Thank you. This is Patricia Murphy, and I'd like to welcome you to IBM's Third Quarter 2021 Earnings presentation. I'm here with Arvind Krishna, IBM's Chairman and Chief Executive Officer, and Jim Kavanaugh, IBM's Senior Vice President and Chief Financial Officer. Prepared remarks will be posted on the IBM Investor website within a couple of hours, and a replay will be available by this time tomorrow. I will remind you that the separation of Kyndryl is expected to be completed at the beginning of December, and as a result, our third quarter performance reflects IBM, including the managed infrastructure services business and our pre-separation segment structure. 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. Mention about these factors is included in the Company's SEC filings. The presentation also includes non-GAAP measures to provide additional information to investors. We present revenue in signings growth at constant currency. In addition, to provide a view consistent with our go-forward business, we'll focus on constant currency growth, adjusting for the divested businesses for the impact of lines of total revenue, cloud, and our geographic performance. We will provide a reconciliation chart for these and other non-GAAP measures at the end of the presentation, and an 8-K will be submitted to the SEC. With that, I'll turn the call over to Arvind.

Thank you, Patricia. And thanks to all of you for joining us today to discuss our third quarter performance. At our recent investor briefing, we laid out our Hybrid Cloud and AI strategy, and our approach to delivering strong free cash flow and sustainable mid-single-digit revenue growth starting in 2022. For the last year and a half, we've been taking actions and investing to execute our strategy. This quarter, we reported modest revenue growth and delivered solid free cash flow, generating over $11 billion of adjusted free cash flow over the last year. We also made tangible progress in our key growth areas of software and consulting. With that, I will acknowledge that in other areas of the business, we fell short of our expectations. This was during the end of the cycle, and global technology services clients paused ahead of the public filing of the Form 10 and separation of Kyndryl. We have made further progress in the Kyndryl separation in the last two weeks and announced a distribution date on November 3rd, which is ahead of our original schedule. We've done a lot to prepare Kyndryl for this moment. We took structural actions to improve the profile; the management team is in place, and employee transfers and the vast majority of client contract innovations are complete. We're now even more certain that separating this business creates value through focus. That said, the people of GTS have been a part of IBM for a long time. And it is with mixed emotions that we're reporting on this segment for the last time. The separation is just one of the many actions we are taking to focus our business on hybrid cloud and AI and improve our financial profile. To give you some color on IBM's performance excluding Kyndryl, we delivered 2% revenue growth this quarter. That compares to 1% in the second quarter and a minus 1% in the first quarter. These results reflect a strong demand for technology products and services that help our clients advance their digital transformation. Our software revenue growth was led by Red Hat, security, automation, and cloud backs across our software. Global Business Services, soon to be IBM Consulting, accelerated revenue growth to a double-digit rate. Software and consulting are our two main drivers of growth, and this was certainly true this quarter.

Thanks, Arvind. Over the last year, we have been very clear on the two most important measures of success: revenue growth and free cash flow generation. I'll start with these key metrics. In the third quarter, our revenue of $17.6 billion was up as reported and down modestly at constant currency. Excluding the content that will go to Kyndryl, IBM’s revenue grew 2% with an improving trend over the last three quarters. Our cash generation was up for the quarter year to date and trailing 12 months. This excludes the cash charges associated with the separation of Kyndryl and the structural actions initiated at the end of last year. Looking at our revenue from a segment perspective, Global Business Services growth accelerated to 11%, and our software revenue was up 2%. These businesses will be our growth drivers into the future, and together represent over 70% of our post-separation revenue profile. Systems declined this quarter by 12%, reflecting product cycle dynamics. Across our segments, IBM's cloud revenue was up 11% over last year. This is led by Global Business Services in cloud and cognitive software, which are up 27% and 28% respectively over that period. Moving onto the profit dynamics, pre-tax margin is up 10 basis points sequentially, but down 100 basis points year-to-year. Since we saw the demand environment improving in the fourth quarter of last year, we have been increasing investments in skills, innovation, and our ecosystem, both organically and through acquisitions.

Yes, thank you. Arvind, there seems to be a lot of concerns around the actual separation in terms of potential disruptions. You noted on this call that you saw some hesitation or pause in spending. Do you feel, given the changes that you have put in place, also with sales compensation, that you feel comfortable about the trajectory of the business once you get past this threshold of near-term disruption that you highlighted? And if I could ask you, Jim, you noted about a $2.5 billion one-time bump from Kyndryl in 2022. Can you maybe calibrate that number for 2021 as well? That would be helpful. Thank you.

Thank you for the question, Wamsi. I want to be very clear. I wouldn't describe the situation as a disruption; rather, I think we are experiencing a slight pause, as I mentioned in my prepared remarks. This pause is expected to be around the end of the third quarter and possibly into the beginning of the fourth quarter, primarily affecting hardware and Kyndryl. To provide some context, much of the hardware goes through Kyndryl, and many of our clients see that as an alternative way to procure infrastructure in the past. Given the substantial relationships we have with these clients, a pause is not unexpected. I believe this captures the situation accurately. When I examine our pipeline, along with our sales and executive compensation, I feel completely confident that we will move past this by the start of 2022, specifically by January. It will be well behind us. Additionally, as we enter a new product cycle for some hardware in the first half of 2022, I anticipate that it will fully resolve the situation. Therefore, I maintain our projections confidently, as I do not foresee any long-term or systemic issues based on our numbers, pipelines, and client behavior.

Thanks, Wamsi. Regarding your second question, as we mentioned on October 4th during our Investor Day, we talked about the strong strategic relationship between IBM and Kyndryl moving forward. At that time, we indicated about $2.5 billion in annualized business, mainly focused on our high-value mission-critical recurring revenue from software, along with some in our infrastructure segment related to hardware purchases and support. This was an annualized estimate for the full year. For the fourth quarter, we expect to see two months worth of this in 2021, estimating around $350 million to $400 million in total. If we compare what I said on October 4th, the amount for 2022 compared to 2021 reflects a difference of just over $2 billion, which translates to an approximate three points of incremental growth above our mid-single-digit model in 2022.

Thank you. Arvind, you mentioned this earlier, but I want to ask more directly. This quarter, IBM's growth for RemainCo was 1.9%, compared to a constant currency decline of 3.5%. Next year, the comparisons will be about two or three points more challenging, meaning you will need to improve your growth rate significantly to achieve mid-single-digit growth. Essentially, you'll need to increase your growth rate by about five percentage points compared to this quarter to reach that goal. Beyond the product cycles in Mainframe and UNIX, considering your comments on the time required for investments to yield results, what major changes do you anticipate that would adjust the growth profile by four, five, or six points in the coming quarters? Additionally, how long do you foresee continuing to invest and putting pressure on operating margins, especially in Software and GBS? Thank you.

Okay. Thanks, Toni. I'll take the first part of that and then I'll look at Jim for the second part of the question. Toni, there's three parts of it. First, let me acknowledge, yes, our growth rates have to improve. No question about it. We are not saying we are done. There are three elements that will contribute to the growth rate, and I think a lot of what you were pointing to was towards the software growth rate, and I’ll say it comes from three things. One: we are seeing improvements in our organic, meaning the software we already had. We continue to see that. We expect that will improve the software growth rates by a few points. The second one, we will continue to make acquisitions, but not only the ones we have made which keep contributing because they are growing well into double-digit growth rates, but the new ones we make will also contribute to that. Think of that to be in the same range. The third one, as we're making a lot of changes in our sales compensation as well as in the makeup of our sales team, we talk about the Garages, we talk about client success managers leading to more experiential and more technical selling. We believe that’ll drive greater deployment and hence quicker purchases in that segment. All of those together will contribute to a much improved growth rate in the Software segment, up to the mid-single digits. As I think you're pointing out in some of your math. I'm not going to debate whether it’s 3, 4, or 5%. Happy to do that when we have a bit more time. And I'll pass it over to Jim for the second part of the question.

Thank you for the great question, Toni. Let’s discuss this quarter’s numbers. IBM, excluding Kyndryl, saw about 2% growth, which is an improvement compared to being flat in the first half of the year. While we acknowledge an easier comparison this quarter, it's important to analyze what contributed to that growth. We had mentioned our goal of a mid-single-digit growth rate across our three segments. We are experiencing an improved growth profile as we focus on higher value markets, with over 70% of our business coming from Software and Consulting, which also offers a more valuable recurring revenue stream. Both of these segments will drive all five points of IBM's growth, coupled with improving operating margins, which I will discuss later. The infrastructure segment, which includes our Mainframe and infrastructure support businesses, is expected to remain flat as it follows the innovation cycle. We are confident that once we introduce new innovations next year, we will see growth in that area, although it will stay flat over a three-year horizon while still generating significant cash. In the third quarter, we aimed for a five-point contribution based on those two growth factors, and we achieved 4.5 points of revenue growth for IBM. We fell short by about 0.5 points in the software area, largely because we had strong results in IBM Consulting. We have a solid business pipeline in Consulting, and we anticipate this will continue. Although we need to improve in Software, our underlying business performance is promising. We noted that our deferred revenue tailwind is diminishing over time, which cost us about a point of growth in software. However, the core performance of our proforma IBM Software is on an upward trend. We are confident for the future for several reasons. First, we have had strong renewal rates for five consecutive quarters. Our software business generates 80% of its revenue repeatedly, and our deferred income and deferred revenue balance has increased by $800 million year-over-year. Second, we are seeing a good acceleration in Annual Recurring Revenue and our Net Revenue Retention has exceeded 100% for three straight quarters, particularly in Cloud Paks. Importantly, we are now entering the initial phase of our Enterprise License Agreement cycle, which will extend into 2022 and early 2023. We feel optimistic about our growth factors. The shortfall we experienced was due to being at the end of a very successful mainframe cycle, with the infrastructure segment deducting 2.5 points from IBM's growth, excluding Kyndryl. Therefore, we achieved 4.5 points against a target of 5, losing 2.5 points due to infrastructure, a trend that should stabilize as we release new innovations. Finally, regarding operating margin, we stated at the beginning of the year that the key measures for us were revenue growth and free cash flow generation, and we are succeeding in both. Free cash flow generation is crucial to fund investments in innovation and IBM Consulting, where demand remains strong. This will likely improve as we move into 2022, but we are consistently driving cash performance. Year-to-date, through the third quarter, we are seeing revenue growth, with revenue excluding Kyndryl growing at constant currency. Our gross and pretax dollars are on the rise, along with pre-tax margin and trailing 12-month pre-cash flow. We feel confident as we head into 2022 based on this model.

Yes, thank you. Arvind, you referenced the pauses in Kyndryl and Hardware in the quarter, but Software performance was also light of expectations, so can you talk about what drove the shortfall in Cloud and Cognitive Software and where you see opportunities for better execution within that Software business?

Thanks, Katy. Totally. Actually, even Jim acknowledged that we fell maybe a half-point short of our own expectations and we could've done better. Here is where I see it doing better. First, the one that performed exactly according to what we wanted was Red Hat. Red Hat gave us 17%, which is pretty much what we wanted and expected. If I now look at our transaction processing platform, it was a little bit below what we would like because we have been saying that in a long-term model that should be more mid-single-digit decliner, but this quarter it was a high single-digit decliner. We think that as we get past, because that is coupled, I won't call it identical, but it is coupled to some of the infrastructure cycles, I expect that to come back starting early '22 or maybe late in '21. Then on our category that is today called AI applications, we were minus 1%. There I would expect us to get back to mid-single-digit growth. Now you see if I put it all together, do we expect to see a tiny bit of pausing from people because of everything going on? Yes. Two, we are turning our incentive models. I spoke on it on the prior question very briefly. Our incentive models for our sales team are going to be very heavily tuned towards software going forward in '22. That I believe will result in much better performance because the only way that they will get anywhere near the target incentives is to make this up a number. That is probably for the first time that that's been true in a long, long time at IBM. So Katy, that's my view on what happened there and how we will improve going forward.

Yeah. Tien-Tsin, this is Jim. I'll take that as we move forward. As I stated earlier and Arvind commented in the prepared remarks, we do see a robust demand environment out there. We called it as we were going through the fourth quarter; we called a very conscious strategy around GBS. Now, IBM Consulting again plays a very integral role in our Hybrid Cloud platform-centric business model. Why? Because it drives scale and adoption of our platform and it also pools IBM technology while taking advantage of the ecosystem and partnership and skill and capability. So we started aggressively adding skills, capacity, expertise, ecosystem partnerships, and scaling acquisitions. I think we just announced today our eighth GBS acquisition in the last 12 months overall. So it was a conscious strategy and we believe that that flywheel effect of GBS that turns into the multiplier of driving our platform, pulling our Software, and driving a very robust economic equation for our ecosystem partners is essential in our long-term strategy. That said, we saw margins down 310 basis points; we saw pretax margins down 110 basis points. Within that, though, we grew gross profit dollars and we grew pretax dollars. We're focused on generating growth in the top line while generating cash contribution, and GBS delivered that today. I would also mention that GBS accelerated their margins quarter-to-quarter tremendously. Pretax margins were up 5 points quarter-to-quarter, and they've been accelerating their gross margins sequentially every single quarter this year. So we delivered over 13 points of pretax margin in the third quarter, and our model, as we said on October 4th, was low teens. So we feel pretty comfortable; we see a very good book of business, and we continue to see in the fourth quarter IBM Consulting delivering double-digit revenue growth and margin dollar and profit dollar and cash dollar contributions, while pulling our Software and Hybrid Cloud platform.

Thank you, Jim. Let's go to the next question, please.

Thank you, and thanks for squeezing me in here. Just two really quick ones. First, how much, if any, of the revenue with Kyndryl is activity-based, which may be dependent on their own execution? And then secondly, Jim, you mentioned the ELA cycle starting up, I think early 2022. Perhaps you could share with us just how much of a headwind that it's been and which segments its impacted most. Thanks.

David, thank you very much for the question. I think I'll take both and then Arvind can wrap it up here overall. First, around Kyndryl. If you go back to October 4th at the Investor Day, which we were pretty transparent about, we said we're going to continue that transparency into 2022 around the external sales with the strong strategic relationship between IBM and Kyndryl. We said about on a full-year basis, $2.5 billion give or take, and in 2022, when you got 12 months versus two months in 2021, it will be about $2 billion of incremental or about three points. Within that, David, the majority of that is in Software, and a majority of that is annuitized based high-value mission-critical recurring revenue. So if you're thinking about, do we have any deflationary impacts around that $2 billion, on the Software side, which carries the majority of it, no. The second component is we have about $0.5 billion annualized with regards to our infrastructure support and hardware. On the infrastructure support, it's again an annuitized based business overall, and with regards to hardware, in our strategic relationship as we set Kyndryl up, we've given them a pretty aggressive and component of an aged inventory refresh program. So we have very little hardware purchases over probably the next 18 months to two years, given we just went through a big asset refresh. So long answer to your question, but I don't think we have a lot of impact moving forward against that. Second, around the ELA cycle, you know this quite well. It's typically a three-plus-year cycle. The dynamics of client buying behaviors change over time, but we feel very confident. The good news is we have a lot of headroom. We're just starting the early part of that in the fourth quarter. That will predominantly play out in 2022 and will also extend early into 2023 as we move forward. If we look at our transactional related activity, we've been making strong performance improvement in our annuitized based business with renewal rates and our on-prem transactional business has struggled, especially during the pandemic. This will bolster that as we move forward. Most importantly, we feel confident in the investments in innovation and what we're bringing to market with our modernized and containerized Cloud Pak offerings optimized on top of our Hybrid Cloud Red Hat platform that we're good. So with that, let me turn it over to Arvind.

Thank you, Jim. First, I want to express my appreciation for your questions. They really delved into the specifics, and I hope our responses have clarified our business for you. I would like to make a few concluding remarks. I hope you recognize that we have made progress this quarter in crucial areas, which both Jim and I pointed out regarding our growth opportunities and value vectors as we move into 2023. We acknowledge that we have more work ahead. Importantly, we are on the brink of the future of IBM, and we expect to end the year positioned well to achieve our midterm goals starting in 2022, which include sustainable mid-single-digit revenue growth and increasing free cash flow to support further investments. I look forward to discussing this with all of you again.

Arvind, thanks. Victor, let me turn it back to you to close out the call.

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