate.

Just today what in earnings calls from now on.

Oh, you're topics I'd like to coupled with you today.

First.

Revisit areas I've talked about.

I will tell you about what we've accomplished in the last two weeks.

And finally, I'll tell you about areas I intend to focus on in the near future.

Ill quickly touch upon our Q1 results.

Let's start with the area as I've talked about.

I have told our team it is essential.

That we deepened our understanding of our clients journey to hybrid cloud in AI.

Which will result in hybrid cloud as the fourth platform.

We remain obsessed with continually delighting clients.

And before that establish RPM as the gold standard for good deck.

All these are underpinned by our culture that fosters growth and an entrepreneurial mindset.

I see these as our collective priorities.

I'll move on what's been done in the last few weeks.

Despite the challenges we're facing as a result of the global crisis.

We remain steadfast in our commitment to employees lines.

Society at large.

More than 95% off our 350000 IB demos are working remotely now.

In addition, about 8000 of them remain at a social sites to carry out mission critical work.

As arc was adjusted this new normal.

We need a partner that can crossed.

Is that partner.

This isn't just about helping our clients navigate the prices.

Ensure that emerged stronger and more resilient.

To that end, we have taken concrete steps to bundle existing offerings to address the shifting needs appliance.

Part of leveraging hybrid cloud.

Using AI for automation and enabling remote work.

Another area, we've been focusing on has been to mobilize IBCM annabi demos to help with the global battle against covered 90.

You are also examples.

The computing Paula.

All 360 product blocks that we have helped convene for researchers.

The other channels Gord 19 County by County map.

More than 40 million visits in the first week of launch.

The AI assistance, that's going to answer citizens questions about covert 19.

21 of them live today, nearly 90 being rolled out.

And educational resources available to anyone anywhere.

We are doing great work, helping the city of New York and are delivering 300000 tablets.

Additional software and free cellular data connections that can help student loan remotely.

When we add this all up.

I've done the math.

Just a few weeks.

Already committed over $200 million in terms of contribution and volunteer time.

I'm extremely proud of IB in response to go over 90.

Now I want to tell you about some areas of focus for the near future.

I want to be clear.

Ultimate outcome that I am absolutely committed to is growth for our company as we can emerge from the pandemic.

The key area of focus is to ensure that IB bleeds into two major transformational journeys our clients are on.

Cloud and AI.

Hi, Jim has already built three enduring platforms.

And frame.

Services and middleware.

The fourth one is hybrid cloud.

Brian However did more than a platform.

The need our deep industry expertise.

This is why the surpluses that flaws rely on to build and manage the hybrid cloud platform because a massive opportunity for IBCM. It's nearly half of the 1.2 trillion dollar hybrid cloud opportunity.

Together with Red hat have unique sources of competitive advantage, we can leverage to win the architectural barber for cloud.

There is our open source and security leadership.

Deep expertise and crossed.

But also the fact that we've launched the unique ability to build mission critical applications, one and run them anywhere.

Together with Red hat, we are establishing Linux containers and kubernetes has the new standard.

This is winning the architectural Bible hybrid cloud.

Let's talk a little bit on how we take this supplies.

I want us to lead with a more tactical approach.

And our teams to showcase the value for solutions as early as possible likewise.

There must be a relentless focus on quality.

Our products must speak for themselves in terms of user experience design and ease of use.

My approach a straightforward.

I'm going to focus on growing the value of the company.

This includes better aligning our portfolio around harbor thought on AI to meet evolving needs of the market.

We will continue investing including acquisitions.

As you have seen we've divested parts of software and services.

That did not align with our focus areas. This will continue.

The boss few weeks.

Well to the us into the world of virtual selling and remote delivery.

These entail new ways of working.

This as a reminder, we should always be asking ourselves.

Is there a better way to do this.

If you don't question, why you're doing things, you'll never evolve into something better.

What's clear is our confidence in our strategy and our portfolio, which is focused on hybrid cloud and AI.

Before turning to Jim I want to comment on our results.

In the first quarter, we had modest revenue growth.

That's net of currency.

Vestiges.

Entered the quarter in a good position with momentum from the end of last year.

However in the last few weeks, we face a shift in client properties.

Towards the preservation of capital.

This impacted software disproportionately.

And Jim will comment more on this later.

The other part of our business.

Modest momentum.

We are entering this challenging environment from a relative position of strength.

Our clients are enterprises that run the most essential processes of the world.

Our balance sheet, a strong and Jim is going to take you through that.

I believe that what we're going through today with the shift to remote work automation.

Location modernization will accelerate our clients shift to hybrid cloud.

This gives me immense confidence in our future.

So.

I will turn it over to Jim to take you through the quarter and then we'll come back at the end for QNX.

Thank you Arvind I want to start out by expressing my sympathy to all those who have been impacted by this health crisis.

And deep gratitude to the incredible people, who have been helping IBCM, our clients and the world to deal with this crisis, especially those on the front line.

Now turning to our first quarter, we delivered $17.6 billion or revenue.

With modest growth net of currency and divestitures.

We had good gross margin expansion operating earnings per share of $1.84 cents and continued solid free cash flow.

Before I get into the specifics of the quarter in light of the current environment I want to take a step back and provide some perspective on a few areas.

First on our client base, our portfolio and our financial profile, which you will see provide some stability to our business.

Second what we saw at the end of the quarter and then finally add on to Urbans comments on what we're doing with our own business to address the current environment.

Has always focus on the enterprise space and within that our business is more concentrated in large enterprises.

For decades, we have run our clients most critical processes like core banking systems supply chains and claims processing.

From an industry perspective, the majority of our revenue comes from clients in financial services Telecom and the public sector, including government and healthcare.

While we're not immune in this environment to disruptions in the transactional content and volume reductions our client profile and annuity base provides some weibo stability.

The only in our revenue, but also in profit and cash as we manage through these challenging times.

Looking at the first quarter through February we were tracking roughly in line with our expectations.

As we got into March the health situation, resulting social distancing became more widespread.

As you would expect we saw a noticeable change and client priorities.

With that there was effectively a pause as clients understandably dealt with their most pressing needs.

This was most pronounced in our software business, where the vast majority of transactions typically close in the last two weeks of the quarter.

For those clients that did engage at the end of the quarter. There was a noticeable change and priorities. We're focused very quickly shifted to the stability of their operations and preservation of cash.

They moved ahead with spending that addressed immediate and essential needs, including running mission critical processes and securing a remote workforce.

For example, we increased infrastructure capacity in services to meet unprecedented demands on critical banking functions.

Our banks in countries, ranging from Italy, and Spain.

Added states to Australia in Singapore.

In Brazil, we developed a platform in a single week to conduct patients to doctors via telemedicine.

And at a major US insurance company, we helped 40000 employees to work remote.

When they had absolutely no work at home capabilities, just two weeks earlier.

At the same time the last few weeks have only reinforce the need for clients to modernize their businesses for the new world.

And cloud in AI or at the core of their digital Reinventions.

With our hybrid cloud nei platforms, together with our expertise and running critical processes, where ideally positioned to guide clients on their journey.

Anthem is a great example of accompany accelerating their digital reinvention in today's cobot 19 environment.

We're helping them to operate more agility and provide greater quality of service by leveraging data and deep insights to enhance the experience of their 41 million members. We're doing this on a secure open platform run on Red hat in the IBCM cloud.

Now in parallel we taken actions within our own business to help IBCM better operate in this environment and emerge stronger.

Example, we're aligning investments so the key offering areas urban mentioned.

We are accelerating our own digital transformation from demand generation to further ramping up our digital sales capability.

And then our supply chain, we are leveraging AI block chain and Aiotv technologies to drive faster and smarter decisions with our suppliers.

We also enhance health and safety measures at our sites to maintain our manufacturing operations at required capacity to meet our customers' needs.

This caps off a lot of work over the last few years to make our supply chain more flexible and resilient.

While we're supporting our clients and improving the flexibility and competitive position of our operations. We're also taking actions to enhance I'd becomes balance sheet strength and liquidity position.

We access to debt market in early February with a 4 billion dollar issuance, while reducing four and a half billion dollars of current.

In 2021 refinancing needs.

In addition, while we do not relying a commercial paper for our funding needs. We thought it was prudent to take advantage of our access to the CP market.

We ended the quarter with $2.5 billion of commercial paper, which increased both our debt and cash balances.

As a result, we ended March with a cash balance of $12 billion, which is up $3 billion from year end.

Our total debt of $64 billion includes $22 billion of global financing done.

Which is in support of IBCM product and services and has a stable credit portfolio.

Finally, as we discussed in January our pension plans, we're well funded at the end of 2019.

With worldwide qualified plans funded at 102%.

Bottom line, we have a strong cash position and ample credit available during these uncertain times to support and invest in the business.

We'll continue to be opportunistic on the capital markets, while remaining fully committed to our mid to high single a credit rating and our targeted leverage ratio.

And with our share repurchase program suspended since the Red hat acquisition, our overall shareholder payout remains at a comfortable level and we remain fully committed to our dividends.

So with that as a backdrop, let me focus on a few highlights in the quarter before getting into the segments.

We had strong cloud performance again, this quarter with cloud revenue up 23%.

By bringing together, our technology and expertise to help our clients accelerate their journeys to cloud.

Our cloud revenue has grown to $22 billion over the last 12 months.

Urban talked about winning the cloud architecture of Linux containers in kubernetes, and the acquisition and integration of Red hat bolsters, our position in hybrid cloud.

Red hat momentum continued this quarter with normalized revenue growth of 20% and strong bookings and backlog growth.

ROE has proved to be mission critical for many customers, particularly in this environment and infrastructure revenue was again up double digits.

Application development and emerging technologies was up nearly 40% this quarter driven by Openshift and ansible.

The number of Red hat large deals was up from the fourth quarter and up above 50% over last year.

Red hat sign the two largest deals in its history, leveraging IBM has deep client relationships.

This is a great proof point of the value of IBM and Red hat together.

Have emerged as the leading container platform.

The contribution of Red hat together with strong margin performance in our services businesses contributed to a 150 basis points of operating gross margin expansion.

Our pre tax income reflects charges of nearly $900 million, primarily for the structural actions to improve our competitiveness in gcs and accelerate our shift to a cognitive enterprise.

The charges for these actions were more than offset by noncash discrete tax benefits.

We call I mentioned, both the structural actions and the discrete tax benefits back on our call in January and sold these had been plan for some time.

Our cash and balance sheet strength, our fueled by healthy free cash flow.

This quarter, we generated $2.1 billion of cash from operations and $1.4 billion of free cash flow, both excluding our financing receivables.

There was a lot of seasonality in our free cash flow and over the last year, we generated $11.6 billion, which is about 125% of GAAP net income.

In a final comment on Red Hat's contribution to our free cash flow.

When we close Red hat back in July we expected Red hat net of interest expense to be accretive to free cash flow by the end of the first year.

With Red hat strong performance after three quarters, we've now achieved that milestone.

Now, let me turn to the segment results, starting with cloud and cognitive software, which grew 7% this quarter.

We had strong performance in Red hat Aiotv and data in the.

And in our security services.

This is I did for overall IBCM I'll start with a view of software dynamics as we move through the quarter.

We ended the year would a robust offering portfolio in solid pipeline.

We had double digit revenue growth through February.

In March our software transaction installed nearly overnight.

As our clients shifted their focus to resiliency efforts.

We saw those dynamics play out most notably in cognitive applications, where many transformational deals were pause, especially in the retail industry.

And then transaction processing platforms, given cash concerns clients traded off Capex for Opex.

These are typically large engagements and in this environment clients elected to defer purchases impacting perpetual license sales late in the quarter.

More than offsetting that we continue to have good growth in cloud and data platforms led by Red hat in the synergies, we're realizing by bringing together red hat and IBCM software.

Given the shifting software demands we've seen in some parts of the business. We are focused on a number of initiatives heading into the second quarter.

We're doubling down on areas that facilitate the shift the cloud, including Red hat and other cloud and data platform offerings cloud packs were operational efficiency and curator on cloud for security threats.

Our go to market teams are accelerating their ships to digital channels.

We're now leveraging our partner ecosystem to expand our reach into critical industries end markets.

To sum it up our portfolio and cloud and cognitive software is aligned with the hybrid cloud in AI opportunity.

We modernize our software to be cloud native and optimized on Openshift.

Which provides a compelling hybrid cloud platform for clients on their digital journeys to cloud.

While we expect near term pressure on transactions, we continue to invest in new development and innovation for our hybrid cloud and AI strategy.

Turning to global business services, we entered the year with a good momentum in revenue gross profit and signings and our backlog returned to growth.

This growing backlog and the revenue we expected to yield from it gave us confidence that GBS revenue performance would accelerate as the year progress.

We had solid performance in GBS in the first quarter with revenue growth of 1% and gross profit margin expansion of 100 basis points.

Our consulting revenue grew 5% led by offerings that help clients with their digital reinventions, such as cloud advisory and application modernization.

And offerings that leverage AI to inject intelligence into business processes.

These offerings enable clients to reengineer their business processes and environments for speed flexibility and efficiency to better serve their end users.

We have standardize our cloud application modernization offerings on Openshift and.

And built the world's largest red hat consulting practice.

We're now working with over 100 clients on Red hat technologies, such as anthem, Procter and Gamble, USAA Santander and horizon healthcare just to name a few.

In the first quarter. We also had good growth in many of the transformational offerings like next generation enterprise applications.

But as the impact of Cobot 19 intensified in March clients began to de prioritize some of these projects.

In this environment, we are aligning our go to market and delivery resources for the near term opportunity.

Addressing challenges like engaging customers virtually modernizing and migrating applications to the cloud empowering a remote workforce and cyber security and resiliency.

Internally, we have shifted from a predominantly face to face engagement model to a virtual one now with almost 100% of our GBS delivery resources that only working remotely, but productively working to support our clients.

Over the last few weeks, we've gotten questions from investors and our ability to support clients given the shutdown in some countries I.

I can tell you that in India, we had over 98% of our practitioners working remotely within 48 hours of Blackstone.

As we look forward, we have a solid base of business and a growing backlog, though in the near term, we expect customers to continue to delay and Replan some projects.

We're going to continue to prudently manage the business by leveraging our variable and global delivery resource model to ensure utilization is balanced with a rate and pace of backlog consumption and new deals.

And we're going to continue to build skills and practices. So that as the demand returns to more normal levels, we're ready to address it.

Turning to global Technology services, our revenue decline of 4% was fairly consistent with last quarter's performance and we expanded gross profit margin by 30 basis points.

As I've said in the past, we're managing this business from margin and cash contribution.

Last quarter I talked about the actions to accelerate to shift to higher value segments of the market and approve our cost competitiveness. So let me start with a quick update on our progress.

A significant portion of the first quarter structural actions addressed GTS.

This improves our position for the future, but impacted our PGTI in the first quarter.

In this dynamic environment, we're going to continue to evaluate the cost competitiveness of this portfolio and we'll take further actions as required.

We also advanced our joint offerings and go to market capabilities with GBS.

As clients shift their mission critical workloads to the cloud, they're looking for integration across the application and infrastructure stack.

By more tightly integrating GBS and GTS, we're providing a differentiated solution. While we are in the initial stages of this work we see some early indications are progress in our signings this quarter.

Both total signings and our cloud signings grew at a double digit rate.

This includes significant engagement Acacia bank and anthem.

Strong signings contributed to an improved total services backlog, which is now roughly flat year to year.

Within that cloud now represents over 40% of our outsourcing backlog.

This fuels, our GTS cloud revenue, which was up 12% this quarter.

In the current environment enterprises are focused on infrastructure solutions, which enhance it resiliency and business continuity address new cyber security risks and reconfigure their environments for cost efficiency and business agility.

We are prioritizing our resources and our management system to these opportunities focusing on offerings like unified communications business continuity, and resiliency workplace virtualization and enabling remote working.

At the same time, we are adopting alternative delivery models as we continue to support mission critical workloads without service interruptions in fact, almost 100% of our employees and our GTS global delivery centers are now working remotely.

Well in this environment, we expect to have some impact due to lower business volumes. This will ultimately lead to an acceleration in the shift a mission critical workloads to the cloud.

And as I've said this will be a hybrid multi cloud environment built on open standards IBCM services will leverage our incumbency, our industry regulatory and business process expertise and of course red hat to capture this opportunity.

And so now looking at systems revenue was up 4% this quarter and gross margin expanded over 400 basis points.

In an environment, where client behavior shifted at the end of the quarter, our hardware portfolio held up well.

This reflects the importance of by BMC and high end storage for mission critical operations as well as product cycle dynamics. These are high end systems and client value. In this segment is driven by new innovation, we see that in this 15 mainframe.

And we see it in storage with the high end DS 8900 introduced at the end of 2019 and more recently in new and simplified distributed storage portfolio, which supports hybrid multi cloud deployments.

In the second full quarter of availability Z 15 proved to be a crucial backbone of enterprise operations, providing a stable secure and scalable platform.

Our financial services clients, we're able to scale up their capacity to meet the significant demands from unprecedented spikes in market volatility without touching their physical infrastructure.

And in high end storage, which is tightly integrated with the mainframe we had a good quarter, especially in support of mission critical banking workloads to.

The growth and Z and storage was partially offset by a decline in power.

This reflects where were in our product cycle as well as the fact that power is more skewed the smaller enterprises, which were more impacted by the dynamics in March.

We're continuing to adapt our operations to meet the needs of clients, most effectively especially in this changing environment.

We're expanding the digital sales channel for both the storage and power business and we're leveraging technology to proactively manage our globally diversified supply chain.

Now after going through the segments I want to bring it back up to the IBM level and talk about what this means going forward.

First and foremost we have confidence in our strategy and our portfolio, which is focused on hybrid cloud in AI.

Nothing we've seen over the last two months causes us to waiver from these priorities.

In fact is aravind set up front, we believe the challenges clients are facing today will speed or transitions to digital that bodes well for us.

There is obviously some dislocation in the near term.

In this environment, we've taken quick and prudent actions to manage our cost and expense further improve our liquidity position and focus on opportunities to emerge stronger.

Since the crisis began we've been stress testing our model and running a number of scenarios based on various assumptions.

Given the level of uncertainty around the duration of the health crisis, and the rate and pace of economic recovery, there's a wide range of outcomes for the year, which we are prepared for.

But to assign probabilities to the assumptions during these unprecedented times just isn't valuable.

As a result, it is prudent to withdraw our expectations for full year 2020, and we will reassess at the end of the second quarter.

So to be clear under the various scenarios. We ran we have ample free cash flow and liquidity to support our business and secure our dividends.

Before turning back to Harvin I want to provide some perspective on how we're entering the second quarter.

Over the last few years, our software transactional content in the second quarter is about 20% to 25% of our software revenue.

We have a solid pipeline at deals, but in the end our software performance will depend on how we yield against that pipeline.

If we continue to see the same client buying behavior, it's reasonable to expect the second quarter will be more challenging.

Systems hardware is essentially all transactional here too we have a good pipeline in idmc and storage while the current environment is expected to impact closure rates I would expect less of an impact the Z and storage given the essential nature of the purchases and the additional.

Capacity requirements, especially in certain industries.

In services, we've made real progress in the backlog and for the first time in a while we ended the quarter with services backlog essentially flat versus last year.

Thats with GBS up in GTS down modestly.

About 80% of the GBS revenue and 90% of the GTS revenue in a quarter has historically come from the opening backlog.

So our contracts adjusts for flexible volumes in our clients businesses.

As mentioned earlier close to 100% of our people in our service delivery centers are working remotely.

Looking at our cost and expense were closely managing our spending and capitalizing on new and efficient ways of operating.

The savings from structural actions will start to yield in the second half.

We are likely to take additional actions in the second quarter.

Ill remind you that we are well positioned from a liquidity perspective and remain focused on driving our free cash flow, including robust working capital management.

For years, we've been talking about our high value portfolio and business model and in times like these that really matters.

This is why our liquidity position is nationally strong and our pension plan is well funded coming into this environment.

Arvind I'll turn it back over to you.

Thank you Jim.

We have taken the importance of transparency seriously.

And so it was a tough decision to withdraw guidance.

But these are unprecedented times and this quarter is not the time to declare that we have commodity.

That does not benefit to us and it does not benefit to you as investors and analysts.

With better clarity on the economic recovery, we will provide an update at the end of the second quarter.

But please note there's a difference between the ability to accurately predict a near term revenue or earnings per share number.

Confidence in our business over the longer term.

And I have confidence in our business.

Under different scenarios.

For free cash flow and liquidity to support the business and secure our dividend.

We are entering this environment from a position of strength.

So over to Patricia for the QNX.

Thank you Arvind before we begin the Q in a I'd like to mentioned a couple of items.

First you'll notice we updated our chart format to streamline the information presented during the webcast.

The content no longer presented in the mainline chart is now included in our supplemental information, which is at the end of the slide deck.

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

So operator, please open it up for questions.

Thank you.

We will begin the question and answer session at the conference to ask a question. Please press star one had record your name clearly if you need to withdraw your question from start to begin to ask a question. Please press star line.

Our first question will come from ceremony with Evercore you May go ahead.

Yes.

Thanks, a lot dot gas for the crowd the opportunity and Arvind congrats on the spot a nice hanging in the queue and it.

Session.

You guys are when you spend a fair amount of time kind of talking about the areas, where you want to focus on as you go forward and maybe to put it put aside the cobot discussion.

How do you think about the investments the company needs to do.

And how do you go about that organic was inorganic just love to understand when you think of investments, which we are you going to skew as you go forward.

And maybe on the flip side of the coin.

There are things that you want to focus less on other things and opportunities to divest default potentially healthy balance sheet.

Okay. Thanks, Amit let.

Let me start with the talking about the portfolio audio questions.

Investment.

Look.

Obviously, the portfolio something I value add deeply we do it all the time and continuously when I do want to caution that in the immediate period, which is right now we got a focus on put our priority of supporting our employees on clients.

Now investment to off encompasses both encompasses both organic investments.

On inorganic or acquisitions, we have been clear that we will acquire when do you find.

And refine properties, both attractive but that fit our strategy.

And hybrid cloud and AI, all the focus of our business going forward, but when we talk about hybrid cloud. It is an all in and I'll just give a quick reflection on red hat, we add Linux or the core you had openshift surrounding it we put all of our middleware on open ships, we have hundreds of GBS projects already.

Hi, leveraging both the cloud facts and open to ship to make application modernization and then eventually we refine services also running those modernize applications for our clients you'll find that many many properties in that in my broader definition of hybrid cloud that fit that and did to on AI.

Hey, actually be looked upon as the way to get the value out of the data that people collect well that internal data.

And external data.

Now I don't want to also comment a big or small size is not a strategy, it's about being caught full and strategic and so you should expect that over time more time meeting just that'll get boss. The next few months, we will get back to an acquisition strategy.

Yes.

Only thing I would add to our vision is our capital allocation strategy. Obviously is there to support the business design and the business and portfolio strategy that we have chosen to your point around hybrid cloud data AI, we've got enough.

Fire power with regards to a strong balance sheet solid free cash flow generation solid investment grade.

Component is a very big important part of our capital allocation strategy and that hasn't changed.

Thanks, let Sheila can we go to the next question. Please.

Our next question will come from Wamsi Mohan with Bank of America. Your line is open.

Yes. Thank you our wind congrats on the new role as well.

You mentioned, some changes and go to market in your prepared remarks, leading perhaps with a more technical band I Wonder if you can elaborate there a bed and Jim appreciate you're not providing explicit guidance at this point, but maybe can you address the levers the company has and responding to the pandemic in the context of preserving cash flows you alluded to.

A few things.

Prepared comments as well, but last call you had mentioned several puts and takes so the cash flows tail them than had been than just wondering if you could maybe recast those again.

Hey, Wamsi good to hear from you.

With respect to more technical approach to selling its a journey we have been on what actually the cotton process in effect catapulted us our accelerated what we are doing.

And I'll touch on sort of three elements.

We have always wanted to have Pablo product teams do a lot of demonstrations and proof of concepts that we and I'll go to do the virtually every Stan properties up on our public cloud and then allow the pipeline so sort of play around with them and so you take away the weeks of doing it in a more traditional manner.

Second in our services teams, they're doing a lot of what the call virtual garage is.

Our garage used to be they'd be would have our consultants and our implementers fit side by side with our client and go do those but when you do have social distancing and it's not just toss our clients don't really want us on premise either we're not become a big big on virtual garage is.

There is an advantage there by the way a big advantage is it allows you to actually get access to skills that around the globe not just those that maybe physically call resident how to client and that is again not much more technical approach and then good with a lot of remote delivery happening in the GTS part of the business.

They are also bringing a much more technical solution to bear through this so those are the elements that I mentioned, but you can expect us to do more and more of this as we go along and Jim I'll give it to you for the second part, yes, Hello, and thanks for the question I mean, because this is important as you can imagine given the unfortunate an unprecedented.

Ration everyone around the world is dealing with right here with coated 19, we've been spending a lot of time on our business profile, our business model stress testing it running multiple scenarios as I said in the in the prepared remarks, but when you look at it it's always been done around one.

The long term sustainability of the IBM company to deliver value for our clients and for our investors and that means you got to have the strong balance sheet, you've got to have ample liquidity to give you flexibility. They continued to invest so that we emerge stronger as we get through this pen.

Dynamic when we move forward and that really Simplistically. If you take a step back is two levers one is on the topline in revenue and the others on the fundamentals of your operating leverage in the business both of those deliver that free cash flow net cash and then that latter part.

I would put put in there optimization of your balance sheet and we've looked at our revenue portfolio as we talked about in prepared remarks. We believe we are differentiated although we're not immune from what's happening in the marketplace. We do have some level of stability and our revenue our profit our.

Cash and that's driven by all of the work that we've done over time to transform this company transform and optimize our portfolio Weve went from in 2008 at the last recession, we were only about 45, 47% annuity. We're now north of 60% we have.

Always been focused on large enterprise versus consumer SMB and that is playing out well our industry concentration as I said on their prepared remarks over 70% of our revenue sits in industries based on ITC and Gartner that are going to be either moderately our minimally.

Impacted by corporate 19, so we are diversified along geographic dimensions market dimensions industry dimensions client dimensions that gives us that and strong annuity content to to move forward and then on the margin and balance sheet, we're going to optimize as we've always done the portfolio.

Polio shift in the higher value the structural actions, we just got done here in the first quarter 900 million that impacted our P.T.I. in the first quarter that by the way, we will give us say annualized return over two x. and we'll keep watching our credit portfolio on the quality our deferred revenue.

And also our depot NDS, so which is in very good shape. So net of that is we feel confident around ample financial flexibility ample liquidity to continue to invest in our business as we move forward and secure that dividends.

Thank you Ron can we please go to the next question.

Our next question will come from Toni Sacconaghi with Bernstein, you May go ahead.

Yes. Thank you are up and welcome and create to heavy on the call.

I was wondering if you could.

Maybe define or articulate on a scale of one to 10, how different do you think IB Oems portfolio businesses will be two years from now I recognize change is not going to happen eminently, but want to 10 with 10 being extremely different where would you place that and then Tim if you could just very.

Quickly you talked a lot about the stability of Ivy EMS portfolio, but it looks like year over year pre tax income went from over 2.2 billion to under 1.6 billion, if I back out the restructuring in charge, so even though revenues weren't impacted PPI.

Adjusted for the restructuring was down nearly 30% and this is your lowest transactional quarter is that how we should be thinking about changes to profit going forward or was there something unique about this quarter, where we saw more negative leverage. Thank you both.

Thanks, Tony.

Look Tony if you look at our industry, it's a fast moving industry with a lot of change that goes on all the time.

If I look at where vivo five years ago, and if our fast forward to today right outflows not their cloud box them out there.

Allowed backlog inside services was a tiny fraction of what it is today.

And I would look at all about and say it looks like in aggregate likely about half our business has changed in the last five to seven years.

That's I think the hallmark of successful company they begin to change it.

It takes advantage of the relationship devalue the incumbency, we have with our clients, but it also takes advantage of the fast move fast moving nature of technology.

No.

The question you Didnt ask what I was sort of put in there is the questions of the focus I think the focus is going to be much more around what we've been talking about as good of air on in the near term is going to be around hybrid cloud and.

Good luck with quantum coming down the road, which I do believe has a half trillion dollars worth of value to give back to our clients. Since you give me the five year horizon, not just one or two year horizon.

So let me set to begin with that and say that and it's hard to put that on a scale of 1% because you didn't tell me how much of it changes the Dan, but I gave you the sense that probably half half the things change Jim.

Yes, and Tony Thank you very much for the question because operating leverage.

It's obviously one of the core fundamental pillars of our high value based thesis and high value based business model overall, but let me just cut to the chase with regards to your question. Overall, you asked about a from a pre tax income I'll take it down to an EPS level, which was similar to net income we were down 18% overall.

That EPS was down 41 cents year to year.

Yes, it includes to $900 million worth of restructuring and the structural change charges also includes as we guided back in January a discreet tax event, but the thing that you're missing in that equation is all of the red hat integration and non.

Cash related purchase accounting implications that are in our EPS in April in our profit number now as we close that trends that transaction by the way less than three quarters ago, and we feel very confident about the health and the profile of our red hat business overall.

We took us substantial write down.

With regards to that deferred revenue $2.2 billion overall, and we talked about red hat being free cash flow accretive year, one MPN operating EPS accretive at the end of year too. We are already hit a milestone on the first metric and we're well on our way delivering the progress on the second metric.

And just to bring this all home the EPS of $1.84 down 41% cents year over year about 35 to 38 cents to that 41 is the red hat noncash deferred revenue and integration why do I bring that up because as we said that will diminish.

Overtime and as we continue to replenish the backlog, which we are and we'll talk about and though we wrap around those expenses, that's where you're going to get even more substantial operating leverage going forward in the future.

Thanks, Tony Let's go to the next question.

Our next question will come from Matt Cabral with credit Suisse. Your line.

Yes, Thank you very much and welcome to the call Arvind.

Appreciate the commentary in the prepared remarks about what you guys saw during the month of March Wonder if you could extend that a little bit and just talk about what you've seen so far across the first few weeks of April across the segments and just the extent to which if any you had customers asking for price concessions new concern new terms, even on the more recurring pieces of your business.

Okay. Thanks, Matt let me start with that because look from.

Paypal tends to be a month, where as Jim pointed out it's not just of the flows quota in every in every quarter larger transactions due to end took at funds top near the end of the quarter, Let's say that probably is more June than April.

And you also asked a question on the and ready side of the business what our caused subscription.

We haven't seen a play so far any big change into subscription side.

Coming into April.

No no that is no doubt because as both of us appointed out.

Now the transaction side, so far things are holding up but it's too early to tell that's one of the reasons you heard both Jim and I talk about but drawing guidance because of a little bit of progress is not enough to give us a full view into what will happen this quarter Jim.

Yes, Matt. Thank you very much for the question. So our urban kind of gave a perspective of what we're seeing here for the first couple of weeks and as you stated just given the one transactional versus annuity nature second quarter like fourth quarter is our highest transactional quarter, particularly in our software base of business overall, but let me give.

You a little perspective around.

The month to March versus February quarter to date, because I think it's important for investors to understand the value of our high value based business model and integrated business model because the unfortunate kobin 19 situation thats impacting economies around the world has a very.

Different profile across our business, whether its hardware software and services and as we've seen coming through February.

The company was growing revenue through February led by strong double digit growth in software overall.

A month the March as I said in her prepared remarks as the healthcare crisis intensified, that's where we saw the fundamental shift in client buying behavior appropriately. So by the way is we've done in IBCM were first and foremost you wanted to focus on the operational stability in business continuity of your enterprise.

And second.

Around the preservation of cash, but when you look at it was more pronounced in our software and our GBS business, we actually ahead.

Substantially grow in the month of March in our hardware portfolio, but I would align that more around bringing new innovation to market. We're in the cycle of mainframe and we did very well with the attach of storage overall and our GTS business remember is a strong annuity base and it's running mission critical work.

In our outsourcing is business actually got better by about a point quarter to quarter, So that's pretty stable, but within GBS and software.

Interesting around software, our cloud and data platform, 34% growth, yes, driven by Red hat, but even on a normalized organic basis, we grew over 3% and that's really the instantiation of our hybrid cloud thesis with Red hat overall, so that port.

Part of the portfolio is still executing well on I think thats part of what Arbain said clients are now even faster more accelerating their journeys to cloud and that plays right to that now where we got hit was in cognitive applications, and then transaction processing platform to different phenomenon circle.

Costs that portfolio, our car gaps is much more centered around industry related content. We're industries that are getting more impacted disproportionately.

Like retail like industrial like automotive and it TPP that was a function of just preservation of cash shifting away from Capex and Opex and just concluding GBS. Although we're very pleased to remember 90 days ago, we talked about accelerating momentum in GBS return that business back to backlog.

Growth, we actually delivered growth in the quarter strong growth in consulting strong signings and consulting, but we did see a pullback in the latter part of March, particularly in that many European countries around project base transformational base activity in.

Next generation applications like S. Four Hannah Oracle Workday and other people are delaying and we expect that to continue here in the second quarter.

Thanks, Matt Silicon we go to the next question. Please.

Our next question will come from Katy Huberty with Morgan Stanley.

And then I wanted to follow up and ask either you or Jim can comment you talked about scenario.

Engine scenarios for this year, obviously, the most bearish with the social distancing through the remainder of the calendar year and the most optimistic with the opening.

Kevin.

What does that translate to in terms that sort of the bearish scenario and EPS and free cash flow and more optimistic scenario just any color as to how wide that that range may look like thank you.

Thanks, Katy looked at me is thought to you said, what uptick apia size or what metrics should you use.

But I think I mean, where we should look at growth as the metric, albeit once we begin to emerge from the pandemic.

And it's impossible for me to predict how long. This is going to be you mentioned two scenarios, but I listen to all of you any appears and I don't have any particular crystal ball on this the estimates on all of what the place on both the depth and the land off.

Of the impact.

Now the other one that I think you should hold us to in metric other than revenue automobile financial metric is the number of clients on which we are engaged on hybrid cloud engagements.

We talk about it from a product perspective, we talk about ready to 100 plans to date, but as you begin to wrap those also but services engagements I think that's the second metric that is that effectively a leading indicator towards the overall revenue metric because that's the precondition to bought that and Thats why we are driving that our company.

Thats, what I'm focused on.

On a water Oman dot.

Every week and that's what our sales forces are incented to go get Don.

So Jim I don't know, whether you want to add something no.

So the question those are the to the aligned to our business model of tier to your second question, Katie I'm not going to talk to specificity around there as I said in the prepared remarks, we have done a tremendous amount of work stress testing running these scenarios. There is a wide range of outcomes. The key here for investors I think our.

Questions one in any of those scenarios do you still have the strength of your cash year liquidity position to ensure that you can one invest in your business to make sure is make sure as you come out of this you can emerged stronger and too can you maintained your capital allocation.

And your commitment to our investors and with regards to the dividend.

Q1 2020 Earnings Call

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