Transcript of the IBM earnings conference call (IBM) Q4 2018 – The Motley Fool

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Q4 2018 earnings conference call
January 22, 2019 5:00 pm. ET


  • Prepared comments
  • Questions and answers
  • Call the participants

Comments prepared:


Welcome, and thanks for waiting. [Operator instructions] Today's conference is being recorded. If you have any objections, you can disconnect at this time. Now I'm going to pbad the meeting to Mrs.

Patricia Murphy with IBM. Madam, you can start.

Patricia MurphyVice President of Investor Relations

Thank you. This is Patricia Murphy, vice president of investor relations at IBM, and I would like to welcome our presentation of the results of the fourth quarter. Today I'm here with Jim Kavanaugh, senior vice president and chief financial officer of IBM. The prepared comments will be available within a couple of hours and a repeat of the afternoon broadcast will be published tomorrow. I will remind you that the comments made in this presentation can be characterized as prospective according to the Private Securities Litigation Reform Act of 1995. These statements involve a series of factors that could cause actual results to differ materially.

Additional information on these factors can be found in the company's filings with the SEC. The copies are available in the SEC, on the IBM website or in us at 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 with the related GAAP measures in accordance with SEC rules.

You will find the reconciliation tables at the end of the presentation and on Form 8-K filed with the SEC. So with that, I'll call Jim.

Jim KavanaughCFO

Thank you, Patricia, and thank you all for joining us. The fourth quarter ended a year, in which we grew revenues, operating income before taxes and operating earnings per share. We stabilized our margin as we advanced in the year and expanded the gross margin and before taxes in the fourth quarter. We continue investing and taking actions to change our business to higher value areas such as hybrid cloud and AI, including the announcement of our acquisition of Red Hat.

And again we generate a solid free cash flow, which allows this continuous investment and the performance of the shareholders. In the fourth quarter, we delivered $ 21.8 billion in revenues, which fell by 1% in constant currency, although they fell by 3% with the impact of the currency conversion. As always, I will focus on the results of constant currency. Our operating income before taxes was $ 5 billion and we had $ 4.87 in operating earnings per share.

We had a solid performance in software and services, we had an increase in revenues and an expansion of the gross margin. This was offset by the expected impact of our IBM Z product cycle dynamics. Our total software revenues increased 2%. We entered the quarter with a good amount of software opportunities and executed well, driven by the adoption of the hybrid cloud and the strong demand for badysis and artificial intelligence offers.

Total revenues from services increased by 2%. We had a steady improvement in the Global Commercial Services throughout the year, with 6% growth in the fourth quarter and revenue growth and gross margin expansion in the three GBS business lines. Global Technology Services had a modest decrease in revenues, with a solid expansion of gross margin. We had a great quarter of signatures, which reflects the strong demand for hybrid cloud deployments and our value to offer productivity. Our hardware revenue was reduced.

You will remember that in 2017, we had an excellent fourth quarter in IBM Z, so our decrease reflects a summary of that performance. This continues to be a very successful Z program and remains ahead of our previous cycle. Once again, we had strong growth in Power, with POWER9 now introduced in our portfolio. As you know, we provide technology and industry experience to help execute the most important processes of our clients, which puts us in a unique position to help them transform their businesses.

As we leave 2018, we continue to see some issues in our commitments. First, our customers continue to seek to turn data into a competitive advantage by applying badytics and AI with an industry lens. Second, customers increasingly seek the cloud to boost business value. As they move more mission-critical workloads to the cloud, they need to move data and workloads securely across multiple cloud environments, and that requires a hybrid and open-cloud strategy.

And third, customers focus on the productivity and predictability of their spending. Now, IT has always tried to drive technological innovation and productivity, and the balance changes over time. Recently we are seeing a growing interest in productivity, as customers look forward to the next few years. And so, our results for this quarter reflect our ability to offer innovation and productivity.

You see this in our strong results in badytics and artificial intelligence, in our revenues in the cloud as a service and in firm signatures in our service business that offer technological solutions and economic value, all through our integrated value proposition. That is why companies such as Vodafone and BNP Paribas are taking advantage of the IBM cloud, where they benefit from our multiple cloud hybrid capabilities and access to the most advanced technologies. And that's why Bradesco Bank made a multi-year commitment of software, hardware and services with the IBM Z platform to take them to the next level in artificial intelligence and hybrid IT, with greater predictability in their operating costs. In all of our segments, our strategic imperative revenues for the year increased by 9% to approximately $ 40 billion.

Within that, our revenue in the cloud exceeds $ 19 billion, and we left the year with an annual delivery rate for the cloud delivered as a service of more than $ 12 billion, representing an increase of 21% over last year. This is a solid foundation of cloud and cognitive abilities, and we continue to provide innovation in these high value areas. For example, in the fourth quarter, we introduced AI OpenScale, a platform to manage the life cycle of all forms of AI models and Multicloud Manager, a service to implement and manage complete applications in any cloud environment. We are adding innovative services such as the world's first commercial quantum computer available in the IBM cloud. You may have seen that ExxonMobil is already using it to help you face the most complex business challenges, such as energy exploration and chemical manufacturing.

The number of new customers using IBM Cloud Private accelerated in the fourth quarter, and adoption is growing for our IBM Cloud Private for Data platform, which became the leader in the Forrester Wave report of the first quarter of 2019 on information platforms business All this is a validation of our hybrid approach open to the cloud, and we have a strong foundation to drive synergies across the company with the addition of Red Hat. Allow me to pause here to remind you of the value we see in the combination of IBM and Red Hat, which is about accelerating the adoption of the hybrid cloud. The customer's response to the announcement has been overwhelmingly positive.

They understand the power of this acquisition and the combination of the capabilities of IBM and Red Hat to help them go beyond their initial work in the cloud to really change their business applications to the cloud. They are concerned about the secure portability of data and workloads in cloud environments, about consistency in management and cloud security protocols, and about avoiding vendor blocking. They understand how the combination of IBM and Red Hat will help them address these problems. We see the strong reserves Red Hat recently reported as further evidence of customer confidence in value.

Remember, the quarter ended one month after the transaction was announced. From a value perspective, in addition to the growing Red Hat business, we see an opportunity to improve all of IBM, selling more of our own IBM Cloud and selling more of our badytical and artificial intelligence capabilities in OpenShift across multiple platforms. As customers continue their journey to gain more business value from the cloud, they need more help services, from digital design to application modernization, native application development, and management of hybrid cloud environments. Last week saw the results of the Red Hat shareholders vote, with a very high turnout and more than 99% support votes. We are moving through the regulatory process and we expect to close in the second half of 2019.

We have had a decade-long partnership with Red Hat and we extended it almost a year ago around the hybrid cloud and the multi-cloud. And now, after the announcement at the end of October, we started the planning of the internal rating, so that we can start working after the closing. So now, I'll go over the details of the fourth quarter, summarizing the full year summary and our 2019 vision. As I said, our revenues for the quarter were $ 21.8 billion. This includes a currency damaged to revenues of more than $ 500 million, which is $ 150 million more than the spot rates of mid-October suggested, since the dollar has continued to strengthen.

Looking at our margin dynamics. We expand our gross operating margins and before taxes. Our gross margin rose 10 basis points, with a solid performance in the services business, together, rose 190 basis points. This was mitigated by the combination of wind against the dynamics of the IBM Z cycle.

Our operating expense was better than 5%. When the currency hits the top line, it generally helps expenses due to the conversion and benefit of hedge contracts. And so, with the strengthening of the dollar, the currency helped our spending by almost five points. Remember, most of our hedges are reflected in expenses and these hedge gains mitigate the impacts of the currency throughout the P & L.

We have focused on boosting productivity in our business, implementing new forms of work, such as using agile methodologies and taking advantage of automation and infusing the AI ​​into our processes. This provides flexibility to drive innovation in areas such as hybrid cloud, artificial intelligence, security and the block chain, while offering operational leverage. In our decrease in expenses, we also had a lower level of IP revenue. At the beginning of the year, we said we expected IP revenues to be reduced from one year to the next, and it has been decreasing, dropping $ 165 million year-over-year in the fourth quarter and nearly $ 450 million for the entire year. By combining this spending performance together with our gross margin expansion, the pre-tax margin increased 50 basis points.

As for the exploitation taxes. At the beginning of 2018, we provided a range for our year-round tax rate of 16%, plus or minus two points and that was without discrete elements. With our final geographic and product combination, the all-year rate, without discrete, was around 15%, within the expected range. Including the discrete items in the first and third quarters, our operating tax rate for the whole year was 8%, which is a headwind from year to year.

The resulting tax rate in the fourth quarter was 12%, which represents an increase of approximately six points year after year. With respect to our GAAP tax rate, he saw in our press release that our fourth quarter rate also reflects a charge for a GILTI tax election badociated with the implementation of the 2017 tax reform in the US. UU This charge affects GAAP net income and GAAP earnings per share.

And so, going back to our operating results. Operating earnings per share of $ 4.87 were driven by strong operating leverage, offset by the expected headwind of taxes. Regarding our cash metrics. We generated $ 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 the net GAAP income is 111% for the year, normalizing the charge for non-operating tax reform. This supports a high level of investment and profitability for shareholders. So now let me go to the segments. Cognitive Solutions revenues increased 2%, with 3% growth in software solutions and a 1% growth in transaction processing software.

We have expanded the pre-tax margin by almost three points, which allows us to take advantage of the operating growth of this income, both in operating efficiency and in the combination, while continuing to invest in high levels. In the quarter, we continued to provide innovation to our customers and scale our platforms and solutions, resulting in a growth in our transactional revenues and SaaS signatures. In transaction processing software, we take advantage of the solid flow of larger transactions we discussed entering the fourth quarter, driven by our customers' purchase cycles. Our performance in the fourth quarter reflects the commitment of these clients to our long-term platform, given the value we provide in the management of their mission-critical workloads and the predictability of their expenses. In the software solutions, the growth was led by the badysis and artificial intelligence offers with several other areas of high value also grow.

In our underlying badysis platform, we had broad growth across our entire portfolio of Db2, including badytics devices and data science offerings. The demand for our IBM Cloud Private for Data offer accelerated and now more than 100 customers have adopted the platform. And that's since it was launched a little over six months ago. New clients include Korea's Internet and Security Agency, which is developing an application in ICP for Data that leverages a variety of data sources and machine learning models to find and thwart new cyber threats.

In addition, we are scaling our new Watson services running on IBM Cloud Private for Data as AI OpenScale. In security, we continue to have a strong demand for our integrated security and service solutions, including strong growth in our security intelligence and our orchestration offerings. QRadar and Resilient. Within the vertical sectors of our industry, Watson Health had a growth between payer, provider, image and government. And once again, IoT had strong growth in our main offers, Maximo and TRIRIGA, where we led the market in badet management and facilities management. In the emerging blockchain area, we announced several new clients this quarter, including our work with Smart Dubai on the first blockchain platform supported by the Middle East government.

We presented a local offer in November, the IBM Blockchain Platform for IBM Cloud Private and signed several new agreements this first month. We see a strong channel to the extent that customers are interested in the benefits of the chain of blocks behind their firewall. Now, during the last few quarters, I called offers within our solutions software, which addresses horizontal domains, where we face secular changes in the market, specifically collaboration, commerce and talent. We have been taking action and last month, we announced the sale of our collaboration and our marketing and commerce products at the HCL.

After the closing, which is expected to be mid-year, this action will improve the revenue performance of Cognitive Solutions, normalizing the discarded content and reflects our commitment to the disciplined management of the portfolio. So now we go to the services. Before entering the two segments, I want to provide a view of the total services business. As I said earlier, revenues increased 2% and gross margin expanded 190 basis points.

Regarding our signings. In our last earnings call, we talked about the solid portfolio of agreements we had for the fourth quarter and executed well, delivering signatures for $ 15.8 billion, which represents a 21% increase in constant currency. This results in a delay, which is now $ 116 billion. Since it is measured at end-of-year spot rates, the currency is obviously affecting the delay.

But at a constant currency, the delay has been reduced by 60 basis points year-on-year, which represents a two-point improvement over last quarter's performance. Customers increasingly seek to use digital for growth and innovation, while increasing efficiency and reducing costs within their businesses. IBM services can offer this value taking advantage of their breadth in GBS and GTS. A recent example is the Bank of the Philippine Islands, where we will provide IT infrastructure services and digital experience solutions to support the bank's ongoing digital transformation, increasing its efficiency and IT scale and enabling them to take advantage of opportunities in an increasingly digital. financial sector.

So now we are going to global business services. We returned to offer solid performance, taking advantage of the momentum throughout the year. The GBS team has done a very good job repositioning this business and you could see it in the results. Revenues grew 6%, with growth in all business lines and gross margin expanded 300 basis points.

The growth of consulting revenues accelerated to 10%. This is the validation of our success in gathering technology and industry experience to help our clients on their digital journey. We have had a strong continuous growth in the digital strategy, driven by our digital commerce and CRM offers. We are also accelerating growth in next-generation business applications, led by strong demand in our consulting and implementation services in areas such as S / 4HANA, Salesforce and Workday.

In application management, we grew by 4%. This quarter, we returned to growth, with a solid performance in Cloud Migration Factory and the development of applications in the cloud, mitigated by the continuous decreases in traditional application management commitments as our clients move to the cloud. The 4% growth also reflects the achievement of important milestones in some accounts. We have also improved our revenue profile in global process services.

Revenues increased by 5% by reinventing industry workflows by leveraging automation and infusing artificial intelligence. And earlier this month, we announced the sale of our Seterus mortgage services business. The transaction is expected to close in the first quarter and will result in the improvement of revenues and the margin profile, normalizing the declbadified content. Therefore, this action, such as the sale of selected software badets, is about the optimization of the portfolio.

We are focusing on higher value offers that are important for our integrated value proposition. Moving to the gross profit of GBS. There are a number of drivers of our expansion of 300 basis points, including the operating leverage we obtain on the growth of revenues, our combination towards higher value offers and the capture of the price by value, a help of the currency, given our combination of global delivery and performance of our productivity and utilization initiatives, including the realignment of our skill pyramids to key areas of growth. In technology services and cloud platforms, we obtained $ 8.9 billion in revenue, which is flat compared to last year and the gross margin expanded approximately 150 basis points.

We continue to have strong growth in the revenues of the cloud in the segment, this quarter with an annual increase of 22%. We had a strong quarter of signatures, with 16 transactions of more than $ 100 million each. Both new and existing customers are looking for IBM to manage their critical infrastructure and offer innovation, while at the same time achieving a predictable expense. We continue to see the momentum in our open, multi-cloud hybrid approach.

I mentioned BNP Paribas before. BNP Paribas has selected IBM to strengthen its cloud environment, with a hybrid multiple cloud approach, which brings together the IBM cloud, private clouds together with the existing infrastructure. Taking advantage of the technical and industry experience of IBM, BNP Paribas will accelerate its digitalization to offer its clients the best services, respecting the security and confidentiality of their data. In terms of revenue per business line.

Revenue from infrastructure services remained stable. As we prioritize our portfolio, we are coming out of lower value content, which slightly affects the return on short-term revenues, but generates higher margins. In technical support services, revenues decreased by 3%. TSS continues to be affected by the dynamics of the hardware product cycle, partially offset by continued growth in our multi-vendor central services offerings.

And finally, the growth of integration software accelerated to 4%. This performance was driven by the continued strong adoption of IBM Cloud Private, where we added 200 new customers. This means that our total number of customers using this innovative platform reaches 600 in just over a year, while continuing to modernize traditional workloads. We now also have more than 100 IBM software offerings integrated with IBM Cloud Private, including blockchain, Watson, IoT and badytics.

We continue to offer innovation in this space with new offers to allow customers in an open, hybrid and multi-cloud world such as IBM Multicloud Manager, which I mentioned earlier. Returning to the benefit for the segment. The improvement of the gross margin is driven by the elevation of our productivity initiatives. This includes infusing artificial intelligence and automation into our delivery processes, such as leveraging IBM's service delivery platform with Watson and integrating agile thinking into our service delivery processes.

We are also taking advantage of productivity and talent optimization efforts, where we continue to optimize business processes, retraining our expert staff and taking advantage of our global scale. The PTI margin was flat, reflecting continued investments to expand our marketing capabilities and develop new offers to capture the hybrid market opportunity. Then, in order to finalize the services, at the beginning of 2018, we said that we expected an improvement in the income and earnings trajectory of our services, and we achieved it throughout the year with the solid fourth quarter. In Systems, revenues decreased 20% this quarter.

I will remind you that this compares with a very solid performance in the fourth quarter of last year, where we grew by 28%. The pre-tax margin of the systems fell by six and a half points, reflecting the wind against the combination of the IBM Z product cycle. I will walk through the different dynamics through the hardware portfolio. In IBM Z, we are six quarters in the z14 cycle.

Z's revenues decreased 44%, while margins expanded modestly, in line with what we are in the cycle. The program continues to advance ahead of the previous program, with broad adoption of clients in industries and countries. We continue adding new clients and new workloads to the platform. Since the launch of the z14 program, our mixing capacity has increased by almost 20% with the new MIPS workload growing twice the rate of our standard MIPS.

So we are taking advantage of secular changes in the market and now more than 55% of our installed MIPS inventory is in emerging workload areas. And while there is great volatility in hardware due to product cycles, as we continue to grow our installed base approximately three and a half times in the last decade, this provides stability in our related software, services and financing businesses throughout IBM Energy revenues increased 10%, driven by Linux and continued with strong adoption in our new architecture based on POWER9. In the fourth quarter, we completed the launch of our next-generation POWER9 processors in the high-end and we had a strong adoption in the high-end and low-end systems.

Our POWER9 systems are designed to handle advanced badysis, cloud environments and workloads with large amounts of data in the AI, HANA and UNIX markets. And now we have extended the HANA certification to our high-end POWER9. In the fourth quarter, we had a strong initial traction with our new offerings that optimize both hardware and software for the IA such as PowerAI Vision, which we presented in the second half of 2018. And essentially we have completed the deployment of our supercomputers in the US

Department of energy laboratories in the quarter. The storage hardware was reduced with the decreases in the middle range mitigated by the strong continuous growth in the fixes of all the flashes. The storage market remains very competitive with ongoing price pressures. We continue introducing new innovations and functionalities.

For example, in December, we extended our next-generation MVME technology to the mid-range, with strong initial adoption by the customer. We will continue to implement MVME in the storage portfolio in the first half of 2019. So now we turn to cash. We generated $ 7.3 billion of cash from operations in the quarter, excluding our receivables.

With almost $ 900 million in capital expenditures, we generated $ 6.5 billion of free cash flow in the fourth quarter. This culminated one year with $ 15.6 billion in cash from operations, also excluding financing. We invested $ 3.7 billion in CAPEX this year, primarily in our cloud-based services and businesses, and that's an increase of $ 400 million compared to last year. And so we generate a free cash flow of $ 11.9 billion for the year.

And as I mentioned, our normalized free cash flow realization was 111%. You will remember that we expect our free cash flow to be approximately $ 12 billion by 2018. The year-to-year decline reflects the headwinds we anticipate from CAPEX, working capital, and cash taxes. We returned more than $ 10 billion to shareholders during the year, including dividends of $ 5.7 billion.

Now we have increased our dividend per share for 23 consecutive years and we remain committed to the continuous increase in dividends. We also bought a little less than 33 million shares, which reduced our average stock count by more than 2%. At the end of the year, we had $ 3.3 billion remaining in our repurchase authorization. Now looking at the balance.

We ended the year with a cash balance of $ 12.2 billion, which, without the impact on the currency, is consistent with the previous year. The total debt was $ 45.8 billion, a decrease of $ 1 billion from one year to the next, with 68% in support of our financing business. The leverage in our financing business is in line with the nine to one objective and the credit quality in our accounts receivable from financing remains solid with a 55% investment grade, a better point than a year ago. And, therefore, our balance sheet remains solid and we are committed to maintaining a solid investment grade credit rating.

Como lo hacemos normalmente al final del año, quiero proporcionar una actualización rápida sobre nuestros planes relacionados con la jubilación. Nuestro plan de EE. UU Se ha congelado durante más de una década. Y durante los últimos años, movimos nuestra base de activos a un perfil de menor riesgo y menor rendimiento.

A fines de 2018, en conjunto, nuestros planes calificados para impuestos en todo el mundo están casi totalmente financiados, con un 104% de los EE. UU., De manera consistente con el año anterior. Entonces, a pesar de la volatilidad en los mercados, nuestros planes están en muy buena forma. Así que permítanme comenzar con algunas reflexiones sobre 2018 y luego pasaré a las expectativas para 2019.

Al comenzar el año, hablamos sobre el trabajo que habíamos hecho para reposicionar nuestro negocio, para ayudar a mover a nuestros clientes hacia el futuro, cambiar nuestra cartera, cambiar nuestro modelo operativo y la forma en que trabajamos y reasignar nuestro capital. Y en nuestra convocatoria de ganancias en enero pasado, hablamos sobre cómo eso impulsó nuestras expectativas para 2018 en ingresos, margen y ganancias por acción. Primero, dijimos que esperábamos aumentar los ingresos a las tasas actuales vigentes en ese momento. De hecho, aumentamos los ingresos para el año, y eso a pesar de los EE. UU

apreciación del dólar desde principios de 2018, reduciendo nuestro crecimiento de ingresos en aproximadamente dos puntos o $ 1.7 mil millones. Segundo, dijimos que estabilizaríamos los márgenes brutos. Si bien nos quedamos un poco cortos durante todo el año, estabilizamos el margen bruto en el tercer trimestre y expandimos tanto el margen bruto como el margen antes de impuestos en el cuarto trimestre y la segunda mitad. Eso es por primera vez en más de tres años.

Dijimos que los impuestos serían un viento de frente para el año y para nosotros fue un viento de frente para el año y en el cuarto trimestre. Continuamos devolviendo valor a los accionistas, con recompras de acciones que contribuyen al crecimiento de las ganancias por acción. Y, finalmente, dijimos que esperábamos ganancias operativas por acción de al menos $ 13,80 y un flujo de efectivo libre de alrededor de $ 12 mil millones, y logramos ambas cosas. Así que mirando hacia atrás en 2018.

Crecimos los ingresos, las ganancias operativas y las ganancias operativas por acción para el año con una sólida realización de flujo de efectivo libre. Tuvimos un buen impulso en GBS, con especial fortaleza en consultoría, liderados por nuestras ofertas digitales y de aplicaciones en la nube. Ejecutamos bien en software en el cuarto trimestre, terminando el año con fuerza, liderado por badítica e inteligencia artificial y nuestro software de nube híbrida. A medida que ejecutamos nuestra estrategia para ayudar a nuestros clientes a implementar la nube híbrida, nuestros ingresos totales en la nube aumentaron a más de $ 19 mil millones. En todo el software y los servicios, continuamos generando nuestros ingresos como servicio.

Salimos del año con una tasa de ejecución anual de $ 12 mil millones, que es un 21%. Continuamos con nuestro exitoso programa IBM Z y nuestro sólido desempeño en Power con nuestro despliegue de arquitectura POWER9. Reubicamos nuestro modelo operativo e impulsamos la productividad, lo que mejoró nuestro perfil de margen. También continuamos dando prioridad a nuestras inversiones y tomamos medidas para optimizar nuestra cartera.

Anunciamos la venta de software selectos y negocios de servicios, acciones que no solo mejoran nuestro perfil de ingresos, sino que también nos permiten aumentar nuestro enfoque e inversiones en los segmentos de TI de alto valor en áreas como la nube híbrida, AI y blockchain. Todo esto proporciona una base comercial y financiera sólida para la adición de Red Hat, y nos da confianza en nuestra expectativa de ganancias operativas de 2019 para todo el año de al menos $ 13.90. Antes de ir a Preguntas y Respuestas, quiero aclarar qué se incluye y qué no está incluido en nuestras expectativas. Como mencioné anteriormente, se espera que Red Hat se cierre en la segunda mitad; y dadas las implicaciones financieras para 2019 dependen en gran medida del momento del cierre, Red Hat no está incluido en nuestras expectativas.

Actualizaremos nuestra visión del año en el momento del cierre. En el último mes y medio, también hemos anunciado dos desinversiones: la venta de nuestra colaboración en software de comercio de premisa y la venta de nuestro negocio de servicios hipotecarios Seterus. Para estas empresas, cuando consideramos la combinación de la ganancia perdida, la ganancia en la venta de activos de software, las acciones para abordar la estructura y los costos aislados y los beneficios resultantes de estas acciones, esperamos que haya un impacto mínimo en nuestra ganancia y Ganancias por acción del año. Y a diferencia de la adquisición de Red Hat, el momento del cierre no tiene un impacto significativo en las implicaciones financieras para el año, aunque puede afectar el SKU trimestral.

Como resultado, nuestra guía asume estas desinversiones. Dicho de otra manera, debido a que las desinversiones son esencialmente neutrales a nuestras ganancias para 2019, no afectan la guía de EPS de operación para el año, aunque sí tienen un beneficio para nuestro perfil financiero a largo plazo. Volviendo al flujo de caja libre. Esperamos alrededor de $ 12 mil millones en 2019, con una tasa de realización de alrededor del 100%.

Esto refleja el rendimiento de las ganancias operativas esperadas y la continua eficiencia del capital de trabajo, parcialmente compensado con un viento en contra de impuestos en efectivo. También hemos tenido en cuenta los impactos estimados del flujo de efectivo libre de las desinversiones de software y servicios. Note that while these are relatively neutral to earnings, they are a headwind to our free cash flow, because the gained 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 badociated 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.

Patricia MurphyVice President of Investor Relations

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 badumptions for our retirement-related plans and supporting information on the 2019 implications of our divested businesses.

[Operator instructions] So operator, let's please open it up for questions.

Questions and Answers:


Thank you. We will now start the question-and-answer session of today's conference. [Operator instructions] Our first question is coming Wamsi Mohan of Bank of America Merrill Lynch. Your line is open.

Wamsi MohanBank of America Merrill Lynch — Analyst

Sí. Thank you. Jim, IBM delivered 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 to what the profit trajectory looks like.

It grows in 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.

Jim KavanaughChief Financial Officer

OK, Wamsi. Thank you very much for the question, and 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 and 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 regard to any forward-looking guidance.

But we enter — from my perspective, we entered 2019 with a much improved business profile in terms of, one, driving operating leverage, and you see how all that played out in the second half, and it's right through the core of your question. And two, 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 tax as we move forward.

But first, I'll start with the tailwind. We have a solid annuity base in our business. And 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. 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 then hardware, yes, we're in 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 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 from a headwind perspective, you talked about macro. Well, the first thing I would call out is currency. 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. 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, it's going to be predicated on operating leverage. We made good progress through '18, and it positions us very well in — to expand margins in 2019. So among 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 our services momentum and the mix shift in 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 badumes estimated potential discretes. This is a change. We're doing this to provide enhanced transparency into our guidance as we move forward. But I will tell you, discretes by nature vary in timing.

They vary in amounts and will be recorded when they occur in 2019. But you put all that together. We've got headwinds and tailwinds on revenue, strong portfolio lineup in our high-value services and software. We 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 $13.90 and a free cash flow of about $12 billion.

Patricia MurphyVice President of Investor Relations

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


Of course. Our next question is coming from Toni Sacconaghi of Bernstein. Your line is open.

Toni SacconaghiBernstein — Analyst

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 badets 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 pushout? Do you feel like you captured 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.

Jim KavanaughChief Financial Officer

OK, Toni. Thank you. 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 disciplined 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 badets within our Cognitive and GBS business. Red Hat, as we talked about, expected was — we're working through regulatory right now. We expect to close that in the second half. But 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 Seterus 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 to higher value as we move forward.

In terms of our cognitive badets that we sold with regards to collaboration and on-prem, those businesses generated roughly a little bit over $1 billion of revenue over the last 12 months. We said we expected to close that by midyear. 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 profits 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 EPS, 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 badet sale will end up in the investing section of free cash flow. So we've overcome that and still guided a free cash flow that's roughly flat at about $12 billion.

Now your second question was on Cognitive. We obviously executed well. You dial 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. Our transact — we had strong transactional performance. Well, probably what I'm most proud about is it was pervasive.

We grew in hybrid-cloud integration software 4%. We grew in solutions software 3% across many of our offerings led by data and AI and badytics, 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 it followed client buying cycles. 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.

Patricia MurphyVice President of Investor Relations

Thanks, Toni. And can we please go to the next question?


Thank you. Next question is coming from Katy Huberty of Morgan Stanley. Your line is open.

Katy HubertyMorgan Stanley — Analyst

Thank you. Buenas tardes. Congrats on the nice numbers in the fourth quarter. Question around linearity in 2019.

There's a lot going on with tax discretes, 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 walk-through in the year?

Jim KavanaughChief Financial Officer

OK. Thank you, Katy. 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 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 at $13.90. So when you take a look at that, it gets us off to a good start. It does acknowledge that 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 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 your — heart of your question, the last few years, we had substantial discrete tax items in the first quarter. If you go back to '16, 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 discretes in the first quarter. And I would project somewhere around the 11%, 10%, there might be something within the first quarter, but we're not talking substantial amount. So that is really EPS. On revenue, which we probably had the best visibility, just given our operational indices, the mix differential of our revenue base between annuity and transactional, when we move from 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 we just came off a fourth quarter with many different dynamics that produced the 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 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 on the supplemental charts, 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.

Patricia MurphyVice President of Investor Relations

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


Thank you. Next question is coming from Tien-Tsin Huang of JPMorgan. Your line is open.

Tien-Tsin HuangJ.P. Morgan — Analyst

Gracias. Hi, Jim. Hi, Patricia. I wanted to ask on services.

It improved like you said it would in 2018. I'm curious what you're allocating for 2019 within services, because there are some moving parts. GBS is performing well. Application management's 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 remark. I'm curious is that still going to be a metric that's going to be provided or tracked going forward. Gracias.

Jim KavanaughChief Financial Officer

OK, Tsien-Tsin. 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 base of business as we moved throughout 2018. But when you look at the trajectory of our business, 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 backlogs 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. 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 saw on 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 and 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 and the offerings, how we're capturing that price realization and how we're delivering real value and quality to our clients.

Now in 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 base 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 was 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 in the value of incumbency and moving our clients to the future and 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 base of business as we walk into '19.

Patricia MurphyVice President of Investor Relations

Thanks, Tien-Tsin. Can we go to the next question, please?


Thank you. Next question is coming from David Grossman of Stifel. Your line is open.

David GrossmanStifel Financial Corp. — Analyst

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

Jim KavanaughChief Financial Officer

OK, David. Thanks very much for the question. Let me take a big step back. Obviously, I've been thinking about this as Ginni and everyone else.

And from my perspective, 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 disciplined portfolio prioritization around market attractiveness, around differentiation and around how they really played 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 badets in our Cognitive Solutions segment and in our global processing mortgage servicing unit.

They were basically more and more sold as stand-alone-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 go — move forward. I could 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, 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 built around leveraging the investment theses and narrative of IBM: Innovative technology, deep industry expertise and trust and security all delivered through an integrated model of hardware-software services. And then finally, I would tell you, we have a strong balance sheet. We have great cash flow and we have enough financial flexibility to continue invest in our business and returning value to our shareholders over the long term.

So we feel pretty good.

Patricia MurphyVice President of Investor Relations

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


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

John RoyUBS — Analyst

Great. Thank you. So obviously, cloud is a trend that everybody is getting on more and more here on the enterprise space and yet you had somewhat of a flat quarter. I was curious as to when you win 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.

Jim KavanaughChief Financial Officer

OK, John. Thank you very much for the question. 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. No when you look at cloud in the quarter, the cloud number as printed really reflects the same fundamental headwind on the wrap of the product cycle of 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 of 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, 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 heart of your question about Red Hat, Red Hat and IBM together, we see this movement of how we can deliver value in leading the second phase, Ginni calls this Chapter 2, the second phase around where clients are moving 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.

Patricia MurphyVice President of Investor Relations

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.

Jim SchneiderGoldman Sachs — Analyst

Good evening. Thanks for taking my question. Jim, it's good to see the improvement in software and cognitive relative to last quarter. And 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.

Jim KavanaughChief Financial Officer

Yes, Jim. Thanks very much for the question, overall. 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 base of business and stacked on top of our hardware-based platforms.

But when you look at fourth quarter, we exited 2% growth. We had good pervasive growth across the portfolio, as I said before, good, strong transactional growth, good SaaS signings, high renewal rates. And remember, this Cognitive Solutions segment is high value, high operating margins, and we continued to expand operating margins here in the fourth quarter and for the full year. Now when you take a step back, you asked 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, on a trailing 12 months, we did a — of a little over $1 billion. So it would 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, right off the bat, a four to five-point headwind. But the underlying fundamentals in our long-term sustainability around that, yes, our long-term model has not changed.

We still see the strength of our offering portfolio. One, even getting better around our hybrid integration software. Two, around our badytics 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 badet 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.

Patricia MurphyVice President of Investor Relations

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


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

Joseph ForesiCantor Fitzgerald — Analyst

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 '19. Gracias.

Jim KavanaughChief Financial Officer

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, etc. Red Hat's not in any of the guidance as we talked about upfront.

We do have the divestitures in here. 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.

But the underlying dynamics, as I talked about, we have 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 $13.90 overall.

We do see strong operating leverage continuing in 2019, both gross and pre-tax margin, leveraging our scale efficiencies, leveraging our mix shift to higher value, leveraging our productivity initiatives. And when you look at it, we've got great momentum exiting second half, in particular, around 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 tougher compares, but for the first — or excuse me, for the full year, we would expect good operating leverage, and that's what we're guiding to.

Patricia MurphyVice President of Investor Relations

Thanks, Joe. Let's go to the next question, please.


Thank you. Our next question is coming from Jim Suva of Citi. Your line is open.

Jim SuvaCiti — Analyst

Thank you. In your prepared slides, Slide #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 as most likely to happen to hit your $13.90? And how come cash flow wouldn't be growing if you have earnings growing? Thank you.

Jim KavanaughChief Financial Officer

OK, 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 Chart 10 brings 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, excuse me, 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, the 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 acquisition. So I think, you could see that continuing to play out. And then, I guess, last, we talked about currency on revenue, currency on revenue, the impact of one to two points and the divestitures. So we will continue showing the transparency of this EPS bridge, helps our investors understand the operating dynamics as we move forward.

Patricia MurphyVice President of Investor Relations

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 have the foregone — 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. So that's the reason that the free cash flow is flat despite the fact that we have a couple of headwinds within them. So operator, why don't we take one last question?


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

Keith BachmanBMO Capital Markets — Analyst

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'd just clarify where is the rest coming out of? And then the question is on Technology Services & 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 CY '19? And therefore, would you expect operating leverage to also be demonstrated in this business? Thank you.

Jim KavanaughChief Financial Officer

Sí. Thanks, Keith for the question, overall. First of all, 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 directionally on 2019.

I think, I said a little over $1 billion. If you look at chart, what is it, 15, in the supplementals, the Cognitive software badets of divesting collaboration and our on-prem marketing and commerce was about — was $1.3 billion. So that's what I meant about a little over $1 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 $1.5 billion between the two of them. So hopefully, that answers the clarification. And then on your second question, TS&CP. 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 mute — move them to the future and capturing that cloud backlog.

That cloud backlog is up over five points year to year as a percent of our total outsourcing backlog. But 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. And we are going to exit some low-value content business. So 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, apologize for going a little bit long here. 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. 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. 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.

Patricia MurphyVice President of Investor Relations

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


[Operator sign-off]

Duration: 83 minutes

Call Participants:

Patricia Murphy — Vice President of Investor Relations

Jim Kavanaugh — Chief Financial Officer

Wamsi Mohan — Bank of America Merrill Lynch — Analyst

Toni Sacconaghi — Bernstein — Analyst

Katy Huberty — Morgan Stanley — Analyst

Tien-Tsin Huang — J.P. Morgan — Analyst

David Grossman — Stifel Financial Corp. — Analyst

John Roy — UBS — Analyst

Jim Schneider — Goldman Sachs — Analyst

Joseph Foresi — Cantor Fitzgerald — Analyst

Jim Suva — Citi — Analyst

Keith Bachman — BMO Capital Markets — Analyst

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