4Q 2015 Earnings Presentation January 19, 2016 www.ibm.com/investor Forward Looking Statements and Non-GAAP Information Certain comments made in this presentation may be characterized as forward looking under the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on the company's current assumptions regarding future business and financial performance. Those statements by their nature address matters that are uncertain to different degrees. 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 IBM Investor Relations. Any forward-looking statement made during this presentation speaks only as of the date on which it is made. The company assumes no obligation to update or revise any forward-looking statements. These charts and the associated remarks and comments are integrally related, and are intended to be presented and understood together. In an effort to provide additional and useful information regarding the company’s financial results and other financial information as determined by generally accepted accounting principles (GAAP), the company also discusses, in its earnings press release and earnings presentation materials, certain non-GAAP information including "operating earnings" and other "operating" financial measures. The rationale for management’s use of this non-GAAP information, the reconciliation of that information to GAAP, and other related information are included in supplemental materials entitled “Non-GAAP Supplemental Materials” that are posted on the Company’s investor relations web site at http://www.ibm.com/investor/events/earnings/4q15.htmlThe Non-GAAP Supplemental Materials are also included as Attachment II to the Company’s Form 8-K dated January 19, 2016. www.ibm.com/investor 2 4Q and Full Year 2015 Overview Revenue ($B) Yr/Yr As Reported Operating (Non-GAAP) EPS 4Q15 $ 22.1 $ 4.84 Yr/Yr (2%)* (9%) (17%) FY15 $ 81.7 $ 14.92 Yr/Yr (1%)* (12%) (10%) *Revenue growth rate @CC , FY15 Revenue growth also excludes divested businesses Ø Continued strength in Strategic Imperatives • $29B revenue, +26% Yr/Yr, 35% of IBM revenue Ø Profit dynamics reflect shift to higher value, higher investment levels, currency impacts and prior period gains Ø Free cash flow of $13.1B, up Yr/Yr • Free cash flow realization of 98% www.ibm.com/investor 3 Transformation Progress Strategic Imperatives Revenue Progression 22% 35% +19% $29B of IBM +26% Yr/Yr Capital deployed for growth • Watson Health: Merge, Explorys, Phytel • Watson IoT: The Weather Co (announced) +19% • Cloud acquisitions, including Cleversafe, Clearleap • Cloud data centers, Bluemix expansion 2013 2014 • Expanded partnerships 2015 • Repositioned Power and rolled out z13 Analytics Cloud Mobile Security Social 2015 $18B 10 3 2 1 Yr/Yr 16% 57% 250% 12% 21% aaS-exit run rate $5.3B +$1.8B Capital returned to shareholders: • Reduced average share count by 2.7% • Paid ~$5B in dividends Revenue growth rate @CC and excludes divested businesses Overlap in Strategic Imperatives primarily reflects solutions delivered via Cloud www.ibm.com/investor 4 Key Financial Metrics $ in Billions, except EPS impact of 4Q14 gain* P&L Ratios (Operating) 4Q15 B/(W) Yr/Yr GP Margin 52.7% (1.2 pts) P&L Highlights 4Q15 Yr/Yr Revenue $22.1 (2%) PTI – Operating $5.5 (25%) (17 pts) PTI Margin 25.0% (5.7 pts) NI – Operating $4.7 (19%) (19 pts) Tax Rate 14.7% 7.1 pts $4.84 (17%) (20 pts) NI Margin 21.3% (2.7 pts) EPS – Operating impact of 4Q14 gain* (5.8 pts) (4.6 pts) Revenue growth rate @CC *impact of $1.4B pre-tax 4Q14 System x divestiture gain Cash Highlights 4Q15 $ 6.1 FY15 $ 13.1 Share Repurchase (Gross) 0.8 4.6 Dividends 1.3 4.9 Cash Balance @ December 31 8.2 Free Cash Flow (excl. GF Receivables) www.ibm.com/investor 5 Revenue by Geography $ in Billions Americas 4Q15 Yr/Yr $10.3 (4%) Europe/ME/Africa 7.3 1% Asia Pacific 4.4 (3%) $22.1 (2%) IBM Major Markets Growth Markets BRIC Countries (2%) (4%) (11%) Canada/ LA U.S. -‐5% EMEA Japan AP ex. Japan +3% Revenue growth rate @CC www.ibm.com/investor 6 Revenue and Gross Profit Margin by Segment Revenue $ in Billions Global Technology Services Operating Gross Profit Margin 4Q15 Yr/Yr 4Q15 Yr/Yr Pts $ 8.1 1% 37.7% (1.5 pts) Global Business Services 4.3 (4%) 28.2% (3.3 pts) Software 6.8 (6%) 88.0% (2.0 pts) Systems Hardware 2.4 3% 48.0% (1.6 pts) Global Financing 0.5 (6%) 39.9% (8.8 pts) $22.1 (2%) 52.7% (1.2 pts) Total Revenue & Op. GP Margin Revenue growth rates @CC www.ibm.com/investor 7 Expense Summary $ in Billions 4Q15 B/(W) Yr/Yr SG&A – Operating $5.0 15% Drivers RD&E – Operating 1.4 (1%) Divestiture Gain 4Q’14* (OI/E) (25 pts) IP and Development Income (0.2) (3%) 10 pts Other (Income)/Expense (0.1) (90%) Workforce Rebalancing (SG&A) 0.1 (10%) Currency 8 pts $6.1 (9%) Interest Expense Operating Expense & Other Income Acquisitions B/(W) Yr/Yr (2 pts) *impact of $1.4B pre-tax 4Q14 System x divestiture gain www.ibm.com/investor 8 Services Segments Global Technology Services (GTS) $ in Billions Revenue (External) Gross Margin (External) PTI Margin $ in Billions 4Q15 $8.1 37.7% 17.8% GTS 4Q15 Revenue GTS Outsourcing Integrated Technology Services Maintenance GBS 4Q15 Revenue GBS Outsourcing Consulting & Systems Integration Backlog Global Business Services (GBS) 4Q15 $121B Yr/Yr 1% (1.5 pts) 1.9 pts Revenue (External) Gross Margin (External) PTI Margin Yr/Yr (1%) 5% Flat (4%) (4%) 1% 4Q15 $4.3 28.2% 16.0% Yr/Yr (4%) (3.3 pts) 0.2 pts 4Q15 Revenue (% of Total Services) Maint. 12% GTS Outsourcing 34% ITS 19% GBS C&SI 25% GBS Outsourcing 10% Revenue growth rates @CC www.ibm.com/investor 9 Software Segment $ in Billions Revenue (External) Gross Margin (External) PTI Margin 4Q15 Revenue WebSphere (5%) Information Management (5%) Tivoli (1%) Workforce Solutions (4%) Rational (28%) (6%) Total Middleware (6%) Total Software (6%) Yr/Yr (6%) (2.0 pts) (5.3 pts) 4Q15 Revenue (% of Total SoWware) Yr/Yr Key Branded Middleware 4Q15 $6.8 88.0% 39.4% Key Branded Middleware 72% Other Middleware 14% Opera[ng Systems Other 7% 7% Revenue growth rates @CC www.ibm.com/investor 10 Systems Hardware Segment $ in Billions Revenue (External) Gross Margin (External) PTI Margin 4Q15 $2.4 48.0% 13.9% 4Q15 Revenue Yr/Yr z Systems 21% Power Systems 8% Storage Total Systems Hardware (7%) 3% Yr/Yr 3% (1.6 pts) (1.5 pts) 4Q15 Revenue (% of Total Systems Hardware) Servers 66% Storage 32% Other Revenue growth rates @CC www.ibm.com/investor 11 Cash Flow Summary 4Q15 B/(W) Yr/Yr FY15 B/(W) Yr/Yr $5.3 ($0.8) $17.0 $0.1 (1.8) (0.3) 0.2 7.1 (0.5) 16.9 0.7 (1.0) (0.0) (3.8) (0.0) 6.1 (0.5) 13.1 0.7 Acquisitions (2.5) (2.5) (3.3) (2.7) Divestitures 0.1 (1.8) (0.4) (2.8) Dividends (1.3) (0.2) (4.9) (0.6) Share Repurchases (Gross) (0.8) (0.6) (4.6) 9.1 Non-GF Debt (0.9) 5.0 (0.1) 1.2 Other (includes GF A/R & GF Debt) (2.1) 0.4 0.0 (2.6) $ in Billions Net Cash from Operations Less: Global Financing Receivables Net Cash from Operations (excluding GF Receivables) Net Capital Expenditures Free Cash Flow (excluding GF Receivables) Change in Cash & Marketable Securities ($1.4) ($0.3) www.ibm.com/investor ($0.3) (0.6) $2.3 12 Balance Sheet Summary $ in Billions Dec. 14* $8.5 Dec. 15 $8.2 Non-GF Assets** 71.5 67.7 Global Financing Assets 37.3 34.6 117.3 110.5 64.5 56.2 Non-GF Debt* * 11.6 12.7 Global Financing Debt 29.1 27.2 40.7 39.9 105.3 96.1 Equity 12.0 14.4 Non-GF Debt / Capital 59% 54% 7.2 7.3 Cash & Marketable Securities Total Assets Other Liabilities Total Debt Total Liabilities Global Financing Leverage * Prior year reclassified for the adoption of the FASB guidance (Debt issuance cost and Deferred Tax classification) ** Includes eliminations of inter-company activity www.ibm.com/investor 13 Summary Ø Investing and adding capabilities • R&D 6% of revenue, $4B capital, $3B acquisitions • Building platforms and ecosystems Ø Strong base of business • • • • Continued strength in Strategic Imperatives Successful mainframe product cycle and repositioned Power systems Large and growing services backlog Growth in annuity software content Ø Profit dynamics reflect shift to higher value, higher investment levels, currency impact Ø Continued progress in transformation of the business www.ibm.com/investor 14 www.ibm.com/investor 15 Supplemental Materials Supplemental Materials Some columns and rows in these materials, including the supplemental exhibits, may not add due to rounding Ø Ø Ø Ø Ø Ø Ø Ø Ø Ø Ø Ø Currency – Year/Year Comparison Supplemental Segment Information – Global Services Supplemental Segment Information – Systems Hardware, Software Global Financing Portfolio Key Financial Metrics – FY 2015 Revenue by Geography – FY 2015 Revenue and Gross Profit Margin by Segment – FY 2015 Expense Summary – FY 2015 Historical Free Cash Flow Performance Cash Flow (FAS 95) Retirement-Related Charges Non-GAAP Supplemental Materials • Operating (Non-GAAP) Earnings Per Share and Related Income Statement Items, Constant Currency • Cash Flow, Debt-to-Capital Ratio, Customer Care Outsourcing and System x Business Divestiture • GAAP to Operating (Non-GAAP) Bridge – 4Q 2015 • GAAP to Operating (Non-GAAP) Bridge – 4Q 2014 • GAAP to Operating (Non-GAAP) Bridge – FY 2015 • GAAP to Operating (Non-GAAP) Bridge – FY 2014 • GAAP to Operating (Non-GAAP) Bridge – 4Q 2015 and 4Q 2014 • GAAP to Operating (Non-GAAP) Bridge – FY 2015 and FY 2014 • Reconciliation of Debt-to-Capital Ratio • Reconciliation of Revenue Growth • Reconciliation of Revenue Growth • Reconciliation of Revenue Growth • Reconciliation of Revenue Growth • Reconciliation of Free Cash Flow (excluding GF Receivables, adjusted for Taxes and Gains) www.ibm.com/investor 16 Supplemental Materials Currency – Year/Year Comparison Quarterly Averages per US $ 3Q15 Yr/Yr 4Q15 Yr/Yr 1/15/16 Spot Euro 0.90 (19%) 0.91 (14%) 0.91 (3%) (1%) Pound 0.65 (8%) 0.66 (4%) 0.70 (6%) Yen 122 (17%) 121 (6%) 117 IBM Revenue Impact (8.6 pts) Prior View (Oct 2015) Revenue As Reported Currency Impact Revenue @ CC 4Q16 FY16 (2%) 0% (1%) (7%) (8%) (6%) (7%) 2% 4% 4% 4% 3% (6.2 pts) (3-4 pts) (3 pts) ~(2 pts) ~(5 pts) ~(1 pts) ~(0-1 pts) (US$B) Yr/Yr $22.1 (9%) (1.5) 1Q16 Yr/Yr @ 1/15/16 Spot 2Q16 3Q16 (1 pts) (2-3 pts) (6.2 pts) (2%) www.ibm.com/investor 17 Supplemental Materials Supplemental Segment Information – 4Q 2015 Global Services Revenue Global Services Backlog / Signings $ in Billions Revenue Growth Yr/Yr Backlog 4Q15 Yr/Yr GTS Outsourcing (1%) Total Backlog $121 1% Change in Backlog due to Currency Integrated Tech Services 5% Maintenance Flat Quarter-to-Quarter ($2) 1% Year-to-Year ($9) Total GTS GBS Outsourcing (4%) GBS C&SI (4%) Outsourcing Backlog (4%) Signings Total Outsourcing (2%) Outsourcing - GTS O/S, GBS O/S Total Transactional Flat Maintenance Flat Total GBS Transactional - ITS, Consulting & AMS SI (incl. US Federal) Total Signings Growth rates @CC $76 2% 4Q15 Yr/Yr $9.5 (6%) 7.1 7% $16.7 (1%) Actual backlog calculated using Dec 31 currency spot rates www.ibm.com/investor 18 Supplemental Materials Supplemental Segment Information – 4Q 2015 Systems Hardware Revenue Growth z Systems Power Systems Storage Total Systems Hardware Yr/Yr Software GP% 21% 8% (7%) 3% = Revenue Growth Yr/Yr WebSphere (5%) Information Management (5%) Tivoli (1%) Workforce Solutions (4%) Rational Key Branded Middleware Other Middleware (28%) (6%) (9%) Total Middleware (6%) Operating Systems (7%) Other Software/Services Total Software 1% (6%) Revenue growth rates @CC www.ibm.com/investor 19 Supplemental Materials Global Financing Portfolio 4Q15 – $28.5B Net External Receivables 40% Investment Grade 55% 30% 20% Non-Investment Grade 45% 33% 23% 22% 10% 13% 8% 1% 0% Aaa to A3 Baa1 to Baa3 Ba1 to Ba2 B2 to B3 Caa1 to D 4Q15 3Q15 4Q14 Identified Loss Rate 1.8% 2.1% 1.6% Anticipated Loss Rate 0.3% 0.3% 0.3% Reserve Coverage 2.1% 2.4% 1.9% 3.8 4.2 4.1 $15M $33M $26M Client Days Delinquent Outstanding Commercial A/R > 30 days 20 Ba3 to B1 www.ibm.com/investor 20 Supplemental Materials Key Financial Metrics – FY 2015 $ in Billions, except EPS FY15 B/(W) Yr/Yr GP Margin 50.8% 0.2 pts (7 pts) PTI Margin 21.6% (1.1 pts) (12%) (7 pts) Tax Rate 17.2% 3.8 pts (10%) (7 pts) NI Margin 17.9% (0.1 pts) P&L Highlights FY15 Yr/Yr Revenue $81.7 (1%) PTI – Operating $17.7 (16%) NI – Operating $14.7 EPS – Operating $14.92 impact of 2014 gains* P&L Ratios (Operating) impact of 2014 gains* (1.7 pts) (1.3 pts) Revenue growth rate @CC and excluding divested businesses *impact of System x (4Q14) and Customer Care (1H14) divestiture gains Cash Highlights Free Cash Flow (excl. GF Receivables) FY15 $ 13.1 Share Repurchase (Gross) 4.6 Dividends 4.9 Cash Balance @ December 31 8.2 www.ibm.com/investor 21 Supplemental Materials Revenue by Geography – FY 2015 $ in Billions FY15 Yr/Yr Americas $38.5 (2%) Europe/ME/Africa 26.1 Flat Asia Pacific 16.9 (2%) IBM $81.7 (1%) Major Markets Growth Markets BRIC Countries (1%) (3%) (10%) Canada/ LA U.S. -‐3% EMEA Japan AP +5% ex. Japan Revenue growth rate @CC and excluding divested businesses www.ibm.com/investor 22 Supplemental Materials Revenue and Gross Profit Margin by Segment – FY 2015 Revenue $ in Billions Operating Gross Profit Margin FY15 Yr/Yr FY15 Yr/Yr Pts $32.0 1% 37.4% (1.5 pts) Global Business Services 17.2 (4%) 28.2% (2.2 pts) Software 22.9 (4%) 87.3% (1.3 pts) Global Technology Services Systems Hardware 7.6 8% 46.6% 7.2 pts Global Financing 1.8 2% 45.6% (3.7 pts) (1%) 50.8% 0.2 pts Total Revenue & Op. GP Margin $81.7 Revenue growth rate @CC and excluding divested businesses www.ibm.com/investor 23 Supplemental Materials Expense Summary – FY 2015 FY15 B/(W) Yr/Yr SG&A – Operating $19.6 13% RD&E – Operating 5.2 6% IP and Development Income (0.7) (8%) Other (Income)/Expense (0.7) (62%) 0.5 3% $ in Billions Interest Expense Operating Expense & Other Income $23.8 8% Drivers Currency Divestiture Gains* Workforce Rebalancing Acquisitions B/(W) Yr/Yr 9 pts (6 pts) 3 pts (1 pts) *impact of 2014 System x (4Q14) and Customer Care (1H14) divestiture gains www.ibm.com/investor 24 Supplemental Materials Historical Free Cash Flow Performance 108% 101% 103% 98% 107% 97% 94% 98% 100% 98% 2010 FCF Realiza4on 2011 2012 89% 79% 2013 2014 2015 FCF Realiza4on adjusted for book/cash tax differen4al and cash from gains Free Cash Flow realization = Free Cash Flow / GAAP Net Income from continuing operations. www.ibm.com/investor 25 Supplemental Materials $ in Billions Cash Flow (FAS 95) 4Q15 4Q14 FY15 FY14 $4.5 $5.5 $13.2 $12.0 Depreciation / Amortization of Intangibles 1.0 1.0 3.9 4.5 Stock-based Compensation 0.1 0.1 0.5 0.5 Working Capital / Other 1.5 0.9 (0.7) (4.3) (1.8) (1.5) 0.2 0.7 0.0 0.0 0.1 3.4 5.3 6.1 17.0 16.9 (1.0) (1.0) (3.8) (3.8) 0.1 1.9 (0.4) 2.4 Acquisitions, net of cash acquired (2.5) (0.0) (3.3) (0.7) Marketable Securities / Other Investments, net (2.0) (2.1) (0.6) (0.9) (5.4) (1.2) (8.2) (3.0) 0.6 (4.6) 0.0 1.8 Dividends (1.3) (1.1) (4.9) (4.3) Common Stock Repurchases (0.8) (0.1) (4.6) (13.7) 0.1 0.2 0.3 0.7 Net Cash used in Financing Activities (1.3) (5.7) (9.2) (15.5) Effect of Exchange Rate changes on Cash (0.3) (0.2) (0.5) (0.7) Net Change in Cash & Cash Equivalents (1.8) (1.1) (0.8) (2.2) Net Income from Operations Global Financing A/R Loss on Microelectronics Business Disposal Net Cash provided by Operating Activities Capital Expenditures, net of payments & proceeds Divestitures, net of cash transferred Net Cash used in Investing Activities Debt, net of payments & proceeds Common Stock Transactions - Other www.ibm.com/investor 26 Supplemental Materials Retirement-Related Charges Funded Status* US WW 102% 97% 101% 97% YE 2014 YE 2015 Expected ROA WW 6.7% 6.4% Actual ROA WW 12.2% -0.2% Operating Discount Rate WW 3.1% 3.3% Non-Operating Pre-Tax Retirement-Related (Cost) / Income ($B) $0.1 ($0.5) ($1.9) ($1.9) ($1.8) ($1.6) ($1.5) ($1.4) 2011 2012 2013 2014 2015 2016 2011 2012 ($0.4) 2013 ($0.5) 2014 2015 2016 ($1.0) ($1.1) ($1.2) 2015 2016 Retirement-Related Contribution Drivers ($B) ($0.9) ($1.9) ($1.9) ($1.8) ($1.6) 2011 2012 2013 2014 * Tax-qualified plans ($1.0) ($1.1) ($1.5) ($1.4) 2015 Actual 2016 ($1.4) ($1.6) 2011 2012 2013 2014 Projection based on year- end 2015 assumptions www.ibm.com/investor 27 Supplemental Materials Retirement-Related Metrics YE 2014 YE 2015 US WW US WW Funded status 102% 97% 101% 97% Expected ROA 7.5% 6.7% 7.0% 6.4% Actual ROA 10.1% 12.2% -1.0% -0.2% Discount rate 3.7% 3.1% 4.0% 3.3% $ billions 2015 2016 Operating cost 1.5 1.4 Non-operating cost 1.0 0.5 Total cost 2.6 2.0 Contributions* 2.6 2.6 *includes cash and non-cash contributions www.ibm.com/investor 28 Supplemental Materials Non-GAAP Supplemental Materials In an effort to provide investors with additional information regarding the company's results as determined by generally accepted accounting principles (GAAP), the company also discusses, in its earnings press release and earnings presentation materials, the following Non-GAAP information which management believes provides useful information to investors. Operating (Non-GAAP) Earnings Per Share and Related Income Statement Items Management presents certain financial measures from continuing operations excluding the effects of certain acquisitionrelated charges, non-operating retirement-related costs and any related tax impacts. Management uses the term "operating" to describe this view of the company's financial results and other financial information. For acquisitions, these measures exclude the amortization of purchased intangible assets and acquisition-related charges such as in-process research and development, transaction costs, applicable restructuring and related expenses, and tax charges related to acquisition integration. For retirement-related costs, the company has characterized certain items as operating and others as non-operating. The company includes service cost, amortization of prior service cost and the cost of defined contribution plans in its operating results. Non-operating retirement-related costs include interest cost, expected return on plan assets, amortized actuarial gains/losses, the impacts of any plan curtailments/settlements, multi-employer plan costs, pension insolvency costs, and other costs. Non-operating costs primarily relate to changes in pension plan assets and liabilities which are tied to market performance, and management considers these costs to be outside the operational performance of the business. Management’s calculation of these operating measures, as presented, may differ from similarly titled measures reported by other companies. Overall, management believes that providing investors with an operating view as described above provides increased transparency and clarity into both the operational results of the business and the performance of the company’s pension plans, improves visibility to management decisions and their impacts on operational performance, enables better comparison to peer companies, and allows the company to provide a long term strategic view of the business going forward. For its earnings per share guidance, the company is utilizing an operating view to establish its objectives and track its progress. The company’s segment financial results and performance reflect operating earnings, consistent with the company’s management and measurement system. Constant Currency Management refers to growth rates at constant currency or adjusting for currency so that certain financial results can be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons of the company's business performance. Financial results adjusted for currency are calculated by translating current period activity in local currency using the comparable prior year period’s currency conversion rate. This approach is used for countries where the functional currency is the local currency. Generally, when the dollar either strengthens or weakens against other currencies, the growth at constant currency rates or adjusting for currency will be higher or lower than growth reported at actual exchange rates. www.ibm.com/investor 29 Supplemental Materials Non-GAAP Supplemental Materials Cash Flow Management uses a free cash flow measure to evaluate the company’s operating results, plan share repurchase levels, evaluate strategic investments and assess the company’s ability and need to incur and service debt. The entire free cash flow amount is not necessarily available for discretionary expenditures. The company defines free cash flow as net cash from operating activities less the change in Global Financing receivables and net capital expenditures, including the investment in software. A key objective of the Global Financing business is to generate strong returns on equity, and increasing receivables is the basis for growth. Accordingly, management considers Global Financing receivables as a profitgenerating investment, not as working capital that should be minimized for efficiency. Therefore, management includes presentations of both free cash flow and cash flow from operations that exclude the effect of Global Financing receivables. Debt-to-Capital Ratio Management presents its debt-to-capital ratio excluding the Global Financing business. A financing business is managed on a leveraged basis. The company funds its Global Financing segment using a debt-to-equity ratio target of approximately 7 to 1. Given this significant leverage, the company presents a debt-to-capital ratio which excludes the Global Financing segment debt and equity because the company believes this is more representative of the company’s core business operations. Customer Care Outsourcing and System x Business Divestiture With respect to the sale of IBM's worldwide customer care outsourcing services business to SYNNEX, the initial closing date was January 31, 2014. With respect to the sale of IBM’s x86 server business to Lenovo, the initial closing date was October 1, 2014. Management believes that presenting financial information without either or both of these items is more representative of operational performance and provides additional insight into, and clarifies the basis for, historical and/or future performance, which may be more useful to investors. www.ibm.com/investor 30 Supplemental Materials Non-GAAP Supplemental Materials GAAP to Opera[ng (Non-‐GAAP) Bridge – 4Q 2015 $ in Millions, except EPS GAAP Acquisition-related Adjustments* Retirement-related Adjustments** Operating (Non-GAAP) $11,407 $105 $119 $11,630 SG&A 5,157 (95) (88) 4,975 RD&E 1,362 - (12) 1,350 Other Income & Expense (146) 0 - (146) Total Operating Expense & Other Income 6,308 (95) (100) 6,114 Pre-Tax Income from Continuing Operations 5,098 199 218 5,516 638 89 82 809 Net Income from Continuing Operations 4,460 110 137 4,707 Diluted Earnings Per Share from Continuing Operations $4.59 $0.11 $0.14 $4.84 Gross Profit Tax *** * Includes amor4za4on of purchased Intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs and acquisi4on integra4on tax charges ** Includes re4rement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amor4za4on of transi4on assets, other sePlements, curtailments, mul4-‐employer plans and insolvency insurance ***The tax impact on the Opera4ng (Non-‐GAAP) Pre-‐Tax Income from con4nuing opera4ons is calculated under the same accoun4ng principles applied to the As Reported Pre-‐Tax Income under ASC 740, which employs an annual effec4ve tax rate method to the results. The above serves to reconcile the Non-GAAP financial information contained in the “4Q and Full Year 2015 Overview”, “Key Financial Metrics” and “Expense Summary” discussions in the company’s earnings presentation. See Slide 29 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 31 Supplemental Materials Non-GAAP Supplemental Materials GAAP to Opera[ng (Non-‐GAAP) Bridge – 4Q 2014 $ in Millions, except EPS GAAP Acquisition-related Adjustments* Retirement-related Adjustments** Operating (Non-GAAP) $12,862 $101 $33 $12,996 SG&A 6,034 (94) (95) 5,845 RD&E 1,320 - 21 1,341 (1,506) (1) - (1,506) Total Operating Expense & Other Income 5,767 (95) (74) 5,598 Pre-Tax Income from Continuing Operations 7,094 196 107 7,398 Tax *** 1,580 10 24 1,613 Net Income from Continuing Operations 5,515 186 84 5,785 Diluted Earnings Per Share from Continuing Operations $5.54 $0.19 $0.08 $5.81 Gross Profit Other Income & Expense * Includes amor4za4on of purchased Intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs and acquisi4on integra4on tax charges ** Includes re4rement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amor4za4on of transi4on assets, other sePlements, curtailments, mul4-‐employer plans and insolvency insurance ***The tax impact on the Opera4ng (Non-‐GAAP) Pre-‐Tax Income from con4nuing opera4ons is calculated under the same accoun4ng principles applied to the As Reported Pre-‐Tax Income under ASC 740, which employs an annual effec4ve tax rate method to the results. The above serves to reconcile the Non-GAAP financial information contained in the “4Q and Full Year 2015 Overview”, “Key Financial Metrics” and “Expense Summary” discussions in the company’s earnings presentation. See Slide 29 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 32 Supplemental Materials Non-GAAP Supplemental Materials GAAP to Opera[ng (Non-‐GAAP) Bridge – FY 2015 $ in Millions, except EPS GAAP Acquisition-related Adjustments* Retirement-related Adjustments** Operating (Non-GAAP) $40,684 $373 $469 $41,526 SG&A 20,430 (324) (533) 19,573 RD&E 5,247 - (48) 5,200 Other Income & Expense (724) (5) - (729) Total Operating Expense & Other Income 24,740 (330) (581) 23,830 Pre-Tax Income from Continuing Operations 15,945 703 1,050 17,697 2,581 141 316 3,037 Net Income from Continuing Operations 13,364 562 734 14,659 Diluted Earnings Per Share from Continuing Operations $13.60 $0.57 $0.75 $14.92 Gross Profit Tax *** * Includes amor4za4on of purchased Intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs and acquisi4on integra4on tax charges ** Includes re4rement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amor4za4on of transi4on assets, other sePlements, curtailments, mul4-‐employer plans and insolvency insurance ***The tax impact on the Opera4ng (Non-‐GAAP) Pre-‐Tax Income from con4nuing opera4ons is calculated under the same accoun4ng principles applied to the As Reported Pre-‐Tax Income under ASC 740, which employs an annual effec4ve tax rate method to the results. The above serves to reconcile the Non-GAAP financial information contained in the “4Q and Full Year 2015 Overview”, “Key Financial Metrics – FY 2015” and “Expense Summary – FY 2015” discussions in the company’s earnings presentation. See Slide 29 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 33 Supplemental Materials Non-GAAP Supplemental Materials GAAP to Opera[ng (Non-‐GAAP) Bridge – FY 2014 $ in Millions, except EPS GAAP Acquisition-related Adjustments* Retirement-related Adjustments** Operating (Non-GAAP) $46,407 $416 $173 $46,996 SG&A 23,180 (385) (257) 22,537 RD&E 5,437 - 77 5,514 Other Income & Expense (1,938) (1) - (1,939) Total Operating Expense & Other Income 26,421 (386) (180) 25,855 Pre-Tax Income from Continuing Operations 19,986 803 353 21,142 4,234 133 73 4,440 Net Income from Continuing Operations 15,751 670 280 16,702 Diluted Earnings Per Share from Continuing Operations $15.59 $0.66 $0.28 $16.53 Gross Profit Tax *** * Includes amor4za4on of purchased Intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs and acquisi4on integra4on tax charges ** Includes re4rement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amor4za4on of transi4on assets, other sePlements, curtailments, mul4-‐employer plans and insolvency insurance ***The tax impact on the Opera4ng (Non-‐GAAP) Pre-‐Tax Income from con4nuing opera4ons is calculated under the same accoun4ng principles applied to the As Reported Pre-‐Tax Income under ASC 740, which employs an annual effec4ve tax rate method to the results. The above serves to reconcile the Non-GAAP financial information contained in the “4Q and Full Year 2015 Overview”, “Key Financial Metrics – FY 2015” and “Expense Summary – FY 2015” discussions in the company’s earnings presentation. See Slide 29 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 34 Supplemental Materials Non-GAAP Supplemental Materials GAAP to Opera[ng (Non-‐GAAP) Bridge – 4Q 2015 and 4Q 2014 GAAP Acquisitionrelated Adjustments* Retirement-related Adjustments ** Operating (Non-GAAP) Gross Profit Margin from Continuing Operations 51.7% 0.5 pts 0.5 pts 52.7% PTI Margin from Continuing Operations 23.1% 0.9 pts 1.0 pts 25.0% Tax Rate *** 12.5% 1.2 pts 1.0 pts 14.7% Net Income Margin from Continuing Operations 20.2% 0.5 pts 0.6 pts 21.3% Gross Profit Margin from Continuing Operations 53.3% 0.4 pts 0.1 pts 53.9% PTI Margin from Continuing Operations 29.4% 0.8 pts 0.4 pts 30.7% Tax Rate *** 22.3% -0.5 pts 0.0 pts 21.8% Net Income Margin from Continuing Operations 22.9% 0.8 pts 0.3 pts 24.0% 4Q 2015 4Q 2014 * Includes amor4za4on of purchased Intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs and acquisi4on integra4on tax charges ** Includes re4rement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amor4za4on of transi4on assets, other sePlements, curtailments, mul4-‐employer plans and insolvency insurance ***The tax impact on the Opera4ng (Non-‐GAAP) Pre-‐Tax Income from con4nuing opera4ons is calculated under the same accoun4ng principles applied to the As Reported Pre-‐Tax Income under ASC 740, which employs an annual effec4ve tax rate method to the results. The above serves to reconcile the Non-GAAP financial information contained in the ”Key Financial Metrics” and “Revenue and Gross Profit Margin by Segment” discussions in the company’s earnings presentation. See Slide 29 of this presentation for additional information on the use of these NonGAAP financial measures. www.ibm.com/investor 35 Supplemental Materials Non-GAAP Supplemental Materials GAAP to Opera[ng (Non-‐GAAP) Bridge – FY 2015 and FY 2014 GAAP Acquisitionrelated Adjustments* Retirement-related Adjustments ** Operating (Non-GAAP) Gross Profit Margin from Continuing Operations 49.8% 0.5 pts 0.6 pts 50.8% PTI Margin from Continuing Operations 19.5% 0.9 pts 1.3 pts 21.6% Tax Rate *** 16.2% 0.2 pts 0.9 pts 17.2% Net Income Margin from Continuing Operations 16.3% 0.7 pts 0.9 pts 17.9% Gross Profit Margin from Continuing Operations 50.0% 0.4 pts 0.2 pts 50.6% PTI Margin from Continuing Operations 21.5% 0.9 pts 0.4 pts 22.8% Tax Rate *** 21.2% -0.2 pts 0.0 pts 21.0% Net Income Margin from Continuing Operations 17.0% 0.7 pts 0.3 pts 18.0% FY 2015 FY 2014 * Includes amor4za4on of purchased Intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs and acquisi4on integra4on tax charges ** Includes re4rement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amor4za4on of transi4on assets, other sePlements, curtailments, mul4-‐employer plans and insolvency insurance ***The tax impact on the Opera4ng (Non-‐GAAP) Pre-‐Tax Income from con4nuing opera4ons is calculated under the same accoun4ng principles applied to the As Reported Pre-‐Tax Income under ASC 740, which employs an annual effec4ve tax rate method to the results. The above serves to reconcile the Non-GAAP financial information contained in the ”Key Financial Metrics – FY 2015” and “Revenue and Gross Profit Margin by Segment – FY 2015” discussions in the company’s earnings presentation. See Slide 29 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 36 Supplemental Materials Non-GAAP Supplemental Materials Reconcilia[on of Debt-‐to-‐Capital Ra[o Dec. 2015 Sept. 2015* Dec. 2014* Non-Global Financing Debt / Capital 54% 58% 59% IBM Consolidated Debt / Capital 73% 75% 77% * Prior periods reclassified for the adoption of the FASB guidance (Debt issuance cost classification) The above serves to reconcile the Non-GAAP financial information contained in the “Balance Sheet Summary” discussions in the company’s earnings presentation. See Slide 30 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 37 Supplemental Materials Non-GAAP Supplemental Materials Reconcilia)on of Revenue Growth FY15 Yr/Yr FY14 Yr/Yr @CC excl. Divested Businesses GAAP @CC 16% 18% GAAP @CC Strategic Imperatives 17% 24% 26% Cloud 43% 54% 57% FY13 Yr/Yr @CC excl. Divested Businesses 19% GAAP @CC 17% 19% FY15 Yr/Yr GAAP @CC Mobile 220% 250% Social 14% 21% The above serves to reconcile the Non-GAAP financial information contained in the “Transformation Progress” discussions in the company’s earnings presentation. See Slides 29-30 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 38 Supplemental Materials Non-GAAP Supplemental Materials Reconcilia[on of Revenue Growth FY 2015 Yr/Yr Americas U.S. Europe/ME/Africa Asia Pacific Japan Major Markets Growth Markets BRIC Countries GAAP (7%) (4%) (15%) (17%) (10%) (10%) (18%) (27%) @CC (4%) (4%) (2%) (7%) 3% (2%) (10%) (18%) @CC excl. Divested Business (2%) (3%) Flat (2%) 5% (1%) (3%) (10%) 4Q15 Yr/Yr Major Markets Growth Markets Japan GAAP (7%) (14%) (3%) @CC (2%) (4%) 3% The above serves to reconcile the Non-GAAP financial information contained in the “Revenue by Geography” and “Revenue by Geography – FY 2015” discussions in the company’s earnings presentation. See Slides 29-30 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 39 Supplemental Materials Non-GAAP Supplemental Materials Reconcilia[on of Revenue Growth 4Q15 Yr/Yr GTS Outsourcing Integrated Technology Services GBS Outsourcing Consulting & Systems Integration Total Outsourcing Total Transactional Maintenance WebSphere Information Management Tivoli Workforce Solutions Rational Total Middleware Other Middleware Other Software/Services GAAP (9%) (3%) (10%) (10%) (9%) (7%) (8%) (9%) (10%) (6%) (10%) (32%) (11%) (14%) (4%) @CC (1%) 5% (4%) (4%) (2%) Flat Flat (5%) (5%) (1%) (4%) (28%) (6%) (9%) 1% The above serves to reconcile the Non-GAAP financial information contained in the “Services Segments”, “Software Segments” and “Supplemental Segment Information – 4Q 2015” discussions in the company’s earnings presentation. See Slides 29 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 40 Supplemental Materials Non-GAAP Supplemental Materials Reconcilia[on of Revenue Growth FY15 Yr/Yr Global Technology Services Global Business Services Systems Hardware GAAP (10%) (12%) (24%) @CC (0%) (4%) (20%) @CC excl. Divested Businesses 1% (4%) 8% FY15 Yr/Yr Software Global Financing GAAP (10%) (10%) @CC (4%) 2% The above serves to reconcile the Non-GAAP financial information contained in the “Supplemental Segment Information - FY 2015” discussions in the company’s earnings presentation. See Slides 29-30 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 41 Supplemental Materials Non-GAAP Supplemental Materials Reconcilia[on of Free Cash Flow (excluding GF Receivables, adjusted for Taxes and Gains) FY 2015 Free Cash Flow (excluding GF Receivables) $13.1 Less: Taxes and Gains adjustments Book/Cash Tax Differential* (0.1) Gains on assets sales and other** (0.3) Free Cash Flow (excluding GF Receivables, adjusted for Taxes and Gains) $13.4 * Taxes (Continuing Operations Provision for Income Taxes less Income Taxes paid) ** Net gains on asset sales and other The above serves to reconcile the Non-GAAP financial information contained in the “Historical Free Cash Flow Performance” discussions in the company’s earnings presentation. For reconciliation to GAAP and other information about FY 2010 through FY 2014 non-GAAP measures of Free Cash Flow refer to page 66 of the company’s 2014 Annual Report which is Exhibit 13 to the Form 10-K submitted to the SEC on February 24, 2015 and see Non-GAAP Supplementary Materials and related information in the Form 8-K submitted to the SEC on February 26, 2015. See Slide 30 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 42 42 www.ibm.com/investor 43