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 want to welcome you to our first quarter 2020 earnings presentation. I’m here with Arvind Krishna, IBM’s 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 growth at constant currency throughout the presentation. 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 impacted lines of total revenue, cloud, and our geographic performance. We have provided reconciliation charts for these and other non-GAAP measures at the end of the presentation and in the 8-K submitted to the SEC. I’d like to make two other comments regarding this quarter’s presentation. First, consistent with our last two quarters, IBM’s revenue, profit, and earnings per share reflect the impact of purchase accounting and other transaction-related adjustments associated with the acquisition of Red Hat. These adjustments and charges are primarily non-cash. Second, our segment structure for 2020 remains consistent with 2019. So, with the beginning of this year, we realigned a couple of offerings between segments, resulting in very modest adjustments. Our results reflect this realignment, and we’re providing a view of first quarter 2019 on that recast basis in today’s supplemental slides and two years of historical recast data on our website. So, with that, I’ll turn the call over to Arvind.

Hello, everyone. As you all know, we are in the midst of an unprecedented global public health crisis. I’d like to pause for a moment and say that my heart goes out to all those dealing with COVID-19. One of the first commitments I made was to be transparent and open, not just with our employees and our clients and partners, but with our investment community as well. In that spirit, I will participate, not just today, but in earnings calls from now on. There are a few topics I’d like to cover with you today. First, I’ll revisit areas I’ve talked about; second, I’ll tell you about what we have accomplished in the last two weeks; and finally, I’ll tell you about areas I intend to focus on in the near future; and then, I’ll quickly touch upon our Q1 results. Let’s start with the areas I’ve talked about. I have told our team it is essential that we deepen our understanding of our clients’ journey to hybrid cloud and AI, which will result in hybrid cloud as the fourth platform. We remain obsessed with continually delighting clients. And we further established IBM as the gold standard for good tech. All these are underpinned by our culture that fosters growth and an entrepreneurial mindset. I see these as our collective priorities. I’ll move on to what’s been done in the last few weeks. Despite the challenges we’re facing as a result of a global crisis, we’ve remained steadfast in our commitment to employees, clients, and society at large. More than 95% of our 350,000 IBMers are working remotely now. In addition, about 8,000 of them remain at essential sites to carry out mission-critical work. As our clients adjust to this new normal, they need a partner they can trust. IBM is that partner. This isn’t just about helping our clients navigate the crisis but to ensure that they emerge stronger and more resilient. To that end, we have taken concrete steps to bundle existing offerings to address the shifting needs of clients, such as leveraging hybrid cloud, using AI for automation, and enabling remote work. Another area we’ve been focusing on has been to mobilize IBM and IBMers to help with the global battle against COVID-19. Here are some examples: The computing power, over 360 petaflops that we have helped convene for researchers; the weather channel, COVID-19 county by county map, which saw more than 40 million visits in the first week of launch; the AI assistants that can answer citizens’ questions about COVID-19, 21 of them live today, and nearly 90 being rolled out; and educational resources available to anyone, anywhere. We’re doing great work, helping the city of New York and are delivering 300,000 tablets with educational software and free cellular data connections that can help students learn remotely. When we add this all up, we have done the math. In just a few weeks we have already committed over $200 million in terms of contributions and volunteer time. I’m extremely proud of IBM’s response to COVID-19. Now, I want to tell you about some areas of focus for the near future. I want to be clear. The ultimate outcome that I am absolutely committed to is growth for our Company as we emerge from the pandemic. A key area of focus is to ensure that IBM leads in the two major transformational journeys our clients are on, cloud and AI. IBM has already built three enduring platforms, mainframe, services, and middleware. The fourth one is hybrid cloud. Clients, however, need more than a platform. They need deep industry expertise. This is why the services that clients rely on to build and manage the hybrid cloud platform is a massive opportunity for IBM. It’s nearly half of the $1.2 trillion hybrid cloud opportunity. IBM, together with Red Hat, have unique sources of competitive advantage we can leverage to win the architectural battle for cloud. There’s our open source and security leadership, our deep expertise and trust, but also the fact that we give clients the unique ability to build mission-critical applications once and run them anywhere. Together with Red Hat, we are establishing Linux, Containers, and Kubernetes as the new standard. This is winning the architectural battle for hybrid cloud. Let’s talk a little bit about how we take this to clients. I want IBMers to lead with a more technical approach. I want our teams to showcase the value of our solution as early as possible. Likewise, there must be a relentless focus on quality. Our products must speak for themselves in terms of user experience, design, and ease of use. My approach is straightforward. I am going to focus on growing the value of the Company. This includes better aligning our portfolio around hybrid cloud and AI to meet the evolving needs of the market. We will continue to invest, including acquisitions. As you have seen, we have divested parts of software and services that did not align with our focus areas. This will continue. The past few weeks have catapulted us into the world of virtual selling and remote delivery. These entail new ways of working. This is a reminder we should always be asking ourselves, is there a better way to do this? If you don’t question why you’re doing things, you’ll never evolve into something better. What’s clear is our confidence in our strategy and our portfolio, which is focused on hybrid cloud and AI. Before turning to Jim, I want to comment on our results. In the first quarter, we had modest revenue growth. That’s net of currency and divestitures. We entered the quarter in a good position with momentum from the end of last year. However, in the last few weeks, we faced a shift in client priorities towards the preservation of capital. This impacted software disproportionately, and Jim will comment more on this later. Other parts of our business maintained modest momentum. We are entering this challenging environment from a relative position of strength. Our clients are enterprises that run the most essential processes of the world. Our balance sheet is strong, and Jim is going to take you through that. I believe that what we are going through today with the shift to remote work, automation, application modernization will accelerate our clients’ shift to hybrid cloud. This gives me immense confidence in our future. So, I will turn it over to Jim to take you through the quarter and then will come back at the end for Q&A.

Thank you, Arvind. I want to start out by expressing my sympathy to all those who have been impacted by this health crisis and deep gratitude to the incredible people who have been helping IBM, our clients, and the world to deal with this crisis, especially those on the frontline. Now, turning to our first quarter. We delivered $17.6 billion of revenue with modest growth net of currency and divestitures. We had good gross margin expansion, operating earnings per share of $1.84, and continued solid free cash flow. Before I get into the specifics of the quarter, in light of the current environment, I want to take a step back and provide some perspective on a few areas. First, on our client base, our portfolio, and our financial profile, which you’ll see provides some stability to our business; second, what we saw at the end of the quarter; and then finally, add on to Arvind’s comments on what we’re doing with our own business to address the current environment. IBM has always focused on the enterprise space and within that, our business is more concentrated in large enterprises. For decades, we have run our client’s most critical processes, like core banking systems, supply chains, and claims processing. From an industry perspective, the majority of our revenue comes from clients in financial services, telecom, and the public sector, including government and healthcare. We have long-term relationships with these clients in the form of multiyear services contracts, recurring software streams, and financing arrangements. As a result, when you look at our business mix, about 60% of our annual revenue is in recurring businesses. While we’re not immune in this environment to disruptions in the transactional content and volume reductions, our client profile and annuity base provides some level of stability, not only in our revenue but also in profit and cash as we manage through these challenging times. Looking at the first quarter, through February, we were tracking roughly in line with our expectations. As we got into March, the health situation and resulting social distancing became more widespread. As you would expect, we saw a noticeable change in client priorities. With that, there was effectively a pause as clients understandably dealt with their most pressing needs. This was most pronounced in our software business, where the vast majority of transactions typically closed in the last two weeks of the quarter. For those clients that did engage at the end of the quarter, there was a noticeable change in priorities where focus very quickly shifted to the stability of their operations and preservation of cash. They moved ahead with spending that addressed immediate and essential needs, including running mission-critical processes and securing a remote workforce. For example, we increased infrastructure capacity and services to meet unprecedented demands on critical banking functions for banks in countries ranging from Italy and Spain to the United States, to Australia and Singapore. In Brazil, we developed a platform in a single week to connect patients to doctors via telemedicine. And at a major U.S. insurance company, we helped 40,000 employees to work remotely, when they had absolutely no work-at-home capabilities just two weeks earlier. At the same time, the last few weeks have only reinforced the need for clients to modernize their businesses for the new world, and cloud and AI are at the core of their digital reinventions. With our hybrid cloud and AI platforms, together with our expertise in running critical processes, we’re ideally positioned to guide clients on their journeys. Anthem is a great example of a company accelerating their digital reinvention in today’s COVID-19 environment. We’re helping them to operate with more agility and provide greater quality of service, by leveraging data and deep insights to enhance the experience of their 41 million members. We are doing this on a secure, open platform run on Red Hat and the IBM Cloud. Now in parallel, we’ve taken actions within our own business to help IBM better operate in this environment and emerge stronger. For example, we are aligning investments to the key offering areas Arvind mentioned. We took structural actions to improve the competitiveness of our Global Technology Services business and enable new ways of working across our operations. Our actions will deliver annualized gross savings of nearly $2 billion. We are accelerating our own digital transformation from demand generation to further ramping up our digital sales capability. And in our supply chain, we are leveraging AI, blockchain, and IoT technologies to drive faster and smarter decisions with our suppliers. We also enhanced health and safety measures at our sites to maintain our manufacturing operations at required capacity to meet our customers’ needs. This caps off a lot of work over the last few years to make our supply chain more flexible and resilient. While we’re supporting our clients and improving the flexibility and competitive position of our operations, we are also taking actions to enhance IBM’s balance sheet strength and liquidity position. We accessed the debt market in early February, with a $4 billion issuance, while reducing $4.5 billion of current and 2021 refinancing needs. In addition, while we do not rely on commercial paper for our funding needs, we thought it was prudent to take advantage of our access to the CP market. We ended the quarter with $2.5 billion of commercial paper, which increased both our debt and cash balances. As a result, we ended March with a cash balance of $12 billion, which is up $3 billion from year-end. Our total debt of $64 billion includes $22 billion of global financing debt, which is in support of IBM products and services and has a stable credit portfolio. Finally, as we discussed in January, our pension plans were well funded at the end of 2019, with worldwide qualified plans funded at 102%. While we typically don’t provide a status during the year, I can say that our overall pension funded status in March was fairly consistent with year-end, and we do not see a change to our expected plan contributions in 2020. Bottom line, we have a strong cash position and ample credit available during these uncertain times to support and invest in the business. We’ll continue to be opportunistic in the capital markets while remaining fully committed to our mid-to-high single A credit rating and our targeted leverage ratio. I’ll remind you, we also have over $15 billion of unused credit facilities. And while we have no plans to draw on the facilities, they are available as backup liquidity, and our debt covenants are well within the required levels. And with our share repurchase program suspended since the Red Hat acquisition, our overall shareholder payout remains at a comfortable level and we remain fully committed to our dividend. So, with that as a backdrop, let me focus on a few highlights in the quarter before getting into the segments. We had strong cloud performance again this quarter, with cloud revenue up 23%. By bringing together our technology and expertise to help our clients accelerate their journeys to cloud, our cloud revenue has grown to $22 billion over the last 12 months. Arvind talked about the winning cloud architecture of Linux, Containers, and Kubernetes, and the acquisition and integration of Red Hat bolsters our position in hybrid cloud. Red Hat momentum continued this quarter, with normalized revenue growth of 20%, and strong bookings and backlog growth. RHEL has proved to be mission-critical for many customers, particularly in this environment, and Infrastructure revenue was again up double-digits. Application Development and emerging technologies were up nearly 40% this quarter, driven by OpenShift and Ansible. The number of Red Hat large deals was up from the fourth quarter and up about 50% over last year. Red Hat signed the two largest deals in its history, leveraging IBM’s deep client relationships. This is a great proof point of the value of IBM and Red Hat together. We see it in the larger Red Hat deals, in the pipeline of IBM services engagements based on Red Hat’s technologies, and in the number of clients now using Red Hat and IBM’s container solutions. This has grown to over 2,200, as Red Hat and IBM have emerged as the leading container platform. The contribution of Red Hat, together with strong margin performance in our services businesses contributed to our 150 basis points of operating gross margin expansion. Our pre-tax income reflects charges of nearly $900 million primarily for the structural actions to improve our competitiveness in GTS and accelerate our shift to a cognitive enterprise. The charges for these actions were more than offset by non-cash discrete tax benefits. You’ll recall I mentioned both the structural actions and the discrete tax benefits back on our call in January, and so these had been planned for some time. Our cash and balance sheet strength are fueled by healthy free cash flow. This quarter we generated $2.1 billion of cash from operations, and $1.4 billion of free cash flow, both excluding our financing receivables. There is a lot of seasonality in our free cash flow, and over the last year we generated $11.6 billion, which is about 125% of GAAP net income. And a final comment on Red Hat’s contribution to our free cash flow. When we closed Red Hat back in July, we expected Red Hat, net of interest expense, to be accretive to free cash flow by the end of the first year. With Red Hat’s strong performance, after three quarters, we’ve now achieved that milestone. Now, let me turn to the segment results, starting with Cloud & Cognitive Software, which grew 7% this quarter. We had strong performance in Red Hat, IoT, and Data & AI, and in our security services. Just as I did for overall IBM, I’ll start with a view of software dynamics as we moved through the quarter. We entered the year with a robust offering portfolio and solid pipeline, and we had double-digit revenue growth through February. In March, our software transactions stalled nearly overnight, as our clients shifted their focus to resiliency efforts. We saw those dynamics play out most notably in Cognitive Applications, where many transformational deals were paused, especially in the retail industry. And in Transaction Processing Platforms, given cash concerns, clients traded off CapEx for OpEx. These are typically large engagements, and in this environment, clients elected to defer purchases, impacting perpetual license sales late in the quarter. More than offsetting that, we continue to have good growth in Cloud and Data Platforms, led by Red Hat and the synergies we’re realizing by bringing together Red Hat and IBM software. Given the shifting software demands we’ve seen in some parts of the business, we are focused on a number of initiatives heading into the second quarter. We’re doubling down on areas that facilitate the shift to cloud, including Red Hat and other cloud and data platform offerings, Cloud Paks for operational efficiency, and QRadar on Cloud for security threats. Our go-to-market teams are accelerating their shifts to digital channels. And we’re now leveraging our partner ecosystem to expand our reach into critical industries and markets. To sum it up, our portfolio in Cloud & Cognitive Software is aligned to the hybrid cloud and AI opportunity. We’ve modernized our software to be cloud native and optimized on OpenShift, which provides a compelling hybrid cloud platform for clients on their digital journeys to cloud. While we expect near-term pressure on transactions, we continue to invest in new development and innovation for our hybrid cloud and AI strategy. Turning to Global Business Services. We entered the year with good momentum in revenue, gross profit, and signings, and our backlog returned to growth. This growing backlog and the revenue we expected to yield from it gave us confidence that GBS revenue performance would accelerate as the year progressed. We had solid performance in GBS in the first quarter, with revenue growth of 1%, and gross profit margin expansion of 100 basis points. Our Consulting revenue grew 5%, led by offerings that help clients with their digital reinventions such as cloud advisory and application modernization, and offerings that leverage AI to inject intelligence into business processes. These offerings enable clients to re-engineer their business processes and IT environments for speed, flexibility, and efficiency to better serve their end-users. We have standardized our cloud application modernization offerings on OpenShift, and built the world’s largest Red Hat consulting practice. We are now working with over 100 clients on Red Hat technologies, such as Anthem, Procter & Gamble, USAA, Santander, and Horizon Healthcare, just to name a few. In the first quarter we also had good growth in many of the transformational offerings like next-generation enterprise applications. But as the impact of COVID-19 intensified in March, clients began to deprioritize some of these projects. In this environment, we are aligning our go-to-market and delivery resources to the near-term opportunity, addressing challenges like engaging customers virtually, modernizing and migrating applications to the cloud, empowering a remote workforce, and cybersecurity and IT resiliency. Internally, we have shifted from a predominantly face-to-face engagement model to a virtual one, now with almost 100 percent of our GBS delivery resources not only working remotely, but productively working to support our clients. Over the last few weeks we’ve gotten questions from investors on our ability to support clients given the shutdown in some countries. I can tell you that in India, we had over 98% of our practitioners working remotely within 48 hours of lockdown. As we look forward, we have a solid base of business and a growing backlog, though in the near term, we expect customers to continue to delay and replan some projects. We are going to continue to prudently manage the business by leveraging our variable and global delivery resource model, to ensure utilization is balanced with the rate and pace of backlog consumption and new deals. And we’re going to continue to build skills and practices, so that as the demand returns to more normal levels, we’re ready to address it. Turning to Global Technology Services. Our revenue decline of 4% was fairly consistent with last quarter’s performance, and we expanded gross profit margin by 30 basis points. As I’ve said in the past, we are managing this business for margin and cash contribution. Last quarter, I talked about the actions to accelerate the shift to higher value segments of the market and improve our cost competitiveness. So, let me start with a quick update on our progress. A significant portion of the first quarter’s structural actions addressed GTS. This improves our position for the future but impacted our PTI in the first quarter. In this dynamic environment, we are going to continue to evaluate the cost competitiveness of this portfolio, and we’ll take further actions as required. We also advanced our joint offerings and go-to-market capabilities with GBS. As clients shift their mission-critical workloads to the cloud, they are looking for integration across the application and infrastructure stack. By more tightly integrating GBS and GTS, we’re providing a differentiated solution. While we are in the initial stages of this work, we see some early indications of progress in our signings this quarter. Both total signings and our cloud signings grew at a double-digit rate. This includes significant engagements at Caixabank and Anthem. Strong signings contributed to an improved total Services backlog, which is now roughly flat year-to-year. Within that, cloud now represents over 40% of our outsourcing backlog. This fuels our GTS cloud revenue, which was up 12% this quarter. In the current environment, enterprises are focused on infrastructure solutions, which enhance IT resiliency and business continuity, address new cybersecurity risks, and reconfigure their IT environments for cost efficiency and business agility. We are prioritizing our resources and our management system to these opportunities, focusing on offerings like unified communications, business continuity and resiliency, workplace virtualization and enabling remote working. At the same time, we are adopting alternative delivery models as we continue to support mission-critical workloads without service interruption. In fact, almost 100% of our employees in our GTS global delivery centers are now working remotely. While in this environment we expect to have some impact due to lower business volumes, this will ultimately lead to an acceleration in the shift of mission-critical workloads to the cloud. And as I’ve said, this will be a hybrid multi-cloud environment, built on open standards. IBM Services will leverage our incumbency, our industry, regulatory, and business process expertise, and of course Red Hat to capture this opportunity. And so now looking at Systems, revenue was up 4% this quarter, and gross margin expanded over 400 basis points. In an environment where client behavior shifted at the end of the quarter, our hardware portfolio held up well. This reflects the importance of IBM Z and high-end storage for mission-critical operations, as well as product cycle dynamics. These are high-end systems, and client value in this segment is driven by new innovation. We see that in the z15 mainframe. And we see it in Storage, with the high-end DS8900 introduced at the end of 2019, and more recently, a new and simplified distributed storage portfolio, which supports hybrid multi-cloud deployments. In the second full quarter of availability, the z15 proved to be a crucial backbone of enterprise operations, providing a stable, secure, and scalable platform. Our financial services clients were able to scale up their capacity to meet the significant demands from unprecedented spikes in market volatility without touching their physical infrastructure. And in high-end storage, which is tightly integrated with the mainframe, we had a good quarter, especially in support of mission-critical banking workloads. The growth in Z and storage was partly offset by a decline in Power. This reflects where we are in our product cycle, as well as the fact that Power is more skewed to smaller enterprises, which were more impacted by the dynamics in March. We’re continuing to adapt our operations to meet the needs of clients most effectively, especially in this changing environment. We’re expanding the digital sales channel for both the Storage and Power business. And we’re leveraging technology to proactively manage our globally diversified supply chain. Now after going through the segments, I want to bring it back up to the IBM level and talk about what this means going forward. First and foremost, we have confidence in our strategy and our portfolio, which is focused on hybrid cloud and AI. Nothing we’ve seen over the last two months causes us to waiver from these priorities. In fact, as Arvind said upfront, we believe the challenges clients are facing today will speed their transitions to digital. That bodes well for us. But there is obviously some dislocation in the near term. In this environment, we’ve taken quick and prudent actions to manage our cost and expense, further improve our liquidity position, and focus on opportunities to emerge stronger. Since the crisis began, we’ve been stress testing our model and running a number of scenarios based on various assumptions. Given the level of uncertainty around the duration of the health crisis and the rate and pace of economic recovery, there is a wide range of outcomes for the year, which we are prepared for. But to assign probabilities to the assumptions during these unprecedented times just isn’t valuable. As a result, it is prudent to withdraw our expectations for full year 2020, and we will reassess at the end of the second quarter. Though to be clear, under the various scenarios we ran, we have ample free cash flow and liquidity to support our business and secure our dividend. Before turning back to Arvind, I want to provide some perspective on how we’re entering the second quarter. Over the last few years, our software transactional content in the second quarter is about 20% to 25% of our software revenue. We have a solid pipeline of deals, but in the end, our software performance will depend on how we yield against that pipeline. If we continue to see the same client buying behavior, it’s reasonable to expect the second quarter will be more challenging. Systems hardware is essentially all transactional. Here too, we have a good pipeline in IBM Z and storage. While the current environment is expected to impact closure rates, I would expect less of an impact to Z and storage, given the essential nature of the purchases and the additional capacity requirements, especially in certain industries. In services, we’ve made real progress in the backlog, and for the first time in a while, we ended the quarter with services backlog essentially flat versus last year, that’s with GBS up and GTS down modestly. About 80% of the GBS revenue and 90% of the GTS revenue in a quarter has historically come from the opening backlog, though our contracts adjust for flexible volumes in our clients’ businesses. As mentioned earlier, close to 100% of our people in our service delivery centers are working remotely. Looking at our cost and expense, we’re closely managing our spending and capitalizing on new and efficient ways of operating. The savings from structural actions will start to yield in the second half. We are likely to take additional actions in the second quarter. I’ll remind you that we are well positioned from a liquidity perspective and remain focused on driving our free cash flow including robust working capital management. For years, we’ve been talking about our high-value portfolio and business model, and in times like these that really matters. This is why our liquidity position is naturally strong, and our pension plan is well funded coming into this environment. So, we’re prepared for this environment, have a strong financial position, and compelling value propositions for clients, but our near-term performance will ultimately be influenced by client buying patterns in this economic environment.

Thank you, Jim. We have taken the importance of transparency seriously, and so it was a tough decision to withdraw guidance. But these are unprecedented times, and this quarter is not the time to declare that we have clarity, that does not benefit us, and it does not benefit you as investors and analysts. With better clarity on the economic recovery, we will provide an update at the end of the second quarter. But please know there’s a difference between the ability to accurately predict a near-term revenue or earnings per share number, and confidence in our business over the longer term. And I have confidence in our business. Under different scenarios, we have ample free cash flow and liquidity to support the business and secure our dividend. We are entering this environment from a position of strength. So, over to Patricia for the Q&A.

Thank you, Arvind. Before we begin the Q&A, I’d like to mention a couple of items. First, you’ll notice we updated our chart format to streamline the information presented during the webcast. The content no longer presented in the mainline charts is now included in our supplemental information, which is at the end of the slide deck. And finally, as always, I’d ask you to refrain from multi-part questions. So, operator, let’s please open it up for questions.

Thank you. Our first question will come from Amit Daryanani with Evercore. You may go ahead.

Thank you for the opportunity. Arvind, congratulations on your new role, and it's great to have you in the Q&A session. You mentioned the areas you plan to concentrate on moving forward. Setting the COVID discussion aside, how do you view the company's necessary investments? How will you approach that in terms of organic versus inorganic growth? I would like to understand which investment strategy you will lean towards as you progress. Additionally, are there areas you plan to focus less on, and are there opportunities to divest that could potentially strengthen your balance sheet?

Thank you, Amit. I'll begin by discussing our portfolio and your questions regarding investments. The portfolio is something I continually evaluate. However, I want to emphasize that in the current period, our main focus must be on supporting our employees and clients. Our approach to investment includes both organic growth and acquisitions. We have been clear about pursuing acquisitions when we identify opportunities that align with our strategy and are attractive. Our future direction centers on hybrid cloud and AI. Regarding hybrid cloud, we are fully committed. For example, with Red Hat, Linux serves as our foundation, while OpenShift surrounds it. We've integrated our middleware into OpenShift, and several of our GBS projects already utilize both Cloud Paks and OpenShift for application modernization. Eventually, we will implement services to support these modernized applications for our clients. Additionally, there are many aspects of hybrid cloud that will align with this vision, and the same applies to AI, which should be seen as a means to extract value from both internal and external data. I want to clarify that size is not our main concern; what matters is being strategic and thoughtful. Therefore, you can expect that as we move beyond the next few months, we will return to an acquisitive strategy.

Yes. The only thing I would add to Arvind is our capital allocation strategy obviously is there to support the business design and the business and portfolio strategy that we have chosen. To your point around hybrid cloud, data AI, we’ve got enough fire power with regards to a strong balance sheet, solid free cash flow generation, solid investment grade, a good access to market, which we talked about in the prepared remarks that gives us ample free cash flow and flexibility to invest in our business, while also returning value to our shareholder in securing that dividend that we talked about upfront. And that acquisition component is a very big important part of our capital allocation strategy, and that hasn’t changed.

Sheila could we go to the next question, please?

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

You mentioned some changes in go-to-market in your prepared remarks, leading perhaps to a more technical bent. I wonder if you can elaborate there a bit. And Jim, I appreciate you’re not providing explicit guidance at this point. But maybe can you address the levers that Company has in responding to the pandemic in the context of preserving cash flows? You alluded to a few things in your prepared comments as well, but last call, you had mentioned several puts and takes of the cash flows as tailwind and headwind, and just wondering if you could recast those again.

With respect to a more technical approach to selling, it’s a journey we have been on, but actually the current crisis in effect catapulted us or accelerated what we are doing. And I’ll touch on sort of three elements. We have always wanted to have our product teams do a lot of demonstrations and proof-of-concepts that we are now going to them virtually, where we stand the properties up on our public cloud and then allow the clients to sort of play around with them. And so, you take away the weeks of doing it in a more traditional manner. Second, in our services teams, they’re doing a lot of what they call virtual garages. So, a garage used to be that we would have our consultants and our implementers sit side-by-side with our client and go do those. But, when you do have social distancing and it’s not just us, our clients don’t really want us on-premise either, they have now become virtual garages, but there’s an advantage there by the way. A bigger advantage is it allows you to actually get access to skills that are around the globe, not just those that may be physically co-resident at a client. And that is again not much more technical approach. And then, third with a lot of remote delivery happening in the GTS part of the business, they are also bringing a much more technical solution to bear through this. So, those are the elements that I mentioned, but you can expect us to do more and more of this as we go along. And Jim, I’ll give it to you for the second part.

Yes, hello, Wamsi. Thank you for the question, as this is important. Given the unfortunate and unprecedented situation everyone is facing with COVID-19, we’ve been focusing a lot on our business profile and model, stress testing it and running various scenarios. It’s always been centered around the long-term sustainability of IBM to deliver value for our clients and investors. This means maintaining a strong balance sheet and sufficient liquidity to ensure we can continue to invest and emerge stronger from this pandemic. Essentially, it boils down to two factors: one related to top-line revenue and the other concerning the operating leverage of our business. Both are crucial for generating free cash flow. This also includes optimizing our balance sheet. We’ve reviewed our revenue portfolio and believe we are differentiated, even though we are not immune to market challenges. We maintain some level of stability in our revenue, profit, and cash, thanks to the transformations we have implemented over time. For context, during the last recession in 2008, around 45% to 47% of our revenue was annuity-based; now it's above 60%. We have consistently targeted large enterprises over consumer SMBs, and this strategy is paying off. More than 70% of our revenue comes from industries identified by IDC and Gartner as being only moderately or minimally affected by COVID-19. This diversified approach across geographic, market, industry, and client dimensions provides us with a solid annuity base moving forward. Regarding our margins and balance sheet, we will continue to optimize as we have done, including shifts in our portfolio toward higher value areas. We recently implemented structural actions that impacted our PTI by $900 million in the first quarter, which we anticipate will yield an annualized return of over two times. We will keep monitoring the quality of our credit portfolio, deferred revenue, and our DPO and DSO are in excellent condition. Overall, we are confident in our financial flexibility and liquidity to keep investing in our business and secure our dividend as we move forward.

Thank you, Wamsi. Can we please go to the next question, please?

Our next question will come from Toni Sacconaghi with Bernstein. You may go ahead.

Yes. Thank you. Arvind, welcome, and great to have you on the call. I was wondering if you could maybe define or articulate on a scale of 1 to 10. How different do you think IBM’s portfolio businesses will be two years from now? I recognize change is not going to happen imminently. But 1 to 10, with 10 being extremely different, where would you place that? And then, Jim, if you could just, very quickly, you talk a lot about the stability of IBM’s portfolio. But it looks like year-over-year, pre-tax income went from over $2.2 billion to under $1.6 billion, if I back out the restructuring and charge. So, even though revenues weren’t impacted, PPI, adjusted for the restructuring, was down nearly 30%, and this is your lowest transactional quarter. Is that how we should be thinking about changes to profit going forward, or was there something unique about this quarter where we saw more negative leverage? Thank you, both.

Thank you, Toni. Looking at our industry, it's fast-moving with constant changes. Five years ago, Red Hat wasn't part of our business, and our cloud backlog in services was significantly smaller than today. Overall, I would say that about half of our business has transformed over the past five to seven years. This reflects the nature of a successful company adapting to leverage our existing relationships and the rapid advancement of technology. One aspect I wanted to emphasize is our focus moving forward, which will center more on hybrid clouds and AI, with quantum technology emerging in the future. I believe this could represent a significant opportunity worth around $0.5 trillion over the next five years. It’s challenging to quantify such changes on a scale of 1 to 10 without specifics, but I certainly sense considerable transformation is underway. Jim?

Thank you for your question, Toni. Operating leverage is a fundamental aspect of our high value-based business model. To address your inquiry, regarding pretax income, if we look at EPS, which is similar to net income, we experienced an 18% decline, resulting in a year-over-year drop of $0.41. This decline includes $900 million from restructuring and structural charges, along with a discrete tax event we mentioned back in January. However, it's important to consider the impact of the Red Hat integration and non-cash purchase accounting adjustments reflected in our EPS and profit figures. We completed that transaction less than three quarters ago and are confident about the overall health of our Red Hat business. We took a significant write-down of $2.2 billion in deferred revenue. We have indicated that Red Hat will contribute positively to cash flow in the first year and enhance EPS by the end of the second year. We have already achieved the first milestone and are making good progress toward the second. To summarize, our EPS stands at $1.84, down $0.41 compared to last year, with approximately $0.35 to $0.38 of that decline attributed to Red Hat's non-cash deferred revenue and integration costs. I highlight this because, as we indicated, these effects will lessen over time. As we continue to replenish the backlog and navigate these expenses, we expect to see significant operating leverage in the future.

Thank you, Toni. Let’s go to the next question.

Our next question will come from Matt Cabral with Credit Suisse. Your line is open.

Thank you very much, Arvind. I appreciate your comments in the prepared remarks regarding what you observed in March. Could you provide additional insights on what you’ve experienced so far in the first few weeks of April across the different segments? Also, have any customers requested price concessions or raised new concerns or terms, particularly regarding the more recurring aspects of your business?

Thanks, Matt. Let me address that. April tends to be a month where, as Jim mentioned, larger transactions often cluster at the end of the quarter. This is probably more true for June than for April. You also asked about the energy aspect of the business, or what I would refer to as subscription services. So far, we haven’t observed any significant changes in the subscription area as we enter April. This is likely because, as we’ve both noted, we typically handle our clients’ mission-critical workloads, which are not the first to be cut; in fact, they are likely to be among the last to be affected. We feel quite confident about the subscription side. On the transaction front, things are still stable, but it’s too early to make definitive conclusions. This is one of the reasons Jim and I mentioned withdrawing guidance, as early progress does not give us a complete picture of what to expect this quarter. Jim?

Yes. Matt, thank you very much for the question. So, Arvind kind of gave a perspective of what we’re seeing here for the first couple of weeks. And as you stated, just given the one transactional versus annuity nature, second quarter like fourth quarter is our highest transactional quarter, particularly in our software base of business overall. But, let me give you a little perspective around the month of March versus February quarter-to-date, because I think it’s important for investors to understand the value of our high value based business model and integrated business model. Because the unfortunate COVID-19 situation that’s impacting economies around the world has a very different profile across our business, whether it’s hardware, software, and services. And as we’ve seen coming through February, the IBM Company was growing revenue through February, led by strong double-digit growth in software overall. The month of March, as I said in the prepared remarks, as the healthcare crisis intensified, that’s where we saw the fundamental shift in client buying behavior, appropriately, so by the way as we’ve done in IBM, where first and foremost you wanted to focus on the operational stability and business continuity of your enterprise and second around the preservation of cash. But, when you look at it, it was more pronounced in our software and our GBS business. We actually substantially grew in the month of March in our hardware portfolio. But, I would align that more around bringing new innovation to market. We’re in this cycle of mainframe, and we did very well with the attach of storage overall. And our GTS business, remember, is a strong annuity base and it’s running mission-critical work and our outsourcing IS business actually got better by 1 point quarter-to-quarter. So, that’s pretty stable. But within GBS and software, interesting around software, our cloud and data platform, 34% growth, yes, driven by Red Hat, but even on a normalized organic basis, we grew over 3%. And that’s really the instantiation of our hybrid cloud thesis with Red Hat overall. So, that part of the portfolio is still executing well. And I think that’s part of what Arvind said, clients are now even faster, more accelerating their journeys to cloud. And it plays right to that. Now, where we got hit was in Cognitive Applications and in Transaction Processing Platform, two different phenomenons across that portfolio. Our Cog Apps is much more centered around industry related content where industries that are getting more impacted disproportionately, like retail, like industrial, like automotive. And in TPP that was a function of just the preservation of cash shifting away from CapEx and OpEx. And just concluding GBS, although we’re very pleased, remember 90 days ago, we talked about accelerating momentum in GBS. We turned that business back to backlog growth. We actually delivered growth in the quarter, strong growth in consulting, strong signings in consulting. But we did see a pullback in the latter part of March, particularly in many European countries around project base, transformational base activity in next generation applications like S/4HANA, Oracle, Workday and other people are delaying, and we expect that to continue here in the second quarter.

Thanks, Matt. Sheila, can we go to the next question, please?

Our next question will come from Katy Huberty with Morgan Stanley. You may go ahead.

Could you start by commenting on the one or two metrics you would like us to track for you and your team over the next couple of years? Additionally, either you or Jim could share insights on the range of scenarios you discussed for this year. The most pessimistic one would involve social distancing for the rest of the year, while the most optimistic scenario is currently unclear. How do those scenarios impact the bearish outlook on EPS and free cash flow, and what does the range look like for the more optimistic scenario? Thank you.

So, let me start. You said what KPIs or what metrics should you use? Look, I think, I’ve been clear, we should look at growth as the metric, albeit once we begin to emerge from the pandemic. And it’s impossible for me to predict how long this is going to be. You mentioned two scenarios, but I’ve listened to all of you and your peers, and I don’t have any particular crystal ball on this. The estimates are all over the place on both the depth and the length of the impact. Now, the other one that I think you should hold us to in metric, other than revenue or a pure financial metric is the number of clients on which we are engaged on hybrid cloud engagement. We talk about it from a product perspective, we talk about 2,200 clients to date. But as we begin to wrap those also with services engagement, I think that’s the second metric that is effectively a leading indicator towards the overall revenue metrics, because that’s the precondition for that. And that’s where we are driving the entire company to. That’s what I’m focused on. I run a war room on that every week. And that’s what our sales forces are incented to go get done. So, Jim, I don’t know whether you want to add something. We already answered the question I think.

Those are the two that align with our business model. However, regarding your second question, Katy, I won’t delve into specifics. As I mentioned earlier, we have conducted extensive stress testing and explored various scenarios. There are a wide range of outcomes. The key points for investors are twofold. First, in any of these scenarios, do you still have the strength in your cash and liquidity position to invest in your business and ensure you emerge stronger? Second, can you maintain your capital allocation and commitment to investors, especially concerning the dividend? The answer to both is a resounding yes. The second question pertains to how we are managing our businesses across the board in each scenario. If we separate this into a product-based business and a services-based business, starting with services, we benefit from an annuitized model. For Global Business Services, about 80% is secured at the start of a quarter, while Global Technology Services is over 95%, although this may decline as subsequent quarters progress. This provides a solid foundation for stability that drives profits and flexibility. Currently, Arvind and I are closely monitoring several factors in managing the services business: the rate of backlog consumption, client project activity, utilization, billable rates, and price realization. Each of these are critical key performance indicators reflecting the health of our services business. For the product-based business, which is more transactional, as Arvind noted, software comprises about 20% to 25% of transactions in the second quarter, supported by a strong annuity base, including our Red Hat subscription model. We are focusing on managing the pipeline, volume, deal sizes, yields, progression, renewal rates, and demand capacity for our hardware products at various stages of their cycle. We are implementing the operational discipline expected from this company as we move forward. Ultimately, we have sufficient financial flexibility and liquidity, which I believe is the most important message for investors.

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

Our next question will come from Tien-tsin Huang with JP Morgan. You may go ahead.

I wanted to ask just a quick one, acquisitions for you, Arvind, just looking beyond the pandemic, I know that’s hard to do. But criteria, size, thinking on accretion, dilution you’re willing to accept there, as you want to move quicker to hybrid cloud and AI? Can you share your thoughts on that? Thank you.

You inquired about criteria, size, and accretion. First off, let's address size. Size isn't a criterion, so I’ll set that aside. As Jim has mentioned multiple times, we have enough financial flexibility to explore numerous possibilities that we believe we can successfully execute. So, size is not really a concern. Regarding accretion and decretion, Jim and I are aligned in managing the business for the long term. If an acquisition becomes accretive over a year or two, as we discussed with Red Hat, that is more than acceptable for us. It doesn’t need to be immediately accretive. As long as it’s a healthy business that offers a strong growth profile and sufficient synergies for both IBM and the acquisition itself, both parties must benefit. It can’t just be advantageous for one, otherwise, it's not appealing. Concerning criteria, those are the aspects that enhance how our clients value us, and we have specifically focused on hybrid cloud and AI as key areas where we aim to be a trusted partner. It's important to have a broad understanding of hybrid clouds, which include how we connect private and public environments, secure them, and manage the data within those environments, granting us greater visibility. As we evolve, the definition of what constitutes the cloud market will also expand over time. I hope this addresses your question, as it is something we contemplate seriously.

Thanks, Tien-tsin. Let’s go to the next question, please, Sheila.

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

Thanks. Arvind, congratulations. Nice to have you on the call. This is I guess for both of you. Are there any components of the business that are in transition, whether that’s GTS or certain legacy software segments where the current pandemic creates an opportunity to accelerate that transformation? And perhaps you can tie that into the comments I think in your prepared remarks that telegraph that there may be some additional rebalancing actions in the June quarter?

I think, David, we are always looking at this and always looking at portfolio optimization. I would not say because of the pandemic or COVID-19 would we look at this. As you saw last year, we divested in the software portfolio quite a few things that were core to hybrid cloud. They were around marketing properties and as service properties around many of our retail clients. It didn’t really necessarily fit or pull along or had synergy with the core hybrid cloud portfolio. So, it made sense to divest them. I think we’re done with that round, just to be upfront. Now, as we always look and say, does this or does this not bring value? Is there a reason for our client to have both, the core hybrid cloud portfolio and something? We’re going to reevaluate that all the time, but I don’t have something to name for you that we are trying to do right now. As the quarters go along, as the months go along, we will do it. But I also want to be clear that for the next few months, we have to be focused on the stability of the business. And we have to be focused on making sure that we preserve our liquidity and our balance sheet. So, that’s what we’ve kind of focused on for the very near term.

Okay, Thanks, David. Sheila, let’s take one more question.

Thank you. Our last question will come from Keith Bachman with BMO. Your line is open.

Hi. Thank you very much. Arvind, congratulations on your promotion, as well as Jim Whitehurst, congratulations on your promotion as well. I wanted to ask a little higher level question. As I think about IBM, there are many constituents, but probably three broad ones, shareholders, employees, and then customers. And as you think about the stock performance over the last, I don’t know, five to seven years, I think shareholders would conclude that they’ve been disappointed with IBM’s performance. And even from a customer perspective, if you look at IBM’s revenues relative to growth of the many markets who participate in, probably some disappointment there. So, as you think about your new leadership and perhaps focusing, excuse me, on the investor side, what do you think you really need to do differently for IBM and its shareholders versus what’s happened over the last five to seven years? Thank you.

I believe we have recognized the market value growth of various areas. While we have always prioritized high value, we measure our net promoter score, which is considered one of the best metrics for gauging how clients perceive the value they receive from us. This score has significantly improved, increasing by more than 10 points over the past two years. This improvement indicates that our clients are more satisfied with our offerings. However, for our overall portfolio to grow and make investors happier, we need to be clear about our management team's role in delivering this growth. You heard me announce many of our management team members earlier. I believe they are equipped to generate growth in the market. For instance, Jim Kavanaugh will focus on capital allocation and using our financial flexibility for both organic and inorganic investments. Jim Whitehurst has successfully navigated crises and growth phases in his previous roles. Bridget van Kralingen deeply understands client needs and will implement some of the go-to-market changes we discussed. Howard Boville, coming from Bank of America, brings valuable insights into our largest clients and has a history of driving efficiency. Mark Foster, responsible for Services, is committed to growth and ensuring we deliver value to our clients. Together, this team has the potential to achieve growth. However, we must acknowledge the importance of balancing growth with other metrics like earnings per share and liquidity. Liquidity is crucial for any company's survival in uncertain times, and our focus on that will serve us well. That said, growth should be an equal priority alongside other metrics. We will work towards this. Though it may not be a comprehensive answer now, we will clarify our direction as the months progress. If I recall correctly, this was the last question. In conclusion, these are unprecedented times. In the coming weeks and months, we will continue to prioritize our employees, clients, and our contributions to society. Despite the challenges posed by this crisis, it presents a unique opportunity for IBM as a technology leader and a trusted partner. Personally, I find it an intriguing time to assume this role, and I look forward to maintaining this dialogue with all of you. I will provide updates at the end of the second quarter. Thank you.

Okay. Thanks Arvind, thanks Jim. Thanks for all of your questions. Sheila, let me turn it back to you to wrap up the call.

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