Did Jeff Bezos’s kids really use blue painters’ tape to attach an Amazon.com Inc. Echo speaker to a robot vacuum cleaner? Or was his Instagram post on Monday just a teaser for his company’s next device?
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Amazon has Jibo, the world’s first social robot for the home, for 44% off for Prime Day.
It was over 10 years ago that I was introduced to the concept of crowdsourcing. I was a student at London Business School when a professor one day came into the classroom with a jar of pennies.
He asked us each to take a look at the jar and guess the correct amount of money inside. The jar went around the classroom and I gave it an estimate of £30 in good faith. The professor duly wrote down each of our 100 guesses on the whiteboard and then opened a sealed envelope where the real amount was revealed: £18.76.
While my initial lesson learned was that I shouldn’t ever try a career in penny guessing, the amazing surprise was still in store for me: The professor calculated the average of all our 100 guesses and it magically came down to £18.76. The wisdom of the crowd was spot on and was better than 99 percent of our own estimates (only one of us actually guessed the right amount).
Just a few months later I founded a crowdsourcing company with my fellow student Janeen. We attracted the best security and defence innovators to solve complex challenges for industry and government clients. That was 2005, and the initial wave of crowdsourcing was born with InnoCentive, Wikipedia, and Amazon Mechanical Turk leading the pack in accessing and working with the knowledge and ideas of the crowd.
Existing companies also started various crowdsourcing initiatives to access the minds of customers and suppliers to co-create products like My Starbucks Ideas.
Over the last few years, crowdsourcing has evolved into a more pragmatic approach for corporates, who access the crowd not for co-creation of products or their ingenuity but rather as trainer for their AI systems.
Eric Schmidt, the Chairman and long serving CEO of Google, said back in 2016 that the next Google will be a crowdsourcing AI company. He said that if he wanted to start a new company, he would crowdsource a lot of labeled data from a crowd of specialists (he used the example of dermatologists) in order to train an AI system that would be able to learn and eventually be better at a task than these individuals and then sell the product back to them.
And there are large enterprises who use crowdsourcing for services typically performed by contractors or employees. Swisscom for instance acquired crowdsourcing platform Mila to outsource its maintenance and repair work to the crowd. The company ultimately seems to want to gather data from these crowd workers via mobile and AR so that it can eventually train an AI system to perform most of that human work.
So is the crowd now just cannon fodder for AI?
The point of crowdsourcing was always to outsource “micro tasks” that didn’t take an individual much effort (like guessing pennies in a jar) but delivered real value when executed by a crowd.
In the age of AI we see a parallel, where one labeled data set is useless but thousands together create value.
But I predict that it will go a step further. Today we are accessing the knowledge of the crowd to label data — for instance to label a picture to be a sunset or sunrise. But the next step will be for the crowd to provide data sets, too. For instance, I could provide health information about myself on a daily basis in a format that an AI system requires (formatted data) in order for firms to develop new drugs. One amazing non-profit venture I once advised, CancerBase, is trying something like that for curing cancer. In this next generation of crowdsourcing, the crowd will either get paid for its data or, as in the case of CancerBase, will provide data for free to help advance a good cause for humanity.
So how will this affect my university’s penny guessing problem in the future? Instead of asking students to guess the number of pennies, the professor will ask them each to take a picture of a random set of pennies from their wallets. Students will then label that picture with the amount their photo contains and send it to an AI app, which will determine the right number in any jar going forward.
Welcome to a brave new crowdsourcing world where we are the data providers.
Simon Schneider is an entrepreneur in the crowdsourcing economy and director at ECSI.
A growing number of tech companies are counting on people being willing to socialize with robots in their homes, like Vector a personal robot that goes on sale this week. (Aug. 8)
They say there’s no accounting for taste! And it seems that streaming giant Netflix has grown a little concerned as their viewers have started crushing on an artificial specimen in their new Lost In Space reboot.
Over the past week, fans of the show have been taking to Twitter to comment how the robot character in the series has been pushing all their buttons. One fan got straight to the point by tweeting: “There’s literally NO REASON the lost in space robot should have a butt that nice. this was intentional.”
To be fair, while the robot doesn’t have anything on those AI stunners over at Westworld we will say it certainly has an impressively built physique with a sleek design. Still, Netflix is having none of it, and made their feelings known by pouring cold water over the heated discussion on the Internet. “When Lost In Space premiered we were prepared for a big reaction. What we weren’t prepared for was this…,” the streaming service began in a humorous tweet, posting some of the messages from fans. “Ya’ll need Jesus,” their messaged added.
Hang on a second though, Netflix. Is it just us or are robots and monsters in genre getting a whole lot sexier lately? We’ve already mentioned the delectable Delos hosts, and as we found out last year, director Guillermo del Toro “kept pushing for sexy” when he directed Doug Jones as the hunky fish monster in the Oscar-winning The Shape of Water.
Hell, even Pennywise managed to make some movie fans swoon thanks to the good looks of actor Bill Skarsgård in last year’s .
We’re going to throw this out there too with no judgement whatsoever: some people have also been lusting after Thanos from(corrugated chin and all.) So intentional or not, it would appear that Netflix is very on-trend with their mechanical pin-up in the midst of all this love from genre fans.
Do you think the robot in Lost in Space is hot? Yes, we did just ask you that. Let us know your thoughts (keep ’em clean) in the comment section below.
When Anki unveiled its latest robot companion Vector earlier this year, the bot came with its own custom voice interface to better depict its playful character, said the company.
But one personality might not be enough for Vector: Anki announced today that it’s going to integrate Alexa into the little bot. The company announced the news in a blog post, saying it was the top request from backers on Kickstarter. “We’re in the early phases and hope to share more details soon on exact timing but we’re aiming for end of this year,” said the blog’s author, Anki CEO and co-founder Boris Sofman.
We’ve reached out to Anki for more details, but the company said it had nothing else to share at this time, so it’s not clear what this Alexa integration will actually mean. We can safely assume it won’t take over from Vector’s built-in personality, which the company spends a lot of time shaping with the help of animators and writers. But it might take over some basic question functionality. Anki can answer queries like “what’s the weather like,” start timers, and so on, but Alexa can do much more with the help of its ecosystem of skills.
The news is particularly interesting given rumors that Amazon is reportedly developing its own mobile robot with Alexa built in. Project Vesta, as the robot is supposedly called, would follow users around their home so they can talk to Alexa in more places.
Although Amazon’s AI assistant has made its way into plenty of products, from microwaves to cars, it hasn’t been put in a mobile robot for the home. But if that’s functionality that customers actually want, it might be Vector, not Vesta, that’s the first device to offer it.
International Business Machines Corporation (NYSE:) Q3 2018 Results Earnings Conference Call October 16, 2018 5:00 PM ET
Patricia Murphy – VP, IR
Jim Kavanaugh – SVP and CFO
Amit Daryanani – RBC Capital Markets
Katy Huberty – Morgan Stanley
Toni Sacconaghi – Bernstein
Wamsi Mohan – Merrill Lynch
Tien-tsin Huang – JP Morgan
John Roy – UBS
David Grossman – Stifel Financials
Keith Bachman – BMO
Joseph Foresi – Cantor Fitzgerald
Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. Today’s conference is being recorded. If you have any objections, you may disconnect at this time.
Now, I will turn the meeting over to Patricia Murphy with IBM. Ma’am, you may begin.
Thank you. This is Patricia Murphy, Vice President of Investor Relations for IBM, and I’d like to welcome you to our third quarter earnings presentation. I’m here today with Jim Kavanaugh, IBM’s Senior Vice President and Chief Financial Officer. Our prepared remarks will be available within a couple of hours, and a replay of the webcast will be posted by this time tomorrow.
I’ll also remind you that certain comments made in this presentation may be characterized as forward-looking, under the Private Securities Litigation Reform Act of 1995. Those statements involve a number of factors that could cause actual results to differ materially. Additional information concerning these factors is contained in the Company’s filings with the SEC. Copies are available from the SEC from the IBM website or from us in Investor Relations.
Our presentation also includes certain non-GAAP financial measures in an effort to provide additional information to investors. All non-GAAP measures have been reconciled to the related GAAP measures in accordance with SEC rules. You’ll find reconciliation charts at the end of the presentation and in the Form 8-K submitted to the SEC.
So, with that, I’ll turn the call over to Jim.
Thanks, Patricia, and thanks to all of you for joining us.
In the third quarter, we delivered $18.8 billion of revenue, $3.6 billion of operating pretax income and $3.42 of operating earnings per share. And over the last 12 months, we generated $12.2 billion of free cash flow with realization over 100%. As compared to last year, our revenue was flat at constant currency though down 2% with the impact of the stronger dollar. Gross profit margin was flat, which is the best year-to-year performance in years. The improvement was led by services margin expansion. We expanded our overall operating pretax margin and we grew operating profit and earnings per share.
We continue to see strong client demand in the emerging, high-value segments of the IT industry. And our performance this quarter was driven by the offerings in hybrid cloud, in security, in digital, and in analytics and AI, a testament to our ability to deliver differentiated value to our clients through innovative technologies with the skills and expertise to implement these technologies. We see the results in our strategic imperatives revenue growth of 13% over the last 12 months. We also see this playing out in higher operating margin over the last few quarters, which supports both, our long-term investment and return to shareholders. With our success in these higher value areas and our focus on delivering consistent operational performance, we remain on track to our full-year expectations of earnings per share and free cash flow.
Coming into the second half, we said we expected to improve our services revenue trajectory and to expand total services margins for the half. We also said we face some headwinds as we wrap on the new mainframe launch and our strongest software performance in the third quarter of last year.
And so now this quarter, we delivered revenue growth and gross margin expansion in both services segments. In global business services, our revenue growth accelerated, driven by consulting as we help clients with their digital transformations. And we grew revenue again in Technology Services and Cloud Platforms, driven by hybrid cloud implementations. And I should mention that my revenue comments here and throughout will be based on constant currency.
In systems, our IBM Z revenue grew, despite a wrap on new mainframe launch, resulting in what is now the most successful Z program in our history. And then, looking at our software revenue, which spans our segments, we had growth in integration software, driven by offerings that help clients modernize applications and enable hybrid cloud adoption. In solution software, we had good performance in several areas including security, key offerings and analytics like data science, and our Watson health verticals, as we embed AI into more of our offerings. At the same time, we continue to deal with challenges in a few horizontal solution areas and a tougher compare in transaction processing software, both of which impacted overall software revenue growth.
Across our segments, our strategic imperatives revenue has grown to $39.5 billion over the last 12 months. Within that, our cloud revenue is $19 billion, and we exited the third quarter within as-a-service annual run rate of $11.4 billion, which again was up 24%. While that’s already a significant revenue base in the emerging, high-value segments of the IT industry such as cloud and AI, it’s still early in the adoption of these technologies.
For example, it’s estimated that enterprises are only 10% to 20% into their cloud journey, with progress slow by the lack of interoperability across cloud environments and concerns about the ability to manage data privacy and security in multiple cloud environments. And so, clients need a cloud partner that can offer a hybrid cloud for workloads that cut across public, private and traditional, a secure cloud for mission-critical workloads and highly sensitive data and an open cloud to run complex, multi-cloud environments.
12 months ago, we launched IBM Cloud Private, which is a starting point for many companies as they embrace a hybrid, multi-cloud strategy. Already, more than 400 global companies have embraced this platform to manage mission-critical business processes in the cloud, and nearly all of these are competitive wins. Just yesterday, we announced a series of innovations that will help clients scale their cloud, AI and cyber security initiatives. These include IBM Multicloud Manager, which is the industry’s first service to deploy and manage complete applications in any cloud environment. We also announced IBM’s AI OpenScale technology, the first open, interoperable AI platform to manage the lifecycle of all forms of AI applications and models. This includes the management of bias, security and provenance of models and data which are the issues clients are facing with scaling AI in the enterprise.
These are just a few examples of how we’re building our technology innovations and industry expertise with trust and security to help enterprises on their journey to cloud and to AI.
Before getting into the financial metrics, I’ll lay out the drivers of our operating earnings per share growth. As I said, our revenue is flat at constant currency, but with the continued strengthening of the dollar, revenue was down 2%. And at constant margin, this was a headwind to profit and earnings per share growth. Our actions to reposition our cost base and drive operating efficiencies resulted in pretax margin expansion of 50 basis points, despite a headwind from mix. And so, we had modest growth in our pretax income. Our tax rate was down, driven by a discrete benefit in the quarter, and finally, a lower share count contributed to growth. Putting it all together, our operating EPS was up 5%. Year-to-date through September, our operating EPS is also up 5%. And you can see on this chart the contributors to earnings per share growth consistent with how we presented it over the last three quarters.
Looking at our underlying profit and cash metrics. As I said, our gross margin was flat compared to last year, which is an improvement in the year-to-year trajectory. We had solid gross margin improvement in the services segments, together up 160 basis points. And as I talked about last quarter, in services, which is a human capital based business, value is instantiated in gross margin. This was offset by the mix headwinds we discussed 90 days ago, in z14 mainframe and software.
Our operating expense was down 4% year-to-year with half due to currency and half due to the base operational performance. When currency hurts the top-line, it generally helps the expense line due to both translation and the benefit of hedging contracts. The base expense reduction of 2 points was driven by operating efficiencies, including acquisition synergies. We deliver productivity across our business by using automation, leveraging agile processes and changing the way we work. This provides flexibility to increase investment to deliver innovations in areas like hybrid cloud, AI, cyber security and blockchain, while also dropping some to the bottom line.
Within our expense decline, we also absorbed a lower level of IP income. We expanded both operating pretax and net income margins, and net income was up 3%. Our operating tax rate was down 2 points from last year, while our underline rate of 16% is up slightly. As I said the year-to-year dynamic is driven by discrete benefit in the quarter.
Looking at our cash metrics. We generated $2.2 billion of free cash flow in the quarter and $5.4 billion through September, which is year-to-year. As expected, our year-to-date decline is driven by cash tax headwind and growth in CapEx. As always, trailing 12 months is the best way to look at our cash flow performance. And on that basis, we generated $12.2 billion, which a 108% free cash flow realization. We returned about 70% of that to shareholders while increasing our capital investment.
Turning to our segments. Cognitive solutions had $4.1 billion of revenue, which was down 5%. The segment is comprised of a broad set of offerings. So, let me take a minute to break it down. solutions software includes offerings and strategic verticals like health, domain-specific capabilities, like analytics and security, as well as our emerging technologies of AI and blockchain. We had good performance across these areas this quarter, and I’ll come back to these in a minute.
Cognitive Solutions also includes transaction processing software. This includes software that runs mission-critical workloads, leveraging our hardware platforms. While much of the revenue is annuity-based, in any quarter, the performance reflects the timing of larger transactions that are tied to client buying cycles. We have a good pipeline in transaction processing software as we enter the fourth quarter, which supports a return to growth.
So, now, let me turn back to a few of our high-value areas where we continue to scale new platforms and high-value solutions. This quarter, we had growth in industry verticals like health, key areas of analytics and security. In Watson health, where we’ve been infusing AI the longest, we had broad-based growth including in payer, provider, imaging and life sciences. In the area of life sciences, we’ve been working with Medtronic to leverage data and apply intelligence into their glucose monitors. In June, the Sugar.IQ with Medtronic went live, and initial demand and patient results are very strong.
In our underlying analytics platform, we had growth in our data science and IBM Cloud Private for data offerings. We continue to invest in advancing data and AI. We announced bias detection services and introduced new Watson services on the IBM Cloud Private platform as clients seek the benefits of AI and the cloud behind their firewall.
Security growth in the quarter was led by offerings in orchestration, data security and endpoint management. Our momentum is driven by our unique market position, comprehensive integrated portfolio and differentiation with AI. In the emerging area of blockchain, this quarter our IBM Food Trust network for food safety went live, and Carrefour, one of the world’s leading retailers joined the network. We also jointly announced TradeLens with Maersk. Together we will apply blockchain technologies to address inefficiencies in the global supply chain, and signed up over 50 ecosystem participants, and we now have over 75 active blockchain networks.
Looking at profit this quarter. We expanded pre-tax margin by over a point year-to-year. This was driven by operational efficiencies, including acquisition synergies, while continuing to invest at high levels in key strategic areas.
Looking at services. Our global business services revenue grew 3%, building on the progress from first half. Consulting revenue growth accelerated to 7%, led by strength in offerings within the Digital Strategy and iX, as well as Cognitive Process Transformation. And in application management, a decline in traditional enterprise application managed services is being mitigated by the continued strength in areas such as cloud migration factory and cloud application development.
Our consulting performance reflects the fact that enterprises are undergoing a digital transformation and reinvention, leveraging technology to transform the way they operate, to attract the best talent, and to improve engagements with their customers.
Customers are turning to GBS as we are uniquely positioned to infuse IBM’s leading-edge technology and partnerships with our industry expertise to enable clients’ digital transformation. For example, we are partnering with Sally Beauty to provide it innovative digital and in-store customer experience, influenced by deep understanding of the brand, consumer, and retail industry. We are creating virtual assistance for Lloyds Banking Group to enhance the way they communicate with and serve customers. And at the U.S. Open, GBS provided the digital fan experience, which included several innovative features. AI highlights enabled the tournament’s digital team to view and find the most exciting shot of the day or match for distribution, and the AI powered virtual concierges answered fans’ questions on a range of topics.
Turning to gross profit. GBS gross margin expanded 270 basis points year-to-year. We are shifting our revenue mix towards higher value offering such as digital and cognitive, and capturing that price for value. Additionally, we have aligned our resources to key skill areas and are seeing productivity and utilization benefits. Putting it all together, GBS delivered a solid quarter. They are executing well and delivering value to clients in key strategic areas.
In Technology Services and Cloud Platforms, we delivered $8.3 billion of revenue and grew for the second consecutive quarter. Growth was led by hybrid cloud implementations with cloud revenue up 22%. And we exited the quarter with a $7.5 billion as-a-service annual run rate. This reflects IBM’s differentiated value proposition to address cloud for the enterprise. As I said earlier, clients are early in their cloud journey and their needs are evolving. Initial cloud projects focused on the productivity economics of renting IT infrastructure at scale.
More and more however, clients want to move beyond that model and start to shift mission-critical business processes and apps to the cloud. They recognize that cloud can help drive real business value in those processes, launch new applications rapidly and enter new markets. And this all needs to be optimized across public, private and on-prem where many of the workloads will remain. This is why IBM’s approach to cloud is hybrid, secure and open.
I mentioned our announcements yesterday. It’s important to note that we are bringing new, open and interoperable approaches to cloud. This is consistent with our heritage as a leader in open standards and governance. From the early days of Linux and Java to Kubernetes and Hyperledger for blockchain, we’re bringing the same open approach to cloud and AI, which will also help clients overcome the complexity of proprietary technology and vendor lock-in. Within this segment, we see results of this shift in infrastructure services and integration software with strong cloud performance contributing to revenue growth in both of these areas.
I mentioned earlier the strong adoption of IBM Cloud Private, with 95 new companies alone this quarter around the globe. For example, Aflac in Japan is trusting IBM Cloud to help speed the development of new business products and services. Brazil’s Fidelity National Information Services, a global leader in payment processing solutions has adopted IBM Cloud Private to help streamline credit card charge backs for its Brazilian operations. And CNH Industrial, a leader in the capital goods sector will use IBM Cloud Private and Watson Artificial Intelligence to transform its business processes across manufacturing, supply chain, sales and marketing, and financial services.
And now, turning to technical support services, revenue was down 3%, which is a modest sequential improvement from second quarter. Similar to last quarter, this area continued to be impacted by the dynamics of our hardware product cycle, moderated by continued growth in our core multi-vendor services offerings.
Moving on to gross profit for the segment. Margin expanded 120 basis points. This improvement was driven by scale efficiencies in our cloud business as well as a lift in our productivity initiatives. As we continue to drive value in Technology Services and Cloud Platforms, we are making investments to capitalize on the shifts to cloud by adding capacity and expanding our data center footprint around the world as well as expanding our go-to-market capabilities to capture the opportunity in hybrid. We’re also investing in development to drive hybrid cloud innovation that means both private and public technologies. You see this in the introduction of IBM Multicloud Manager and AI OpenScale. And we’re also adding functionality and enhancements to IBM Cloud Private and IBM Cloud.
Before moving on to Systems, let me give you some perspective on our combined services business. As we entered the year, we saw improved revenue from opening backlog, which pointed to an improving revenue trajectory. And the actions we’ve been taking to remix our offerings to higher value, improve price realization and drive productivity and workforce optimization combined with scale efficiencies in the cloud are designed to improve gross profit performance, which in a human capital-based business is where the value is instantiated. In the third quarter for services, the revenue trajectory and gross margins continued to improve, with combined revenue up 1% and gross margins expanding 160 basis points.
In Systems, we grew revenue again this quarter, driven by a combination of a strong z14, a newly introduced POWER9 adoption. This quarter IBM Z revenue grew 6% year-to-year on 20% MIPs growth, and margins expanded. The z14 program continued to track ahead the prior cycle. And in fact, program to-date in terms of shipped capacity, it’s the most successful in our platform’s long history. The z14’s pervasive encryption continues to be a key differentiator. For instance, governments are selecting z14 to protect the sensitive data, including a large U.S. government agency this quarter. The z14 adoption spans many industries and countries. And we added new clients to the platform again this quarter, including several new clients to our new single-frame z14 designed specifically for cloud environments.
Our Power revenue was up double digits, driven by strong growth in Linux, and traction across our new POWER9-based architecture. In the third quarter, we released our next-generation POWER9 processors for a mid-range and a high-end systems, and we’ve seen strong adoption. These systems are designed for handling advanced analytics, cloud environments, and data intensive workloads in AI, HANA and UNIX markets. We also introduced new offerings optimizing both hardware and software for AI. Offering such as PowerAI Vision and PowerAI Enterprise will help to drive new customer adoption. And we continued to deploy our supercomputers at U.S. Department of Energy labs in the quarter.
Storage hardware was down this quarter with declines in mid-range and high-end, mitigated by strong growth in all-flash arrays. Storage is an increasingly competitive environment with continued pricing pressures. So, to differentiate in this environment requires additional investment in innovation. We’ve been releasing new functionality like Safeguarded Copy for cybersecurity to protect critical client data from cyber attack. And we signed our first large deployment of this technology with a major bank this quarter. And our new FlashSystems with next generation NVMe technology was announced earlier this quarter. We will continue to roll out NVMe across the portfolio.
Turning to profit. Systems pretax margin was down over 6 points, reflecting a mixed headwind and lower level of IP income and ongoing investment to drive innovation across the brands.
Turning to cash flow and balance sheet in the quarter. We generated $3.1 billion of cash from operations excluding our financing receivables and $2.2 billion of free cash flow. This brings our year-to-date free cash flow to $5.4 billion, which is down $800 million year-to-year. The decline is driven by a combination of higher capital expenditures and cash taxes. You’ll recall at the beginning of the year, we said we expected three headwinds to our free cash flow growth this year, higher CapEx, higher cash taxes, and our strong working capital performance at the end of last year, driven by the IBM Z introduction. The combined impact from cash taxes and capital investments is in line with what we expected at this point. So, we spent a little more in CapEx and a little less on cash taxes.
Looking at uses of cash over the last three quarters. We returned $6.6 billion to our shareholders, including $4.2 billion in dividends. And we bought back 16 million shares with $1.4 billion remaining in our buyback authorization at the end of September.
Looking at the balance sheet highlights. We ended September with $14.7 billion in cash and non-financing debt of about $16.5 billion. We had just over $30 billion of debt in support of our financing business, which continues to be leveraged at 9 to 1. Our financing portfolio remained strong at 55% investment grade. That’s a point better than December and two points better than a year ago. So, I’m confident in the strength of our balance sheet. We’ve got plenty of flexibility to continue to invest, while returning value to our shareholders as evidenced by 23 consecutive years of dividend increases.
So, let me wrap it up. Our performance through the first three quarters reflects the investments we’ve been making over the last couple years and actions to reposition the business. We’ve been rebuilding our innovation pipeline to address what our enterprise clients value in an IT industry that has been rapidly reordering, technologies like AI, blockchain, cyber security delivered in hybrid cloud environments. And we’ve taken actions to further align our skill base to this opportunity and to drive operating efficiencies.
And so, now, on a year-to-date basis, our revenue is up, our gross margin trajectory has been improving, and then the third quarter was flat year-to-year. Our operating profit is up modestly and we returned a lot of value to shareholders. These all reinforce the fact that we’re a high-value company.
As we look forward as always, there’s more work to do. And the fourth quarter seasonally has a large transaction base. But with the performance in the first three quarters and our focus on consistent operational execution, we continue to expect to deliver at least $13.80 of operating earnings per share. Regarding our free cash flow with the headwinds we expected in cash taxes and capital expenditures largely behind us, we are maintaining our view of about $12 billion of free cash flow for the year, which is over 100% realization.
And with that, let me turn it back to Patricia, so we can get started on Q&A.
Thank you, Jim. Before we begin the Q&A, I’d like to mention a couple of items. First, we have supplemental charts at the end of the slide deck that provide additional information on the quarter. And second, I’d ask you to refrain for multiple questions and multi-part questions, so that we can make the best use of the time we have today. So, operator, let’s please open it up for questions.
Thank you. At this time, we will begin the question-and-answer session of the conference. [Operator Instructions] Our first question comes from Amit Daryanani from RBC Capital Markets.
Thank you. Jim, I guess, when I think about this quarter, there were multiple cross currents that IBM dealt with across the portfolio. So, I guess, it would be helpful just to hear how you would characterize IBM’s performance in September quarter versus what you guys were expecting 90 days ago, and importantly the sustainability of some of the trends that you’re seeing, especially on gross margins, which were flat on a very difficult compare I think versus last year. And then, on the other hand, you had Cognitive was down somewhat more than I thought. So, if you could maybe just characterize the performance and sustainability of some of these trends versus what you thought 90 days ago, that would be really helpful for us.
Okay. Thanks, Amit. And it’s a good place to start here talking about the characterization of our quarter, now that we’re through three quarters of 2018. But, I guess from my perspective, I would say, first, we had a solid quarter. We delivered $18.8 billion of revenue, which was consistent with our guidance of a typical quarter-to-quarter seasonality, even in light of a strengthening U.S. dollar, which continues to go against us. But, the headline overall would be, we fundamentally have taken the actions to reposition our business entering 2018. And you see that play out as we enter the second half where we grew operating profit, we expanded operating pretax margins by 50 basis points, we grow EPS 5% consistent with the first half, and we continue to drive strong free cash flow realization to deliver value back to our shareholders.
Now, some of the underpinnings behind that. One, we still see strong demand in key high value segments and you see that play out in our third quarter performance, and we think that will continue moving forward. Areas like hybrid cloud where we’re winning with our hybrid cloud value proposition to the marketplace, data and AI, security, digital, all of these are instantiated in our strategic imperatives, which now from a trailing 12-month perspective were at $39.5 billion, pretty close to that $40 billion target that we put in place well over three years ago, when the IBM company had less than 25% of its portfolio in strategic imperatives; today, we’re roughly at 50%. That’s a massive transformation over a period of time. And that’s led to significant improvement in trajectory of our revenue growth overall, whereas quarter — year-to-date, we’re up 2%.
But underneath that you see some of the areas of growth around cloud, $19 billion, growing 20%. And within that, it’s being driven by our high-value as-a-service content, driving our cloud component. That’s up now to $11.4 billion on an annualized exit run rate, growing consistently at 24%. But, if you put all that together, yes, we’re seeing the underlying fundamental shifts of our top line. We’ve done the tough work to transform our portfolio. But really, what I would call as an inflection point as we enter the second half of the year is what’s happening with our operating leverage. And you see that play out in our gross margin performance, which is the best we’ve had year-to-year in over three years.
Now, let’s talk a little bit about that, because each of you is analyst; and more importantly, as I go out and meet with many of our investors, it is a very critical signpost in a high-value-based business model. And they’ve been talking about our gross margin performance and when are we going to stabilize and how are we going to get back to expansion towards our model. And we talked about as we entered the year, we knew we had headwinds coming into the second half, predominantly around mix, mix around our successful mainframe launch but also mix is starting to hurt us from a currency perspective as we talked at length 90 days ago on how currency and the strengthening of dollars is actually hurting our product-based businesses in hardware and software where you have a disconnect between your cost base, which is in U.S. dollars versus your actual revenue of local currency. So, we knew that headwind. And now, what we’ve been able to do is we’ve been able to reposition our services base of businesses, and you see not only that we return both units back to growth, we actually delivered 160 basis points of margin improvement year-over-year. That’s the best year-over-year in our services business in over five years. And we see that continuing and we expect that to continue to accelerate as we move into fourth quarter.
So, you combine that margin with our continued enterprise productivity, and you see that we’re able to deliver strong operating pretax margins, and you couple that with our strong free cash flow which on a trailing 12 months is still in excess of $12 billion and free cash flow realization over 100%. And that gives us confidence to reaffirm our expectation of at least $13.80.
Thanks Amit. Can we please go to the next question?
Our next question is from Katy Huberty from Morgan Stanley.
Good afternoon. Jim, I want to get your early thoughts as you think about planning for next year, in particular because you face a number of headwinds, services backlog is down, the mainframe comps get more difficult, the dollars is strong, question of what tariffs do to demand. And so, in the context of all those headwinds, can you talk about what some of the offsets are as you start to plan for 2019? Whether there is a potential to continue to grow PTI as you go into next year, even as some of these headwinds don’t? Thank you.
Sure, Katy. Thank you very much for the question. Obviously, we’ve still got a lot of work to do. We’re 16 days into a very important fourth quarter. We are focused on delivering consistent operational performance to deliver value for our clients in the marketplace and also for our shareholders. So, with that said, we’ll give updates on guidance in January. But, let me give you — and to your point, let me give you kind of what we see as the trajectory of our business in the connotation of a headwind, tailwind as we move forward. So, let me first start with services.
You see, as we entered 2018, we talked about we had a much better position on our backlog near-term runout, and you’ve seen that play out throughout 2018. And I think that’s a combination of us taking some very bold actions about repositioning our services business and capitalizing on a differentiated services model, services practices and services value propositions to capture the growth in digital, cognitive and cloud. And we see great momentum in our GBS base of business, both on top-line and on bottom-line as we move forward.
In our GTS business, again, we continue to make progress, see acceleration in revenue through the third quarter. We are leveraging our differentiated hybrid cloud value proposition. Our clients value our incumbency. They value it because we understand their infrastructure, their workloads, and they trust us to move them to the future. And we talked about in the beginning of the year, when you look at our outsourcing backlog, we were hovering around 25% of a $90 billion outsourcing backlog. But right now, exiting third quarter, that $90 billion backlog give or take, we are now in about 32%, 35% cloud content. So, we are winning in the marketplace and our clients are choosing us to move down to the future. So, I continue to see both of our services business.
Now, with that said, we got a big fourth quarter on signings. We fell short in third quarter on signings. And as you know, signings can vary. And really, all signings are not equal. The reality is, the duration, the mix of signings and also new logo versus just extensions, all can impact overall. But, when we look at our fourth quarter, we got the strongest line-up in greater than $100 million deals lined up that we’ve got a chance to exit the year with a very strong position in our services base of business. And when I couple that with our margin leverage that we’re getting out of that business, once you get the revenue growth, you see the fundamental operating leverage, I definitely see that playing out into ‘19.
Now, on Systems, Systems as you talked about, we’re into our fifth quarter on mainframe. By the way, in terms of shipped MIPs as I said in prepared remarks, this is the most successful mainframe program that we’ve ever had. And we still grew in the third quarter, albeit mid-single-digits. Now, we know we wrap on that in the fourth quarter coming off of a 72% growth last year. But, you see the underlying innovation playing out in our Systems portfolio as we rolled out our new POWER9 architecture and we grew nicely in the third quarter by — excuse me, 17%, if I remember correctly. And we see that continuing to play out as we rolled out mid-range and high-end late in the third quarter, we see that playing out in fourth quarter and next year also. And we’ve got also innovations coming out in our all-flash systems in storage, which is where we’re gaining share and winning in the marketplace.
So, the innovation of continually modernizing those platforms and systems, power in storage, we should see some continued growth as we move into ‘19, but we will wrap on some very tough compares to mainframe, which leads me to Cognitive. And we focused on Cognitive throughout this year. One, in the third quarter, we dealt with some enterprise client buying seasonality. And as I said earlier, that will come back in the fourth quarter, just given where clients are at in their buying cycles about committing to the platform. But, we’ve been dealing with some issues around our horizontal apps. And as I said, that’s a function of a secular shift in client value and consumption models to as-a-service. And we’ll see that play out as we get into ‘19 and throughout ‘19.
So, our focus has been on the key high-value emerging areas of Cognitive around our industry verticals and around our domains, like security, blockchain, which we see great opportunity, and we’re very pleased with that portfolio overall. So, kind of a posture around headwinds, tailwinds but we’ll give a lot more color as we get into January.
Okay. Thanks, Katy. Can we please go to the next question?
Next question is from Toni Sacconaghi from Bernstein.
Yes. Thank you. I was wondering if you could talk, Jim, a little bit about free cash flow for this year. You mentioned that it will be greater than 100% of GAAP net income this year, despite the fact that you have some headwinds in cash taxes and higher CapEx, and that number is higher than your longer term guidance of 90% to 100% realization. So, I’m wondering if you can help us understand what are the positive tailwinds that you’re seeing that are enabling free cash flow to be higher than 100% of GAAP net income? And can you explicitly comment on what your expected cash pension and retirement contributions are this year, and whether receivables factoring will benefit your free cash flow and to what extent?
Okay. Toni, thank you very much. And as always, many very good questions that you bring up. But, I hope I can capture many of them. If not, Patricia can get to all of you after the call. But, first of all, let me start at the big picture. Free cash flow, as we entered 2018, we entered 2018 coming off of a very strong fourth quarter in 2017 where we drew — we actually contributed significant working capital efficiency through the launch of our mainframe product cycle. And we said in our January call that we expected about $12 billion of free cash flow in 2018 and the drivers of that from 2017 were really going to be centered around, one, incremental cash taxes that would be a headwind to us in ‘18, and by the way, that is playing out, and all of that is behind us now as we exit the third quarter; number two, that we work on a plan on driving that strong working capital efficiency with the introduction of our mainframe as we exit the fourth quarter of 2018, and that would be a headwind; and then third, we said we were going to continue to invest in our business to capitalize on our innovation and differentiate value around our hybrid cloud. And we’ve continued to invest, actually invested more this year, because we’re seeing an accelerated growth in our proud overall. Our CapEx is up, I think year-to-date 21%. So when you put those three headwinds in play, that’s what you’re seeing play out in our free cash flows through nine months.
And by the way, we still feel comfortable and expect about $12 billion for the full-year based on any metric I look at in payment wise and our trailing 12 months is at $12.2 billion et cetera.
Now, let’s get to free cash flow realization. First of all, as you know appropriately so, we draw free cash flow realization compared to GAAP earnings and GAAP net income because we believe that’s the best way of doing realization overall. And you know within that, you’ve got not only our core operating profit but we got working capital efficiencies, you got CapEx, you got tax, you got pension, all of those can be variables in that free cash flow realization. But, if you look at the last couple of years, we’ve seen positive impact to our stated goal of at least 90% free cash flow realization, driven by working capital efficiency, it’s been driving that free cash flow above 100%; and then, also tax and pension, tax about 6 points, pension a couple of points year-over-year.
So, when you take a look at those pieces, we feel comfortable in 2018 looking at both our expectation for non-GAAP and our expectation for GAAP that we will be well north of our realization here in 2018. And I’m factoring — I would tell you, our factoring is no different from 2018. We use that appropriately as a risk mitigation strategy, to manage credit, to manage concentration and collection risk overall. And we’ll continue to use that judiciously, but I wouldn’t see any major change in that year-over-year.
Great. Could we please go to the next question?
Next question is from Tien-tsin Huang from JPMorgan. I’m sorry. Our next question is from Wamsi Mohan from Merrill Lynch.
Thank you. Jim, I was wondering if you can talk a little bit about the strategic imperative performance within Cognitive including the cloud revenues and as-a-service, both of which declined versus overall strategic imperative growth. Can you maybe talk about some of the puts and takes there and some color on what do you think drove that client buying seasonality that you mentioned to a prior question? And if I could, how do you think that some of these new announcements around AI OpenScale and multi-cloud could change the trajectory for Cognitive and when? Thank you.
Okay, Wamsi. Thank you very much for your questions. There is a lot there to compact into a one answer. But, let me talk about strategic imperatives first and then I’ll get into Cognitive next. But let’s put the strategic imperatives into perspective. So, as I stated on the call, trailing 12 months, $39.5 billion. We talked about three years ago, we put the signpost out there. They had $40 billion at that point in time, the IBM contribution was less than a quarter of IBM’s revenue. Now, we’re approaching 50%. We’re growing in the mid-teens, 13% I think, if I remember correctly, over the trailing 12 months. And that has lifted IBM’s overall revenue growth. As you’ve seen, year-to-date, we’re growing 2% at the IBM level. But within that strategic imperatives, our cloud business, to your point, is at $19 billion right now, up 20%. And the high-value as-a-service component underneath that is up 24%, consistent with where we’ve been in the first half of the year. And I think that’s an attestation to we are capturing the new and emerging workloads as the secular shift to as-a-service world is happening overall.
Now, when you take a look at our strategic imperatives, let’s put this in perspective, where we were 90 days ago. We knew to hit that $40 billion that we needed to be at basically mid to high-single-digit growth in the second half. And we knew similar to how we laid out our expectation for guidance that we were going to wrap around the most successful mainframe product program that we’ve had in history. So, as we entered the second half, we knew we had a focus on driving that underlying high-value as-a-service content and continue to accelerate that to offset the impacts on that mainframe wrap around on product cycle. And you see in the third quarter, our strategic imperatives basically accomplished that. We did what we expected.
So, as we look going forward then in the fourth quarter, we have to repeat what we just did in the third quarter. And the underlying acceleration in our base services businesses I talked about, the expectation as we have a great pipeline lined up for our software entering the fourth quarter based on those buying cycle seasonality that impact us in third quarter, we do expect to hit the $40 billion at the end of the year. And I’ll remind you, when we set that $40 billion target in 2015, we lost over $2 billion of revenue due to the strengthening of the U.S. dollar. So, you’ve seen what it’s done to transform our portfolio. It’s changed the mindset of how we run our Company, how we allocate capital and investment, and you see how that’s playing up with regard to the improved trajectory.
Now, getting to Cognitive, and I’ll just talk about Cognitive SI, because to be honest with you, it’s a simple answer. We talked about last 90, 120 days about the challenges and headwinds we’re facing with regards to our horizontal application areas of talent, collaboration, and around Watson — excuse me, marketing and commerce. We’ve been making progress and I’ll talk a little bit about that. But those three areas are still depressing our revenue. And as you know, there are secular shift to SaaS and consumption models, they hurt our as-a-service run rate.
So, while we’ve been maintaining rounding up and down $2 billion of an as-a-service for the last couple of quarters, you’re seeing strength in areas like security in our industry verticals like healthcare and blockchain and Watson, but it’s getting depressed by those three horizontal app areas, and that will not play out until that time to value throughout 2019.
Thanks, Wamsi. Let’s go to next question, please.
Next question is from Tien-tsin Huang from JP Morgan.
Thanks. Can you guys hear me now?
We can hear you now.
Sorry about that. I don’t know what happened. Good to hear from you guys. Just want to clarify, I guess on the on the 13.80, at least 13.80, trying of better assess the at least in that comment. And what’s required or how much cushion there is on the transactional side to achieve the outlook? Because if we use 13.80, that suggests 4Q earnings looks like a little below consensus and below each of the last two fourth quarters. So, just trying to understand the at least piece at this stage. Thanks.
Sure, Tien-tsin, and thank you very much for the question. I think a little bit below, when you’re doing the math. I mean, we just beat third quarter by $0.02. But, let’s put that aside right now. As always, when we take a look at our following quarter and most importantly for the year, and it’s one of the same right now, we always have multiple scenarios taking into account, one, the trajectory of our business and also the fundamentals and the operational indices that we see. And all support our expectation of the at least — excuse me, at least $13.80 of earnings per share.
So, if you put that in perspective, how are we entering fourth quarter? Well, if you look at the fundamentals of our business profile through third quarter we’re growing revenue, we’re growing operating profit, we’re growing earnings per share consistently, and we’re still driving that strong free cash flow realization. So, kind of — let me walk down the I&E and give you a perspective. And again, there are multiple variables here. But the way we kind of see it triangulating each of these pieces.
First on revenue. On revenue, as you’ve seen in our supplemental charts, the dollar continues to go against us and strengthen against foreign currencies. And right now on revenue, we see about a 2-point currency headwind here in the fourth quarter, pretty consistent by the way with the third quarter. But, we would expect a normal historical quarter-to-quarter seasonality probably in the range of somewhere around 3 to 5 years, I mean average seasonality of 3Q to 4Q. But putting that in perspective, year-to-date grown at 2%; and where we think fourth quarter can be, we continue to feel that we expect full year revenue at current spot rates that we will grow. And again, I’ll make the statement, we’ve been saying that throughout the year. And from the trough of the U.S. dollar to FX, we’ve lost $1.5 billion of revenue since that period of time. But, we still feel based on the fundamentals and our underlying business that we will see growth moving forward, with regards to that content.
So, now, let’s turn to margin. Margin though is where we made the most progress. It is how you instantiate value. And when you take a look at, again, 90 days ago, nothing’s different. We expected a headwind on product mix, and now we’re dealing with a headwind on currency with regards to our product based businesses. And we’re more than offsetting that with services. We delivered our best year-to-year margin performance in the third quarter, led by services up 160 basis points year-over-year. The tough work we’ve done around shifting to higher value, we’re starting to see the realization in our margin on that. The momentum that we’ve got on our hybrid cloud value proposition, we’re starting to see the scale efficiencies. And the productivity benefits are playing out as we move forward.
So, when you take a look at margin, we see our margin continue to accelerate and approaching our model here in the fourth quarter. And then, you combine that with the work we have done about fundamentally changing the way we operate this Company and our enterprise productivity. I’m talking about things like embedding agile into all of our methodologies, transforming the way we work, embedding automation, AI, becoming a cognitive enterprise. With that enterprise productivity, we see our fourth quarter operating pretax margins expanding significantly as we move forward.
So, the last thing I’ll bring up is tax. And as you know, on tax, in our third quarter our underlying rate was still 16%. We did have a discrete in the third quarter. But, if you look at our fourth quarter, we continue to expect our underlying rate to be 16% plus or minus to 2 points. And I’ll tell you when you take a look at fourth quarter, fourth quarter always has the biggest variability in tax. Go look at the fourth quarter over the last 5 to 10 years. Why is that the case? Because one, it’s our largest transactional quarter. So, the product mix and geographic mix has a major implication on our underlying rate, but also tax events typically happen in the fourth quarter. Tax closures, audit closures, statute explorations, each tends to drive variability overall. But with that said, consistent with what I’ve said all year along, we expect on a full-year basis that our tax rate all-in printed will be a headwind. So, you put all those elements together, we expect the full-year guidance of at least 13.80; and as I said earlier, about $12 billion of free cash flow.
Excellent. Tien-tsin, thanks. Mark, can we go to the next question, please?
Next question is from John Roy from UBS.
Thanks so much. Jim, I know obviously the mainframe has done very well. Is there any chance you continue to see slower moderation as you go through or is, are we back to the regular mainframe cycles? Thank you.
Thank you, John. I appreciate it, a very good question. And to be honest with you, I haven’t talked enough about mainframe because we couldn’t be more pleased with how we’ve been able to leverage our high-value innovation technology, which really is instantiated, and I would argue one of the most enduring platforms that delivers tremendous value to our clients overall. But with that said, mainframe, we had a good quarter in mainframe. It is the 5th quarter we’ve wrapped, we grew 6% on a successful z14 launch. And again, I’ll remind you, that’s of a 62% growth last year. We had double-digit growth in MIPs, 20%. And by the way, as you get to the back half of the mainframe cycle, we drive margin expansion, and that happened here in the quarter. So, again, best program ever. Against the prior cycle, we are still well in excess of that prior cycle. And I would expect us to continue to be well in excess of that prior cycle here in the fourth quarter. Although, I’ll caution you in a GA [ph] plus 5 or 6 quarter in, we typically do not grow. And again, we’re coming off of 71% growth last year on a strong launch. But, we are very pleased with the platform, the pervasive encryption, value proposition is really resonating. Now, as we get into the back half of the cycle, we drive margin expansion and now we start seeing the rest of the platform stack play out with regards to our maintenance base, our IGF base, our software base that’s on top of it.
Thank you, John. Can we go to the next question, please?
Next question is from David Grossman from Stifel Financials.
Thank you. Jim, you touched on this briefly in one or two of the questions. But, is there anything you can share beyond the quarterly data points that will help us better understand the growth trajectory of the Cognitive segment going forward? I think, I understand the issues, but they seem somewhat open ended, and really having a hard time changing how to model growth of that segment going forward?
Okay. David, thank you for the question. Cognitive, so, from a net perspective, then, I’ll expand. We were impacted by enterprise client buying cycles, as I said in prepared remarks. And also challenges that we’ve talked about last quarter around our horizontal apps, in particular, talent collaboration and marketing and commerce where we’re seeing in some green shoots but again, time to value in that as you shift to SaaS, all you know quite well will play out as we get into 2019.
But, let’s take a moment and really unpack this segment. To your point and part of this, I think is on us. But, there are many different pieces of this segment. So, we have a strong portfolio of high-value areas around domains like security, analytics, blockchain. We’ve got industry verticals like healthcare, our FSS portfolio, and IoT. We’ve got horizontal apps, as I talked about, like talent, collaboration and marketing in commerce. And then we have transaction processing software. So, let me unpack this. But, I’ll remind you, this segment’s high-value, high-margin. And we continue to expand even in third quarter and third quarter year-to-date, we’re expanding our pre-tax margins overall. But let me give you the different dynamics and how they’re playing out, I’ll do it kind of headwind, tailwind.
First in terms of headwind, as you could see through the prepared remarks, we were impacted by TPS and by our horizontal apps. So, let’s talk TPS.
TPS, high value business. Strategically important to our clients. By the way, it encompasses mission-critical systems that run many industries like banking, like airlines, like retail, and there is seasonality to this business. And what you saw play out in third quarter was tied to enterprise client buying cycles that really reflect the time of when they commit to choose to go to the platform. And what we see right now, when you look at the last couple years by the way, a 2-year CGR [ph] kind of within our long-term model expectations. We had a strong growth last year, down 8% this quarter, but when we look at our fourth quarter, we actually see a very strong pipeline because we’re in the sweet spot of what that client buying cycle is here in the fourth quarter. And with that, we expect growth in this part of the portfolio here in the fourth quarter, and that will lead to much better software performance overall.
And then, finally, I’ll wrap up on our high-value industry verticals and domain areas. We had good growth in security. We have a differentiated value proposition. We’re gaining market share. We’re the industry leader. We expect that to continue. And in health, we had strong growth in health, pervasive across the platforms and we’re scaling. We’re scaling new emerging areas like blockchain, where again, we’ve got 75 active blockchain networks in production, and we’ve got engagements in over 500 clients around global trade, universal payments, around trade finance, around food safety, et cetera. So, we see that part of the portfolio continue to improve. So, when you bring it all together, we expect with a strong pipeline that we would return IBM software back to an expectation of modest growth in the fourth quarter. And we’ll see as we get through fourth quarter, how that momentum will continue in ‘19, and we’ll talk in January.
Thanks, David. Let’s go to the next question, please.
Next question is from Keith Bachman from BMO.
Hi. Thank you so much for taking my question. I wanted to ask about Technology Services and Cloud Platforms. A little less focused on Q4 but more focused on the outlook say for CY ‘19. And the simple question is, can it grow? The backdrop to the question is, your backlog is down a little bit, but I think your duration is also down. But, against that context, is Technology Services support declined meaningfully this quarter down 3%? With presumably being a harder mainframe cycle next year, can that grow and enable the whole business unit to grow? So, if you could just talk more broadly about the outlook for Technology Services and Cloud Platforms, with particular bias to CY ‘19? Thank you.
Sure. Thank you very much for the question. I appreciate it. Remember, within this segment, we got multiple components. And I think you want to get to the services aspect of Technology Services and Cloud Platform. But, let me start first with the integration software, which is essential part of our integrated value proposition around our hybrid cloud strategy, which differentiates us in the marketplace. You’ve seen consistent growth over the last couple quarters. And we think given that differentiated value proposition that we’ve got momentum in that space, and we’ve always focused on being open, a secure platform in driving differentiation around multi cloud as we move forward. That integration software is going to be a critical component of that moving forward. So that’s that.
Now, let’s go to our Technology Services or GTS part of the business. Remember, that’s made up of two primary offering segments, one TSS, which has been a drag on us throughout 2018, and that is entirely aligned to what our expectations would have been with a mainframe product launch cycle. Typically, we’ll see that cycle hurt us in the first 5 to 6 quarters and then it comes back and accelerate, especially coupled with our extension into multi-vendor service where we’ve been quite well as we move forward. And the margin dynamics by the way are very strong in that portfolio. So, as we start accelerating growth, we’ll see better operating leverage in that segment as we go forward.
And then finally, you have your core infrastructure service offering, and that ties right back to our overall outsourcing backlog that you quoted and it ties back to our success in moving our enterprise clients to the cloud. And I talked earlier about over 30% of our backlog now sits in cloud in new SI content is approaching 45% overall. Durations, you’re right, have been reduced as we continue to execute. And again, fourth quarter is huge. We expect a good quarter, and that will position 2019 as we execute to deliver the value for our clients.
Okay. Thank you, Keith. Mark, let’s take just one more question.
Our last question is coming from Joseph Foresi from Cantor Fitzgerald.
Hi. I think you’ve given a mid-single-digit long-term growth target in Cognitive Solutions. Is that still a target and can you hit it in ‘19? And then, how do you feel about the portfolio at this point? Could you be divesting other pieces? Thanks.
Yes. Thanks, Joe. I appreciate the question overall. Obviously, we’ll get into 2019 in January. We got a lot of work to do ahead of us. Again, as I said, we’re 16 days into arguably the most important quarter, given the amount of large transactional business that we’ve got to get done. I talked about my answer on Cognitive. We see a good opportunity pipeline ahead of us right now. We believe in the portfolio, the strength of it, the offerings we have to deliver differentiated value to our enterprise clients overall. And we expect, as I stated, IBM software to return to modest growth here in the fourth quarter.
And as we play fourth quarter out, we’ll see, as we get into January where we move forward. You’re right, our model is mid-single-digit growth. We believe we’ve got the right portfolio for that. But, as always, portfolio optimization has been a critical strategy to our overall business model and our financial model. And you’ve seen that play out over time not only on where we invest our capital organically, but where we leverage M&A and how we create value for our clients and for IBM shareholders and also where we divest in areas that either didn’t meet our strategic fit or our financial requirements on where we see growth and more importantly profit pools move forward. So we’ll continue to evaluate that, and we’ll update you in 2019 on where we’re at.
So, with that, let me close up the call. And I like to thank all of you for joining us here today. So, our results through the third quarter reflect the work we’ve been doing collectively across 366,000 IBMers around the world, around how we reallocated capital, how we’ve taken bold actions around where we placed our investments, and how we’ve repositioned our business. And then we’ve done all the work on how we transform the way we operate in our operating model overall. And you see that play out in our margins, in our level of operating leverage and productivity here in the third quarter, which we expect going into fourth quarter and beyond. You see those results, profit margins are strong. You see it in the innovation and differentiation that we’ll bring into the market, especially in areas like hybrid cloud, how we’re winning in digital with our GBS business and around data and AI and security.
So with that said, we’ll talk more about hybrid cloud in particular at the end of this month, when Arvind and Martin Jetter will host the next webcast in our investor webcast series. So, I’d like to thank you all for joining us today. And as always, it’s back to work for all of us. Take care.
Thank you for participating on today’s call. The conference is now ended. You may disconnect at this time.
If you’re worried about intelligent robots taking over the planet, don’t be. Self-driving cars are here to take them down.
Although, you might have to start preparing for self-driving cars to wipe out humanity instead.
In what’s possibly the most futuristic story ever, a driverless Tesla knocked down an autonomous robot after the computerised victim journeyed into the road.
The incident happened on Paradise Road, Las Vegas on Sunday night (January 6), as engineers transported a number of the robots to a display booth ahead of CES – an annual trade show which advertises itself as ‘the global stage where next-generation innovations are introduced to the marketplace.’
The robot was a v4 model from Promobot; part of a collection of ‘autonomous robot[s] designed for business purposes’, which are rentable for $2,000 a day.
The Promobot website reads:
It is able to communicate with people on any topic, recognize faces, answer questions, move around avoiding obstacles, move its arms and head, show various materials on its display and integrate with third-party devices and systems. [sic]
They perform the functions of administrators, promoters, hostesses, Museum guides, consultants, concierges, and many others.
After Sunday’s collision, the firm revealed one of their creations had been ‘killed’ as the robots made their way to the booth at around 7pm, when the bot strayed out of line and into the parking lot roadway where it was struck by a Tesla Model S.
The car was operating in autonomous mode, though according to the there was a passenger on board. The car continued driving for another 50 metres after the accident before finally coming to a stop.
Now, I’m not saying for certain the robot had become self aware and was trying to escape from its life as a smiling servant, but I’m just going to leave it there for your consideration.
While I’m quite confident in my theory, other people believe the incident was actually an over-the-top PR stunt from the firm – though it’s unlikely Elon Musk knew anything about it. The crash doesn’t exactly do much to promote the safety of Tesla’s driverless cars.
Promobot explained, as the two futuristic creations collided the robot was tipped on to its side, causing ‘serious damage’ which is likely irreparable.
The injured bot was unable to be displayed at CES as parts of its body, head, arm mechanisms, and movement platform were destroyed.
According to the Mail Online, Oleg Kivokurtsev, Promobot’s Development Director, spoke about the incident, saying:
Of course we are vexed. We brought this robot here from Philadelphia to participate at CES.
Now it neither cannot participate in the event or be recovered.
We will conduct an internal investigation and find out why the robot went to the roadway.
Tesla passenger George Caldera explained:
There was nobody there, no men, no cars. I switched this Tesla into a self-driving mode and it started to move. And wow! A robot on the track!
I thought the flivver would come round, but it bumped straightly into the it! [sic] I am so sorry, the robot looks cute. And my sincere apologies to the engineers.
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