Q2 2021 International Business Machines Corp Earnings Call

Time, all participants are in a listen only mode. Today's conference is being recorded if you have any objections you may disconnect. At this time now I will turn the meeting over to MS. Patricia Murphy with IBM Ma'am you may begin.

Thank you this is Patricia Murphy and I'd like to welcome you to Ibm's second quarter 2021 earnings presentation, I'm here with Arvind Krishna Ibm's, Chairman and Chief Executive Officer, and Jim Kavanaugh, Ibm's, Senior Vice President and Chief Financial Officer.

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

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

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

Additional information about these factors is included in the company's SEC filings. Our presentation also includes non-GAAP measures to provide additional information to investors. For example, we present revenue and signings growth at constant currency.

In addition to provide a view consistent with our go forward business, we'll focus on constant currency growth adjusting for the divested businesses for the impact of the lines of total revenue cloud and our geographic performance. We've provided reconciliation charts for these and other non-GAAP measures at the end of the presentation and in the 8-K submitted to the SEC.

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

Hello, everyone. Thank you for joining us today, it's my pleasure to be speaking with all of you again.

<unk> to make progress this quarter.

Our revenue growth improved to 3% as reported led by global business services and our software business.

And we grew adjusted free cash flow for the first half.

Across every industry enterprises are using technology to redesign business processes.

Whether it's automation and manufacturing telemedicine in health care for Omnichannel and retail these.

Of these digital transformations are enabled by the hybrid cloud environment.

The technology and services, we provide to our clients.

Enable the business growth and productivity increases and improved customer experiences.

As the wireless strategy is focused on hybrid cloud and AI.

At the same time, the overall spend environment continues to improve.

The economy reopening in many parts of the world many markets and industries are getting back on track.

We see this in North America and in select industries.

Jim will delve deeper into our performance across the different parts of our business.

But I wanted to be clear upfront that with the results over the last 2 quarters, we remain on track to achieve our financial expectations for the year.

Revenue growth of the actual rates and 11% to $12 billion of adjusted free cash flow.

We continue to take the size of steps and make the investments required to execute on our strategy.

This includes making acquisitions that strengthen our portfolio.

Offering new innovations and digital capabilities to our clients.

Spending of Puerto Rico system accelerating changes to our go to market model, while also selling more of a growth mindset, among our teams and building a more client centric culture.

We are executing the separation of <unk>, which is still on track to be completed by the end of the year.

The recent announcements within the senior team also support and reinforce our strategic priorities.

While there have been the number of changes or comment on Jim Whitehurst, who has stepped down as president but remains as the senior adviser to me and the rest of the leadership team.

Jim worked on many parts of our strategy, including the integration of Red hat.

Nearly 3 years since we announced the acquisition there is no doubt this integration has been successful.

Jim remains a strong believer in IBM and our strategy.

Given his background I understand of the desire to become an investor.

Going back to the execution of our strategy. We are pleased with the early signs of progress from the significant changes we are making.

But as you would expect it will take time before we realize the full benefit of these changes.

Our strategy around hybrid cloud and AI is resonating among our clients and bears repeating.

Hybrid cloud is more than the strategy, it's the reality for our clients today.

They have multiple public clouds.

But cloud <unk>.

The 1 premise workloads.

And of dealing with stringent regulatory and security requirements.

Our hybrid cloud platform gives clients the ability to flexibly deploy and manage data and applications across any environment.

With hybrid cloud clients can derive during the half times more value in comparison to other approaches.

Our strategy is platform centric Linux containers and kubernetes all of the heart of our hybrid cloud platform.

Allowing clients to write once run anywhere.

Our software portfolio, including cloud fax built a read out open shift around cloud native.

Our GBS experts work with clients across every industry.

Celebrate the digital transformation journeys true hybrid cloud and AI.

Our systems and industrial specific public clouds provide differentiated infrastructure.

This platform approach drives compelling economics to IBM and our ecosystem partners.

This quarter, we've continued to make progress in the execution of our strategy.

More and more clients have chosen our technology and services as the lever for business growth.

Now have over 3200 clients using our hybrid cloud platform.

That's almost 4 times the number of clients just prior to our announcement of the readout of acquisition.

GBS is helping to drive this platform adoption.

As we modernize and manage our clients' applications in a hybrid cloud environment.

This work is accelerating and we have now grown to 700 GBS Red hat based client engagements since the acquisition.

Our hybrid cloud platform is proving to be of immense value across industries.

1 example is telecommunications companies, which are amongst the largest technology spend of each year.

We recently announced the major telco clients, including Verizon Telefonica has chosen ibm's hybrid cloud platform to transform the core networks and bring to life the era of <unk> and edge computing.

Moving on to AI.

We fundamentally believe that or to the competitiveness of every company going forward will be the ability to use AI to unlock real time value from the data.

Wherever the data resides.

Our efforts are focused on bringing our AI technologies to horizontal processes GB.

GBS helps our clients build intelligent workflows and transform the core business process, whether that be of supply chain talent management of customer service.

This allows them to boost productivity and improve the customer experience.

An example of this is the work we're doing with Cvs health.

As Covid vaccines began rolling out of the United States.

IBM built in just a few weeks and AI powered assistant to help the Cvs health deal with the massive influx of calls.

Watson health handles more than $10 million call. It 3 months, improving the customer experience and reducing costs.

Keep in mind. This is for 1 vaccine and 1 use case.

Use cases expand the benefits will grow.

This is a compelling value proposition and we've recently deployed Watson assistant to other clients ranging from York University to DFW Airport to Paypal.

These examples and others reflect our ability to build powerful AI capabilities of our business.

Which we are also externally recognized.

IBM was again ranked number 1 in Idc's artificial intelligence market for 2020 market share.

And the IBM has been named the leader in Gartner, Australia, 21 Magic quadrant for data science and machine learning platform.

Since we announced our new go to market model in January we have made significant changes to our sales model.

And of providing clients with the more technical and experiential approach.

Every client that I've spoken to sees the value of the approach there.

We're pleased to co innovate with IBM leverage our garage methodology and derive value more quickly from our solutions.

Of course, we expect the return on these investments such as improved renewal rates and client expansion to take time.

The time measured in months not years.

<unk> also been building and expanding a powerful ecosystem of partners who.

While playing a larger role in helping our clients move along the transformation journey.

We are expanding the scope of our partnership with <unk> to help financial institutions accelerate digital transformation.

IBM and <unk> recently created the financial services Center of Excellence and launched the IBM Tech hub at the Hawaii to strengthen <unk> capabilities and hybrid cloud.

We also built <unk> diligence edge and AI platform hosted on the IBM cloud using Watson to gradually decrease the time it takes to do due diligence during mergers and acquisitions.

And the other partnership that has grown stronger is the Schlumberger building on the partnership we announced last year. We've recently launched a new data management platform.

Clients can leverage to unlock value from the massive amount of data produced by the energy industry.

We are seeing growing momentum in our IBM cloud for financial services.

Banks have stringent needs driven by compliance security and resiliency.

Last year, the IBM cloud for financial services includes key control and security features built right into its very core.

It makes it easier for banks to collaborate with ecosystem partners and vendors.

In the second quarter, we reached the milestone of more than 100 ecosystem partners in support of clients like Bank of America and BNP Paribas.

While we invest to expand our ecosystem. We are also investing to enhance our portfolio.

In the second quarter, we announced a series of products to further differentiate our hybrid cloud and AI capabilities.

This includes auto SQL that automates, the management of data without having to move it.

Good net the teachers are systems on hydro translate code.

Watson orchestrate that augments the personal productivity of professionals cloud engine.

The simplify our developers build cloud native apps and mono 2 micro to help companies decide which app should move to the cloud and the transfer of monolithic apps into micro services.

The Red hat launched new managed services and open shift, including API management Apache.

The <unk> Kafka and data science services that make it easier than ever to build next generation applications and open shift.

Meanwhile, we continue to complement our organic investments with acquisitions.

Deborah gnomic as of the RM provider that helps optimize the performance of any application or resources. It builds on the recent acquisition of antenna for APM and observe ability and the launch of IBM cloud Pak for Watson AI ops to automate the idea of operations with AI.

We are reinforcing our ecosystem play in GBS.

The acquisition of week, a leading sales force consulting partner in Europe.

These are near term opportunities at the same time, we are focused on emerging and longer term opportunities such as quantum computing.

Quantum is an area of incredible promise slated to unlock hundreds of billions of dollars of value for our clients by the end of the decade too.

To help business and society reap the benefits of quantum computing, the or put a roadmap in place to build of housing plus cubic computer by 2023.

We are forging a series of major partnerships to advance the business and science of quantum computing and force quantum encryption.

This quarter, we have announced we will join forces with the University of Tokyo in Japan, The SCLC Hawtrey center in the United Kingdom, and the Fraunhofer Institute in Germany.

This builds on the partnership we announced last quarter with the Cleveland Clinic.

Before I close I'd like to quickly comment on some of our initiatives around societal issue.

This month, we released our 2020 CSR report.

You will see our efforts to apply the power of our technologies to advance societal progress such as applying supercomputing resources in support of COVID-19 research.

We have made the important commitment to reach zero greenhouse gas emissions by 2030 without the use of carbon offsets were.

We're taking a series of actions to increase our diversity representation and we are being transparent in our diversity and inclusion scores.

As you can see in our report.

To close let.

Let me reiterate my confidence in our strategy.

Our second quarter results demonstrate.

Demonstrate the progress we are making towards achieving our 2 financial objectives.

Stable mid single digit revenue growth post separation.

And strong cash generation.

Jim over to you.

Thanks, Arvind as always I'll start with the financial highlights and then comment on our revenue performance business model dynamics, and cash and liquidity position before getting into the segments.

In the second quarter, we grew revenue over 3% as reported to $18.7 billion, we expanded our operating gross profit margin and grew gross profit dollars 4%.

We reported operating earnings per share of $2.33.

Our adjusted free cash flow was $3.8 billion through the first half and we generated $11 billion over the last year.

And our balance sheet and liquidity position remains strong.

We continue to make progress in our revenue performance led by 7% growth in global business services and 2% growth in software both at constant currency.

As Arvind mentioned the spending environment is improving we see this in markets, where reopening is progressing like the United States and Canada and in several countries in Western Europe from an industry standpoint, we saw a meaningful improvement in some of the areas that had been more impacted by the pandemic.

Like travel and transportation automotive and industrial products globally.

Globally, we're helping enterprise digitally transform leveraging our platform approach.

Ibm's cloud revenue over the last year across software services and infrastructure is now $27 billion, which is up at a double digit rate. This continues to be led by global business services and cloud and cognitive software, whose cloud revenue this quarter.

Was up 30% and 25% respectively.

As our revenue performance improves the fundamentals of our business model remains solid.

We expanded operating margins with gross margin up 30 basis points and pretax margin up 70 basis points. We've.

We've taken actions to streamline and simplify our operating model as.

As I've said in the past roughly 1 third of the structural actions are to improve global technology services profit profile of ahead of the separation of Kendra. We're realizing these savings in our GTS gross and pretax margins are up this quarter.

The other roughly 2 thirds of the targeted actions address stranded costs from the separation and create financial flexibility, which we are investing for future growth.

We're ramping investments in skills innovation and in our ecosystem.

Over the last couple of quarters, we've been aggressively hiring adding delivery resources in GBS technical skills in Red hat and go to market capabilities across the board.

We're scaling our garage footprint and skills to provide a more experiential approach to selling and consulting services where.

We're increasing research spend in areas like quantum hybrid cloud and AI.

We're accelerating our ecosystem of investment.

We also completed several acquisitions in the first half of the year to add hybrid cloud and AI software capabilities and skills and strategic GBS ecosystem partners.

Now turning to our free cash flow and balance sheet and liquidity position.

We generated $3.8 billion of adjusted free cash flow in the first half of.

This adjusted view excludes $1.2 billion cash impact for the structural actions initiated late last year and transaction charges associated with the separation of Ken drove these.

These first half charges are consistent with our expectations from the beginning of the year.

This $3.8 billion of adjusted free cash flow was up slightly year to year.

With growth in our underlying business performance offset by about $700 million of the $1 billion full year cash tax headwind, we discussed last quarter.

With solid cash generation and disciplined financial management, we continue to delever, while investing in the business and paying a secure and modestly growing dividend.

Our cash balance at the end of June was $8.2 billion. This is down about 6 billion from year end, while that was down about $6.5 billion.

We've now reduced our debt by about $18 billion from the peak in mid 2019.

In the first half we also used cash to acquire businesses and return capital to shareholders roughly $3 billion. Each in the second quarter. We also increased our dividend per share for the 26th consecutive year.

So now I'll turn to the segment results, starting with cloud and cognitive software where revenue growth improved to 2% this quarter.

This performance was led by growth across both cloud and data platforms and cognitive applications.

Our software growth factors.

These were offset by declines in transaction processing platforms, our value of vector.

Stepping back growth factors reflect key areas of importance and investment for our hybrid cloud and AI strategy.

<unk> Red hat automation data and analytics and security.

Our success is reflected in our software our cloud revenue, which was up 25% this quarter.

The transaction processing platforms as our value of vector driving profit and cash while supporting mission critical solutions for our enterprise clients.

In cloud and cognitive software overall, we again had strong subscription and support renewal rates and our software deferred income was up over $1 billion year to year.

Moving it to the business areas cloud and data platforms grew 8% led by strength in our hybrid cloud platform and cloud packs.

Red hat had good performance with normalized revenue growth of 17% with.

With consistently strong performance in red hat, and the value of bringing IBM and Red hat together, we've now achieved our objective of operating earnings per share accretion in 2 years, So an important acquisition milestone.

In the quarter, both ROE and open shift continued to deliver strong growth and take share in the respective markets.

Cloud packs, which are built on open shift continues our momentum with our enterprise clients the.

This quarter, we had strength in cloud Pak for integration, which delivers rapid and cost saving solutions for integration development.

Cloud Pak for business automation also had strong growth as clients leverage AI powered automation to solve operational challenges.

The acquisition of turbine gnomic further extends our automation offerings.

In cognitive applications revenue was up 8% the.

The growth was fueled by horizontal solutions, including security software and services Maximo asset management, whether and Sterling supply chain.

With the acceleration of cyber security attacks clients are increasingly looking for modernize security platform to detect and respond the ransomware and other attacks.

This quarter, we had strengthened our integrated software and services offerings, including cloud Pak for security day.

The security and X Force Security services.

IBM security offerings are employed and over 2 thirds of the world's 500 largest companies in.

In the area of supply chain, we are working with several new clients. This quarter as demand for omni channel solutions have accelerated requirements for Sterling order management and industries like retail.

Our transaction processing platforms revenue declined we provide flexibility to our clients and how they purchase this mission critical software.

Since early last year, we have seen a preference for opex over capex, putting pressure on perpetual licenses in favor of more consumption like models the.

This continues the clients remain committed to our products as we again had strong renewals in our transaction processing platform software.

Looking at cloud and cognitive software profit, we grew profit dollars with the operating leverage from revenue growth, while we continue to invest in new innovations and our ecosystem.

Turning the GBS revenue of $4.3 billion returned to pre pandemic levels and revenue growth improved to 7%.

Clients are accelerating the rate and pace of digital transformations, using cloud and AI to gain operational insights increased productivity and create new growth opportunities we.

We are capturing this market growth through our differentiated offerings and the hybrid cloud, including Red hat and intelligent workflows.

We have seen signings and revenue momentum in both business transformation services, which leverage our combined consulting PPO and core ERP capabilities as well as the application modernization and management services, we provide around the hybrid cloud platforms of our clients the.

This is reflected in our performance this quarter for.

For example, our book to Bill in the strong revenue quarter was greater than 1 driven by growth in digital transformations across key practice areas such as Salesforce SAP.

Workday as well as in application modernization and the hybrid multi cloud management.

And we continue to see momentum in our small deals, which historically convert to revenue in a shorter timeframe small deal signings grew at a high teens rate.

Moving to revenue, we had continued momentum in GBS cloud revenue, which was up 30% in the quarter with growth across consulting application management and GPS.

A red hat practice, which now contributes over 1 third of our cloud revenue growth again had strong results. This quarter, we added over 170 red hat client engagements.

The 700 engagements since the acquisition have generated over $2.5 billion of signings.

In consulting revenue was up 11% driven by the investments we are making in building skills and third party cloud providers like Microsoft and AWS and in expanding our practices with ecosystem partners such as SAP.

Salesforce and Adobe.

Clients are also finding value in our differentiated garage methodology as we work with them to co create solutions.

This unique and scalable approach the innovation and execution is now embedded in the majority of our value propositions across ERP implementation.

Oh and application modernization.

We also had strong growth in our intelligent workflow offerings. These are end to end offerings, which leverage hybrid cloud and AI to transform client processes.

They cannot consulting and PPO and areas such as finance supply chain customer service and talent transformation and contributed to our global process services revenue growth of 25%.

Lastly, within the application management revenue was up 1% as we continued the transition from managing applications on premise to those that run in the hybrid multi cloud environments.

Turning the GBS profit our gross profit margin declined 60 basis points this quarter.

We are investing to expand on the skills and practices to continue to capture of the market opportunity.

We are making significant investments in both delivery and go to market resources, where we increased our capacity by 10%.

We are adding skilled practitioners in high demand areas, such as Salesforce or SAP Adobe.

Adobe, Microsoft AWS and Red hat.

And we are investing to integrate and scale, our recently announced acquisitions.

Turning the systems revenue was down 10%, reflecting product cycle dynamics across IBM Z power and storage.

IBM Z revenue was down 13% and I'll remind you that compares to a very strong performance last year, when we were up 68%.

Throughout the last day quarters. The Z 15 client value has been apparent and the program continues to outpace the strong Z 14 program.

Another proof point of IBM Z is an enduring platform.

This quarter financial services continued to drive Ibm's <unk>.

Given capacity requirements to address robust market volatility.

With the security top of mind purchases were also driven by clients looking for capabilities, such as pervasive encryption and hyper protect to secure mission critical applications and data.

The on premises and in the cloud.

The value proposition is clear Z 15 of secure scalable and reliable.

Product cycle dynamics also played out across power and storage.

Power revenue was down 5% and 8 point improvement over last quarter's rate.

Storage revenue also declined driven by high end storage tied to the IBM Z cycle.

Looking at systems profit pre tax profit margin was down reflecting a mix headwind given where we are in the <unk> product cycle.

Moving the global Technology services, we remain focused on improving the financial profile as we positioned kindred to be of Standalone company by the end of the year.

You will recall last year, we initiated actions for an improved margin profit and cash generation profile. Upon separation. We are seeing the results of these actions and the GTS profit performance this quarter with profit dollar growth and margin expansion.

Gross margin expanded 110 basis points and pretax margin of 190 basis points.

GTS revenue declined 4% a mark.

This improvement from first quarter performance, driven by improving trends in client base business volumes and project activity.

Our current clients continue to value partnering what can draw to modernize and manage their mission critical workloads and services as evidenced by our strong and improving renewal rate of 95%, which is up 2 points quarter to quarter. The.

These renewals include 6 deals with the contract value of greater than $100 million..1 of these is an extension of our relationship with AT&T to provide support for data center migration and consolidation and IBM Z infrastructure management.

Al mentioned, we also extended our software our relationship with AT&T.

As an IBM strategic global networking provider AT&T business is playing an important role in the separation of Kendra using their expertise for network separation.

While our performance with existing clients remained strong as we would expect the sales cycles for new logo clients is elongated.

As they await further information related to Kendra.

With that let me give you a quick update on where we are in the separation process.

We are continuing to build out the management system and support structure at.

At the same time, we are making solid progress executing on the necessary financial legal and regulatory milestones to enable the transaction with.

We still expect the form 10 to be available in the fall and remain on track the close by the end of the year.

To wrap up let me bring it back to the IBM level.

In January we said, we expected an improving financial profile throughout 2021.

As I look back at our first half results our revenue performance improved in the first quarter and then again in the second.

And our adjusted free cash flow of grew in the first half.

Our business model fundamentals are solid operating margins are improving and we're driving profit dollar growth.

Importantly, as you've heard today, we've been taking a number of actions to execute our hybrid cloud and AI strategy.

This includes strengthening our portfolio expanding our ecosystem and implementing go to market changes.

And we continue to have a strong balance sheet and liquidity position.

We've been clear on the metrics, we're focused on revenue growth and cash flow.

For the full year, we continue to expect revenue growth at current spot rates. We maintain this view since January so I'll remind you. Since then we've lost about 1 point of revenue growth from the dollar strengthening.

We also continue to expect 11% to $12 billion of adjusted free cash flow.

This adjusted free cash flow excludes about $3 billion of cash impacts for structural actions and the transaction charges for the spin off.

As we looked at the third quarter, we expect second or third quarter revenue dynamics to be in line with the average of the last 3 years.

Looking at the revenue profile more year to year growth should come from the underlying business performance mitigated by moderating currency benefits.

We're continuing to ramp our investments as I mentioned, we're reinvesting much of the savings from our structural actions and as a result, this will keep expense levels higher.

Our operating tax rate will also be up year to year, though I expect the third quarter rate to be fairly consistent with the second.

To sum it up we made progress in the first half while there is more to do we are well positioned to deliver on our 2021 expectations and our financial model post separation.

So with that let's go to Q&A I'll turn it back over to Patricia.

Thank you Jim before we begin the Q&A I'd like to mention a couple of items.

First we've included supplemental information at the end of the presentation and finally as always I'd ask you to refrain from multi part questions.

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

Thank you.

Time will begin the question and answer session of the conference to ask the question. Please press star 1 and record your name clearly if you need to withdraw your question Press Star 2 again to ask a question. Please press star 1.

Our first question comes from Katy Huberty with Morgan Stanley. Your line is open.

Thank you. Good afternoon question, I guess for Jim cloud and cognitive software as well as G. B S. P. T. I margins are down year on year I imagine a lot of that is coming from the investments that you walked through but can you talk about any other factors like mix that are playing into the margin performance in those groups and also.

Are you seeing any impact from labor shortages and wage increases, particularly in the services business.

Sure Katie Thank you very much for the question.

Obviously, those 2 very important segments that you chose GBS and software are 2 of our growth factors within our business model as we've said entering the year, we guided both on revenue and on cash flow and we said that we were going to continue to invest significantly within those growth.

Factors as we move forward and I see and I think what you see playing out here in the second quarter is that investments starting the ramp up from the first quarter into the second quarter going forward. We are investing in front of demand because of what we said in the pre pre remarks is that we see in incurred.

<unk> macro and demand profile of playing out and you see that with the with the strong acceleration in our software base of business quarter to quarter and in our GBS base of business GBS by the way exceeded our expectations and actually got back to pre pandemic revenue less.

<unk> overall, but just to really bring it home 1 we're investing 2 we have high margins in our software base of business already and the dynamics between Red hat and the deferred revenue dissipating as we move through the year is really what you see play out in the second quarter overall, we.

Feel very comfortable at the margin level in software, we're going to continue to invest in innovation ecosystem and skills and we feel very good about our GBS business overall labor pressures, yes. There is a war for talent going on we are investing significantly, we're bringing thousands and thousands of GBM.

S practitioners in the.

Through the first half and we feel pretty good about what the profile of that business going forward.

Thanks, Katy Sheila can we take the next question. Please.

Our next question will come from Onesie <unk> Mohan with Bank of America You May proceed.

Hi, yes. Thank you, it's nice to see the growth in the gross profit dollars 2 quarters in a row you had very strong consulting growth in GBS growth as Jim just alluded, but gross margins compressed 60 basis points year on year in GBS. It would be of nice to see the full leverage of the model come through with both revenue growth and margin expand.

And to amplify the gross profit dollar growth. So sort of my question is really how much longer would you need to be in investment mode. In GBS and is it possible that we see in the coming quarters over the years when when do we actually see both revenue growth of that margin expansion come into the model and UBS. Thank you.

<unk>. Thanks for the question. So just building on <unk> question upfront.

We are.

And we will continue to invest in this business as GBS is an essential part of our hybrid cloud platform centric strategy. It is both the tip of the spear if you want to call. It in driving the demand from an architectural point of view to our platform that then creates that flywheel.

Effect that we talked about for every dollar that we land on the platform, we get 3 to $5 of software and $6 to $8 of services revenue. So we're going to invest significantly now with that said, we rebounded off of second quarter second quarter last year when the pandemic hit.

We dropped 7 points quarter to quarter, we posted down 6 last year in GBS, we return back to pre pandemic.

Revenue levels and exceeded growth expectations, but we're going to continue to invest in this part because of the importance of GBS place of that hybrid cloud platform and we will get that profit dollar contribution and more importantly, you see of play out in our second key metric that we give guidance on and Thats our adjusted.

Free cash flow and we feel very good about where our adjusted free cash flow is through the first half it's up year to year.

Really taken into account most of the cash tax said when we talked about 90 days ago is pretty much behind us going forward. So our attainment wise on adjusted free cash flow, which is really going to be a reflection of both topline revenue acceleration and operating leverage and margin as we move forward.

Thanks, Badri can we go to the next question. Please.

Our next question comes from Toni <unk> with Bernstein. Your line is open.

Yes. Thank you I was wondering if I could ask you a little bit about acquisitions.

I think over the last year, you spent $3.2 billion on acquisitions.

And Arvind do you you've said that you expect the acquisitions on a sustained basis to contribute about 100 to 150 basis points of inorganic growth per year. So is that what we should be thinking about about 3 billion in acquisition spend generating 600 to 900 million. That's 100 day 150 basis points of remain co.

So is that sort of the mental model of framework, we should think about and then could you comment specifically on how much acquisitions.

The impacted GBS as reported growth rate and cognitive apps reported growth rate in the quarter or just give us a dollar figure for the inorganic acquisition contribution to each of those business. This place. Thank you.

Thanks, Tony Great question. So, let's just start with the first book. So we are generating last year, if I remember correctly at the endpoint $8 billion of free cash flow for the year of trainees fan day, we have set of 11 to 12 this year.

Do the math between dividends.

Acquisitions and capital expenditures you get to the beat of 3 of the half. If you now say that we are going to increase our free cash flow by half a billion 2 of $1 billion in a given the air and you can expect that number on inorganic activities to go up year over year.

The 3 to pay the offer is a fair number for this year. It would it could go up as we began to increase our cash flow you. All of you said next day, we expect to generate out of the per diem not 11 to 12. So that gives you 1 Tony just on the absolute number.

The second question you had in there on the GBS so as.

We have said and I've said before.

100 to 150 basis points of growth from acquisitions, I would say that GBS is right at the top end of that number if we look at the second quarter.

And if you look at cognitive applications actually more broader cognitive software all in kind of thing.

Cognitive applications, though are the net if any from acquisitions.

The number would be at the very very low number I mean, maybe a few tens of basis points nothing significant yet now.

The GBS acquisitions give you an immediate return and then grow at a nice number, but obviously contributing a lot less there think of in the software side. The model is the come in they do because of the deferred revenue begin to give you some acquisition, but Robert.

The revenue over 12 months.

But those acquisitions grow very fast so the contribution actually goes on for multiple years not just for a single year from those acquisitions to the overall growth rate and so that's the slide different GBS immediately bought 150 software much smaller few tens, but imagine that all of those build.

Over time, but it provides a pretty nice tailwind than or 2 to 3 years.

Okay.

Thanks for the question Tony Let's go to the next question. Please.

Our next question will come from Amit <unk> with Evercore. Your line is open.

Okay.

Thanks for taking my question good afternoon, everyone.

1 of the other question on the hybrid cloud potentially you've talked a fair bit about it today than in the past.

The most investments would only agree that hybrid cloud is the reality, but maybe you could touch on a why do you think IBM is better positioned to enable the all customers to get there where some of your peers and then secondly, what does the hybrid cloud meaningfully of profitability and free cash flow because I think there's some extend the day.

Perception, perhaps misperception that the shift from on Prem to hybrid is negative items margin.

Hi, Amit thanks and the.

So as you correctly pointed out I mean of Wood River.

Peter you, but I, obviously believe it hybrid cloud is the reality for our clients.

Now to get into the more.

Meaty parts of your question.

If you look at.

Why would people prefer also of hybrid cloud.

I look at a <unk>.

The given large hyper scaler they'll do hybrid as in their own public cloud and maybe some on premise means of the goal is to drive workload onto the public cloud.

Who has the credibility to go across multiple public clouds, and that's why you hear me always say.

Both Microsoft and Amazon are our partners not only our competitors.

And that is an important play that IBM has done for many many decades, while we integrate across the environment that our clients operate.

So that's 1 part on a bit more of the technical level that was the primary reason for the right out of acquisition.

It gave us both the platform and the assets to be able to bring of hybrid cloud platform to bear because.

We would all agree I think all of you our listeners in all of your audience would agree that the next of the de facto operating system.

As of the factor for on premise and private environments.

<unk> is the standard which people are going to move on to so if you see beginning really strong on premise of the private you can dig the same exact environment of multiple public that gives us. We believe an advantage now let me acknowledge to the point of making if hybrid cloud is the reality that everyone is going to start having a play in.

Hybrid.

But we believe that <unk> is advantaged for the industries that we serve that doesn't mean they'll use us exclusively but they will use us to a large extent and that is where we are headed there. The second part of your question, which I think are few players rite aid on profitability and cash flow.

The way we look at it.

Over 2 thirds of.

Maybe you'll get a revenue is going to lie and software.

If that is the case and software Commvault software margin.

I'm not going to debate, whether you get a difference in motto from on premise licensing too has the service licensing to term license model all of those even out and pretty much out of wash over 2 to 3 years the out of different in any given 6 months, but if I take of 2 to 3 of our view and that is what we're really of fixed on driving that all of them.

That evens out and you begin to get gross margin back up in the Seventy's and Eighty's.

Begin to get the profitability and cash flow associated with that and so that is the answer to that question. The other way of the services based on.

Helping our clients go there you can begin to see that and I know that there were a couple of questions. The.

Earlier on the GBS margin look, we're very fixed and driving investment. So we drive investment a little bit ahead, I'm not going to tell your years of Ed, but maybe 1 of 2 quarters ahead of the revenue of the revenue growth come we'll keep doing that and that will impact maybe percentages, but by tens of basis points, but it shows up in.

Absolute profit in absolute.

Cash flow even in that part of the business, Yes, I would just add 1 thinks of the urban to build on your point when you look at the IBM company post separation of kindred.

The IBM company is going to be roughly around 45% to 50% software as far as composition of mix that carries with it the high EBITDA profile already today and just as 1 example, when you look at our Red hat base of business today is CFO I love that that subscription model that has grow.

And the <unk> built into it overall, it's already running well north of the rule of 40 today.

So as more and more to software based contribution that mix effect will help us bottom line in cash also.

Thank you Amit Sheila let's take the next question.

Next we will hear from Matt Cabral with Credit Suisse. You May proceed.

No.

Yes. Thank you.

Within cloud and cognitive I was hoping to dig a little bit more into the cloud Pak and wondering if you could talk about just more broadly the the maturity of the cloud tax portfolio and where you are in the integration with open shift any of you.

You're just talking about where youre seeing the impact in terms of customer adoption so far.

Any forward just the.

Contribution from cloud packs on the the financial performance of the software segment from here.

Yes, Matt.

Matt. Thanks for the question, let me answer the first part of your question on the bulk of the arc.

Architectural elements of the use cases, and then I'll give it to Jim to answer it on the.

On the financials. This thing so if you look at the maturity of brought backs Amit.

Tell you that every plot back we have been selling this year in deploying this year is on open shift we made the move from other kubernetes platforms onto open shift way starting in October of 19.

So yes of course.

Lets acknowledge that people move out of purchased prior to 19, what our board other kubernetes platform and so by last year 2020.

All going onto the open ships.

That maturity is complete now of some people have prior versions of software deployed we observed typically within 3 years from day, 1 they do move to the new versions. So I would expect by the end of this year, even the prior deployed would of fully moved and that's done.

If you look at customer adoption.

Capex of a very strong contributor to the 30 to 100 clients that we mentioned.

Well over half of them come true cloud fax and so what are the use cases look the wall.

We are doing with volunteers of Great example of volunteer runs the top of the cloud Pak for data and that's a great example of what we're doing.

When you hear us talk about Watson assistant Hasnt, the Cvs use case, which handled over 10 million calls in the quarter, while COVID-19 vaccines.

Watson assistant runs on top of the other cloud back. So these are great. Examples of how mature the technology is I would tell you. The open shift maturity is complete and it really helps reinforce both the adoption of open shift as well as the clients get very comfortable with deploying open shift for other use case.

It's the workload at the end of the day for all the children are phones get comfortable they might deploy for other purposes as well in terms of the financials of parts of the gym.

Jim just quickly.

Thank you very much for the question.

The step back first of all we're very pleased with our overall progression.

Within our software portfolio of more work to do but we're making progress in C and D P, which I'll remind everyone on the call and our investors is about 50% of our overall software portfolio and that's where the lion's share of our cloud packs sit now when you look at our Sandeep performance when we look at it.

On the way, we manage the business on a historical normalized basis, we see acceleration, we return back to growth.

The first quarter, we accelerated that growth of 4% here in the second quarter and that is really attributed to the nice momentum we're seeing in cloud packs, we announced club packs of 18 months ago, 2 years ago, given our E. L. A historical client base that takes time to true.

<unk> through that client base and as you know last year was the was the trough of our E. L. A renewal cycle, we start to improve on that later in the second half and really that Ela cycle plays out in 2022, but we actually had a very nice inflection here in the second quarter, our cloud path.

<unk> on a N IRR net revenue renewal, we're north of 100%. So we've said all along Arvind of myself that theres going to be shifting the cloud packs and theres going to be lift, which with capex and now we're starting to see a higher mix contribution of cloud packs and we're starting to see where we do have.

Of shift, we're getting north of 100% on the NR perspective, and that's an encouraging trend.

Thank you, Matt what's kind of the next question. Please.

Our next question comes from Tien Tsin Huang with Jpmorgan. Your line is open.

Hey, Thanks, good to talk to you all just some of the on the services side consulting obviously, great double digit signings were pretty strong here.

Do you feel like some of backlog and pipeline perspective that you're starting to reach of a little bit of infection to get some better.

Growth overall of the services unit, given what you see plus some of the investments that Youre, making and then separately forget the follow up question, Patricia but just on the.

On the PPP front transaction processing platforms.

Is it just the comps issue that we should look for that.

And is there to get better or are there other areas that we could be potentially monitoring to see some better performance there or is it just waiting for that transition.

I'll take that urban Tien tsin. Thank you very much for the question when you look at our services base of business.

Delivered $9.2 billion of signings in the quarter, it's up double digit at actual rate, we did see improvement in our backlog overall, it's really very different dynamics playing out here as we tried to say in the prepared remarks, we see very strong momentum in our GBS base of business when you look.

At our signings in the quarter.

We had strong performance our trailing 12 months book to Bill is 1 dot too.

Through the first half we have roughly double digit growth in signings across all 3 sub segments very good growth this quarter in large deals and we have continued momentum in small deals and we saw improvement in our revenue and our backlog and our revenue realization moving forward and that gives us.

<unk> as we said in the prepared remarks, we expect about a normal quarter to quarter seasonality overall, we actually see GBS accelerating growth probably about another point from the from the second quarter overall in GTS really what we're seeing is a good performance overall.

For all of leveraging our incumbency position and driving strong renewals, we're seeing with that incumbency position finally of turnaround with an encouraging trend on client base business volumes and project based services that they are engaging in project based services and our incumbency accounts were up.

20% here in the second quarter, but as expected the new logos, while we have a very healthy pipeline of new logos out there.

The sales cycles are elongated as we've said in the prepared remarks, so we see some nice acceleration continuing in GBS overall, but again with GTS is our focus on the fundamentals of the business profile of that that means margin profit and cash and I think you've seen in the second quarter. We made some very good progress.

Overall with margins up 110 basis points.

Pre tax margins up 190 basis points and profit dollar growth both in gross profit dollars and of pretax profit dollars lastly on TPP, yes, as we talked about many times over the last year.

Year or so we do see the transition happening in this portfolio with regards to a shift back more and more to consumption base annuity base purchasing versus in 2018 in 2019, we had a much healthier macroeconomic environment a.

<unk> cash cash rich environment clients, then shifted to more perpetual licenses, we're seeing that come back and that's going to play as it played out where we saw the revenue upside in 18 and 19 in 2020, 1 you're going to continue to see the headwind as we've been saying we expect that to.

Come back in 2022 back to normal market trend growth rates overall.

Thanks, Tien Tsin, let's go to the next question Sheila.

Our next question will come from David Grossman with Stifel. Your line is open.

Alright. Thank you actually most of my questions have been answered I just have 1 follow up question I think James you mentioned.

Revenue of retention of greater than 100% and I wasn't quite sure of what the reference point was.

Software.

Either you have any incremental you know why.

The data points, you can share about revenue retention by business unit within the cognitive segment's book.

Sure David Thank you very much.

Cloud packs are definitely in central part as we've.

Invested significantly to Containerize, our software and optimize it on top of open shift of our hybrid cloud platform overall, when we take a look at our cloud packs, we measure and manage.

And I have a dashboard that we look at all of our large enterprise top clients overall, our deployment penetration within each of those clients and we're able to see as we transition of client from a traditional middleware to our cloud based containerized solution.

Not only can we track the deployment and how that progresses over time, we could see the dollar of yesterday versus the dollar of today as they transition to cloud Pak and we measure the net revenue retention not only how much come in whether we're able to upsell cross sell with.

<unk> cloud packs as we move forward and like I said in the second quarter, we're making progress much more to do but we're making progress on the mix composition of moving more and more to the cloud packs and we're also making progress on capturing more of our clients' wallet share dollar for that same.

The dollar of traditional middleware overall, hopefully that helps David.

Hi, Jim to make it into the business.

Our use case of that tells you is that when they renew they're actually buying more volume, which means it's the beginning to become a larger part of the real estate technology real estate out of clients.

Thank you David you know, we're at the top of the hour, but let's take 1 more question Sheila.

Thank you our last question will come from Keith Bachman with Bank of Montreal. Your line is open.

Hi, many thanks team I wanted to ask Arvind you a question on revisiting on.

What your growth assumptions of our targets are around cognitive and the.

Particular reference point to my question is this quarter.

The generated roughly 2%.

Revenue growth.

And it was you had the benefit of compare it particularly on some of the line items within cognitive.

And so.

Not particularly.

It's good growth, but still a ways to go to reach your longer term targets. So so what happens to change that proves cognitive and part b. The backdrop is if I think about red hat and we remain pretty positive on red hat, even over the next couple of years, but you still face the uphill battle of the longer term trends within cognizant of DB twos, probably.

The declining market unless you've talked about in the past transaction processing platforms is also of declining.

I think revenue stream over the arc of time, so if you could just revisit on.

How do you reach the longer term growth rates within cognitive thank you.

Hi.

Thanks, Keith important question of an important element of our of our pieces going forward.

So we've been clear of that.

Our cloud and cognitive software where to grow mid single digit going forward and your questioning is how is that going to be possible. So first and most important element of red hat today is sitting at about <unk>.

In rough numbers right at 5% of the business growing at about.

The 17% this quarter, let's call it 15% in the.

In the medium term, but as opposed to being 25 percentage is going to go up and up to become 35% of the total and over a longer term even more.

So 15% for 1 third of the business you kind of get the contribution from that which is quite significant.

Also as we are.

Both innovating organically.

But in the cloud fax and we're acquiring businesses that are going to turbocharge.

A bit of of upon until the gnomic our business there on both management as well as on cyber security, we expect to see very high growth rates there.

High single digit that is well above the mid maybe into the low double digits.

Will we see declines in some parts of the portfolio. We have been very transparent, we expect <unk> to be between mid and high single digit decline in the mid to long term, but it becomes the smaller and smaller portion of the total so it has.

It has the drag from there.

Cognitive applications, we expect to be right in there, but it's the smallest part of the portfolio of it's not the biggest part of the portfolio and so.

So just a recap on that number 1 red hat.

Growing in the mid teens as it becomes bigger a bigger absolute contributed of the total the rest of the cloud and data platform with the mixture of both organic innovation and inorganic acquisitions is going to then contribute to growth.

At or above the mid single digits in the medium term.

ABB mid single digit decliner.

The <unk> probably right in line with the model. So hopefully that gives you a breakdown into into a lot of pieces.

By the way the D V..2 that you mentioned declining is very much inside of the TPP. So those are not really different questions maybe to mainframe and DPP.

1 of the same.

Okay. So let me just make a couple of comments to wrap up the call.

Again made progress in this quarter, but we acknowledge we still have more to do.

As you move into the second half of continuing to invest and execute on our actions, which included the separation of kindred.

All of this positions the IBM to exit the year in a strong position on a path of sustainable growth.

And I look forward to continuing the dialogue with you.

Great Sheila can I turn it back to you to close out the call.

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

[music].

[music].

Welcome and thank you for standing by at this time all participants are in a listen only mode. Today's conference is being recorded if you have any objections you may disconnect at this time.

I will turn the meeting over to MS. Patricia Murphy with IBM Ma'am you may begin.

Thank you this is Patricia Murphy and I'd like to welcome you the IBM second quarter 'twenty 'twenty, 1 earnings presentation, I'm here with Arvind Krishna Ibm's, Chairman and Chief Executive Officer, and Jim Kavanaugh, Ibm's, Senior Vice President and Chief Financial Officer.

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

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

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

Information about these factors is included in the company's SEC filings. Our presentation also includes non-GAAP measures to provide additional information to investors. For example, we present revenue and signings growth at constant currency and.

In addition to provide the view consistent with our go forward business, we'll focus on constant currency growth adjusting for the divested businesses for the impact of the lines of total revenue cloud and our geographic performance. We've provided reconciliation charts for these and other non-GAAP measures at the end of the presentation and in the 8-K submitted to the SEC.

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

Hello, everyone. Thank you for joining us today, it's my pleasure to be speaking with all of you again, we've continued to make progress this quarter.

Our revenue growth improved to 3% as reported led by global business services and our software business.

And we grew adjusted free cash flow for the first half.

Across every industry enterprises are using technology to redesign business processes whether.

Whether it's automation and manufacturing telemedicine in health care for omni channel and retail.

These digital transformations are enabled by our hybrid cloud environment the.

Of the technology and services, we provide to our clients.

Enable their business growth and productivity increases and improved customer experiences.

As the wireless strategy is focused on hybrid cloud and AI.

At the same time, the overall spend environment continues to improve.

With the economy reopening in many parts of the world many markets and industries are getting back on track, we see this of North America and in select industries.

Jim will delve deeper into our performance across the different parts of our business.

What I wanted to be clear upfront, but with the.

The results over the last 2 quarters, we remain on track to achieve our financial expectations for the year.

Revenue growth of the actual rates and 11% to $12 billion of adjusted free cash flow.

We continue to take the size of steps and make the investments required to execute on our strategy.

This includes making acquisitions that strengthen our portfolio.

Offering new innovations and digital capabilities to our clients.

Spending of Puerto Rico system accelerating changes to our go to market model, while also selling more of a growth mindset, among our teams and building a more client centric culture.

We are executing the separation of Kindle, which is still on track to be completed by the end of the year.

The recent announcements within the senior team all the support and reinforce our strategic priorities.

Those that have been the number of changes I'll comment on Jim Whitehurst, who has stepped down as president but remains as the senior adviser to me and the rest of the leadership team.

Invoked on many parts of our strategy, including the integration of Red hat.

Nearly 3 years since we announced the acquisition there is no doubt this integration has been successful.

Jim remained a strong believer in IBM and all strategy.

Given his background I understand the desire to become an investor.

Going back to the execution of our strategy. We are pleased with the early signs of progress from the significant changes we are making.

But as you would expect it will take time before we realize the full benefit of these changes.

Our strategy around hybrid cloud and AI is resonating among our clients and bears repeating.

I'm proud of more than the strategy, it's the reality for our clients today.

They have multiple public clouds.

But cloud on.

On premise workloads.

End of dealing with stringent regulatory and security requirements.

Our hybrid cloud platform gives clients the ability to flexibly deploy and manage data and applications across any environment.

With hybrid cloud plans can derive doing the half times more value in comparison to other approaches.

Our strategy is platform centric Linux containers and kubernetes all of the heart of our hybrid cloud platform.

Allowing clients to write once run anywhere.

That's the portfolio, including cloud Pak built a read out open shift run cloud native.

GBS experts work with clients across every industry.

Accelerate their digital transformation journeys true hybrid cloud and AI.

Our systems and industry specific public cloud provides differentiated infrastructure.

This platform approach drives compelling economics to IBM and our ecosystem partners.

This quarter, we've continued to make progress in the execution of our strategy.

More and more clients have chosen our technology and services as the lever for business growth.

We now have over 3200 clients using our hybrid cloud platform.

Thats almost 4 times the number of clients just prior to our announcement of the readout of acquisition.

GBS is helping to drive the platform adoption.

As we modernize and manage our clients' applications and the hybrid cloud environment.

This work is accelerating and we have now grown to 700 GBS Red hat based client engagements since the acquisition.

Our hybrid cloud platform is proving to be of immense value across industries.

1 example is telecommunications companies, which are amongst the largest technology spend as each year.

We recently announced that the major telco clients, including Verizon and Telefonica have chosen ibm's hybrid cloud platform to transform the core networks and bring to life the era of <unk> and edge computing.

Moving on to AI.

We fundamentally believe that order to the competitiveness of every company going forward will be the ability to use AI to unlock real time value from the data.

Wherever the data resides.

All of that puts a focus on bringing our AI technologies to horizontal processes.

<unk> helps our clients build intelligent workflows and transform the core business process, whether that'd be a supply chain talent management or customer service. This allows them to boost productivity and improve the customer experience.

An example of this is the work we're doing with Cvs health.

As Covid vaccines began rolling out of the United States.

IBM built in just a few weeks and AI powered assistant to help the Cvs health deal with the massive influx of calls.

Watson health to handle more than 10 million calls in 3 months, improving the customer experience and reducing costs.

Keep in mind business for 1 vaccine and 1 use case.

As use cases expand the benefits will growth.

This is a compelling value proposition and we've recently deployed Watson assistant to other clients ranging from New York University to DFW Airport to Paypal the.

These examples and others reflect our ability to build powerful AI capabilities of our business.

Which we are also externally recognized.

IBM was again ranked number 1 in Idc's artificial intelligence market for 2020 market share.

And IBM has been named the leader in Gartner, Australia, 21 Magic quadrant for data science and machine learning platform.

Since we announced our new go to market model in January we've made significant changes to our sales model.

And of providing clients with the more technical and experiential approach.

Every client I have spoken to these the value of this approach there.

We are pleased to co innovate with IBM leverage our garage methodology and derive value more quickly from our solutions.

Of course, we expect the return on these investments such as improved renewal rates and planned expansion to take time.

But time measured in months not years.

<unk> also been building and expanding a powerful ecosystem of partners, who are playing a larger role in helping our clients move along the transformation journey.

We are expanding the scope of our partnership with <unk> to help financial institutions accelerated digital transformation.

<unk> recently created the financial services Center of Excellence and launched the IBM Tech hub at the UI to strengthen <unk> capabilities and hybrid cloud.

Also built <unk> diligence edge, an AI platform.

Is it on the IBM cloud using Watson to gradually decrease the time it takes to do due diligence during mergers and acquisitions.

On the partnership that has grown stronger interest.

Columbus Day building on the partnership we announced last year, we have recently launched the new data management platform.

Clients can leverage to unlock value from the massive amount of data produced by the energy industry.

We are seeing growing momentum in our IBM cloud for financial services.

Banks have stringent needs driven by compliance security and resiliency.

Last year, the IBM cloud for financial services includes key control in the security features built right into its very core.

It makes it easier for banks to collaborate with ecosystem partners and vendors.

In the second quarter the reached the milestone of more than 100 ecosystem partners in support of clients like Bank of America, and BNP part of AR.

While we invest to expand our ecosystem. We are also investing to enhance our portfolio.

In the second quarter, we announced a series of products to further differentiate our hybrid cloud and AI capabilities.

This includes auto SQL that automates, the management of data without having to move it.

God net that teaches air systems on how to translate code.

Watson orchestrate that augments the personal productivity of professionals cloud engine.

The simplified how developers build cloud native apps and more of 2 micro to help companies decide which after the move to the cloud and the transform monolithic apps into micro services.

The Red hat launched new managed services and open shift, including API management.

The <unk> Kafka and data science services that make it easier than ever to build next generation applications and open shift.

Meanwhile, we continue to complement our organic investments with acquisitions.

No, but amit because of the RM provider that helps optimize the performance of any application all resources. It builds on the recent acquisition of instead of APM and observe ability and the launch of IBM cloud Pak for Watson AI ops to automate the idea of operations with AI.

We are reinforcing our ecosystem play in GBS.

The acquisition of week, a leading sales force consulting partner in Europe.

The near term opportunities at the same time, we are focused on the emerging and longer term opportunities such as quantum computing.

1 of them is an area of the incredible promise slated to unlock hundreds of billions of dollars of value for all clients by the.

And of the decade.

To help business of society reap the benefits of quantum computing, the or put a roadmap in place to build of housing plus gigabit of computer by 2023.

We are forging a series of major partnerships to advance the business and science of quantum computing and force quantum encryption.

This quarter, we have announced we will join forces with the University of Tokyo in Japan, The SCLC Hawtrey center in the United Kingdom, and the Fraunhofer Institute in Germany.

This builds on the partnership we announced last quarter with the Cleveland Clinic.

Before I close I'd like to quickly comment on some of our initiatives around societal issue.

This month, we released our 2020 CSR report.

You will see our efforts to apply the power of our technologies to advance societal progress such as applying supercomputing resources in support of COVID-19 research.

We have made the important commitment to reach zero greenhouse gas emissions by 2030 without the use of carbon offsets.

Taking a series of actions to increase our diversity representation and we are being transparent in our diversity and inclusion of scores as you can see in our report.

To close let.

Let me reiterate my confidence in our strategy.

Our second quarter results them.

Demonstrate the progress we are making towards achieving our 2 financial objectives.

Staying in the mid single digit revenue growth post separation.

And strong cash generation.

Jim.

The U.

Thanks, Arvind as always I'll start with the financial highlights and then comment on our revenue performance business model dynamics, and cash and liquidity position before getting into the segments.

In the second quarter, we grew revenue over 3% as reported to $18.7 billion, we expanded our operating gross profit margin and grew gross profit dollars 4%.

We reported operating earnings per share of $2.33.

Our adjusted free cash flow was $3.8 billion through the first half and we generated $11 billion over the last year and our balance sheet and liquidity position remains strong.

We continue to make progress in our revenue performance led by 7% growth in global business services and 2% growth in software both at constant currency.

As Arvind mentioned the spending environment is improving we see this in markets, where reopening is progressing like the United States and Canada and in several countries in Western Europe from an industry standpoint, we saw a meaningful improvement in some of the areas that have been more impacted by the pandemic.

Like travel and transportation automotive and industrial products globally.

Globally, we're helping enterprise digitally transform leveraging our platform approach.

Ibm's cloud revenue over the last year across software services and infrastructure is now of $27 billion, which is up at a double digit rate. This continues to be led by global business services and cloud and cognitive software, whose cloud revenue this quarter.

Is up 30% and 25% respectively.

As our revenue performance improves the fundamentals of our business model remains solid.

We expanded operating margins with gross margin up 30 basis points and pretax margin up 70 basis points, we've taken actions to streamline and simplify our operating model as I've said in the past roughly 1 third of the structural actions are to improve global technology.

Services profit profile of ahead of the separation of Kendra. We're realizing these savings in our GTS gross and pre tax margins are up this quarter the of.

The roughly 2 thirds of the targeted actions address stranded costs from the separation and create financial flexibility, which we are investing for future growth.

We're ramping investments in skills innovation and in our ecosystem over.

Over the last couple of quarters, we've been aggressively hiring adding delivery resources in GBS technical skills in Red hat and go to market capabilities across the board.

We're scaling our garage footprint and skills to provide a more experiential approach to selling and consulting services.

We're increasing research spend in areas like quantum of hybrid cloud and AI.

We're accelerating our ecosystem investment.

We also completed several acquisitions in the first half of the year to add hybrid cloud and AI software capabilities and skills and strategic GBS ecosystem partners.

Now turning to our free cash flow and balance sheet and liquidity position.

We generated $3.8 billion of adjusted free cash flow in the first half of.

This adjusted view excludes $1.2 billion cash impact for the structural actions initiated late last year and transaction charges associated with the separation of Ken drove.

These first half charges are consistent with our expectations from the beginning of the year.

This $3.8 billion of adjusted free cash flow was up slightly year to year.

With growth in our underlying business performance offset by about $700 million of the $1 billion full year cash tax headwind, we discussed last quarter with.

With solid cash generation and disciplined financial management, we continue to delever, while investing in the business and paying a secure and modestly growing dividend.

Our cash balance at the end of June was $8.2 billion. This is down about 6 billion from year end, while that was down about $6.5 billion.

We've now reduced our debt by about $18 billion from the peak in mid 2019.

In the first half we also used cash to acquire businesses and return capital to shareholders roughly $3 billion. Each in the second quarter. We also increased our dividend per share for the 26th consecutive year.

So now I'll turn to the segment results, starting with cloud and cognitive software where revenue growth improved to 2% this quarter.

This performance was led by growth across both cloud and data platforms and cognitive applications.

Our software growth factors.

These were offset by declines in transaction processing platforms, our value vector.

Stepping back growth factors reflect key areas of importance and investment for our hybrid cloud and AI strategy.

<unk> Red hat automation data and analytics and security.

Our success is reflected in our software our cloud revenue, which was up 25% this quarter.

The transaction processing platforms as our value of vector drives profit in cash while supporting mission critical solutions for our enterprise clients.

In cloud and cognitive software overall, we again had strong subscription and support renewal rates and our software deferred income was up over $1 billion year to year.

Moving it to the business areas cloud and data platforms grew 8% led by strength in our hybrid cloud platform and cloud packs.

Red hat had good performance with normalized revenue growth of 17% with.

With the consistently strong performance in Red hat, and the value of bringing IBM and Red hat together, we've now achieved our objective of operating earnings per share accretion in 2 years, So an important acquisition milestone.

In the quarter, both ROE and open shift continued to deliver strong growth and take share in the respective markets.

Cloud packs, which are built on open shift continue the momentum with our enterprise clients the.

This quarter, we had strength in cloud Pak for integration, which delivers rapid and cost saving solutions for integration development.

Cloud Pak for business automation also had strong growth as clients leverage AI powered automation to solve operational challenges.

The acquisition of turbine gnomic further extends our automation offerings.

In cognitive applications revenue was up 8%.

The growth was fueled by horizontal solutions, including security software and services Maximo asset management, whether and Sterling supply chain.

With the acceleration of cyber security attacks clients are increasingly looking for modernize security platforms to detect and respond the ransomware and other attacks.

This quarter, we had strengthened our integrated software and services offerings, including cloud Pak for security day.

The security and X Force Security services.

IBM security offerings are employed and over 2 thirds of the world's 500 largest companies in.

In the area of supply chain, we are working with several new clients. This quarter as demand for omni channel solutions have accelerated requirements for Sterling order management and industries like retail.

Our transaction processing platforms revenue declined we provide flexibility to our clients and how they purchase this mission critical software.

Since early last year, we've seen a preference for opex over capex, putting pressure on perpetual licenses in favor of more consumption like models.

This continues the clients remain committed to our products as we again had strong renewals in our transaction processing platform software.

Looking at cloud and cognitive software of profit we grew profit dollars with the operating leverage from revenue growth, while we continue to invest in new innovations and our ecosystem.

Turning the GBS revenue of $4.3 billion returned to pre pandemic levels and revenue growth improved to 7%.

Clients are accelerating the rate and pace of digital transformations, using cloud and AI to gain operational insights increased productivity and create new growth opportunities we.

We are capturing this market growth through our differentiated offerings and the hybrid cloud, including Red hat and intelligent workflows.

We have seen signings and revenue momentum in both business transformation services, which leverage our combined consulting PPO and core ERP capabilities as well as the application modernization and management services, we provide around the hybrid cloud platforms of our clients.

This is reflected in our performance this quarter for.

For example, our book to Bill in the strong revenue quarter was greater than 1 driven by growth in digital transformations across key practice areas such as Salesforce SAP.

Workday as well as in application modernization and the hybrid multi cloud management.

And we continue to see momentum in our small deals, which historically convert to revenue in a shorter timeframe small deal signings grew at a high teens rate.

Moving to revenue, we had continued momentum in GBS cloud revenue, which was up 30% in the quarter with growth across consulting application management and GPS.

A red hat practice, which now contributes over 1 third of our cloud revenue growth again had strong results. This quarter, we added over 170 red hat client engagements.

The 700 engagements since the acquisition have generated over $2.5 billion of signings.

In consulting revenue was up 11% driven by the investments we are making in building skills and third party cloud providers like Microsoft and AWS and in expanding our practices with ecosystem partners such as SAP sales.

Salesforce and Adobe.

Clients are also finding value in our differentiated garage methodology as we work with them to co create solutions.

This unique and scalable approach to innovation and execution is now embedded in the majority of our value propositions across ERP implementation.

Oh and application modernization.

We also had strong growth in our intelligent workflow offerings.

Our end to end offerings, which leverage hybrid cloud and AI to transform client processes.

They cannot consulting and PPO and areas such as finance supply chain customer service and talent transformation and contributed to our global process services revenue growth of 25%.

Lastly, within the application management revenue was up 1% as we continued the transition from managing applications on premise to those that run in the hybrid multi cloud environments.

Turning the GBS profit our gross profit margin declined 60 basis points this quarter.

We are investing to expand on the skills and practices to continue to capture of the market opportunity.

We are making significant investments in both delivery and go to market resources, where we increased our capacity by 10%.

We're adding skilled practitioners in high demand areas, such as Salesforce and SAP.

Adobe, Microsoft AWS and Red hat.

And we are investing to integrate and scale, our recently announced acquisitions.

Turning to the systems revenue was down 10%, reflecting product cycle dynamics across IBM Z power and storage.

IBM Z revenue was down 13% and I'll remind you that compares to a very strong performance last year, when we were up 68%.

Throughout the last day quarters. The Z 15 client value has been apparent and the program continues to outpace the strong Z 14 program.

Another proof point of IBM Z is an enduring platform.

This quarter financial services continued to drive Ibm's <unk>.

Given capacity requirements to address robust market volatility.

With the security top of mind purchases were also driven by clients looking for capabilities, such as pervasive encryption and hyper protect to secure mission critical applications and data.

The on premises and in the cloud.

The value proposition is clear Z 15 of secure scalable and reliable.

Product cycle dynamics also played out across power and storage.

Power revenue was down 5% and 8 point improvement over last quarter's rate.

Storage revenue also declined driven by high end storage tied to the IBM Z cycle.

Looking at systems profit pre tax profit margin was down reflecting a mix headwind given where we are in the <unk> product cycle.

Moving the global Technology services, we remain focused on improving the financial profile as we positioned kindred to be of Standalone company by the end of the year.

You will recall last year, we initiated actions for an improved margin profit and cash generation profile. Upon separation. We are seeing the results of these actions in the GTS profit performance this quarter.

The profit dollar growth and margin expansion.

Gross margin expanded 110 basis points and pretax margin of 190 basis points.

GTS revenue declined 4% a mark.

Artist improvement from first quarter performance, driven by improving trends in client base business volumes and project activity.

Our current clients continue to value of partnering what can draw to modernize and manage their mission critical workloads and services as evidenced by our strong and improving renewal rate of 95%.

Is up 2 points quarter to quarter the.

These renewals include 6 deals with the contract value of greater than $100 million..1 of these is an extension of our relationship with AT&T to provide support for data center migration and consolidation and IBM Z infrastructure management.

I mentioned, we also extended our software our relationship with AT&T.

As an IBM strategic global networking provider AT&T business is playing an important role in the separation of kindred using their expertise for network separation.

While our performance with existing clients remained strong as we would expect the sales cycles for new logo clients is the long gating.

As they await further information related to Kendra.

With that let me give you a quick update on where we are in the separation process.

We are continuing to build out the management system of support structure at.

At the same time, we are making solid progress executing on the necessary financial legal and regulatory milestones to enable the transaction with.

We still expect the form 10 to be available in the fall and remain on track the close by the end of the year.

To wrap up let me bring it back to the IBM level.

In January we said, we expected an improving financial profile throughout 2021.

As I look back at our first half results our revenue performance improved in the first quarter and then again in the second.

And our adjusted free cash flow of grew in the first half.

Our business model fundamentals are solid operating margins are improving and we're driving profit dollar growth.

Importantly, as you've heard today, we've been taking a number of actions to execute our hybrid cloud and AI strategy.

This includes strengthening our portfolio expanding our ecosystem and implementing go to market changes.

And we continue to have a strong balance sheet and liquidity position.

We've been clear on the metrics, we're focused on revenue growth and cash flow.

For the full year, we continue to expect revenue growth at current spot rates. We maintain this view since January of <unk>.

Remind you since then we've lost about 1 point of revenue growth from the dollar strengthening.

We also continue to expect $11 billion to $12 billion of adjusted free cash flow.

This adjusted free cash flow excludes about $3 billion of cash impacts for structural actions and the transaction charges for the spin off.

As we look to the third quarter, we expect second or third quarter revenue dynamics to be in line with the average of the last 3 years.

Looking at the revenue profile more year to year of growth should come from the underlying business performance mitigated by moderating currency benefits.

We're continuing to ramp our investments as I mentioned, we're reinvesting much of the savings from our structural actions and as a result, this will keep expense levels higher.

Our operating tax rate will also be up year to year, though I expect the third quarter rate to be fairly consistent with the second.

To sum it up we made progress in the first half while there is more to do we are well positioned to deliver on our 2021 expectations and our financial model post separation, so with that let's go to Q&A I'll turn it back over to Patricia.

Thank you Jim before we begin the Q&A I'd like to mention a couple of items.

First we've included supplemental information at the end of the presentation and finally as always I'd ask you to refrain from multi part questions.

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

Thank you.

Time will begin the question and answer session of the conference to ask the question. Please press star 1 and record your name clearly if you need to withdraw your question Press Star 2 again to ask a question. Please press star 1.

Our first question comes from Katy Huberty with Morgan Stanley. Your line is open.

Thank you. Good afternoon question, I guess for Jim cloud and cognitive software as well as the GBS P. T. I margins are down year on year I imagine a lot of that is coming from the investments that you want to that can you talk about any other factors like mix that are playing into the margin performance in those groups and also.

Are you seeing any impact from labor shortages and wage increases, particularly in the services business. Thanks.

Sure Katie Thank you very much for the question.

Obviously, those 2 very important segments that you chose GBS and software are 2 of our growth factors within our business model as we've said entering the year, we guided both on revenue and on cash flow and we said that we were going to continue to invest significantly within those growth.

Factors as we move forward and I see and I think what you see playing out here in the second quarter is that investments starting the ramp up from the first quarter into the second quarter going forward. We are investing in front of demand because of what we said in the pre pre remarks is that we see in incurred.

<unk> macro and demand profile of playing out and you see that with the with the strong acceleration in our software base of business quarter to quarter and in our GBS base of business GBS by the way exceeded our expectations and actually got back to pre pandemic revenue led.

The overall, but just to really bring it home 1 we're investing 2 we have high margins in our software base of business already and the dynamics between Red hat and the deferred revenue dissipating as we move through the year is really what you see play out in the second quarter overall, we.

Feel very comfortable at the margin level in software, we're going to continue to invest in innovation ecosystem and skills and we feel very good about our GBS business overall labor pressures, yes. There is a war for talent going on we are investing significantly, we're bringing thousands and thousands of GBM.

S practitioners in the.

Through the first half and we feel pretty good about what the profile of that business going forward.

Thanks, Katy Sheila can we take the next question. Please.

Our next question will come from Onesie <unk> Mohan with Bank of America You May proceed.

Yes. Thank you it's nice to see the growth in the gross profit dollars 2 quarters in a row you had very strong consulting growth in GBS growth as Jim just alluded, but gross margins compressed 60 basis points here on the air in GBS. It would be of nice to see the full leverage of the model of come through with both.

Revenue growth and margin expansion to amplify the gross profit dollar growth. So some of my question is really how much longer would you need to be in investment mode. In GBS and is it possible that we see in the coming quarters over the years when when do we actually see both revenue growth and margin expansion come into the model and UBS. Thank you.

1 of them. So thanks for the question. So just building on <unk> question upfront.

We are.

And we will continue to invest in this business as GBS is an essential part of our hybrid cloud platform centric strategy. It is both the tip of the spear if you want to call. It in driving the demand from an architectural point of view to our platform that then creates that flywheel.

Effect that we talked about for every dollar that we land on the platform, we get 3 to $5 of software and $68 of services revenue. So we're going to invest significantly now with that said we.

We rebounded off of second quarter second quarter last year, when the pandemic hit we dropped 7 points quarter to quarter, we posted down 6 last year in GBS, we returned back to pre pandemic.

Revenue levels and exceeded growth expectations, well, we're going to continue to invest in this part because of the importance of GBS place of that hybrid cloud platform and we will get that profit dollar contribution and more importantly, you see of play out in our second key metric that we give guidance on and that's our adjusted.

Free cash flow and we feel very good about where our adjusted free cash flow is through the first half it's up year to year.

Really taken into account most of the cash tax said when we talked about 90 days ago is pretty much behind us going forward. So our attainment wise on adjusted free cash flow, which is really going to be a reflection of both topline revenue acceleration and operating leverage and margin as we move forward.

Thanks, Mark can we go to the next question. Please.

Our next question comes from Toni <unk> with Bernstein. Your line is open.

Yes. Thank you I was wondering if I could ask you a little bit about our acquisitions.

I think over the last year, you spent $3.2 billion on acquisitions and Arvind do you you've said that you expect the acquisitions on a sustained basis to contribute about 100 to 150 basis points of inorganic growth per year. So is that what we should be thinking about about 3 billion acquisition.

Bend generating 600 to 900 million. That's 100 day 150 basis points of remain co is that sort of the mental model of framework. We should think about and then could you comment specifically on how much acquisitions.

The impacted GBS as reported growth rate and cognitive apps reported growth rate in the quarter or just give us a dollar figure for the inorganic acquisition contribution to each of those business. This place. Thank you.

Thanks, Tony Great question. So, let's just start with the first book. So we are generating last year, if I remember correctly at the endpoint 8 billion of free cash flow for the year of training Randy we have set of 11 to 12 this year.

Do the math between dividends.

The acquisitions and capital expenditures you get to the 3 to 3 of the house. If you now say that we are going to increase our free cash flow by half of <unk>..2 1 billion in a given the air and you can expect that number on inorganic activities to go up year over year.

The 3 to 3 of the halfway the fan number for this year. It would it could go up as we begin to increase our cash flow you already said next year, we expect to generate out of the per diem not 11 to 12. So that gives you 1 Tony just on the absolute number.

The second question you had in there on the GBS. So as we have said and I've said before.

100 to 150 basis points of growth from acquisitions, I would say that GBS is right at the top end of that number if you look at the second quarter and if you look at cognitive applications actually more product cognitive software all in because I think all.

The applications there was the net if any from acquisitions the.

The number would be at the very very low number I mean, maybe a few tens of basis points nothing significant yet now.

The GBS acquisitions give you an immediate return and then grow at a nice number, but obviously contributing a lot less there think of in the software side. The model is the come in they do because of the deferred revenue begin to give you some acquisition but of what.

Revenue of over 12 months.

But those acquisitions grow very fast so the contribution actually goes on for multiple years not just for a single year from those acquisitions to the overall growth rate and so that's the slight different GBS immediately bought 150 software much smaller few tens, but imagine that all of those beds.

Over time, but it provides a pretty nice tailwind then or to the Ceos.

Okay.

Thanks for the question Tony Let's go to the next question. Please.

Our next question will come from Amit <unk> with Evercore. Your line is open.

Yes.

Thanks for taking my question good afternoon, everyone.

All of the other question on the hybrid cloud potential you've talked a fair bit about it today than in the past and I think most investors would only agree that the hybrid cloud is the reality, but maybe you could touch on a why do you think IBM is better positioned to enable your customers to get there where some of your peers and then secondly, what does the hybrid cloud meaningfully.

Of your profitability and free cash flow because I think there's some extend the day.

Perception, perhaps misperception that the shift from on Prem to hybrid is negative by the EMS margin.

Hi, Amit thanks and the.

So as you correctly pointed out I mean of wood.

Peter you, but I, obviously believe it hybrid cloud is the reality for our clients.

Now to get into the more.

Meaty parts of your question.

If you look at.

Why would people prefer also of hybrid cloud.

If I look at a.

Given the large hyper scaler they'll do hybrid as in their own public cloud and maybe some on premise means of the goal is to drive workload onto the public cloud.

Who has the credibility to go across multiple public clouds, and that's why you hear me always say.

Both Microsoft and Amazon are our partners not only our competitors and that is an important play that IBM has done for many many decades, where we integrate across the environment that our clients operate in.

So that's 1 part of.

On a bit more of a technical level that was the primary reason for the right out of acquisition.

That gave us both the platform and the assets to be able to bring of hybrid cloud platform to bear because we would all agree I think all of you our listeners in all of your audience would agree.

Of the de facto operating system.

The next is the de facto for on premise and private environment.

<unk> is the standard which people are going to move on to so if you say you begin really strong on premise of private you can dig the same exact environment of multiple public that gives us we believe an advantage.

Let me acknowledge to the point of making it.

Hybrid cloud is the reality.

1 is going to start having a play in hybrid.

But we believe that <unk> is advantaged for the industries that we serve that doesn't mean they'll use us exclusively but they will use us to a large extent.

And that is where we are headed there. The second part of your question, which I think actually it plays rite aid on profitability and cash flow.

The way we look at it.

Over 2 thirds of.

Maybe you'll get a revenue is going to lie in software.

If that is the case and software comes out software margin.

I'm not going to debate, whether you get a different model from on premise licensing too has the service licensing to term license model all of those even out and pretty much out of work or 2 to 3 years. The art of difference in any given 6 months, but if I take of 2 to 3 of our view and that is what we really fixed on driving than all of.

That evens out and you begin to get gross margin back up in the Seventy's and Eighty's.

Begin to get the profitability and cash flow associated with that and so that is the answer to that question. The other way of the services based on helping our.

The lines go there you can begin to see that and I know that there were a couple of questions. The earlier.

Earlier on the GBS margin look, we're very fixed and driving investment. So we drive investment a little bit ahead, I'm not going to tell you years ahead, but maybe 1 or 2 quarters ahead of the revenue of the revenue growth come we'll keep doing that and that will impact maybe percentages, but by tens of basis points, but it shows up in.

Absolute profit in absolute.

Cash flow even in that part of the business, Yes, I would just add 1 thinks of the urban to build on your point. When you look at the IBM company post separation of Kindred. The IBM company is going to be roughly around 45% to 50% software as far as composition of mix that carries with it.

Hi, EBITDA profile already today and just as 1 example, when you look at our Red hat base of business today is CFO I love that that subscription model that has growth and <unk> built into it overall, it's already running well north of the rule of 40 today.

So as we shift more and more to software based contribution that mix effect will help us bottom line in cash also.

Thank you Amit Sheila let's take the next question.

Next we will hear from Matt Cabral with Credit Suisse. You May proceed.

No.

Yes. Thank you.

Within cloud and cognitive I was hoping to dig a little bit more into the cloud Pak and wondering if you could talk about just more broadly the the maturity of the cloud tax portfolio and where you are in the integration with the open shift.

Could you talk about where youre seeing the impact in terms of customer adoption so far.

Going forward the.

Contribution from cloud back on the the financial performance of the software segment from here.

Yes, Matt.

Matt. Thanks for the question, let me answer the first part of your question on the bulk of the.

Architectural elements and the use cases, and then I'll give it to Jim to answer is on the.

On the financials. The thing so if you look at the maturity of profit backs Amit.

Tell you that every plot back we have been selling this year in deploying this year is on the open shift we made the move from other kubernetes platforms onto open shift way starting in October of 19.

So yes of course.

Lets acknowledge that people might have purchased prior to 19, what are bought other kubernetes platform and so by last year 2020.

All going onto the open ships I think that maturity is complete now of some people have a prior versions of the software deployed we observed typically within 3 years from day, 1 they do move to the new version. So I would expect by the end of this year, even the prior deployed would of fully moved and that's done if you look at customer.

Adoption.

Capex of a very strong contributor to the 30 to 100 clients that we mentioned.

Well over half of them come through cloud fax and so what are the use cases look the.

The work, we're doing with volunteers of Great example of volunteer runs on top of the cloud Pak for data. That's a great example of what we're doing.

What do you hear us talk about Watson assistant hasn't the Cvs use case, which handled over 10 million calls in the quarter, while COVID-19 vaccines.

Watson assistant runs on top of the other cloud back. So these are great. Examples of how mature the technology is I would tell you. The open shift maturity is complete and it really helps reinforce both the adoption of open shift as well as the clients get very comfortable with deploying open ships for other use cases.

Mrs.

Workload at the end of the day for all of which over the next bonds get comfortable they might deploy for other purposes as well in terms of the financials are part of the gym yep.

Just quickly.

Matt. Thank you very much for the question, taking a step back first of all we're very pleased with our overall progression.

Within our software portfolio of more work to do but we're making progress in C and D P, which I'll remind everyone on the call and our investors is about 50% of our overall software portfolio and that's where the lion's share of our club packs sit now when you look at our Sandeep performance when we look at it.

And the way, we manage the business on a historical normalized basis, we see acceleration, we return back to growth in first quarter, we accelerated that growth of 4% here in the second quarter and that is really attributed to the nice momentum we're seeing in cloud packs, we announced cloud.

<unk> 18 months ago, 2 years ago, given our E. L. A historical client base that takes time to churn through that client base and as you know last year was the was the trough of our E. L. A renewal cycle, we start to improve on that later in the second half and really that Ela cycle plays out.

In 2022, but we actually had a very nice inflection here in the second quarter.

Our cloud packs on a N IRR net revenue renewal, we're north of 100%. So we've said all along the arvin of myself that theres going to be shift with cloud packs and theres going to be lift, which with capex and now we're starting to see a higher mix contribution of cloud packs and we're starting to see.

Where we do have shift we're getting north of a 100% on the NR perspective, and that is an encouraging trend.

Thank you Matt Let's go to the next question. Please.

Our next question comes from Tien Tsin Huang with Jpmorgan. Your line is open.

Hey, Thanks, good to talk to you all just some of the on the services side consulting obviously, great double digit signings were pretty strong here.

Do you feel like form of backlog and pipeline perspective the.

And you're starting to reach of a little bit of inflection to get some better.

The growth overall of the services unit, given what you see plus some of the investments that you're making and then separately forget the follow up question, Patricia but just on the.

The PPP front transaction processing platforms.

Is it just the comps issue that we should look for that.

Is there to get better or are there other areas that we could be potentially monitoring to see some better performance there or is it just waiting for that transition.

I'll take that Arvind Tien tsin. Thank you very much for the question when you look at our services base of business.

Deliver $9.2 billion of signings in the quarter. It is up double digits at actual rate, we did see improvement in our backlog overall, it's really very different dynamics playing out here as we tried to say in the prepared remarks, we see very strong momentum in our GBS base of business when you look.

Our signings in the quarter.

We had strong performance of our trailing 12 months book to Bill is 1 that too.

Through the first half we have roughly double digit growth in signings across all 3 sub segments very good growth this quarter in large deals and we have continued momentum in small deals and we saw improvement in our revenue and our backlog and our revenue realization moving forward and that gives us comfort.

As we said in the prepared remarks, we expect about a normal quarter to quarter seasonality overall, we actually see GBS accelerating growth probably.

Another point from the from the second quarter overall in GTS really what we're seeing is a good performance overall, leveraging our incumbency position and driving strong renewals, we're seeing with that incumbency position finally of turnaround with an encouraging.

Trend on client base business volumes and project based services that they are engaging in project based services and our incumbency accounts were up 20% here in the second quarter, but as expected the new logos, while we have the very healthy pipeline of new logos out there.

The sales cycles are elongated as we said in the prepared remarks, so we see some nice acceleration continuing in GBS overall, but again with GTS. It's a focus on the fundamentals of the business profile of that that means margin profit and cash and I think <unk> seen in the second quarter. We made some very good progress.

Yes, overall with margins up 110 basis points pre.

Pre tax margins up 190 basis points and profit dollar growth both in gross profit dollars and of pretax profit dollars lastly on TPP, yes, as we talked about many times over the last.

Year or so we do see the transition happening in this portfolio with regards to a shift back more and more to consumption base annuity base purchasing versus in 2018 in 2019, we had a much healthier macroeconomic environment here.

<unk> cash cash rich environment clients, then shifted to more perpetual licenses, we're seeing that come back and Thats kind of play as it played out where we saw the revenue upside in 18 and 19 in 2020, 1 youre going to continue to see the headwind as we've been saying we expect that the.

Come back in 2022 back to normal market trend growth rates overall.

Thanks, Tien Tsin, let's go to the next question Sheila.

Our next question will come from David Grossman with Stifel. Your line is open.

Alright. Thank you actually most of my questions have been answered I just had 1 follow up question I think Tim you mentioned.

Revenue of retention of greater than the 100% and I wasn't quite sure what the reference point was.

Software and.

Whether you have any incremental you know what.

The data points, you can share about revenue retention by the business you know within the cognitive.

The segments.

Sure David Thank you very much.

Cloud packs are definitely in central part as we've.

Invested significantly to Containerize, our software and optimize it on top of open shift of our hybrid cloud platform overall, when we take a look at our cloud packs, we measure and manage the.

And I have a dashboard that we look at all of our large enterprise top clients overall, our deployment penetration within each of those clients and we're able to see as we transition of client from a traditional middleware to our cloud based containerized.

Not only can we track the deployment and how that progresses over time, we could see the dollar of yesterday versus the dollar of today is the transition to cloud Pak and we measure the net revenue retention not only how much come in whether we're able to upsell cross sell with.

Multiple cloud packs as we move forward and like I said in the second quarter, we're making progress much more to do but we're making progress on the mix composition of moving more and more to the cloud packs and we're also making progress on capturing more of our clients' wallet share of dollar for that.

Same dollar of traditional middleware overall, hopefully that helps David.

Hi, Jim to make it into the business.

Our use case of that tells you is that when they renew they're actually buying more volume, which means it's the beginning to become a larger part of the real estate technology real estate out of line.

Thank you David you know, we're at the top of the hour, but let's take 1 more question Sheila.

Thank you our last question will come from Keith Bachman with Bank of Montreal. Your line is open.

Hi, many thanks team I wanted to ask Arvind you a question on revisiting on.

What your growth assumptions of our targets are around cognitive and the opposite.

Particular reference point to my question is this quarter.

We generated roughly 2%.

Revenue growth and it was you had the benefit of compare of particularly on some of the line items within cognitive.

And so.

Not particularly.

It's good growth but.

Neil of ways to go to reach your longer term targets. So so what happens to change that proves cognitive and part b of the backdrop is if I think about red hat and we remain pretty positive on red hat, even over the next couple of years, but you still face the uphill battle of the longer term trends within cognizant of DB twos, probably declining market unless you've talked about in the past trends.

The processing platforms is also of declining.

I think revenue stream over the arc of time, so if you could just revisit on.

How do you reach of longer term growth rates within cognitive thank you.

Hi.

Thanks, Keith important question of an important element of our of.

The pieces going forward, so we've been clear of that.

Our cloud and cognitive software where to grow mid single digit going forward. Thank you.

The questioning is how is that going to be possible. So first and most important element red hat today is sitting at about <unk>.

Rough numbers 25 per cent of the business growing at about.

Of 17% this quarter, let's call it 15%.

In the in the medium term, but as opposed to being 25% is going to go up and up to become 35% of the total and over a longer term even more so of 15% for 1 third of the business.

Get the contribution from that which is quite significant.

Also as we are.

Both innovating organically example, in cloud packs and we are acquiring businesses that are going to turbocharge.

Of a final until the gnomic our business there on book.

The management as well as on cyber security, we expect to see very high growth rates there.

The high single digit that is well above the mid maybe into the low double digits.

Will we see declines in some parts of the portfolio. We've been very transparent, we expect <unk> to be between mid and high single digit decline in the mid to long term, but it becomes the smaller and smaller portion of the total so it has it.

It has the drag from there.

Cognitive applications, we expect to be right in there, but it's the smallest part of the portfolio of it's not the biggest part of the portfolio and so.

So just a recap on that number 1 red hat.

Growing in the mid teens as it becomes bigger a bigger absolute contributed of the total.

The rest of the cloud and data platform with the mixture of both organic innovation and inorganic acquisitions is going to then contribute to growth.

At or above the mid single digits in the medium term TPP mid single digit decliner.

Cog apps, probably right in line with the model. So hopefully that gives you a breakdown into into a lot of pieces.

By the way of the D V..2 that you mentioned declining is very much inside of the TPP. So those are not really different questions David to mainframe and DPP.

The 1 of the same.

Okay. So let me just make a couple of comments to wrap up the call.

Again made progress in this quarter, but we acknowledge we still have more to do.

As you move into the second half of continuing to invest and execute on our actions which include of the separation of <unk>.

All of this positions the IBM to exit the year in a strong position on a path of sustainable growth and I look forward to continuing the dialogue with you.

Great Sheila can I turn it back to you too on top of the call.

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