International Business Machines Corp

NYSE:IBM

Earnings Call Transcript 2017-Q4

[Operator]

Welcome, and thank you for standing by. [Operator Instructions]. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the meeting over to Ms. Patricia Murphy with IBM. Ma'am, you may begin.

[Patricia Murphy, VP, IR]

Thank you. This is Patricia Murphy, Vice President of Investor Relations for IBM, and I'd like to welcome you to our Fourth Quarter Earnings Presentation. I'm here today with Jim Kavanaugh, who was announced last week as IBM's Senior Vice President and Chief Financial Officer; as well as Martin Schroeter, who is now Senior Vice President, Global Markets. Prepared remarks will be available within a couple of hours, and a replay of the webcast will be posted by this time tomorrow.

I'll remind you that certain comments made in this presentation may be characterized as forward-looking under the Private Securities Litigation Reform Act of 1995. Those statements involve a number of factors that could cause actual results to differ materially. Additional information concerning these factors is contained in the company's filings with the SEC. Copies are available from the SEC, from the IBM website or from us in Investor Relations.

Our presentation also includes certain non-GAAP financial measures in an effort to provide additional information to investors. All non-GAAP measures have been reconciled to the related GAAP measures in accordance with SEC rules. You'll find the 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 Kavanaugh to start us off.

[James Kavanaugh, Senior VP & CFO]

Thanks, Patricia, and hello to everyone on the call today. As a quick introduction, I've been with IBM for 21 years. I was the IBM Controller from 2008 through January of 2015 when I became the Senior Vice President of Transformation and Operations where I've been focused on driving IBM's operating model transformation. In October of last year, I came back to be Senior Vice President of Finance and Operations. I participated in IBM's annual investor briefings for the last 10 years and have met many of you. I'm now looking forward to working more closely with the investment community as IBM's CFO.

Given I'm a week into the new role, Martin is going to cover the fourth quarter, and then I'll put into context our 2017 performance and how that positions us for 2018. We'll then take the Q&A together.

So for now, I'll turn it over to Martin.

[Martin Schroeter, Senior VP of Global Markets]

Thanks, Jim. Back in July, we planted the flag for our businesses, and we pointed to an improved trajectory in the second half. Now as we look back on the year, we did, in fact, significantly improve the trajectory in our revenue and our gross margin performance. We did this by ramping our cloud and as-a-service offerings by continuing to reinvent our systems brands, by driving a higher level of software transactional revenue and by improving consulting performance.

In the fourth quarter, we returned to revenue growth. Our revenue of $22.5 billion is up about 3.5% and up 1% without the currency tailwind. We also grew our operating net income and our operating earnings per share. As you saw in our press release, our operating net income and EPS exclude a one-time charge associated with the enactment of tax reform because of the unique nature and to provide comparability to the operating expectations we've been providing for 2017. For the year, we delivered $79 billion of revenue, $13.80 of operating earnings per share and free cash flow of $13 billion, which is up over $1 billion year-to-year.

Looking at some of the revenue dynamics of the fourth quarter. Our systems results were terrific across IBM Z, Power and storage. This was our first full quarter with the z14. And with pervasive encryption and the ability to address new technologies like blockchain, we're adding new clients and new workloads to the platform. in Cognitive Solutions, we had good growth in several areas, including security, IoT and our industry-based solutions like Watson Health and Watson Financial Services, though we were disappointed by the performance in a few of our more traditional analytics offerings. And in Services, we had our second consecutive growth in consulting, led by digital offerings. Performance in our outsourcing businesses across GTS and GBS was pretty consistent with the last few quarters.

From a geographic perspective, we had growth in many countries, including our 2 largest, the U.S. and Japan. Across all of our businesses, our strategic imperatives revenue was up 17% or 14% at constant currency as we embed cognitive and cloud into more of what we offer. For all of 2017, Strategic Imperatives revenue was up 11% to $36.5 billion, which is 46% of our revenue. I should mention that we'll continue to focus on constant currency revenue growth rates throughout, but any way you look at it, this was a strong finish to the year.

We introduced the Strategic Imperatives framework back in 2015 as a way to show how we're moving our clients to the future. As you know, these aren't separate businesses but the revenue from our offerings that address opportunities in analytics, cloud, security and mobile. This quarter, the 14% growth in Strategic Imperatives revenue was led by cloud and by security. Let me give you a little more on each.

Our cloud revenue was up 27% as we help our clients to implement hybrid environments, integrating public and private and traditional IT. For the year, our cloud revenue was $17 billion, and we're exiting 2017 with a run rate in our as-a-service offerings of over $10 billion. To put that $17 billion in perspective, it's up from $7 billion just 3 years ago. As you know, we play an important role in running our clients' most critical processes. And now with the IBM Cloud, which is built for the enterprise, each of the 10 largest global banks, 9 of the top 10 retailers and 8 of the top 10 airlines are cloud-as-a-service clients. We can help clients with their hybrid environments as well. With introduction of IBM Cloud Private, we provide clients with the attributes of a cloud behind their own firewall and give them increased portability of workloads across any cloud environment. This is really important for enterprise work.

And then in security, revenue across our security offerings more than doubled. This reflects the strong demand for our pervasive encryption in IBM Z as we reinvent that platform for the most contemporary workloads. We also had good performance in managed security services within our GTS business and in our security software. Over the last several years, we've been making investments and shifting resources, embedding AI and cloud into more of what we offer and building new solutions and modernizing existing ones. These investments not only drive our Strategic Imperatives revenue performance today but will also extend our innovation leadership into the future. I'll give you a few examples.

In the third quarter, we formed a partnership with MIT to create the MIT-Watson AI Lab. Through this partnership, we're mobilizing the talent of more than 100 AI scientists, professors and students to carry out fundamental AI research and drive scientific breakthroughs that unlock the potential of AI. In Quantum, we now have a 20-cubit IBM Q system available for all to use, and we have the first working 50-cubit processor, and we launched the Q Network, which is a collaboration of leading Fortune 500 companies, academic institutions and national research labs that can access IBM Q systems through the IBM Cloud as they explore the practical applications to advance quantum computing. And you saw just last week, we announced that IBM led the U.S. in patents in 2017, marking our 25th consecutive year at #1. Nearly half of the more than 9,000 patents in 2017 are for advancements in AI, cloud computing, cyber security, blockchain and quantum computing.

So now let me move on to our financial metrics for the quarter. Our revenue was $22.5 billion, which, as I said, is up year-to-year. Like last quarter, our performance is pretty much all organic. I'll go into the highlights by brand in the segment discussions, so let me comment here on the geographic performance.

Revenue from the Americas was up 4%, with growth across the U.S., Canada and Brazil. This is a significant sequential improvement in the year-to-year performance, 6 points compared to the third quarter, driven by systems and infrastructure services. Our EMEA revenue was down about 1.5%, which is consistent with last quarter's performance. As always, the performance varied within the geography. This quarter, we had growth in France, Spain and the Middle East and Africa region, offset by weakness in the U.K., Germany and Italy. You'll remember that the U.K. and Germany were impacted by the contract dynamics at the end of 2016, and we've now wrapped on those. In Asia Pacific, we had strong growth again in Japan, which was up 4%. Impacting overall Asia Pacific performance was China where you'll remember we had double-digit growth last year from some large rollouts in China banks.

Looking at our margin performance. Our operating gross margin was down a little over a point year-to-year and up nearly 2 points sequentially. This is about 0.5 point behind what we talked about last quarter, with some of the differences due to mix and the rest due to a delay in the yield from some of our productivity actions in our Services business.

Our operating expense was up 6%. And with revenue up 4%, our E to R increased nearly 70 basis points year-to-year. Now keep in mind, when currency helps the top line, it also hurts the expense line, not just because of translation but because that's where the majority of the hedges are reported. We mentioned this back in October. And so in the fourth quarter, currency, between translation and the year-to-year impact from hedges, drove 4 of the 6 points of expense growth. We also had a lower level of IP income in the fourth quarter, about $175 million year-to-year, and it was down for the full year about the same amount. At the beginning of the year, we said we weren't counting on IP income being flat year-to-year, though we had the opportunity pool to do so. And as we went through the year, we're delighted with the new IP partnerships we signed. You can see they contributed to the $300 million of IP income in each of the last 3 quarters, and we weren't going to do anything unnatural to drive flat performance year-to-year in this line item.

Without the effect of currency and IP, our E to R improved modestly, reflecting the continued efficiency we're driving in our underlying spend base while maintaining a high level of investment, together with the benefit of growing revenue.

Looking at operating taxes. Again, this excludes the one-time charge. We provided a range for our ongoing tax rate at the beginning of the year, and we finished at the bottom end of the range. And so our tax rate for the quarter reflects an underlying effective tax rate of 12% for the year. You'll recall, we had some discrete items in both the first and the second quarter, which took our full year operating tax rate down to 7%. We generated $4.8 billion of operating net income in the quarter, which is up 1%. And with share reduction of about 2.5%, our operating EPS of $5.18 was better by 3.5%. We generated $6.8 billion of free cash flow in the quarter and $13 billion for the year. Now when you look at our realization of GAAP net income, that's over 200%. But when you normalize for the one-time tax charge, it's about 115% for the year. For your awareness, as we show realization of GAAP net income going forward, we'll be using that adjusted view on our charts. Our free cash flow supports both a high level of investment and shareholder returns. And in 2017, we returned 3/4 of our annual free cash flow to shareholders through dividends and share repurchases.

So now let me move on to the segments. Our Cognitive Solutions revenue was flat. Within solutions software, our annuity content, which represents 80% of revenue on an annual basis, was up 3% year-to-year, which is over a point better than last quarter's growth. We had double-digit growth in our SaaS offerings again this quarter as we continue to invest to build scale in our as-a-service businesses. The transactional revenue within solutions was down, driven by weakness this quarter in a few of our more traditional analytics offerings like data integration and content management. As you know, because of the larger mix of transactional content in the fourth quarter, it has an outsized impact on the overall software performance.

Within our solutions software portfolio, we continue to focus on building out our industry verticals, and we had strong performance in those areas, including Watson Health, Watson Financial Services and Watson IoT offerings. In Watson Health, we continue to deliver strong growth, driven by state and local government agencies as well as life sciences and oncology. Watson Health is scaling. We've reached 115,000 people with our cognitive offerings, and oncology is now in over 150 hospitals and health organizations and trained on 13 cancers compared to 4 cancers just over a year ago. Watson Financial Services had another strong quarter as clients look to evolve their financial systems. Growth here was led by our RegTech and commercial payments offerings.

Also, within analytics this quarter, we had good growth in areas that provide data management in hybrid environments like our new unified data system, which leverages DB2 technology built on IBM Power, and in our software-as-a-service business intelligence offerings, including cognitive analytics. As I said earlier, security contribute to growth again this quarter. We had good performance, particularly in the areas of data security, with GDPR as a key driver as well as fraud detection. We saw increased interest in uptake and our software-as-a-service offerings, particularly with QRadar on cloud and Resilient on cloud. We also continue to make progress in emerging areas like blockchain. Remember that for us, blockchain is a set of technologies that allow our clients to simplify complex, end-to-end processes in a way that couldn't have been done before. It requires the attributes of immutability, permissioning and scalability, and we're already performing thousands of transactions per second. And we offer some of the most advanced cryptography available to verify transactions. So by running on z, we provide industry-leading technology to help improve security and performance for our clients' blockchain networks.

We have engaged in blockchain projects with hundreds of clients, and since the release of our IBM Blockchain platform in the third quarter, we've collaborated on 35 active networks with clients such as CLS, Everledger, KBank, London Stock Exchange and Mizuho. These reflect a wide variety of use cases like cross-border payments and financial services, supply chains in retail, valuable goods authentication in industrials and digital identification for governments. This quarter, we extended our food safety initiative with Walmart into China. And just this week, we announced the creation of a joint venture with Maersk to provide more efficient, secure global trade using blockchain technology.

Turning to transaction processing software. We had another good quarter with revenue up 3%, reflecting our clients' long-term commitment and the value our platform provides to them. Growth was driven by middleware as our clients continue to invest and grow their high-value, mission-critical workloads on the z platform.

Turning to profit for Cognitive Solutions. PTI margin declined year-to-year, driven by ongoing investment into strategic areas and mix of business into lower-margin offerings, including the shift towards SaaS. Our SaaS margins continue to expand, though were still not at scale.

Moving on to Services. Global Business Services generated $4.2 billion of revenue this quarter, up 1% at actual rates and down 1.5% at constant currency. We had modest growth in GBS signings, marking the fourth consecutive quarter of signings growth. And our GBS revenue was up in several regions, including Asia Pacific and Latin America. We have good momentum in Consulting but continue to see declines in Application Management, particularly in North America and Europe.

Consulting revenue grew 1% again this quarter. We've said for some time that the path to revenue growth starts with signings, which then translates to backlog growth. Our Consulting backlog was essentially flat in the second quarter and was up starting in the third. And we've now driven 2 consecutive quarters of Consulting revenue growth.

Revenue in our Digital Strategy and iX business grew about 40%. And we're also seeing good growth in the new practices we've built around our innovative technologies like AI and Blockchain. The reason we're able to lead in these emerging areas is because of the technology as well as our ability to implement these platforms into our clients' workflows. So GBS plays a critical role on our leadership in these areas. This doesn't apply just to our own technology. We're also building ecosystems and partnerships around other platforms. We've talked in the past about Salesforce and Workday. And now in December, we announced a partnership with Blue Prism that will combine their robotics processing automation software with IBM services to deliver digital workforce solutions that increase productivity and enable automation at scale. Application Management was down 3% this quarter, driven by declines in traditional ERP managed services and the successful completion of some large contracts. Within Application Management, we grew in our offerings that help clients modernize their critical application suites by implementing cloud-centric architectures and microservices.

Turning to profit. GBS gross margin was down about 2 points year-to-year. Half of this was due to currency dynamics this quarter, and it impact margin by about a point. We're also continuing to invest in our skills and transform our GBS business. As Mark Foster talked about at our investor briefing, our strategy is focused around digital, cognitive and cloud growth platforms, and we've streamlined their practice model to ensure the right skills enablement for practitioners. We're investing to further develop our long-term client relationships with the leading organizations around the world, both with more dedicated senior account leadership and the reinforcement of delivery excellence through methods, automation and widespread rescaling of our practitioners. We're also bringing in new skills through acquisitions. We closed on the acquisition of Vivant this quarter in Australia, which is the seventh acquisition we've done in GBS over the last 2 years. And in some of the more traditional areas in Application Management, we continue to see some price and profit pressure.

Technology Services & Cloud Platforms generated $9.2 billion of revenue this quarter. Our Strategic Imperatives grew at a double-digit rate, and the as-a-service exit run rate for this segment was nearly $7 billion. The IBM Cloud is optimized for cognitive workloads and provides clients with the ability to integrate public, private and managed environments through a single architecture. Infrastructure services was down 4%, which is similar to the trajectory we've seen in recent quarters. As we've talked about, this quarter, we had a more difficult year-to-year compare because of some of the large contract items a year ago. We've now wrapped on those dynamics. Clients are looking to cloud to drive efficiency and agility in their infrastructure and help them create new business models, but they need help getting there and they need someone to manage it for them, given the complexity of their data, environments and industry.

When you look at the composition of our infrastructure services signings this year, about 45% was cloud content, which is ahead of the market mix.

Integration software was down 5%. Our SaaS revenue was again up at a strong double-digit rate across the portfolio, and we continue to have momentum in our hybrid integration tools that are important to enterprise cloud deployments, but it was not enough to offset the decline in our on-premise tools as more of that portfolio shifts to the cloud.

I mentioned earlier this quarter, we announced IBM Cloud Private, a platform to help clients unlock their significant IT investment in core data and applications and extend cloud native tools across public and private clouds. The new platform was built on an open-source container architecture and supports both Docker containers and Cloud Foundry. This facilitates integration and portability of workloads as they evolve to any cloud environment. IBM Cloud Private was developed in response to our clients who want more control of their data and processes while leveraging cloud capabilities. The need is obvious in regulated industries, but every client has data residency requirements and is concerned with the security and performance of pure public clouds. This platform will help everyone to better implement cloud infrastructure that aligns with whatever business model they have. Since the announcement of IBM Cloud Private, we've already brought 120 enterprise clients onto the platform.

Technical Support Services was up 1% at actual rates and down 2% at constant currency. We grew in our multivendor support offerings, where we drive productivity and scale for our clients with integrated and wall-to-wall support solutions across any platform.

Turning to profit. Gross margin for the segment was down about 2 points year-to-year. Some of the large contract dynamics that we've talked about are impacting margins. There were also new large contracts that came into the portfolio at lower margins as we invest ahead to optimize our clients' environments. We continue to invest to scale our cloud platforms and more of the software content in this segment shifts to as-a-service. We're scaling the IBM Services Platform with Watson, where we've already added over 1,000 clients to the platform in 2017. Additionally, we've wrapped on the benefit from our workforce transformation actions that we took in 2016. We did improve our spending here, but as I mentioned, the yield from some of our productivity actions is delayed.

In Systems, we had another strong quarter with double-digit revenue growth. All 3 brands, IBM Z, Power and Storage, grew. We continue to deliver innovation in our systems to enable them to run the most contemporary workloads. Now roughly half of our Systems revenue in 2017 address workloads in the areas of our strategic imperatives.

This quarter, IBM Z revenue was up 71% year-to-year with the highest shipped MIPS in history. The results reflect our first full quarter of z14 and demonstrate the strong client demand for this platform. Our mainframe is an enduring franchise. In fact, it's an enduring and growing franchise. Our MIPS installed base is up 2.5x over the last 10 years. And as long as we continue to innovate and modernize, this platform will continue to be the leading enterprise platform in the world. More than 10 years ago, it was Linux. 5 years ago, it was mobile. And now, it's pervasive encryption.

The z14 adoption was again broad-based across many countries and industries. We added 14 new clients to the platform across 10 countries this quarter, and we saw especially strong performance in North America where clients continue to leverage traditional IT infrastructure together with the cloud. We're continuing to address emerging workloads across the Z platform like blockchain, machine learning, DevOps and payments. We closed 10 instant payments deals this quarter across several markets. And in the emerging blockchain space, the Beijing Institute of Technology selected the IBM LinuxONE platform to run their blockchain solution. Overall, the mainframe continues to deliver high-value, secure and scalable platform that's critical in managing our clients' complex environments.

Our revenue grew 15%, driven by double-digit growth in our high- and low-end portfolio, with our cloud-enabled offerings serving new clients in deep learning and the HANA markets. We continue to shift into the growing Linux market. And our Linux on Power revenue grew again and gained share. For 2017, this now represents 1/4 of our Power portfolio. We also delivered the first installment of our supercomputers at U.S. Department of Energy, with more to come later in 2018. There are 3 labs of this type, and we won 2 of the 3, which is the most any provider is allowed to win. In this quarter, in our low-end Linux portfolio, we released our next-gen Power system with our new POWER9 processor. These POWER9 systems bring unprecedented speed to AI workloads and enable our clients to compete and win in the data-intensive AI era.

Storage hardware was up 8%. This is the fourth consecutive quarter of growth so, obviously, we've got some momentum here. We gained share in a very competitive market while holding margins stable. We had double-digit growth in our high-end hardware products for the quarter, which reflects the demand for flash as well as the capacity increase linked to mainframe demand.

Our all-flash array offerings once again grew at a strong double-digit rate and faster than the high-growth all-flash market. In our storage software, which is reported in Cognitive Solutions and a major contributing to our storage business, had strong revenue from our cloud object storage offerings.

Looking at profit for Systems. Our margin was down slightly year-to-year and up sequentially, consistent with product cycle dynamics.

And so now I'll go quickly through cash on the balance sheet, and Jim will wrap up with the segments in the context of 2018. We generated $7.8 billion of cash from operations in the quarter, excluding our financing receivables. We invested nearly $1 billion in capital expenditures and generated $6.8 billion of free cash flow. For the full year, we generated $16.3 billion of cash from operations, excluding financing receivables. We invested $3.3 billion in CapEx this year, mainly in cloud, in support of our services business. And so we generated free cash flow of $13 billion. And as I mentioned, our cash realization was strong at 116%. That's up 17 points from last year.

You'll recall that we expected our free cash flow to be roughly flat for the year. At $13 billion, we're up $1.3 billion year-to-year so, obviously, we delivered a much stronger number. Relative to what we expected, we were more efficient in the deployment of capital expenditures, which was down about $400 million year-to-year. Additionally, because of the mix of business and the strong working capital performance at the end of the year across collections and our factory program, we drove better cash performance. With that free cash flow performance, we've returned almost $10 billion shareholders, including dividends of $5.5 billion and $4.3 billion in gross share repurchases. We bought back over 27 million shares, reducing our average share count by just over 2%. At the end of the year, we had $3.8 billion remaining in our buyback authorization.

Now looking at the balance sheet. We clearly have the strength and flexibility to support our business over the long term. We ended the quarter with a cash balance of $12.6 billion, higher than a year ago as the bulk of our 2018 debt maturities will occur earlier in the year. Total debt was $46.8 billion, of which 2/3 was in support of our financing business. The leverage in our financing business is 9 to 1, and the credit quality of our financing receivables remains strong at 53% investment-grade, a point better than both September and last December. Given that this is the year-end call, I wanted to give you a quick update on our pension plans.

Our U.S. plan has been frozen for some time, and we've been remixing our asset base toward a lower-risk, lower-return profile. At the end of 2017, in aggregate, our worldwide tax qualified plans are funded at 100%, up a couple of points from a year ago, so our plans are in really good shape. We provided information on the performance of our retirement-related plans and year-end 2017 assumptions in the supplemental charts.

So now let me turn it back to Jim.

[James Kavanaugh, Senior VP & CFO]

Thanks, Martin. Let me take a couple of minutes to wrap up. We've been doing a lot of work to reposition our business, to help move our clients to the future, investing, shifting skills and reallocating capital. In short, a lot of heavy lifting. And our results for 2017 reflect that, with an improvement in revenue and our gross profit trajectory in the second half.

Let me make a few comments on 2017 by business and how it positions us for 2018. In Cognitive Solutions, we're driving good results across most of our solutions portfolio, including our Watson and security offerings. Most of these new areas have a software-as-a-service delivery model. And so for 2018, we'll continue to build scale in these as-a-service businesses.

In our Services segments, we've got some momentum in Consulting, driven by our digital offerings and strong growth in our cloud content as we help our clients to build out hybrid environments. As you know, the majority of Services revenue in any given year comes out of the opening backlog. as we enter 2018, the projected revenue from the current backlog points to an improved revenue trajectory in 2018 versus 2017, and that's in both GTS and GBS.

In Systems, we had a great year. Looking to 2018, we have a strong start to our new z14 and are introducing POWER9 systems and have the most competitive storage offerings in some time.

And then across our businesses, our Strategic Imperatives revenue was up at a double-digit rate to $36.5 billion for the year, which is now 46% of our revenue.

So when you take all of this together, we're entering 2018 with a stronger revenue profile than a year ago. In 2018, we'll maintain a high level of investment. This is important as we continue to build out capabilities in AI, in cloud, in security and in blockchain, just to name a few. As always, we'll look for more productivity in our spend base, especially in our Services business, where we'll continue to remix our skills to new opportunities.

And then let me comment on tax. Tax reform provides additional flexibility over the longer term. Our 2018 rate will reflect the implementation of tax reform, which includes a lower U.S. corporate tax rate, offset by the broader tax base and reduced foreign tax credit utilization. This translates to an ongoing operating rate for 2018 of 16%, plus or minus 2 points, which is a 4-point headwind year-to-year. This, as always, excludes any discrete items we will have. Putting it all together, we expect to deliver operating earnings per share of at least $13.80.

I want to briefly comment on 2 other items with respect to our earnings per share expectations. First, regarding the skew of our business. We expect to deliver between 17% and 18% of the full year expectation of at least $13.80 in the first quarter, which is consistent with the average over the last 5 years. You'll recall, the last couple of years, we've had a benefit from a discrete item in the first quarter. We anticipate a potential benefit again this year. And as in the past, we will likely take actions that will offset some portion of the benefit. This is reflected in the first quarter skew. And then second, there are 2 accounting changes that will be effective in 2018 that will affect our results and are included in our expectations. One helps operating earnings per share, and the other hurts. And they essentially offset each other within the $13.80 of operating earnings per share in 2018.

Now looking at cash flow. We had a very strong end to 2017. Martin mentioned a couple of the drivers, which provide some context to our 2018 expectations. We were more efficient last year in the deployment of capital and, in 2018, we're allowing for some growth in CapEx. In addition, we had a strong finish in receivables performance in the fourth quarter, primarily because of the mix of business that creates a year-to-year headwind in 2018. And we also expect a headwind from cash tax payments in 2018. At this point, it looks to be about $600 million year-to-year. Put all of that together, and we expect free cash flow of about $12 billion in 2018, which results in free cash flow realization well over 100%.

So we're building momentum across our business but, as always, more work to do. And with that, let me turn it back to Patricia for the Q&A.

[Patricia Murphy, VP, IR]

Thank you, Jim. Before we begin the Q&A, I'd like to mention a few items. First, as Jim said upfront, he and Martin will take your questions together. Second, we have supplemental charts at the end of the slide deck that provide additional information on the quarter and the full year. [Operator Instructions]. So operator, let's please open it up for questions.

[Operator]

[Operator Instructions]. Our first question is from Wamsi Mohan from Bank of America Merrill Lynch.

[Wamsi Mohan, Bank of America Merrill Lynch]

Jim and Martin, congrats to both of you on your new roles. Jim, your guidance calls for some revenue growth and margin stability here in 2018. And I was hoping you can share some color on the key puts and takes here as it pertains to your EPS guide. Looks like tax is going to be a big headwind, and if you could quantify sort of that in relation to the operational improvement. And if I could, Martin, could you just comment on what drove the decline in Strategic Imperatives and the Cognitive Solutions segment in 4Q, that would be helpful as well.

[James Kavanaugh, Senior VP & CFO]

Okay, thank you, Wamsi. I appreciate the opening question, and thanks for the comment on the job movement. As you can imagine, when we enter any year, there are multiple scenarios around how we position the full year guidance. And in this year, especially given the improvement that we've seen in the second half of 2017, and taking into account that trajectory of our business and all other operational indices, all of this supports our guidance of at least $13.80. Now as I stated in my prepared remarks, let me first start with tax. Our 2018 operating tax rate of 16%, plus or minus 2 points, incorporates the new tax law. This is a 4-point headwind year-to-year compared to our 2017 operating tax rate of 12%. Both of these are before any discretes.

In terms of discretes, like we've had in recent history, we do anticipate some potential benefits from tax discretes. And as in the past, we will likely take action to offset some of those benefits as we always look to position our business for the long term. Taking all of this into account, tax will be a headwind in 2018 year-to-year. Now in terms of the other drivers as you asked. Given our trajectory exiting 2017 and the confidence we have in our portfolio and how we've repositioned it, we do expect revenue growth at current spot rates for 2018. We see stabilization of our margins on a year-to-year basis, driven by the continued scale-out of our cloud business as we drive efficiency, and we're also going to get yield from our services productivity improvements. And this will start in first quarter. And looking at expense, there are many different dynamics here. And I want to make sure we get this right.

We're going to continue to invest at a high level to drive the strategic growth areas while we will continue to deliver our base productivity. And as you saw in fourth quarter, we'll continue to see an expense headwind due to currency hedges. And in terms of IP, we're not planning on any year-to-year profit contribution. We continue to have a strong opportunity pipeline. We believe in this model, and we'll continue to be opportunistic in leveraging the monetization of our IP over the long term. Now let me just conclude on a little bit of color on first quarter, and then I'll turn it over to Martin. In first quarter, as I said, we expect our earnings per share skew to be between 17% and 18%. That is on average of the last 5 years, and it's above the last 2 years. We're maintaining our momentum, as I talked about, but we do see revenue growth, both at actual rate and constant currency, and constant currency similar to fourth quarter. And the annual effective tax rate, as we talked about, we anticipate a potential tax discrete benefit in our first quarter. And similar to last couple of years, we are evaluating potential actions that will offset some of these, and both of these are included in our guidance overall. So hopefully, that gives you a little color, and I'll turn it over to Martin.

[Martin Schroeter, Senior VP of Global Markets]

Yes, thanks, Jim. So let me give you a little color on Cognitive Solutions for last year. So keep in mind that the majority of our business in Cognitive is annuity-based. And that includes, by the way, the SaaS offerings, which are growing quite well. Where we saw weakness, as we noted in the prepared remarks, was in a couple of traditional analytics offerings like data integration and content management where we either have to go spend some more time getting those offerings better developed, and we did come out with some new wins at the end of the year, but it wasn't soon enough to have an effect in the year, or we're shifting some of those license models to as-a-service. So we don't see a difference in the secular trends, we still believe Cognitive Solutions is going to be driven by the shift to analytics, the shift to cloud, the shift to security. We see that continuing. We just have a couple of offerings here that either we're shifting aggressively or we have to see how the new offerings perform in the marketplace.

[Operator]

Our next question is from Toni Sacconaghi from Bernstein.

[Toni Sacconaghi, Sanford C. Bernstein]

I'd like to just clarify the guidance, please. You keep talking about a tax rate in 2017 of 12% but, with discretes, it was actually under 7%. And so are you saying you believe that your actual reported tax rate can go from 7% to 16% in 2018 and you can deliver $13.80 in earnings? Or do you know now that you have significant discretes and that your real tax rate that will be reported will be dramatically lower? Because it's very difficult to get the bridge, I think, with the tax rate that's really, in effect, almost 1,000 basis point steeper. And then separately, I'm wondering if you can just comment on the erosion in operating profit margins in both GBS and in Technology Services & Cloud Platforms. The margin erosion there was actually the worst we've seen in history on a pretax basis. That did not appear to be an improvement as you expected. I think, if you back out the tax rate, you actually missed your guided EPS by $0.40 relative to a 15% tax rate. And it all seemed to come from the margin erosion in those businesses. Perhaps, you could address that a little more directly, please.

[Martin Schroeter, Senior VP of Global Markets]

Sure, Toni. It's Martin. I'll give you a couple of points. One, when we gave guidance at the beginning already of last year, we said our tax rate on an annual effective basis would be 12% to 18%, and we came in at the bottom on an annual effective rate. And as you point out, we had a couple of discretes already in the first half, nothing additional in the second, so the printed rate was lower than that, but I don't think that's news. We're trying to be clear, by the way, on tax for next year, so I'm glad you said we're -- you're not quite there yet, so we should spend some more time on it. The annual effective rate going from 12% to 16% is what the headwind that Jim noted. And we do see discretes as we always do. I don't think we've ever had a year where we don't have a discrete in the year. So I would expect there to be discretes. And Jim noted already that we'll have one in the first, which will largely be offset.

So the math that we're talking about from a modeling perspective is 12 to 16. In any case, by the way, the year-to-year headwind in tax is real. We see a headwind in tax. We don't expect at this point at the $13.80 that we'll print a number that we did this year. And again, the 12 to 16 is a good way to do it. The erosion in operating profit, I guess, my view, one, we were looking for a sequential improvement in gross profit. We said both in July, when we said first half to second half, we'd get better; and also, when we talked about it back in January, we said sequentially we'll continue to improve margins. When we got to the fourth, we were up about 2 points. And quite frankly, we thought we could have probably gone to about 2.5 points. And the shortfall there was really driven by 2 things. One is mix. We had a terrific, terrific Systems quarter. And our Systems business is high-margin, but it's not as high a margin as our Software business, so that had an impact on mix.

And then some of the productivity we were looking for out of Services got pushed out. Now that wasn't a huge, huge surprise that the revenue performance in TS & CP to us because we talked about the contracts already. And GBS, we said, as we get consistent, signings growth will get to backlog growth, will get to revenue growth, and we saw a nominal improvement in the revenue trajectory but not enough yet to drive overall revenue growth. But as Jim noted, as we go into 2018, we have a much better backlog.

[James Kavanaugh, Senior VP & CFO]

And we also expect the margin trajectory in both of those businesses to start off and improve as we move forward to the year.

[Operator]

Our next question is from Katy Huberty from Morgan Stanley.

[Kathryn Huberty, Morgan Stanley]

I appreciate the commentary around the first quarter skew and expecting revenue growth at constant currency in the first quarter. I wonder if you can provide some clarity as well on margin stabilization for 2018. Is that stabilization for the full year? And how would you think the first half versus second half looks like as it relates to year-on-year margin trends?

[James Kavanaugh, Senior VP & CFO]

Yes. Thank you, Katy. This is Jim. So I'll take that. As I stated in my prepared remarks, the skew is 17%, 18% of the full year on EPS, which is on the average over the last 5 years, but it's also above the last couple of years. Embedded in that, we do see the stabilization of margin on a year-to-year basis starting immediately in the first quarter. We entered the first quarter with some good strength, and we feel very good about our portfolio lineup, strength in our transactional businesses coming out of mainframe where we're ahead of the product cycle in the first 2 quarters, we have enclosed the highest fourth quarter shipped MIPS in history, and it's evident that the market has capacity demands and continues to see the value of that platform. So we see very good performance in our Systems lineup. By the way, Power grew, storage grew.

So we had pervasive growth in the fourth quarter, and we feel very strong coming into first quarter. Second, we do see software having growth in the first quarter, and that's just due to the mix between annuity and transactional. As Martin indicated during the prepared remarks, we continue to drive high renewal rates, and we continue to drive the annuity content of our business. And just given the dynamics there, that will give us growth in the first quarter, and it's going to give us mix and margin benefit in the first quarter overall. And then finally, Services, as I stated, we do see revenue from opening backlog, which, in the first quarter, given it's right in front of us, is almost about 90% of the first quarter revenue needed. And it does show improved trajectory throughout 2018. And I'll remind you, throughout '17, we talked about the headwinds we faced in our TS & CP business around some large contract conclusions that was delayed in 2017. We didn't realize it until the very end. We are going to start off 2018 in a much better position on margin, and we see overall stabilization beginning immediately.

[Operator]

Our next question is from Amit Daryanani from RBC Capital Markets.

[Amit Daryanani, RBC Capital Markets]

I guess, maybe I just want to focus more explicitly on gross margins and how you guys think gross margins will stack up in 2018. I know you've talked about margin stabilization, but it would be helpful if you just talk about how do you see gross margins in 2018. And then what are the levers that you think can enable a gross margin expansion environment in '18 for you guys, given the fact you are talking about revenue growth?

[James Kavanaugh, Senior VP & CFO]

Well, if you take a look at 2018 overall -- thanks, Amit -- we expect margins to stabilize, as I said. And we continue to drive -- that's going to come from a couple of areas, one, continued scale of our cloud business; two, improvement in yield of our services productivity as we wrap around some of those completed contracts I talked about; and three, just getting operating leverage from returning this business and portfolio back to growth. So we're going to continue making the strategic investments that are required to position us to win in key growth areas and position this company for the long term. And we're going to drive the base productivity, and we're going to get scale out of our as-a-service business as we move forward. And we saw great instantiation and proof points in the second half of last year overall.

So if you play that out across our portfolio, I would tell you we'll get mix contribution from our Cognitive Solutions business segment, just driven based on the product lineup and the strength we have in our Watson offerings, in security and in our industry verticals. We're going to get margin and productivity benefit out of our services businesses, GBS and GTS. And we're going to get scale efficiencies out of our as-a-service and cloud-based businesses in our TS & CP overall segment. Martin, if you want to add a few comments.

[Martin Schroeter, Senior VP of Global Markets]

Yes. The other thing I'd add, kind of the way I think about it, in addition to what Jim went through, one, the margins in our Strategic Imperatives remain higher than the margins in the rest of our business. And remember, the whole business, by the way, has high margins, right? We're a high-margin -- we're a high-value model with high margins, we're 49% -- between 49% and 50% margin. So we're building the businesses. The places we're moving to -- and you saw a great performance out of Strategic Imperatives, the places we're going to offer higher margins than the places we're coming from, and the reweighting alone gets us some content. And as Jim pointed out, in any scale business, the worst is behind us because we're building scale every day.

[Operator]

Our next question is from Mark Moskowitz from Barclays.

[Mark Moskowitz, Barclays PLC]

Just one clarification and a question. Did you guys say that the revenue growth for '18 can grow for full year, both reported and constant currency? And then also wanted to understand more on this topic of scale, which has become the common thread throughout the call today. What are kind of the key metrics that you're looking to that your algorithms internally state in terms of the cloud as a percentage of revenue and also Strategic Imperatives as a percentage of total revenue? What do those need to glide to, to get to greater scale, so you can start talking about incremental operating leverage returning to the story, i.e. 50% gross margin and 20% plus operating margin?

[James Kavanaugh, Senior VP & CFO]

Yes. So thank you, Mark, for the question. So yes, a couple of questions. Let me start with the first one around revenue growth. We did state that based on the trajectory in the second half and how we made significant improvement, and the confidence we have in our portfolio and the strength in winning in key market segments, that we see revenue growth for the full year at current spot rates. I also said that starting in the first quarter, we see revenue growth both at actual rates and current spot rates. Now I will tell you, one, we've got a lot of momentum that we built up through the second half. But 2018, there's a lot of work to get done. We have best visibility of what the quarter we're in right now with the 90 days and all of the operational indices around what the profile of our business looks like, and we're very confident that we will grow at both constant currency and at actual rates. And we got a lot of work to do the rest of the year, and we fully expect that we're going to continue that momentum, and we'll update you as we go through the year on that.

[Martin Schroeter, Senior VP of Global Markets]

I guess, Mark, it's Martin. In terms of scale, I guess, one way to think about it, because of the backlog of business we have, which it's north of $120 billion of Services business, that business is moving on to the IBM Cloud. That's the process we're going through now. So not only are we building and moving new SaaS properties into the cloud, which have great margins, not only are we building the Platform-as-a-Service and building ecosystems around that, we have 120 -- north of $120 billion backlog in our services business that we're in the process of moving to the cloud. We've got some progress, but we are not through the majority of this yet. We got a long way to go. So when we talk scale, we're moving our whole services platform on to the IBM Cloud, and that's going to give us the scale we need, not just for that infrastructure layer but it's going to give us the scale we need to manage applications, it's going to give us to scale we need to deliver SaaS as effectively as possible and efficiently as possible, so we got a lot of scale coming our way.

[Operator]

Our next question is from Mr. Steven Milunovich from UBS.

[Steven Milunovich, UBS Investment Bank]

I know you're always excited to hear my suggestions. One would be to provide a bridge, an earnings bridge, which some companies do, and we're obviously all trying to get at that. But it'd be helpful if, at some point, maybe you guys would put one together for us. But a couple of points I wanted to touch on. One would be currency in terms of a bridge, I assume that's positive to EPS. Another is investments. It's very hard to understand. Are your investments increasing year-over-year at a slower rate than they've been? Are they actually declining year-over-year? And then charges. So you're kind of suggesting there's going to be charges that maybe offset some of the discretes on tax. Can you give us a sense of what charges for the year might be like? And there's obviously a lot of speculation about GTS. You're talking about moving things to the cloud, I'm assuming it'd be related to that in part.

[James Kavanaugh, Senior VP & CFO]

Thanks, Steve. I appreciate it. And believe me, as we get to know each other, I'm always looking for suggestions.

[Martin Schroeter, Senior VP of Global Markets]

Yes, I was going to say, Steve, we only have a thing about multipart questions, not multipart suggestions. We're happy to get those.

[James Kavanaugh, Senior VP & CFO]

You took what I was just going to say.

[Martin Schroeter, Senior VP of Global Markets]

Sorry. All right, back to you.

[James Kavanaugh, Senior VP & CFO]

Let's start with currency overall. So as you saw in the fourth quarter, currency, finally after -- Martin, how many years?

[Martin Schroeter, Senior VP of Global Markets]

Too many.

[James Kavanaugh, Senior VP & CFO]

Five years we've been living with this? And it's been a dramatic drain on our portfolio overall just given the dynamics of how much business we do outside U.S. dollar-denominated. But currency is finally a tailwind to the IBM company of a 2.7 points here in the fourth quarter, which was about a $600 million help on the top line. And that's driven from a variety of FX rates across different countries. But as you know quite well, we constantly build a financial discipline in our model, and we hedge those currencies to protect the volatility of our business from the bottom line. And so I would tell you, bottom line currency overall in the period, was de minimis. It was a couple of pennies at most. But what happens is, over the long run, it allows you flexibility to change your pricing, change your sourcing, change your business dynamics. And we've been dealing with that, as I stated upfront, for quite a period of time. And we're glad that it's finally going our way, and we're going to capitalize on that as we move forward.

[Operator]

Our next question is from Tien-tsin Huang from JPMorgan.

[Tien-tsin Huang, JPMorgan Chase & Co.]

I guess, just a couple of quick ones, if you guys don't mind. I know you got a lot of questions around the stable margin outlook. How much of that is coming from expected productivity versus mix and changes in investments? And the second one, just to better understand the tax point here. Just is your capital allocation going to change at all? I heard a little bit about the CapEx, which makes sense, but just wanted to make sure, any change in assumption around capital deployment posttax?

[James Kavanaugh, Senior VP & CFO]

Okay, thank you, Tien-tsin. This is Jim. Let me address the margin piece. As we've been talking throughout the call, obviously, we've got a lot of focus on, one, returning this business back to revenue growth; and two, stabilizing these margins year-over-year. And we firmly believe and are confident that we got the plans in place overall. But when you look at it, I tend to look at margin in a couple of different buckets, as I stated earlier. Number one, we will continue to drive base productivity out of this business. It's instrumental to our financial model, and it's what our clients require as we continue to help our clients move and apply technology and expertise to help enable their businesses to move from one era to the other. And that will be probably about 0.5 point improvement in our margins overall.

On the flip side, we're going to continue to invest in our business to position us strategically, to win in key growth segments. I talked about AI, I talked about cloud, I talked about security in new eras -- areas, excuse me, like blockchain, which you saw a couple of days ago our latest announcement with Maersk around global trade distribution and how we're building and scaling that platform overall. So we're going to continue making investments. And then the third part of the equation is the mix equation. And that's going to come off of driving revenue growth in high profitable areas around our Cognitive Solutions area, and that will drive operating leverage to the IBM company overall. So Martin, you want to address the tax side?

[Martin Schroeter, Senior VP of Global Markets]

Sure. So a couple of things, Tien-tsin. First, we've been supporters of, proponents of and pushing for fundamental tax reform for a long, long time. We think it's the right thing to go. So we're delighted, absolutely delighted, that we got tax reform. Now in the short term, we took a charge, this toll charge, right, to recognize a shift from one system to the territorial that we've all been supportive of. So we'll pay the toll charge. And as Jim noted, within our cash flow guidance, we have a cash headwind, which is all captured -- cash tax headwind, all of which is captured in the guidance. But for us, it's a long-term benefit because we now have freedom of capital movement. It's not really a near-term capital allocation issue for us. So we have -- well, as you know, we have $12 billion of cash around the world. We don't have big cash pile stock -- cash stockpiled outside the U.S. We've always had a really good access to our cash. And we got tax reform done, or they got tax reform done in a period where it wasn't an issue for us, so no capital allocation changes for us.

The reason we're able to grow the dividend over time, the reason we're able to reduce the share count is because we've always had good cash flow, we've had enough to reinvest in the business. But tax reform by itself -- well, again, not -- we are huge supporters, we're glad it happened, not a near-term capital event for us.

[Operator]

Our next question is from Lou Miscioscia from Pivotal Research Group.

[Louis Miscioscia, Pivotal Research Group]

Okay, great. I'll ask a question just on Systems, but maybe, as everybody else, a multipart. I just want to look at Systems. Obviously, nice that you have the mainframe cycle. Could you give us an idea how long that could last, in that usually, you get at least 2 nice quarters of it, maybe even 3? And then also on the storage front, obviously, you've been doing very well there. Is your mix more over -- well over 50% or 60% all-flash, so we could expect a good year from that? And then finally, you came out with an AI chip, POWER9. Does that fall into the systems sector? And do you have any traction with that yet, given there's obviously a lot of discussion about AI?

[James Kavanaugh, Senior VP & CFO]

Thank you, Lou. I appreciate the question. And believe me, we are very pleased with our overall Systems performance here in the fourth quarter, and that goes well beyond mainframe. But let me start with mainframe. Very pleased, as I said, with the performance as it instantiates how we continually modernize and build an enduring platform. Strong value proposition, it's definitely resonating in the marketplace, and we continue to handle mission-critical workloads and also, very, very important, open up new profit pools with our pervasive encryption capabilities, getting strong resonation in the market, our new workloads around Linux and HANA and also emerging workloads like Blockchain. So mainframe, with the second quarter, and we had a couple of weeks here in September, we delivered 71% revenue growth at constant currency, and we had the largest shipped MIPS in any quarter in its history.

And now our MIPS installed base has grown double digits year-to-year, and it's 2.5x the last 10 years. So this performance is, right now, above the prior cycle and consistent with z12 a few years ago. And while we've got many scenarios -- as I said earlier, we gave a guidance of at least $13.80, we got many scenarios and many people working tirelessly to continue to drive innovation into this platform so we can do much better than just the typical cycle. Our guidance is not counting on any material change to that. Now I'm glad you brought up Power and storage because we were very pleased in the fourth quarter. Power grew 15%. We started shipping the first POWER9 architecture with the Cora win. I think we won two of the three. We're only able to win two of the three, by the way.

So a strong start to POWER9 architecture, and we'll roll the rest of that out, our low-end, starting later in the first half and early in the second half. So we look for continued momentum in our Power portfolio overall. And then finally, on storage, this is the first year in a long time, for 4 quarters in a row, we've grown storage. And that's been based on the great work our storage team has done about repositioning their portfolio, leveraging and growing share in flash, but it's also about software-defined and also, more importantly, as we move forward, object storage that will continue to look for growth. So we're very pleased with our system portfolio, and we look for that to continue. Martin, do you want to say a few words?

[Martin Schroeter, Senior VP of Global Markets]

I guess, Lou, it's an interesting question. I guess, since it's only about Systems, it doesn't count as multipart. But we get questions, as I'm sure you do, this idea, what's cyclical, what's secular. And when we go back to why we started talking about the Strategic Imperatives, those are the secular changes in the enterprise IT world. They're all about cloud, they're all about security, they're all about analytics, they're all about mobile. And while what you asked about was a product view, remember that the secular trend that these are tied into continues. And so the demand for mainframe is driven by the secular trend for security. It is not so much about, like, there's a new mainframe, so I have to buy one. It's not so much in POWER9 that, Oh, there's a new POWER9. I have to buy it. All of these machines -- and we kind of shorthand it to say they're built for the most contemporary workloads. But we introduced those shifts and those secular ideas through the Strategic Imperatives, and all of these offerings are riding that secular trend. Mainframe and security is a good example. Power and analytics -- POWER9 and analytics is a good example. And quite frankly, and Jim mentioned this, storage, as it moves to the cloud, needs object store. And our object store offerings in storage are doing terrifically well. So the cyclical versus secular is not as simple as some want to portray it, it really is, are these offerings tied into those long-term secular trends, and our Systems business is absolutely tied to those.

[Operator]

Our next question is from Jim Schneider from Goldman Sachs.

[James Schneider, Goldman Sachs Group]

Welcome, Jim, and congratulations, Martin. I was wondering if you could maybe give us a little bit of color on a constant currency basis for the revenue outlook, and which of the segments' constant currency you would expect to be up versus any that you expect to be down?

[James Kavanaugh, Senior VP & CFO]

Okay, thank you, Jim, for the question. As I stated before, our full year guidance of at least $13.80 is predicated on us delivering revenue growth at current spot rates. I said that earlier because we got a lot of work to do. And while we've got great momentum that we built out in the second half, and we feel very confident about our portfolio across the board, the best line of sight that we have right now is first quarter. And in first quarter, we will deliver revenue growth, both at actual rates and at constant currency. And let me just give you a little color underneath that. If you start with Cognitive Solutions, as Martin said earlier in one of the Q&As, we have repositioned through strategic investments in many different areas that portfolio and have been generating tremendous penetration in our annuity content. Today, in Cognitive Solutions, annuity is about 80% of that portfolio. And underneath that, it's being driven by a strong acceleration in Software-as-a-Service in the mix.

Over the last 12 months, our Software-as-a-Service is up 30% overall. So we see, just based on the annuity versus transactional seasonality of first quarter, we will grow Cognitive Solutions at a constant currency level. In both of our services areas, which, as we talked about earlier, pretty consistent performance throughout the second half, we are actually opening up our backlog with a runout that is showing improvement year-to-year from where we were opening last year. So while our total backlog at $121 billion is up 2% overall, down 3% at constant currency, that backlog and the composition of that backlog gives us much more better confidence and will make sequential improvement in our revenue growth trends as we move throughout the year. And then Systems, coming off of a phenomenal fourth quarter of 28% growth, growth across all 3 platforms, we expect growth to continue, albeit probably not at that rate, but it will continue as we continue to leverage the value of our mainframe proposition and start scaling our Power and the continuation of performance in our storage area.

[Operator]

Our last question is coming from David Grossman from Stifel Financial.

[David Grossman, Stifel, Nicolaus & Company]

Actually, I think you may have just answered it. But just to be clear, obviously, the services is pretty important to your '18 outlook. And while both segments continue to face headwinds, the growth dynamic underlining the tech services and cloud is probably more opaque. So can you just talk about -- or you had talked about customer losses in the first half of '17, and you just mentioned the backlog and that opening up as we migrate into the first half of next year. So with that said, other than typical execution risk, is there any reason to believe that the growth rate of that business should not reaccelerate as the year progresses and maybe even get through some kind of slope dynamic as we anniversary the tough compares in the back half of the year?

[James Kavanaugh, Senior VP & CFO]

Yes, thanks, David. I appreciate the question. So as I -- as you indicated -- let me give you a little bit more color around our Services and, in particular, about our Services backlog runout. If you take our GBS business, our GBS business enters the year with a backlog that should yield in fiscal year of about 2/3 of its revenue. Still has about 1/3 of the revenue that we need to go do sell and bill and translate that backlog into revenue yield throughout the year, but that 2/3 of that backlog shows a significant improvement versus where we were beginning 2017. And that shows sequential improvement as we move throughout the year.

Now the focus in GBS, we've already transformed our Consulting business. As Martin talked throughout the year, signings lead to backlog, lead to revenue growth. We've now gotten two quarters in a row of Consulting growth in revenue. And we finished the year, I'll remind you, growing GBS signings four quarters in a row. The area of focus that we need now is around our AMS business. And that is around an area where we're helping our clients migrate to the cloud and also how we need to capitalize on leveraging the incumbency value of AMS overall. So I definitely see GBS improving its trajectory as we move throughout the year. And if we execute on the pipelines we got in place, I definitely see that we can grow by the end of the year in our GBS business. In GTS, which has much longer durations, the GTS business, the opening backlog is somewhere around 75% to 80% or maybe a little bit higher as you enter the year. So again, similar, we still got about 20% of work to do in the year to go get that revenue yield, but that 80% backlog is actually in a much better shape than what it was at the beginning of 2017, as we spoke about all year long, with some ending -- contract conclusions.

So with that, let me wrap up the call in by saying again, we're very pleased with the work we have done over the last year to reposition our business. And I hope what you took away from today's call is that we're entering with a stronger revenue and margin profile. Now as always, there's more work to do, and I look forward to sharing our progress and continuing this dialogue as we move through 2018. Thank you all for joining the call.

[Patricia Murphy, VP, IR]

Lawrence, let me turn it back to you to close out the call.

[Operator]

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