International Business Machines Corporation
Q2 2014 Earnings Call Transcript

Published: 18 Jul 2014

[Operator:]

Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, I will turn the meeting over to Ms. Patricia Murphy, Vice President of Investor Relations. Ma'am, you may begin.

[Patricia Murphy:]

Thank you. This is Patricia Murphy, Vice President of Investor Relations for IBM. I'm here with Martin Schroeter, IBM's Senior Vice President and CFO, Finance and Enterprise Transformation. I want to welcome you to our second quarter earnings presentation. The prepared remarks will be available in roughly an hour, and replay of this 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 web site, 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 their related GAAP measures in accordance with SEC rules. You will find reconciliation charts at the end of the presentation, and in the Form 8-K submitted to the SEC. Now, I'll turn the call over to Martin Schroeter.

[Martin Schroeter:]

Thank you for joining us today. Our second quarter and first half results reflect the stability of our overall business model, as we transform the company. Looking at the dynamics of our portfolio, we're continuing to drive double-digit growth in the parts of our business that address the emerging trends in enterprise IT. We had stability in our core franchises, where we continue to drive innovation. We're dealing with secular shifts in parts of our hardware business and as we shift to higher value, we have the impact of a divested business. Overall, our year-to-year revenue performance improved from last quarter at actual rates and was fairly consistent at constant currency. We expanded margins and we grew earnings per share. The profit dynamics also reflect the actions we've taken to transform our business. I'll get into that shortly. In the first quarter, you'll remember that we announced a number of initiatives that support the shift to our strategic areas of data, cloud and systems of engagement. These included the launch of Bluemix, which is our cloud platform-as-a service for the enterprise. It included a $1.2 billion investment to globally expand SoftLayer cloud hubs, and it included a $1 billion investment to bring Watson's cognitive capabilities to the enterprise. In the second quarter, we made progress to implement these initiatives, including in June, Bluemix became generally available. We opened new SoftLayer data centers. We started to ship POWER8, and expanded the OpenPOWER consortium. And we completed substantially all of the divestiture of our customer care business. More recently, we announced additional actions to continue our shift to higher value. You saw last week that we're investing $3 billion over the next five years in research and in early-stage development to create the next generation of chip technologies. Those will fuel the systems required for cloud, big data and cognitive systems. And just a couple of days ago, IBM and Apple announced a strategic global partnership to provide a new level of business value from mobility for enterprise clients. The underlying theme of all of this, from the expansion of our cloud platforms and capacity to the OpenPOWER consortium, to the partnership with Apple for enterprise mobility to next generation chip technologies, is that we're leveraging our unique strengths and innovation, and enterprise capabilities to maintain our differentiation in the emerging areas of enterprise IT. While some of these actions impact our results in the short-term, they better position our business for the long-term. For the quarter, we delivered revenue of $24.4 billion and operating earnings per share of $4.32. Our revenue was down 2% or down 1% at constant currency, adjusting for the customer care divestiture. We improved gross margin by 10 basis points, the 22nd consecutive quarter of operating gross margin expansion. Our pre-tax and net margins are up significantly. Last year's profit base was lower, due to a workforce rebalancing charge of about $1 billion. We took a charge of a similar size in the first quarter of 2014, and so on a six-month basis the charges are fairly neutral to profit growth. On the bottomline, we reported operating earnings per share of $4.32 in the second quarter, which is up 34% and we generated $3 billion of free cash flow, which is up $300 million over last year. Let me spend a minute on the first half performance. The revenue performance for the half is very similar to the second quarter. Through six months, we had double-digit revenue growth in strategic initiatives, stable performance in our core franchises and the impact of some secular trends in parts of hardware and from the divested business. Looking at profit. We expanded gross margin 50 basis points, pre-tax margin by 70 basis points and net margin by 50 basis points. All while shifting investment to key areas. Operating earnings per share for the first half were up 9.5%. We generated free cash flow of $3.6 billion, which is down $800 million, though up $400 million without the higher level of cash taxes we paid in the first half. So now I'll get into the details of the quarter, starting with revenue by geography on a constant currency basis. Americas' revenue was up 1% year-to-year, a 3 point sequential improvement from the first quarter rate. From a regional perspective, the U.S. rate also improved 3 points, and we had another great quarter in our Latin America region. The improvement in the Americas was driven by the strong System z mainframe performance. EMEA declined this quarter. Within Western Europe, we had continued growth in Germany and Italy, though the U.K. and France were down. Eastern Europe also declined. Our performance in Asia-Pacific was pretty consistent with last quarter. We had another good quarter in Japan, our seventh consecutive quarter of revenue growth in the country. Asia-Pacific, outside of Japan, declined at a double-digit rate. In total, major markets were down 1%, while growth markets were down 4%. Within the growth markets, the BRICs were up 1%, which is a 7 point sequential improvement from the first quarter rate. The improvement was driven by Brazil, India and China, each up between 9 points and 10 points sequentially. Brazil grew over 20% year-to-year, driven by large deals in the financial sector and India returned to growth. Our revenue in China was down 11%, effectively halving the rate of decline from the last couple of quarters. So this is a change in trajectory in China, but we haven't yet seen improvement in the other Asia-Pacific countries. Put it all together, and we had modest sequential improvement in our growth markets performance. Turning to the segment perspective. Our Services revenue was up 1%, adjusting for the sale of the customer care business. Global Technology Services performance at constant currency was similar to last quarter, with growth in cloud and a ramp in the large outsourcing contracts we signed last year. Global Business Services once again had very strong growth in the practices that address the digital front office, however performance in the globally integrated enterprise offerings lagged. In Software, middleware is up 3%, while operating systems were down, resulting in modest reported growth for total software. We're continuing to drive strong results in strategic areas like mobile and security, as well as in some of our core franchises like our app servers and distributed databases. While still down, our hardware year-to-year revenue performance improved significantly from the first quarter rate, driven by our System z mainframe, System x and Storage. Looking at the gross profit, in total, our operating gross margin improved modestly. The increase was driven by margin improvement in Global Technology Services and an improving mix. This was mitigated by margin declines in Global Business Services and in Systems and Technology. When you look at gross profit dollars, the year-to-year decline was driven entirely by our Systems and Technology business. Aside from STG, our gross profit is flat, even after a $70 million impact from the divested customer care business, and while we transition to some of the emerging areas, where the profit and margins will benefit from scale. Our total operating expense and other income was better by 14% year-to-year. Acquisitions over the last 12 months drove 2 points of expense growth. For the last three years, acquisitions have contributed between 1 point and 3 points of expense growth each quarter. Currency drove 1 point of expense growth; so base expense, which is total expense less the impact of acquisitions and currency, was down 17 points. There is one large item that is impacting the year-to-year expense dynamics. As I mentioned earlier in the call, we had $1 billion workforce rebalancing charge in the second quarter of last year. This impacted the base performance by 12 points. So without the impact of that item, our base expense would have been better 5 points year-to-year. This is a better indication of the productivity in the base. The other item I'll mention is the gain of over $100 million from the sale of our customer care business, associated with the country closings we completed in the second quarter. This is in other income and expense. Keep in mind, the divested business removed about $70 million of gross profit. Within our base expense, we're also continuing to shift our spending to drive our strategic imperatives and differentiated offerings. The substantial investments we're making in cloud, which includes Bluemix, in Watson and in chip innovation are examples of this. Now let's turn to the segments, and we'll start with Services. This quarter, the Services businesses generated $14 billion in revenue, which was down 1% at constant currency. This is where we see the impact of the customer care divestiture in the year-to-year results. So adjusting for that divestiture, total services revenue was up 1% year-to-year. Services pre-tax profit was up 26% and margin improved over 4 points. I'll discuss the profit drivers within the brand details. Total backlog was $136 billion. We reduced backlog by nearly $4 billion, when we divested the customer care business in January. Adjusted for the divested business, total backlog was down 1% at spot rates. Global Technology Services revenue was $9.4 billion, down 1% as reported, but up 2% at constant currency, adjusted for the divestiture. SoftLayer contributed about 1 point to GTS revenue growth in the quarter. We're expanding our footprint, and in the second quarter, we opened a cloud data center in Hong Kong, and followed that with London, earlier this week. We'll continue to roll out additional capacity in the third and fourth quarters. GTS outsourcing, one of our core franchises, continue to improve, with revenue growth of 2% at constant currency, adjusted for the divestiture. Revenue growth was driven by the substantial new contracts we brought on in 2013 and we expanded gross margin. GTS pre-tax profit was up significantly in the quarter. The profit performance was driven by several key factors

[Patricia Murphy:]

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. And second, as always I'd ask you to refrain from multi-part questions. Christine, please open it up for questions.

[Operator:]

(Operator Instructions) The first question comes from Bill Shope with Goldman Sachs.

[Bill Shope:]

Can you comment on how you're currently thinking about the potential for stabilization and perhaps even growth in the Asia-Pac, x Japan region, obviously, you saw some improvement in China? But in terms of the overall region, how should we think about the revenue and profit trajectory from here? And then I guess related to that, on the profit side, can you walk us through some of the permanent changes you're making to your cost structure in that region specifically?

[Martin Schroeter:]

I guess, I'd say a couple of things. As you noted, we did see a pretty good sequential improvement in China and in India as well in the second quarter, but as we noted in the prepared remarks, we did not see that sequential improvement in AP. And notably within that, I would say, we saw degradation in both Australia and Korea within that AP geography. Now, when we look forward, in China, we still see a continued improvement in the sequential performance out of China now. It's important to note in China, even though we were still down year-to-year sequentially, not only do we see a year-over-year improvement, but our business in China was about an $800 million business in the first quarter and in the second quarter it was over $1 billion. So we see a very typical sequential skew in China, which is growth in the second. So again, as we see that year-to-year sequential improvement in China that we expect, this is still a substantial business for us. Now, we did not see and we do not see yet a material change in the trajectory in the rest of Asia-Pacific. As I noted, Australia and Korea were slow in the second, and we don't see that. Outside that area -- I'll comment also on some of the other growth markets. Latin America as an example, as you heard in our prepared remarks, had another strong quarter, again led by Brazil, which was up double-digit. And although they are going to ramp on a strong second half from last year, we still see good performance coming out of Latin America. From an investment perspective, we have made substantial commitments to those growth markets and we see good opportunity to deploy the IBM platform. And we continue to invest in those growth markets to get that IBM platform deployed across the growth markets.

[Patricia Murphy:]

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

[Operator:]

The next question comes from Toni Sacconaghi with Sanford Bernstein.

[Toni Sacconaghi:]

I appreciate all the investments in the pace of change that IBM is undertaking and accomplished so far in the first half. I guess, the question that I hear a lot from investors is, is that change big enough to offset what appears to be deterioration or secular pressures in the core franchise? So very specifically, coming out of last quarter, you did not have a good Software quarter, you were optimistic that Software would be notably better this quarter, it was worse. It was flat at constant currency. Similarly, when I look at Services, which is really the other big core part of your franchise, Services signings are now down 33% for the first half. The signings this quarter were the lowest in more than six years in absolute term. And you've got nine straight quarters with negative revenue growth in Services. So very specifically, can you address what was the shortfall in Software this quarter relative to much more positive expectations you had coming in? And secondly, when you look at Services, given the preponderance of data, I just offered to you, and given the leading indicator of signings being so weak, what secularly is going on there and how does the business get better from here?

[Martin Schroeter:]

Thanks, Toni. There is a lot there. So let me try to talk a bit about Software first and talk a bit about Services next. So first on Software, my view 90 days ago was that Software would accelerate through the remainder of the year. And I still feel like in second half, we will see Software acceleration back to mid-single digit growth. Now, in the second quarter, we saw a couple of things

[Patricia Murphy:]

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

[Operator:]

The next question comes from Katy Huberty with Morgan Stanley.

[Katy Huberty:]

As a follow-up to last question on the weak Software and signings numbers, did you in fact see deal push-outs in the quarter? And if so what do you think caused that and have you been able to close the business in the third quarter?

[Martin Schroeter:]

There are deals that come in -- I don't know, I would not characterize it as a deal push-out. There are a few phenomena though, that I think are worth noting. In our key branded middleware business, it's a mix of both, transactional content as well as subscription and support, which comes in over time. So it's a mix of transactional content and subscription support, but very heavily transaction content. In our total middleware business, so in the other middleware that comprises that total middleware business, we have a mix, as well, some transactional content and some subscription content, but the mix is kind of flipped in that case. So there is a lot more subscription content. What we see in any given quarter, you can see this kind of a mix shift, we saw a much higher transactional content in that total middleware line. And then the key branded middleware quarter-to-quarter behave very similarly as what we saw in the first quarter. So last year in key branded middleware, first to second quarter, we grew that content just under $800 million quarter-to-quarter. And that delivered 10% growth by the way. This year we grew that same key branded middleware a bit over $800 million. So a bit more than last year, but because of the strong compare that drove kind of a flat year-to-year performance. So we have a phenomena of different mixes between transactional and subscription support, and we have quite frankly a tough compare in key branded middleware.

[Patricia Murphy:]

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

[Operator:]

The next question comes from David Grossman with Stifel Nicolaus.

[David Grossman:]

Martin, I think you had mentioned that free cash flow is down $800 million year-over-year for the first six months, and I think the math suggest that $1.2 billion of that $2 billion cash tax headwind is reflected in that figure. So assuming the $18 in earnings is a good number, how much visibility do you have on the change in working capital at this point in the year? And your ability to hit that $16 billion free cash flow target for the year?

[Martin Schroeter:]

I would say, there are couple of phenomena that are going to drive that free cash flow. So first is, as you pointed out, when we make earnings -- I guess I'd say it this way, when we make earnings, we'll make the free cash flow number. And I think that that phenomena that drives that obviously there is profitability skew in the second half here that drives on an absolute basis that drives that. And secondly, within the sales cycle working capital component, the other phenomena is our Enterprise License Agreement cycle we're in, that software content drives a substantial amount of free cash flow as well. So between, again, the profit and the mix towards the second half as well as the phenomena of the cash structure, if you will, of our ELA cycle, I think we have a very strong statement to say, when we make profit, we'll make cash flow.

[Patricia Murphy:]

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

[Operator:]

The next question comes from Ben Reitzes with Barclays.

[Ben Reitzes:]

I want to ask about hardware, and just sorry a two-parter, but mainframe down only 1% was much big improvement, very big improvement from last quarter. So what happened there and is that sustainable? And then, there are some reports out there, and I know you're aware of them about your -- what you might do with your chip making capabilities? And you announced a very large investment commitment to your chip making R&D during the quarter or during this month. So can you just reconcile that, I think you understand what we're hearing out there and what is the commitment to the chip making business as well?

[Martin Schroeter:]

Sure, Ben. So couple of things, first, on mainframe, we did have a very strong mainframe quarter, as you noted just down 1% and in the seventh quarter of the cycle down 1% is quite good. Now in the first half, we were kind of down in the mid-teens, right, in the first quarter we were down pretty healthy double-digit, down 1% in this quarter gets us to a down mid-teens, and that's very typical, that performance, that mid-teens is very typical of where we would expect the next couple of quarters to be again given the cycle. Now, I think the reason that the mainframe continues to do so well and we had in the prepared remarks that in this cycle the revenue and GP is roughly 98% of where it was in the prior cycle. This continues to be now a core franchise for us. But it is the critical infrastructure that drives still 70% of the world's enterprise data. And as our clients are moving towards new systems of engagement and mobility and they want the most secure platform, the mainframe remains the premier platform on which to drive a world-class enterprise structure. So I don't expect that we're going to see a minus 1% going forward. But I think that first half performance is consistent with what we would expect. And then, on the semiconductors, as you said, we did announce a $3 billion investment in semiconductor research and development. And as we've said a number of times it was in our Chairman's letter to shareholders, we've been very, very vocal about our goal to remain the leader, the absolutely leader in high performance and high-end systems. We're the leader today and we would expect with this kind of investment we can continue to maintain that leadership. Now, this R&D investment is clearly focused on the distant future where we have, we have to figure out how to scale semiconductors to seven nanometers, that's a big challenge. And then, obviously, we're also thinking about, as we indicated what the post-silicon world looks like. So we remain committed to being the leader of high performance and high-end systems. And we have not changed our view on that at all. We've been very vocal about it and we'll stay on that path.

[Patricia Murphy:]

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

[Operator:]

The next question comes from Lou Miscioscia with CLSA.

[Lou Miscioscia:]

Maybe if I could link something about China, and also your x86 business. I guess the question is that, we continuously hear that the Chinese government is pushing away from big U.S. tech companies, but obviously the x86 business bounce back, and it sounds like China bounced back, is the sale of that helping the situation there? And I guess I'll leave at that.

[Martin Schroeter:]

Again, we saw a sequential improvement, as I noted earlier in China quarter-to-quarter. And as I also noted, we would expect that sequential improvement to continue. Now, interestingly I would not characterize that sequential improvement as driven solely by x86 or any other of the single brands, in fact, it was across all of our segments, Global Technology Services, GBS, Software group, STG, all showed sequential improvement in China. And in fact, when we look at our strategic imperatives content that sits in China that was up very solid double-digit as well, which is consistent with the overall performance and our strategic imperatives. So really no difference from what we're seeing in our success in China from what we're seeing anywhere else in the world.

[Patricia Murphy:]

Thank you, Lou. Chris, can we go to the next question please?

[Operator:]

The next question comes from Steve Milunovich with UBS.

[Steve Milunovich:]

Couple of odds and ends, Martin. First of all on these share repurchase, you did I think $11.8 billion through the first half. Does that mean you have roughly $3 billion to do in the second half? And then second, on emerging markets, I think in the annual report that you guys suggested you would see emerging market revenue growth in the second half? Is that correct? And does that still stand?

[Martin Schroeter:]

So on share repurchase, we have about $3 billion left on our authorization. And as we've said in the past, we would expect to spend about what we did last year, maybe a little bit less or something. I haven't changed my view on that capital allocation. But we do have about $3 billion left in our authorization. On growth markets, as I mentioned earlier, I would say that we would say a continued sequential improvement in growth markets. And as I noted earlier, L.A is going to ramp on a strong second half, but continues to do quite well. AP we do not see that sequential improvement yet. And I guess the other thing I'd point that's worth noting, particularly in the growth markets, we are in the process, as you know of divesting our industry standard server business, and that's going to have an impact on our revenue growth and that's a profound impact in the emerging markets as well. So when we sell that content, its going to be a pretty big headwind to growth for the emerging markets, notwithstanding the sequential improvements that we see in the business.

[Patricia Murphy:]

Thanks Steve. Let's go to the next question please.

[Operator:]

The next question comes from Tien-Tsin Huang with JPMorgan.

[Tien-Tsin Huang:]

Just wanted to ask about the GBS portion of services. I saw revenue accelerated, and margins contracted a bit. Curious, how much of this is cyclical versus secular? I heard pricing pressure and package limitation weakness. Did you adjust your workforce last quarter to address these things? Just trying to sketch out what the second half might look like given this trend?

[Martin Schroeter:]

So a couple of things on GBS. So there are secular shifts going on this space. And we've been talking about our, how we're shifting towards, we refer to it as the Digital Front Office. So to talk about it as our cloud and analytics and our mobile, that was that while we see that flow in our clients and we're obviously shifting both their resources, our skills, our training after that and we see very solid double-digit growth, we saw that in the second quarter. And in fact, we look at our pipeline going forward and over half of it is that kind of content. So there is absolutely a secular shift going on in that GBS space. And we are in the middle of it. And we are very competitive in that space. On the ERP implementations, and some of the custom development work, I guess what we are seeing is kind of a fewer of those large rollouts and that combined with the large rollouts that do occur, we're seeing them being broken up into small pieces. So they're not as large as they used to be. So I don't know, if I would consider that secular or cyclical, within that our clients where those back office workloads are stable, our clients are still looking for additional productivity. And so obviously, we are in a bit of a battle to win there, but they are looking for productivity. And so we are still competitive. But other than the absolute secular shift towards cloud and analytics and mobile, which we're playing in and which we have very solid double-digit growth in, we'll have to wait and see if the rest is secular or cyclical.

[Patricia Murphy:]

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

[Operator:]

The next question comes from Sherri Scribner with Deutsche Bank.

[Sherri Scribner:]

I wanted to dig a little bit into what you're hearing in terms of global demand and thinking about the second half of the year. Are you hearing that businesses are starting to get a little more confident? I think you made some comments about the developed markets being a bit better. And then thinking about that in terms of how it translates, since the second half of the year, do you think you could start to see some flat or potentially some growth in revenue?

[Martin Schroeter:]

Sure. So if we look at our major, we'll start with our major markets performance. And so I've talked a bit about the growth markets. Already, in major markets, we were flat year-to-year when we exclude our customer care business, which was an improvement sequentially in North America. And we also did quite well in North America in our mainframe business and we saw sequential improvements in some of our other platforms as well including power and storage and X. So there is a sequential improvement story, if you will, in North America business that we certainly benefited from in the second. In Europe, we saw a decline at constant currency, but we did see within that growth in our Services business. And so I would expect Europe to see sequential improvement going forward, but it is a challenged environment from our experience. And then in Japan, we had a very solid performance again in Japan. This is our seventh consecutive quarter of growth in Japan, as we noted in the remarks that our Japan team does quite well. And I think it's more than just macro. I think our Japan team is doing quite well. And then as I mentioned in the growth markets, we do expect to see sequential improvement going forward. And then again, all of this is in context from our own headwinds here in IBM. We have closed on our customer care divestiture, which is a headwind for the rest of us, for the year, for a bit over 1 point. And then, as I noted earlier in my growth markets commentary, if we're able to close our industry standard server, our X series divestiture that will also have a pretty substantial headwind for us as well.

[Patricia Murphy:]

Thank you, Sherri. Can we please take one last question?

[Operator:]

The last question comes from Brian White with Cantor Fitzgerald.

[Brian White:]

Martin, when we think about the Systems & Technology business, the profitability has swung from, looks like $1.6 billion in 2011 to negative $300 million in 2013. Could you just delve into what was the biggest driver of that decline? And I also just want some clarity, do you think this business will be profitable in 2014?

[Martin Schroeter:]

We are still focused, as we talked about in the beginning of the year, we are still focused on stabilizing the STG profit base for the year, right, the Systems & Technology Group profit base for the year. And I believe, we are absolutely on track to do that to stabilize that profit base. The impacts against that profit base, when we look last year and what we're trying to stabilize, there are, one, some cyclical issues. We have certainly seen this downturn in the emerging markets, which has an impact on hardware. And we've talked about that on prior calls that the mix of our STG business in the growth markets is higher than other places. And therefore, that emerging market slowdown had a more pronounced effect on STG. And so there is some cyclical issues there. And then we have talked about the mainframe cycle, already a number of times. But in addition to that, we've had this secular issue around Power and trying to reposition that. And we've taken action pretty aggressively to make that platform the most viable for the future, including we just released POWER8, as an example, which is a Power platform built for the world of big data and analytics, and quite frankly, built for the world of cloud. And then we've also had a lot of success with our OpenPOWER initiative, which we've been able to expand again the alliance, being able to expand the alliance of those who will use and build on top of that. So a mix of cyclical and secular within that STG performance, but as I said, as we said at the beginning of the year, and we are confident with the actions we've taken, both address the secular, and also we've taken a fair bit of cost out of that business to better suit the demand profile, we still see that business stabilizing in profit on a full year basis. So I'm going to wrap up the call. And I guess, first I'll start with what we saw in the first half. We had very strong performance in the strategic imperatives, a lot of software content within that. And as we talked about it at Investor Day, that's very important for our business model. The core franchises were relatively stable, that's also as we said at Investor Day, important for our business model. And we made some progress in addressing some of those secular issues in POWER8. I talked a little bit about that in answer to a question. In the second half, we see, as I noted on an earlier question, we see our Software revenue growth accelerating to mid-single digit. And we see our Services profit growth of mid-single digit, driven by productivity in the base. And then on STG, as I just noted, we see that profit stabilization still. So when I think about the second half and how that plays out, as we did 90 days ago, I said that I think EPS in the second half will be a little bit faster in the fourth than in the third. So kind of a double-digit fourth quarter EPS and a single-digit third quarter EPS. And bear in mind, that that single-digit EPS growth even in the third because of seasonality kind of translates to no more absolute EPS than what we get in the second. So we still see that same mix skewed toward the fourth quarter, when we have the benefit of very strong Software performance, when the productivity hits and helps our margins and services and we get that transactional benefit from STG. Well, thanks very much, everyone. Thanks for joining us. And have a good evening.

[Operator:]

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