International Business Machines Corporation

Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the meeting over to Ms. Patricia Murphy with IBM. Ma'am, you may begin.

Thank you. This is Patricia Murphy, Vice President of Investor Relations for IBM, and I'd like to welcome you to our fourth quarter earnings presentation. I'm here today with Jim Cavanaugh, IBM Senior Vice President and Chief Financial Officer. The prepared remarks will be available within a couple of hours, and a replay of the webcast will be posted by this time tomorrow. I'll remind you that certain comments made in this presentation may be characterized as forward-looking under the Private Securities Litigation Reform Act of 1995. Those statements involve a number of factors that could cause actual results to differ materially. Additional information concerning these factors is contained in the company's filings with the SEC. Copies are available from the SEC, from the IBM website, or from us in Investor Relations. Our presentation also includes certain non-GAAP financial measures in an effort to provide additional information to investors. All non-GAAP measures have been reconciled to the related GAAP measures in accordance with SEC rules. You'll find reconciliation charts at the end of the presentation and in the Form 8K submitted to the SEC. So with that, I'll turn the call over to Jim.

Thanks, Patricia, and thanks to all of you for joining us. The fourth quarter capped off a year where we grew revenue, operating pre-tax income, and operating earnings per share. We stabilized our margin as we moved through the year, and we expanded gross and pre-tax margin in the fourth quarter. We continue to invest and take actions to shift our business toward higher value areas like hybrid cloud and AI. including the announcement of our acquisition of Red Hat. And we again generated solid free cash flow, which enables this continued investment and shareholder returns. In the fourth quarter, we delivered $21.8 billion of revenue, which was down 1% of constant currency, though down 3% with the impact of currency translation. As always, I'll focus on constant currency results. Our operating pre-tax income was $5 billion, and we had $4.87 of operating earnings per share. We had strong performance in software, and in services, we had revenue growth and gross margin expansion. This was offset by the expected impact of our IBM Z product cycle dynamics. Our total software revenue was up 2%. We entered the quarter with a good pipeline of software opportunities, and we executed well, driven by hybrid cloud adoption and strong demand for analytics and AI offerings. Total services revenue was up 2%. We had steady improvement in global business services throughout the year, with 6% growth in the fourth quarter, and revenue growth and gross margin expansion across all three of our GBS business lines. Global technology services had a modest revenue decline with solid gross margin expansion. We had a great signings quarter, reflecting strong demand for hybrid cloud implementations and our value prop to deliver productivity. Our hardware revenue was down. You'll recall in 2017, we had a terrific fourth quarter in IBM Z, and so our decline reflects a wrap on that performance. This continues to be a very successful Z program and remains ahead of our prior cycle. Once again, we had strong growth in power, with Power9 now introduced throughout our portfolio. As you know, we provide technology and industry expertise to help run our clients' most important processes, which puts us in a unique position to help them transform their businesses. As we exit 2018, we're continuing to see a few themes across our engagements. First, our clients continue to look to turn data into competitive advantage by applying analytics and AI with an industry lens. Second, clients are increasingly looking to cloud to drive business value. As they move more mission-critical workloads to the cloud, they need to securely move data and workloads across multiple cloud environments. And that requires a hybrid and open cloud strategy. And third, clients are focused on productivity and predictability in their spend. Now IT has always been about driving both technology innovation and productivity, with the balance shifting over time. We're recently seeing increasing interest in productivity as clients look forward to the next couple of years. And so our results this quarter reflect our ability to deliver innovation and productivity. You see this in our strong results in analytics and AI, in our as-a-service cloud revenue, and in strong signings in our services business that deliver technology solutions and economic value, all through our integrated value proposition. That's why companies such as Vodafone and BMP Parabar are leveraging the IBM Cloud, where they benefit from our hybrid multi-cloud capabilities and access to the most advanced technologies. And it's why Bradesco Bank made a software, hardware, and services multi-year commitment to the IBM Z platform to take them to the next level in AI and hybrid IT, with more predictability in their operating costs. Across our segments, our strategic imperatives revenue for the year was up 9% to about $40 billion. Within that, our cloud revenue is over $19 billion, and we exited the year with an annual run rate for cloud delivered as a service of over $12 billion, which is up 21% over last year. This is a solid base of cloud and cognitive capabilities. and we're continuing to deliver innovation in these high-value areas. For example, in the fourth quarter, we introduced AI OpenScale, a platform to manage the lifecycle of all forms of AI models, and MultiCloud Manager, a service to deploy and manage complete applications in any cloud environment. We're adding innovative services, like the world's first commercial quantum computer available on the IBM Cloud, you may have seen that ExxonMobil is already using it to help address its most complex business challenges, such as energy exploration and chemicals manufacturing. The number of new clients using IBM Cloud Private accelerated in the fourth quarter, and adoption is growing for our IBM Cloud Private for Data platform, which was named a leader in the first quarter 2019 Forrester Wave report on Enterprise Insight platforms. All of this is a validation of our hybrid, open approach to cloud. And we have a strong foundation from which to drive synergies across the business with the addition of Red Hat. Let me pause here to remind you of the value we see from the combination of IBM and Red Hat, which is all about accelerating hybrid cloud adoption. The client response to the announcement has been overwhelmingly positive. They understand the power of this acquisition and the combination of IBM and Red Hat capabilities in helping them move beyond their initial cloud work to really shifting their business applications to the cloud. They are concerned about the secure portability of data and workloads across cloud environments, about consistency and management, and security protocols across clouds, and in avoiding vendor lock-in. They understand how the combination of IBM and Red Hat will help them address these issues. We see the strong bookings Red Hat recently reported as further evidence of clients' confidence in the value. Remember, the quarter ended a month after the transaction was announced. From a value perspective, In addition to the growing Red Hat business itself, we see an opportunity to lift all of IBM by selling more of our own IBM cloud and by selling more of our analytics and AI capabilities on OpenShift across multiple platforms. As clients proceed on their journey to get more business value from the cloud, they need more services help. From the digital design to app modernization, to native app development, to management of hybrid cloud environments. You saw last week the results of Red Hat's shareholder vote with very high participation and over 99% voting in support. We are moving through the regulatory process and continue to expect a close in the second half of 2019. We've had a decade-long partnership with Red Hat and extended it nearly a year ago around hybrid and multi-cloud. And now after the announcement in late October, we've begun the internal enablement planning so we can hit the ground running post-closing. So now I'll go through the details of the fourth quarter, wrap up with a summary of the full year and our view of 2019. As I said, our revenue in a quarter was $21.8 billion. This includes a currency hurt to revenue of over $500 million, which is $150 million more than mid-October spot rates suggested, as the dollar has continued to strengthen. Looking at our margin dynamics, we expanded both our gross and pre-tax operating margins. Our gross margin was up 10 basis points, with strong performance in the services businesses. together up 190 basis points. This was mitigated by the expected mixed headwind from the IBM Z cycle dynamics. Our operating expense was better 5%. When currency impacts the top line, it generally helps expense due to both translation and the benefit of hedging contracts. And so, with the strengthening of the dollar, currency helped our expense by nearly 5 points. Remember, The majority of our hedges are reflected in expense, and these hedging gains mitigate the currency impacts throughout the P&L. We've been focused on driving productivity in our business, implementing new ways of working, like using agile methodologies, and leveraging automation and infusing AI into our processes. This provides flexibility to drive innovation in areas like hybrid cloud, AI, security, and blockchain, while also delivering operating leverage. Within our expense decline, we also had a lower level of IP income. At the beginning of the year, we said we expected IP income to be down year to year, and it has been tracking lower, down $165 million year to year in the fourth quarter, and nearly $450 million for the full year. Putting this expense performance together with our gross margin expansion, pre-tax margin was up 50 basis points. Looking at operating tax, at the beginning of 2018, we provided a range for our full-year tax rate of 16% plus or minus two points, and that was without discrete items. With our final geographic and product mix, the full-year rate without discreets was about 15% within the expected range. Including the discrete items in the first and third quarters, our full-year operating tax rate was 8%, which is a headwind year to year. The resulting tax rate in the fourth quarter was 12%, which is up about six points year to year. Regarding our GAAP tax rate, you saw in our press release that our fourth quarter rate also reflects a charge for a guilty tax election associated with the implementation of 2017 US tax reform. This charge impacts GAAP net income and GAAP earnings per share. And so, turning back to our operating results, operating earnings per share of $4.87 was driven by solid operating leverage offset by expected headwind from tax. Looking at our cash metrics, we generate $6.5 billion of free cash flow in the quarter with $11.9 billion for the year, in line with our expectations. Our realization of GAAP net income is 111% for the year, normalizing for the non-operating tax reform charge. This supports a high level of investment and shareholder returns. So now let me move on to the segments. Cognitive solutions revenue was up 2%, with 3% growth in solution software and 1% growth in transaction processing software. We expanded pre-tax margin by nearly three points, delivering operating leverage on this revenue growth from both operational efficiencies and mix. while still investing at high levels. In the quarter, we continue to deliver innovation to our clients and scale our platforms and solutions, resulting in growth in our transactional revenue and SaaS signings. In transaction processing software, we capitalize on the strong pipeline of larger transactions we discussed entering the fourth quarter, driven by our clients' buying cycles. Our fourth quarter performance reflects these clients' commitment to our platform for the longer term, given the value we provide in managing their mission critical workloads and predictability in their spending. In solution software, growth was led by analytics and AI offerings, with several other high value areas growing as well. In our underlying analytics platform, We had broad-based growth across our DB2 portfolio, including analytics appliances and data science offerings. Demand for our IBM Cloud Private for Data offering accelerated, and now over 100 clients have adopted the platform. And that's since launching just over six months ago. New clients include the Korea Internet and Security Agency, which is developing an app on ICP for data that leverages a variety of data sources and machine learning models to find and thwart new cyber threats. In addition, we're scaling our newest Watson services running on IBM Cloud Private for Data, like AI OpenScale. In security, we continue to have solid demand for our integrated security and services solutions, including strong growth in our security intelligence and orchestration offerings, Curator and Resilient. Within our industry verticals, Watson Health had growth across payer, provider, imaging, and government. And IoT once again had strong growth in our core offerings, Maximo and Tririga, where we lead the market in asset management and facilities management. In the emerging blockchain area, We announced several new clients this quarter, including our work with Smart Dubai on Middle East's first government-endorsed blockchain platform. We introduced an on-prem offering in November, the IBM Blockchain Platform for IBM Cloud Private, and signed several new deals this first month. We see a strong pipeline as clients are interested in the benefits of blockchain behind their firewalls. Now, over the last few quarters, I called out offerings within our solution software, which address horizontal domains, where we face secular shifts in the market, specifically collaboration, commerce, and talent. We've been taking actions, and last month we announced the divestiture of our collaboration and on-prem marketing and commerce products to HCL. After closing, which is currently expected to be mid-year, This action will improve our cognitive solutions revenue performance, normalizing for the divested content, and reflects our commitment to disciplined portfolio management. So now, moving on to services. Before getting into the two segments, I want to provide a view of the total services business. As I said earlier, revenue was up 2%, and gross margin expanded 190 basis points. Looking at our signings on our last earnings call, we talked about the strong pipeline of deals we had going into the fourth quarter, and we executed well, delivering signings of $15.8 billion, which is up 21% at constant currency. This results in a backlog which is now $116 billion. Since it's measured at year-end spot rates, currency is obviously impacting the backlog. But at constant currency, the backlog is down 60 basis points year to year, which is about a two-point improvement versus last quarter's performance. Customers are increasingly looking to leverage digital for growth and innovation, while at the same time increasing efficiencies and reducing costs within their businesses. IBM services can deliver this value by leveraging its breadth across GBS and GTS. A recent example is at the Bank of Philippines Islands, where we'll provide IT infrastructure services as well as digital experience solutions to support the bank's ongoing digital transformation, increasing their IT efficiency and scale and enabling them to seize opportunities in an increasingly digital financial sector. So now turning to global business services, we again delivered solid performance, building on the momentum throughout the year. The GBS team has done a really nice job repositioning this business, and you can see it in the results. Revenue grew 6%, with growth across all business lines, and gross margin expanded 300 basis points. Consulting revenue growth accelerated to 10%. This is validation of our success in bringing together technology and industry expertise to help our clients on their digital journey. We had continued strong growth in digital strategy, fueled by our digital commerce and CRM offerings. We are also accelerating growth in next-generation enterprise applications, led by strong demand in our consulting and implementation services in areas like S4ANA, Salesforce, and Workday. In application management, we grew 4%. This quarter, we returned to growth with strong performance in Cloud Migration Factory and Cloud Application Development, mitigated by continued declines in traditional application management engagements as our clients move to the cloud. The 4% growth also reflects the achievement of significant milestones across a few accounts. We've been also improving our revenue profile in global process services. Revenue grew 5% as we reinvent industry workflows by leveraging automation and infusing AI. And earlier this month, we announced the sale of our Soteris mortgage servicing business. The transaction is expected to close in the first quarter and will result in improving revenue and margin profile, normalizing for the divested content. So this action, like the divestiture of select software assets, is about portfolio optimization. We're focusing on higher value offerings that are important to our integrated value proposition. Turning to GBS gross profit, There are a number of drivers of our 300 basis point expansion, including the operating leverage we get on the revenue growth, our mix towards higher value offerings, and capturing the price for value, a help from currency given our global delivery mix, and the yield on our productivity and utilization initiatives, including the realignment of our skills pyramids to key growth areas. In technology services and cloud platforms, we delivered $8.9 billion of revenue, which is flat versus last year. And gross margin expanded approximately 150 basis points. We continue to have strong growth in cloud revenue in this segment, this quarter up 22% year to year. We had a strong signings quarter with 16 transactions over $100 million each. Both new and existing clients are looking to IBM to manage their critical infrastructure and deliver innovation while simultaneously achieving predictable spending. We continue to see momentum in our open hybrid multi-cloud approach. I mentioned BMP Paribas earlier. BMP Paribas has selected IBM to strengthen its cloud environment. With a hybrid multi-cloud approach, bringing together the IBM cloud, private clouds, along with existing infrastructure. Leveraging IBM's technical and industry expertise, BMP Paribas will accelerate its digitization to offer its clients the best services while respecting the security and confidentiality of their data. Looking at the revenue by line of business, infrastructure services revenue was flat. As we prioritize our portfolio, we are exiting some lower value content, which slightly impacts near-term revenue performance, but results in higher margins. In technical support services, revenue was down 3%. TSS continues to be impacted by the hardware product cycle dynamics, partially offset by continued growth in our core multi-vendor services offerings. And finally, integration software growth accelerated to 4%. This performance was driven by continued strong adoption of IBM Cloud Private, where we added 200 new clients. That brings our total number of clients using this innovative platform to 600 in just over a year, as they continue to modernize traditional workloads. We also now have over 100 IBM software offerings integrated with IBM Cloud Private, including Blockchain, Watson, IoT, and Analytics. We are continuing to deliver innovation in this space with new offerings to enable clients in an open, hybrid, multi-cloud world, like IBM Multi-Cloud Manager, which I mentioned earlier. Turning to profit for this segment, gross margin improvement is driven by the lift of our productivity initiatives. This includes infusing AI and automation in our delivery processes, such as by leveraging IBM's services delivery platform with Watson and embedding agile thinking into our service delivery processes. We're also leveraging productivity and talent optimization efforts, where we continue to optimize business processes, reskill our expert workforce, and leverage our global scale. PTI margin was flat. reflecting continued investments to expand our go-to-market capabilities and develop new offerings to capture the hybrid market opportunity. So to wrap up services, at the beginning of 2018, we said we expected an improving trajectory in our services revenue and profit, and we delivered on that throughout the year with a strong fourth quarter. In systems, revenue was down 20% this quarter. I'll remind you that this is compared to a very strong performance in the fourth quarter last year, where we grew 28%. Systems pre-tax margin was down 6.5 points, reflecting the mixed headwind from the IBM Z product cycle. I'll walk through the different dynamics across the hardware portfolio. In IBM Z, we are six quarters into the Z14 cycle. Z revenue declined 44%. while margins expanded modestly, in line with where we are in the cycle. The program continues to track ahead of the prior program, with broad client adoption across industries and countries. We continue to add new clients and new workloads to the platform. Since launching the Z14 program, our MIPS capacity has increased nearly 20%, with new workload MIPS growing twice the rate of our standard MIPS. So, we're taking advantage of the secular shifts in the market, and now over 55% of our installed MIPS inventory is in emerging workload areas. And while there's volatility in the hardware due to product cycles, as we continue to grow our install base up roughly three and a half times over the last decade, This provides stability in our related software, services, and financing business across IBM. Power revenue was up 10%, driven by Linux, and continued strong adoption across our new Power9-based architecture. In the fourth quarter, we completed the release of our next generation Power9 processors in the high end. And we had strong adoption in both the low and high end systems. Our Power9 systems are designed for handling advanced analytics, cloud environments, and data intensive workloads in AI, HANA, and Unix markets. And we now have extended HANA certification to our Power9 high end. In the fourth quarter, we had strong initial traction with our new offerings that optimize both hardware and software for AI, such as PowerAI Vision, which we introduced in the second half of 2018. And we've essentially completed the deployment of our supercomputers at the U.S. Department of Energy labs in the quarter. Storage hardware was down with declines in mid-range mitigated by continued strong growth in all flash arrays. The storage market remains very competitive with ongoing pricing pressures. We're continuing to introduce new innovations and functionality. For example, in December, we extended our next generation NVMe technology into the mid-range with strong initial client adoption. We will continue to roll out NVMe across the storage portfolio in the first half of 2019. So now turning to cash. We generated $7.3 billion of cash from operations in the quarter, excluding our financing receivables. With nearly $900 million in capital expenditures, we generated $6.5 billion of free cash flow in the fourth quarter. This capped off a year with $15.6 billion of cash from operations, also excluding financing. We invested $3.7 billion in CapEx this year, mainly in our services and cloud-based businesses, and that's up $400 million from last year. And so we generated free cash flow of $11.9 billion for the year. And as I mentioned, our normalized free cash flow realization was 111%. You'll recall that we expected our free cash flow to be about $12 billion for 2018. The year-to-year decline reflects the headwinds we anticipated from CapEx, working capital, and cash taxes. We returned over $10 billion to shareholders in the year, including dividends of $5.7 billion. We've now increased our dividend per share for 23 consecutive years, and we remain committed to continued dividend increases. We also bought back just under 33 million shares, reducing our average share count by over 2%. At the end of the year, we had $3.3 billion remaining in our buyback authorization. Now looking at the balance sheet, we ended the year with a cash balance of $12.2 billion, which without the impact of currency is consistent with a year ago. Total debt was $45.8 billion, down a billion year to year, with 68% in support of our financing business. The leverage in our financing business is in line with the target of 9 to 1, and the credit quality in our financing receivables remains strong at 55% investment grade, a point better than a year ago. And so our balance sheet remains strong, and we are committed to maintaining a strong investment grade credit rating. As we typically do at the end of the year, I want to provide a quick update on our retirement-related plans. Our U.S. plan has been frozen for over a decade. And over the last several years, we moved our asset base to a lower risk, lower return profile. At the end of 2018, in aggregate, our worldwide tax-qualified plans are nearly fully funded, with the U.S. at 104%, consistent with a year ago. So despite the volatility in the markets, our plans are in really good shape. So let me start to wrap up with some thoughts on 2018, and then I'll move on to expectations for 2019. As we opened the year, we talked about the work we had done to reposition our business, to help move our clients to the future, shifting our portfolio, changing our operating model and the way we work, and reallocating our capital. And in our earnings call last January, we talked about how that drove our expectations for 2018 in revenue, in margin, and in earnings per share. First, we said we expected to grow revenue at then current spot rates. We did, in fact, grow revenue for the year, and that's despite the U.S. dollar appreciation since early 2018, reducing our revenue growth by about 2 points or $1.7 billion. we said we'd stabilize gross margins. While we fell a bit short for the full year, we stabilized gross margin in the third quarter and expanded both gross and pre-tax margin in the fourth quarter and second half. That's for the first time in over three years. We said tax would be a headwind for the year, and it was a headwind to us for the year and in the fourth quarter. We continue to return value to shareholders, with share repurchases contributing to earnings per share growth. And finally, we said we expected operating earnings per share of at least $13.80 and free cash flow of about $12 billion, and we achieved both of these. So looking back on 2018, we grew revenue, operating profit, and operating earnings per share for the year with strong free cash flow realization. We had good momentum in GBS with particular strength in consulting, led by our digital and cloud application offerings. We executed well in software in the fourth quarter, finishing the year strong, led by analytics and AI and our hybrid cloud software. As we execute our strategy to help our clients implement hybrid cloud, our total cloud revenue grew to over $19 billion. Across software and services, We continued to build our as-a-service revenue. We exited the year with a $12 billion annual run rate, which is up 21%. We continued our very successful IBM Z program and strong performance in power with our Power 9 architecture rollout. We repositioned our operating model and drove productivity, which improved our margin profile. We also continue to prioritize our investments and took actions to optimize our portfolio. We announced the sale of select software and services businesses, actions that not only improve our go-forward revenue profile, but allow us to increase our focus and investment in the high-value segments of IT in areas like hybrid cloud, AI, and blockchain. All of this provides a solid business and Financial Foundation for the addition of Red Hat. And it gives us confidence in our expectation for full year 2019 operating earnings per share of at least $13.90. Before we go to Q&A, I want to be clear about what is and is not included in our expectations. As I mentioned earlier, Red Hat is expected to close in the second half. and given the financial implications to 2019 are heavily dependent on the timing of the closing, Red Hat is not included in our expectations. We'll update our view of the year at the time of closing. In the last month and a half, we've also announced two divestitures, the sale of our collaboration and on-prem marketing commerce software, and the sale of our Sateris mortgage servicing business. For these businesses, when we consider the combination of the foregone profit, the gain on the sale of software assets, the actions to address structure and stranded costs, and the resulting benefits from these actions, we expect there to be minimal impact to our profit and earnings per share for the year. And unlike the Red Hat acquisition, the timing of the closing does not have a significant impact on the financial implications for the year, though it may affect the quarterly skew. As a result, our guidance assumes these divestitures. Said another way, because the divestitures are essentially neutral to our profit for 2019, they don't impact operating EPS guidance for the year, though they do have a benefit to our financial profile over the longer term. Turning to free cash flow, we expect about $12 billion in 2019, with a realization rate of about 100%. This reflects our expected operational profit performance and continued working capital efficiency, partially offset with the cash tax headwind. We've also taken into account the estimated free cash flow impacts of the software and services divestitures. Note, that while these are relatively neutral to earnings, they are a headwind to our free cash flow, because the gain proceeds flow into the investing section of our cash flow statement. Finally, while we haven't included Red Hat, we have taken into account an estimate of the pre-closing financing costs associated with the acquisition. So when you put it all together, we see free cash flow of about $12 billion, which is roughly flat year to year, even after absorbing the headwind from the portfolio actions. And with that, let me turn it back to Patricia for the Q&A.

Thank you, Jim. Before we begin the Q&A, I'd like to mention a couple of items. First, we have supplemental charts at the end of the slide deck that provide additional information on the quarter and the full year. This includes the 2018 performance, and year-end assumptions for our retirement-related plans, and supporting information on the 2019 implications of our divested businesses. And second, as always, I'd ask you to refrain from multi-part questions. So, operator, let's please open it up for questions.

Thank you. We will now start the question and answer session of today's conference. To ask a question, press star, followed by the number one on your card. And to cancel your question, press star, followed by the number two. One moment, please, to check the questions in queue. Our first question is coming from Wamsi Mohan of BackUp America. Mary Lynch, your line is open.

Yes, thank you. Jim, IBM Delaware, a nice profit trajectory here exiting 2018. In this weaker macro backdrop, it looks like you have pretty robust 2019 guidance, and I was hoping that you can help talk through what the profit trajectory looks like at gross and PTI level in 2019, and some color on the broader puts and takes embedded in your 2019 guide, including the IP income and taxes that would be helpful. Thank you.

Okay, Wamsi, thank you very much for the question. It's probably a good place to start, given we just concluded the prepared remarks and we talked about some of the dynamics of what's in our guidance. But as always, you would expect, we run multiple scenarios here. across our business. And we're looking at the trajectory of our business, the macroeconomic environment, what our enterprise clients are telling us. And we also take into account our own operational indices in front of us and our business plans and strategies. And when we put all that together, this is what gives us confidence in an expectation of operating EPS of at least $13.90 for 2019. Now, as I just stated, This guidance excludes Red Hat, just given to the timing sensitivity and the financial implications on when it closes, but it includes the announced divestitures, and we'll talk about that through all these Q&As with regards to any forward-looking guidance. But, you know, we enter, from my perspective, we enter 2019 with a much improved business profile in terms of, one, Driving operating leverage and you still all that played out in the second half and it's right to the core of your question and to You know our strategic imperatives right now the high value Emerging segments of the IT industry are now consistently over 50% of IBM's business So while we don't give guidance on revenue Let me give you a little color behind that and then I'll go to operating leverage and gross and pre-tax margin and and tax as we move forward. But first, I'll start with a tailwind. You know, we have a solid annuity base in our business. Today, it's about 60% of IBM, and that builds resiliency into our model. And we got good momentum in our as-a-service, as you heard. We exited the year with an annualized exit run rate of $12.2 billion, and that's up 21% year over year. You combine that with the strength within our services business. We accelerated throughout the year, and we exited the year with a very strong performance by a GBS team who is just doing excellent with regards to continuing to win in front of the marketplace and deliver value to their clients. And we also captured significant signings in the fourth quarter that positions our GTS business and really instantiates our value around hybrid cloud and how we're winning. And then you couple that with solid execution on software. You know, we talked 90 days ago about where we were at in the third quarter around software, and we made some forward-looking projections, and we turned our software business around to growth, growing 2% in the fourth quarter, and we have a strong portfolio lineup, so we would expect that to continue. And in hardware, yes, we're on the back end of our mainframe cycle. And I would tell you it's the most successful mainframe we've had in quite a bit of time. But we continue to bring new innovation to market to deliver value for our clients. And in our Power9 architecture, which is resonating well in the marketplace, and we got great acceptance, grew 10% in the fourth quarter, we expect that will continue to play out in 2019. So we've got a good book of business here and some tailwinds at us. And, you know, from a headwind perspective, you talked about macro. Well, the first thing I would call out is currency. You know, the U.S. dollar continues to strengthen throughout 2018, especially even since our last earnings call 90 days ago, the U.S. dollar continued to appreciate. And right now, you saw in the supplemental charts, we provide you with transparency and We expect about a one to two point headwind on currency. And then finally, we are taking very disciplined portfolio actions across our business where they don't align to our integrated value play and where we can reprioritize and focus our investment to drive the value around the IBM company. That divested content is going to be about a one point headwind. So when you put it all together, we've got some pluses and minuses at the top line. But really, this year in 2019 is going to be predicated on operating leverage. We made good progress through 2018, and it positions us very well to expand margins in 2019. So amongst all of our scenarios, our guidance model and our expectations indicate that we will expand gross and pre-tax operating margin in 2019. as we continue to deliver value. And that's going to come out of scale efficiencies. That's going to come out of our services momentum and the mix shift and productivity, which will offset, more than offset, the product cycle mix we still have in the divested content. And one last thing that I would call out is tax. We're guiding to an all-in rate of about 11% to 12%, which, by the way, is a headwind year to year that we're going to have to overcome. finishing with a printed rate of about 8% in 2018. Now, this rate assumes estimated potential discreets. This is a change. We're doing this to provide enhanced transparency into our guidance as we move forward. But I will tell you, discreets by nature vary in timing, they vary in amounts, and will be recorded when they occur in 2019. But you put all that together, you know, we've got headwinds and tailwinds on revenue, strong portfolio lineup in our high-value services and software. We've got expanding operating leverage that we expect, the tax rate all in of about 11% or 12%. This gives us confidence in our full-year EPS of at least $1,390 and a free cash flow of about $12 billion. Great. Thanks, Wamsi.

Can we go to the next question, please?

Our next question is coming from Tony Sakonagi of Bernstein. Your line is open.

Yes, thank you, and thank you for the clarification on the previous question. I just wanted to know if you could clarify what the size of the expected gain is on the sale of assets to Red Hat, excuse me, to HCL, and then whether you expect directionally Red Hat to be accretive or dilutive to free cash flow and EPS this year. And then on software, could you comment on the strength that you saw? Was it a push out? Do you feel like you captured, you know, large enterprise license agreements or Is this sort of a more normalized book and should we expect cognitive to grow in Q1 and Q2 at a similar pace to what we saw in Q4? Thank you.

Okay, Tony. Thank you very much. Very good questions. Let me try to take each of these piece by piece. First of all, as you saw from our last earnings, we continue to take discipline portfolio prioritization efforts around our portfolio, both in terms of the announcement of the acquisition of Red Hat and also the announcement of sale of certain assets within our cognitive and GBS business. Red Hat, as we talked about, we're working through regulatory right now. We expect to close that in the second half. With regards to your specific question on divestitures, we included in our guidance the sale of our collaboration and on-prem marketing and commerce business, and the sale of our Soteris mortgaging business. Both of these will drive headwinds, as you can imagine, in revenue for the year. We expect the mortgage business to close later in the first quarter. That will be a headwind this year to GBS revenue. But on a sustainable basis, this improves both our revenue profile in GBS and our margin profile. as we continue to shift the higher value as we move forward. In terms of our cognitive assets that we sold with regards to collaboration and on-prem, those businesses generated roughly a little bit over a billion dollars of revenue over the last 12 months. We said we expected to close that by mid-year. The transaction price was $1.8 billion, but the expected gain, I will tell you, will be a lot less than that $1.8 billion. as we're working through the acquisition accounting right now with regards to goodwill and how much goodwill will be applied to that. But we still expect a sizable gain, nowhere near $1.8 billion, but a sizable gain. And as we said, we've got to overcome, one, the foregone profit of these businesses, the stranded cost of these businesses, and we will take that gain And as you would expect, we're going to utilize a portion of that gain to address that stranded cost and structure, and we'll get return on that. All of that put together is minimal impact to our profit. So we included that in our guidance. It has minimal impact to our profit and APS, but it does have an impact to free cash flow, just given what I said a little while ago in the prepared remarks on the gain on the asset sale will end up in the investing section of free cash flow. So we've overcome that and still got in a free cash flow that's roughly flat at about $12 billion. Now, your second question was on cognitive. We obviously executed well. You know, you dialed back 90 days ago, and we had some pretty frank discussions about our portfolio, how we had confidence in our portfolio, the competitiveness and the value we bring to clients. and we didn't execute in third quarter, and we came back. We executed on strong pipelines. Software was up 2% overall. We had strong transactional performance, but probably what I'm most proud about is it was pervasive. We grew in hybrid cloud integration software, 4%. We grew in solution software, 3%, across many of our offerings led by data and AI and analytics. also in many offerings in our industry verticals around Watson Health. And we grew in transaction processing software, which we said that business is mission critical, high value to our clients, and a foul client buying cycle. So if anything in our overall portfolio of software that's tied to SKU, it's really the transaction processing software business where we closed a strong pipeline, which we talked about 90 days ago. So we feel very good about the competitiveness and value of our portfolio. We're going to feel even better when we close the Red Hat acquisition on what that does to provide us an acceleration and a leadership position on hybrid multi-cloud, and we're excited and looking forward to that.

Thanks, Tony. Anne, can we please go to the next question?

Thank you. Next question is coming from Katie Uberti of Morgan Stanley. Your line is open.

Thank you. Good afternoon. Congrats on the nice numbers in the fourth quarter. Question around linearity in 2019. There's a lot going on with tax discreets, divestitures. I know the Red Hat numbers aren't in the guidance yet, but how should we think about linearity given that the timing of some of these discrete items may change the walkthrough in the year?

Okay. Thank you, Katie, and thanks, On behalf of the entire IBM team, we really just delivered a solid fourth quarter here. But if you take a look at it, it's a very good question. Why don't I just address it by trying to get some visibility into first quarter. It's right in front of us right now. If you take a look at first quarter, again, we guided full-year EPS of at least $13.90. If you look at first quarter, first of all, on an EPS perspective, we would expect, the operating EPS skew to be around 16% of the full year 1390. So when you take a look at that, it gets us off to a good start. It does acknowledge that you know, we are on the back end of a mainframe product cycle, but we got acceleration in our services and our software base of business. And we feel confident in in at least that 16% starting out the year. Now, if you look at that compared to the last three years, it will show that it's a little bit less attainment. But to the heart of your question, the last few years we had substantial discrete tax items in the first quarter. If you go back to 2016, we closed on the Japan audit. If you go back to last year, we closed on the U.S. audit settlement. We do not see anywhere near the level of discreets in the first quarter. And I would project somewhere around You know, the 11%, 10%, there might be something within the first quarter, but we're not talking substantial amount. So, you know, that is really EPS. On revenue, which we probably have the best visibility just given our operational indices, you know the mixed differential of our revenue base between annuity and transactional when we move from a fourth quarter to first quarter. That seasonality, the transactional businesses have a more muted effect on 1Q versus 4Q. And as the mix of more annuity content, which plays out in the first quarter, this should contribute about a one to two point sequential improvement in our growth at constant currency. And you know, we just came off a fourth quarter with many different dynamics that produced a down one at constant currency. So we do see an improvement just given the mix shift in the strength of our annuity content as we move forward. The last thing that I'll bring up about first quarter is, you know, I talked a little bit about currency for the year. We have our toughest compare on currency in the first quarter. Just given last year the dollar weakened throughout the first quarter and then dramatically accelerated or strengthened as we moved through 2Q through 4Q. So as you saw in the supplemental chart, our currency impact is going to be a three to four point headwind And based on what I looked at where the dollar closed late today, it's going to be probably closer to that four-point headwind overall.

Okay. Thanks, Katie. Can we go to the next question, please?

Thank you. Next question is coming from Yanshan Wang of J.P. Morgan. Your line is open.

Hi. Thanks. Hi, Jim. Hi, Patricia. I want to ask on services. It improved like you said it would, and I'm curious what your outlook is for 2019 within services, because there are some moving parts. GBS is performing really well. Application management is up into a nice place, so curious on the sustainability there. And just as a clarification away from the services, with strategic imperatives up 9%, there wasn't as much talk about that in the prepared remarks. I'm curious, is that still going to be a metric that's going to be provided or tracked going forward? Thanks.

Okay, Tinjin, thank you very much for the question. We obviously are very pleased with our services business and how we've continued to reposition our portfolio both in GBS but also in our GTS space of business as we move throughout 2018. But when you look at the trajectory of our business, you know, we ended the year with an overall or absolute backlog of $116 billion. That's down 60 basis points at constant currency, and it's a big improvement from where we started a year ago. If you remember our discussions here a year ago, we had a lot of discussion about your overall backlog is down 3% at constant currency, and we talked a lot about what we saw play out in 2018, and the team's just done an excellent job. You know, we're in a much better position, and we do see – across our total services business in 19, sustained revenue growth and margin profile. But let me take the pieces and just give you a little bit of perspective. GBS couldn't be more proud of the team about what they've done to reposition their portfolio and their offerings in capturing and delivering growth to our clients in digital, in cognitive, and cloud. You know, you saw in the fourth quarter we exited GBS, I'll get these numbers pretty close, strategic imperatives growing mid-teens, cloud growing 30-plus percent, and our as a service-based business exiting with over a $2 billion number, I think up 64% overall. And we've got pervasive growth across all three lines of business led by digital. We did state in application management where we finally returned back to growth in the fourth quarter, We are executing and delivering value on driving cloud migration services and cloud application development. We have a differentiated offering, and we're delivering value to our clients, but we also closed on many client-specific milestones that caught up in the fourth quarter, but we still see good growth. It's just not going to be at the level that you saw here in the fourth quarter. With all that said, our margin and operating leverage We feel comfortable. We grew GBS operating gross margins 300 basis points in the fourth quarter. That will dissipate throughout 2019, but we still see strong operating leverage led by our mix shift to higher value in the offerings, how we're capturing that price realization, and how we're delivering real value and quality to our clients. Now, at GTS, we are Obviously winning with our hybrid cloud momentum. We had a strong signings quarter really led by GTS overall and the hybrid cloud value prop delivered $15.8 billion of signings up 21%. That's what improved that backlog position here at the end of the year. And we're exiting with an $8 billion as a service annualized exit run rate, which provides a strong annuity-based content and resiliency in our model. Now with that said, we are doing portfolio prioritization in GTS. We are constantly going to focus on where we can exploit and deliver value to our client and also make high value returns for the IBM shareholder. We are walking away from low value based content in GTS. You saw that in the fourth quarter where our GTS business overall. We're down, I think, 50, 70 basis points. And while you see that absolute backlog improve, we are going to continue prioritizing high value because we want to get prioritization of cash, profit, and margin out of that business and leverage that business and the value of incumbency and moving our clients to the future in capitalizing on hybrid cloud. So we'll see continued margin expansion in GTS as we move forward, and that's going to come out of very similar scale efficiencies, productivity. And remember, in both, we're still going to get the second half of our productivity from our 2018 actions. So we feel pretty comfortable and confident in our services-based business as we walk into 2019.

Thanks, Tingen. Can we go to the next question, please?

Thank you. Next question is coming from . Your line is open.

Thank you. So, Jim, you know, you've announced two divestitures in the last six weeks. I think you mentioned in your prepared remarks, you know, exiting some GTS business that was perhaps lower margins, lower growth. You know, obviously, without getting too specific, what else can you tell us about the other efforts that are underway to streamline the legacy core that may positively impact the agility of the organization as well as positively impact your growth rate.

Okay, David, thanks very much for the question. You know, let me take a big step back. Obviously, I've been thinking about this as Ginny and everyone else. And, you know, from my perspective, you know, we constantly say IBM is a high-value-based company. We're high-value to our clients. We're high value to our shareholders. And the way we remain high value is through disciplined portfolio optimization. And whether you go over what we just did the last 90, 120 days, or you go over the last three to five years, we have constantly focused on, one, where is the market moving in terms of growth, high value offerings, client value, and most importantly, profit pools. And you're seeing us continue to do that as we move forward. These latest actions really center around discipline portfolio prioritization, around market attractiveness, around differentiation, and around how they really play to the integrated value of the IBM portfolio, our differentiated hardware, software services. And that was really at the heart of the divestitures that we just announced around certain assets in our cognitive solution segment and in our global processing mortgage servicing unit, they were basically more and more sold as standalone only products and offerings that can be leveraged and delivered to our clients through a different partner who will make the investment prioritization as we move forward. I can tell you we're always looking at portfolio optimization and how we prioritize our investment and capital allocation. And you see that with the announcement of Red Hat, and you see that play out in what we just did with Cognitive and GBS. But as we go forward, you know, we're going to continue prudently managing our portfolio and operate with that financial discipline. In terms of acquisitions, our strategy hasn't changed. It's always been built around supporting high value, and it's been built around leveraging the investment thesis and narrative of IBM. industry expertise, and trust and security all delivered through an integrated model of hardware software services. And then finally, you know, I would tell you, we have a strong balance sheet. We have great cash flow, and we have enough financial flexibility to continue to invest in our business and returning value to our shareholders over the long term. So we feel pretty good.

Thanks, David. Can we go to the next question, please?

Thank you. Next question is coming from John Roy of EVS. Your line is open.

Great. Thank you so much. So, well, obviously, cloud is a trend that everybody is getting on board here in the enterprise space. And yet, you know, you had somewhat of a flat quarter. I was curious as to when you went cloud deals as to why and how do you see the Red Hat acquisition as changing the color around why you win and how much you win?

Okay, John, thank you very much for the question. Let me let me try to put this in perspective around cloud. First of all, our cloud overall, for the year was 19.2 billion. That was up 12%. And within that, as we always talk about the high value, merging areas of as a service finished with an annualized exit run rate of 12.2 billion, up 21%, which really clearly underlines our consistent execution and us capturing the high-value secular shifts around cloud in that as a service. Now, when you look at cloud in the corner, the cloud number as printed really reflects the same fundamental headwind on the wrap of the product cycle and mainframe that we had to overcome. Now, that isn't new. We expected that. We've been talking about that all year long. Second half of the year, we knew we were going to be on the back end of our mainframe product cycle. Remember, we came off a mainframe that grew 71% in the fourth quarter of 2017. And this is, as I said before, the most successful mainframe product cycle in quite some time, which, by the way, generates and captures new emerging workloads around pervasive encryption, but also is capturing new workloads around cloud as we move forward. So that cloud business without mainframe was actually up 19%. That's an acceleration underlying our software acceleration from 3Q to 4Q, underlining our services acceleration from 3Q to 4Q, and we see that as we move forward. Because remember, although we had a deal with the largest transactional quarter on mainframe, You know, albeit in 2019, that starts to dissipate because we're through that biggest volume-based quarter. So we see cloud still resonating with our clients. And to your heartier question about Red Hat, you know, Red Hat and IBM together, we see this movement of how we can deliver value in leading the second phase, Jenny calls this chapter two, the second phase around where clients are moving you know, very business critical, business value-led workloads, and that's about 80% of the workloads ahead of us. So the value of bringing IBM and Red Hat together is going to be centered around hybrid, open, multi-cloud, and us wrapping around our security, secure to the core, and how we're going to deliver that differentiated value proposition. And we're just excited about what Red Hat is going to mean to the IBM company and our clients.

Thanks, John. Anne, can we please take the next question?

Thank you. Next question is coming from Jim Schneider of Goldman Sachs. Your line is open.

Good evening. Thanks for taking my question. Jim, it's good to see the improvement in software and cognitive relative to last quarter. I guess the question is, on a go-forward basis, you have a target of mid-single-digit growth long-term in cognitive. Is it realistic to expect that you could achieve that as we head throughout 2019? And can you maybe talk about the impact of any of the transactional business you may have seen this quarter that might affect that and just kind of talk broadly about the macro environment for that product set in general?

Yes, Jim. Thanks very much for the question overall. You know, we are pleased with our software performance exiting the year. As I talked about, I think it's really – an instantiation that demonstrates our ability to deliver innovative solutions embedded with AI that drives business value to our clients, really through an industry lens that plays across the integrated value of IBM with our services-based business and stacked on top of our hardware-based platforms. But when you look at fourth quarter, you know, we exited 2% growth. We had good pervasive growth across the portfolio. As I said before, good stock. strong transactional growth, good staff signings, high renewal rates. And remember, this cognitive solution segment is high value, high operating margins, and we continue to expand operating margins here in the fourth quarter and for the full year. Now, when you take a step back, you ask long term. Well, obviously, in 2019, we're going to deal with the headwind I talked about with the divested content. That will, to cognitive solutions, probably be You know, on a trailing 12 months, we did a little over a billion dollars. It'll be about a four, five-point headwind in 19. And that's pre-Red Hat acquisition because Red Hat's not in 19 yet. But we're going to have, you know, right off the bat, a four- to five-point headwind. But the underlying fundamentals and our long-term sustainability around that, yeah, our long-term model has not changed. We still see the strength of our offering portfolio there. One, even getting better around our hybrid integration software. Two, around our analytics portfolio, which just had a great quarter. Data AI, our industry-based verticals, our Watson Health had growth across many of its offerings, as I talked about earlier. And even in IoT, we had growth around our core franchises of facilities management and asset management, Maximo and Tririga. So we got a good lineup. It's going to be on us to execute here in 2019. We fully expect to do that. Thanks, Jim.

Can we go to the next question, please?

Thank you. Next question is coming from Joseph of Cantor Fitzgerald. Your line is open.

Hi. It sounded like in your remarks earlier that you thought you could deliver sustainable organic constant currency growth in 2019. If so, does that include or exclude Red Hat? And then just as importantly, maybe you can give us some color around first half margins versus second half margins and maybe what the margin exit rate will be for 2019. Thanks.

Sure, Joe. Thank you very much for the call. First of all, we don't guide on revenue for the year, so I don't remember stating that we are going to grow the year at constant currency organically, et cetera. Red Hat's not in any of the guidance, as we talked about up front. We do have the divestitures in here, and divestitures are going to be about a point headwind as we move forward. And as I stated, currency is going to be a one- to two-point headwind at actual rates. But we do feel confident in the book of business we have. around our services and around our software as we move forward. The underlying dynamics, as I talked about, there are many different scenarios we're running here, all point to giving us confidence in our expectation of at least $13.90 as we move forward. That is going to be a mixture of the mix of our portfolio, the revenue of our portfolio, The operating leverage of our portfolio, the tax structure, IP, there are many different variables that go into that 1390 overall. We do see strong operating leverage continuing in 2019, both gross and pre-tax margin, leveraging our scale efficiencies, leveraging our mixed shift to higher value, leveraging our productivity initiatives. And when you look at it, we've got great momentum exiting second half, in particular on our services base of business. Second half services grew operating gross margins by 200 basis points, and I think you would expect a similar first half trend around that. And then second half, we'll start wrapping on a little bit tougher compares. But for the full year, we would expect good operating leverage, and that's what we're guiding to. Thanks, Joe. Let's go to the next question, please.

Thank you. Our next question is coming from . Your line is open.

Thank you very much. In your prepared slides, slide number 10, it was very informative to help us bridge the two different years on our earnings. The question I have is, as we look forward to next year, I know you have a lot of variables Are there any bridge items that you want to particularly call us out for that's most likely to happen to hit your 1390? And how come cash flow wouldn't be growing if you have earnings growing? Thank you.

Okay, Jim. First of all, thank you for the question. Thanks for the compliment. The team does work very hard to provide the right level of transparency so our investors can understand the operating dynamics of our business. And, you know, Chart 10 lays out that full year. You see how 2018 played out. Strong operating leverage, tax headwind, revenue growth at actuals. When you look at it and you go back to beginning of January last year, we stated what we saw for the year. We grew revenue. We grew operating leverage. We grew operating pre-tax income. We grew earnings per share, and that played out well. If you look at 2019, as I stated, many different scenarios, but what have we talked about already on this call? One, we see continued operating leverage coming out of gross and pre-tax margin in 2019. Two, we do see tax being a headwind to us in 2019. And again, we tried to provide enhanced transparency where we're giving you an all-in rate of at least 11 to 12%. But even with that, that's a three to four point headwind. We'll continue to buy back shares as we talked about. I think that's one, a level of confidence that we have in the long-term value of IBM. But it's also a level of confidence that we have in the power of the IBM and Red Hat acquisitions. So I think you could see that continuing to play out. And then I guess last, You know, we talked about currency on revenue. Currency on revenue, the impact of one to two points, and the divestiture. So we will continue showing the transparency of this EPS bridge, helps our investors understand the operating dynamics as we move forward.

And then, Jim, on your question on cash, as Jim said in the prepared remarks, we obviously have a headwind from the divested businesses. because we'll have foregone profit and we'll have a gain, but the gain doesn't go into free cash flow. We also will have some items that hit our free cash flow relative to some pre-closing costs for Red Hat. That's the reason that our free cash flow is flat despite the fact that we have a couple of headwinds within that. Operator, why don't we take one last question?

Thank you. Our last question in the queue is coming from Keith Backman of BMO. Your line is open.

Hi, thank you, Jim. Just a clarification first and a question. On the clarification, you mentioned the impact of the divestitures. In the slides, it indicates the impact is $1.5 billion. I think you said $1 billion was coming out of cognitive, and I just wanted to see if you could just clarify where is the rest coming out of. And then the question is on technology services and cloud platforms. I wanted to get your perspective as you look at 2019. This business continues to trail a little bit relative to GBS in terms of revenue performance. Would you expect or anticipate this business to grow in CY19 and therefore would you expect operating leverage to also be demonstrated in this business? Thank you.

Yes, thanks Keith for the question overall. on your clarification. The impact of divestitures, we actually did provide a supplemental chart that hopefully each of you and our investors will appreciate on the transparency and the implications both on 19 and then directly on 2019. I think I said a little over a billion dollars. If you look at chart, what is it, 15 in the supplementals, The cognitive software assets of divesting collaboration and our on-prem marketing and commerce was about a billion three. So that's what I meant about a little over a billion. When you take a look at the GBS mortgage servicing divestiture, that's about 200 million. So on a full year basis, annualized, it's about a billion and a half between the two of them. So hopefully that answers the clarification. And then on your second question, TSNCP. We finished the year with strong signings growth, which really instantiates our hybrid cloud value proposition, and also the value of incumbency that we provide with our clients of understanding their workloads, understanding their business processes, and enabling us to move them to the future in capturing that cloud backlog. In fact, cloud backlog is up over five points year to year as a percent of our total outsourcing backlog. As I said earlier, GTS business, we are going to manage this business for profit, for cash, and for leveraging our incumbency to move our clients to the future and provide better client value and delight them through loyalty as they move forward. We are going to exit some low value content business. You know, for 2019, I would expect pretty similar performance in GTS overall on a top line. But in margin, we are going to expand margin. That's in our expectations. And you see that play out in the second half of 18, and we expect that to continue. So, all right, with that said, you know, I apologize for going a little bit long here. You know, we wanted to get a lot in here, one about the quarter, but, Two about wrapping up the year and what it means for 19. So a few comments to wrap up. You know, we're entering 2019 in a great position to help our clients, whether they're looking for innovation or productivity or both. We've got a solid base of business. You see this in our software and services results with strategic imperatives now consistently at about half of our revenue. And in operating leverage, we're driving, and we expect that to continue. This gives us confidence in our expectation of at least $13.90 of earnings per share for the year. You know, our hand will only get stronger with the addition of Red Hat, which positions us as the leader in hybrid multi-cloud world. So thanks for joining us today. We look forward to continuing the dialogue over the course of the year. Thank you very much.

Okay, Anne, let me turn it back to you to wrap up the call.

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