3Q 2015 Earnings Presentation October 19, 2015 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/3q15.html The Non-GAAP Supplemental Materials are also included as Attachment II to the Company’s Form 8-K dated October 19, 2015. www.ibm.com/investor 2 3Q Overview Revenue ($B) Yr/Yr As Reported Operating (Non-GAAP) EPS 3Q15 $ 19.3 $ 3.34 Yr/Yr (1%)* (14%) (9%) * Revenue growth rate @CC and excluding divested System x business Ø Continued strength in Strategic Imperatives • YTD revenue growth > 30% yr/yr Ø Expanded gross and net margins • Reflects shift to higher value Ø Investing and adding capabilities • Building platforms and ecosystems Ø Continued progress in transformation of business www.ibm.com/investor 3 Key Financial Metrics $ in Billions, except EPS P&L Highlights 3Q15 Yr/Yr P&L Ratios (Operating) Revenue $ 19.3 (1%) GP Margin 50.0% 0.8 pts PTI – Operating $ 4.0 (14%) PTI Margin 20.7% 0.0 pts NI – Operating $ 3.3 (11%) Tax Rate 18.0% 2.8 pts EPS – Operating $ 3.34 (9%) NI Margin 17.0% 0.6 pts 3Q15 B/(W) Yr/Yr Revenue growth rate @CC and excluding divested System x business Cash Highlights Free Cash Flow (excl. GF Receivables) 3Q15 $ 2.6 Last 12 Mos. $ 13.6 Share Repurchase (Gross) 1.5 4.0 Dividends 1.3 9.6 4.7 Cash Balance @ September 30 www.ibm.com/investor 4 Revenue by Geography $ in Billions 3Q15 Yr/Yr Americas $9.1 (3%) Europe/ME/Africa 6.1 1% Asia Pacific 4.1 (1%) $19.3 (1%) IBM Major Markets Growth Markets BRIC Countries (1%) (3%) (7%) Canada/ LA U.S. -‐4% EMEA Japan AP ex. Japan +7% Revenue growth rate @CC and excluding divested System x business www.ibm.com/investor 5 Revenue and Gross Profit Margin by Segment Operating Gross Profit Margin Revenue $ in Billions Global Technology Services 3Q15 Yr/Yr 3Q15 Yr/Yr Pts $ 7.9 1% 38.1% (1.0 pts) Global Business Services 4.2 (5%) 29.7% (1.3 pts) Software 5.1 (3%) 86.4% (1.2 pts) Systems Hardware 1.5 (2%) 44.7% 10.8 pts Global Financing 0.4 7% 48.4% 0.6 pts (1%) 50.0% 0.8 pts Total Revenue & Op. GP Margin $19.3 Revenue growth rates @CC and excluding divested System x business www.ibm.com/investor 6 Expense Summary $ in Billions 3Q15 B/(W) Yr/Yr SG&A – Operating $4.6 11% RD&E – Operating 1.3 7% (0.2) 29% IP and Development Income Other (Income)/Expense Interest Expense Operating Expense & Other Income (0.1) 30% 0.1 7% $5.7 12% Drivers B/(W) Yr/Yr Currency 9 pts System x Divestiture 2 pts Workforce Rebalancing www.ibm.com/investor (2 pts) 7 Services Segments Global Technology Services (GTS) $ in Billions Revenue (External) Gross Margin (External) PTI Margin $ in Billions 3Q15 $7.9 38.1% 15.7% GTS 3Q15 Revenue GTS Outsourcing Integrated Technology Services Maintenance GBS 3Q15 Revenue GBS Outsourcing Consulting & Systems Integration Backlog Global Business Services (GBS) 3Q15 $118B Yr/Yr 1% (1.0 pts) (2.2 pts) Revenue (External) Gross Margin (External) PTI Margin Yr/Yr Flat 4% 1% 1% (7%) 3Q15 $4.2 29.7% 15.6% Yr/Yr (5%) (1.3 pts) (1.7 pts) 3Q15 Revenue (% of Total Services) Maint. 12% GTS Outsourcing 35% 1% ITS 18% GBS C&SI 25% GBS Outsourcing 10% Revenue growth rates @CC and excluding divested System x business; Backlog @CC www.ibm.com/investor 8 Software Segment $ in Billions Revenue (External) Gross Margin (External) PTI Margin 3Q15 Revenue 1% Information Management 1% Tivoli (2%) Workforce Solutions (3%) Rational (11%) Key Branded Middleware (1%) Total Middleware (2%) Total Software (3%) Yr/Yr (3%) (1.2 pts) (3.4 pts) 3Q15 Revenue (% of Total SoVware) Yr/Yr WebSphere 3Q15 $5.1 86.4% 32.1% Key Branded Middleware 67% Other Middleware 17% OperaZng Systems Other 9% 8% Revenue growth rates @CC www.ibm.com/investor 9 Systems Hardware Segment $ in Billions Revenue (External) Gross Margin (External) PTI Margin 3Q15 $1.5 44.7% (1.5%) 3Q15 Revenue Yr/Yr z Systems 20% Power Systems 2% Storage (14%) Total Systems Hardware (2%) Revenue growth rates @CC and excluding divested System x business www.ibm.com/investor Yr/Yr (2%) 10.8 pts 2.3 pts 3Q15 Revenue (% of Total Sys Hardware) Servers 63% Storage 34% Other 10 Cash Flow Summary 3Q15 B/(W) Yr/Yr YTD 3Q15 B/(W) Yr/Yr $4.2 $0.3 $11.7 $0.9 0.7 0.0 2.0 (0.3) 3.5 0.3 9.8 1.2 (0.9) 0.1 (2.8) 0.0 2.6 0.4 7.0 1.2 Acquisitions (0.1) (0.1) (0.8) (0.2) Divestitures (0.6) (0.6) (0.5) (1.0) Dividends (1.3) (0.2) (3.6) (0.5) Share Repurchases (Gross) (1.5) 0.2 (3.8) 9.7 Non-GF Debt 0.4 0.9 0.8 (3.8) Other (includes GF A/R & GF Debt) 1.4 0.4 2.1 (3.0) $0.8 $1.0 $1.1 $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 www.ibm.com/investor 11 Balance Sheet Summary $ in Billions Sept. 14 $9.6 Dec. 14 $8.5 Sept. 15 $9.6 Non-GF Assets* 74.5 71.7 67.5 Global Financing Assets 34.8 37.3 31.5 118.9 117.5 108.6 Other Liabilities 58.8 64.7 55.5 Non-GF Debt* 17.1 11.7 13.7 Global Financing Debt 28.6 29.1 26.0 45.7 40.8 39.7 Total Liabilities 104.5 105.5 95.2 Equity 14.4 12.0 13.5 Non-GF Debt / Capital 62% 59% 58% 7.4 7.2 7.0 Cash & Marketable Securities Total Assets Total Debt Global Financing Leverage * Includes eliminations of inter-company activity www.ibm.com/investor 12 Summary Ø Strong performance in Strategic Imperatives Ø Margin expansion reflects shift to higher value Ø Investing and adding capabilities Ø 2015 Full Year Expectations • Operating EPS of $14.75 - $15.75 • Free Cash Flow relatively flat yr/yr ConZnued progress in transformaZon of the business www.ibm.com/investor 13 www.ibm.com/investor 14 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 Currency – Year/Year Comparison Supplemental Segment Information – Global Services Supplemental Segment Information – Systems Hardware, Software Global Financing Portfolio Cash Flow (FAS 95) 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 • Reconciliation of Operating Earnings Per Share • GAAP to Operating (Non-GAAP) Bridge – 3Q 2015 • GAAP to Operating (Non-GAAP) Bridge – 3Q 2014 • GAAP to Operating (Non-GAAP) Bridge – 3Q YTD 2015 • GAAP to Operating (Non-GAAP) Bridge – 3Q YTD 2014 • GAAP to Operating (Non-GAAP) Bridge – 3Q 2015 and 3Q 2014 • Reconciliation of Free Cash Flow (excluding GF Receivables) – 12 months ended 9/30/15 • Reconciliation of Debt-to-Capital Ratio • Reconciliation of Revenue Growth • Reconciliation of Revenue Growth • Reconciliation of Revenue Growth • Reconciliation of Revenue Growth www.ibm.com/investor 15 Supplemental Materials Currency – Year/Year Comparison Quarterly Averages per US $ 1Q15 Yr/Yr 2Q15 Yr/Yr 3Q15 Yr/Yr 10/16 Spot Euro 0.89 (22%) 0.90 (24%) 0.90 (19%) 0.88 (10%) (18%) 1% 3% Pound 0.66 (9%) 0.65 (10%) 0.65 (8%) 0.65 (2%) (7%) 2% 1% Yen 119 (16%) 121 (19%) 122 (17%) 119 (4%) (14%) 0% 2% IBM Revenue Impact (8 pts) (9 pts) (9 pts) (8-9 pts) Prior View (July 2015) Revenue As Reported Currency Impact Revenue @ CC (US$B) $19.3 Yr/Yr (14%) (1.9) (9 pts) 4Q15 Yr/Yr @ 10/16 Spot FY15 1Q16 ~(5 pts) ~(7-8 pts) ~(1pts) (5-6 pts) 2Q16 ~(0-1 pts) (7-8 pts) (5%) www.ibm.com/investor 16 Supplemental Materials Supplemental Segment Information – 3Q 2015 Global Services Revenue Global Services Backlog / Signings $ in Billions Revenue Growth Yr/Yr Backlog 3Q15 Yr/Yr $118 1% GTS Outsourcing Flat Total Backlog Integrated Tech Services 4% Change in Backlog due to Currency Maintenance 1% Quarter-to-Quarter 1% Year-to-Year Total GTS GBS Outsourcing GBS C&SI Total GBS 1% (7%) Signings (5%) Total Outsourcing Flat Total Transactional (2%) Maintenance Outsourcing Backlog Outsourcing - GTS O/S, GBS O/S Transactional - ITS, Consulting & AMS SI (incl. US Federal) 1% Total Signings Growth rates @CC and excluding divested System x business ($2) ($11) $74 4% 3Q15 Yr/Yr $3.9 (15%) 5.4 (1%) $9.3 (7%) Actual backlog calculated using Sept 30 currency spot rates www.ibm.com/investor 17 Supplemental Materials Supplemental Segment Information – 3Q 2015 Systems Hardware Revenue Growth z Systems Power Systems Storage Total Systems Hardware Yr/Yr Software GP% 20% 2% (14%) (2%) Revenue Growth Yr/Yr WebSphere 1% Information Management 1% Tivoli (2%) Workforce Solutions (3%) Rational Key Branded Middleware Other Middleware (11%) (1%) (7%) Total Middleware (2%) Operating Systems (7%) Other Software/Services Total Software (10%) (3%) Revenue growth rates @CC and excluding divested System x business www.ibm.com/investor 18 Supplemental Materials Global Financing Portfolio 3Q15 – $25.2B Net External Receivables 40% Investment Grade 55% 34% 30% 20% Non-Investment Grade 45% 22% 21% 10% 13% 8% 2% 0% Aaa to A3 Baa1 to Baa3 Ba1 to Ba2 B2 to B3 Caa1 to D 3Q15 2Q15 3Q14 Identified Loss Rate 2.1% 2.1% 1.5% Anticipated Loss Rate 0.3% 0.3% 0.3% Reserve Coverage 2.4% 2.4% 1.8% 4.2 3.8 4.0 $33M $45M $28M Client Days Delinquent Outstanding Commercial A/R > 30 days 19 Ba3 to B1 www.ibm.com/investor 19 Supplemental Materials Cash Flow (FAS 95) $ in Billions QTD 3Q15 QTD 3Q14 YTD 3Q15 YTD 3Q14 Net Income from Operations $3.0 $0.0 $8.7 $6.5 Depreciation / Amortization of Intangibles 0.9 1.1 2.9 3.4 Stock-based Compensation 0.1 0.2 0.4 0.4 (0.5) (1.5) (2.2) (5.2) Global Financing A/R 0.7 0.7 2.0 2.2 Loss on Microelectronics Business Disposal 0.0 3.3 0.0 3.3 4.2 3.9 11.7 10.8 Capital Expenditures, net of payments & proceeds (0.9) (1.0) (2.8) (2.8) Divestitures, net of cash transferred (0.6) 0.1 (0.5) 0.5 Acquisitions, net of cash acquired (0.1) (0.0) (0.8) (0.6) 0.3 0.2 1.4 1.2 (1.3) (0.8) (2.7) (1.8) 0.9 (0.2) (0.6) 6.4 Dividends (1.3) (1.1) (3.6) (3.2) Common Stock Repurchases (1.5) (1.7) (3.8) (13.5) 0.1 0.1 0.3 0.5 (1.8) (2.8) (7.8) (9.8) Effect of Exchange Rate changes on Cash 0.0 (0.4) (0.2) (0.4) Net Change in Cash & Cash Equivalents 1.1 (0.2) 1.0 (1.2) Working Capital / Other Net Cash provided by Operating Activities Marketable Securities / Other Investments, net Net Cash used in Investing Activities Debt, net of payments & proceeds Common Stock Transactions - Other Net Cash used in Financing Activities www.ibm.com/investor 20 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 21 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 22 Supplemental Materials Non-GAAP Supplemental Materials ReconciliaZon of OperaZng Earnings Per Share 2015 Expectations IBM GAAP EPS $13.25 - $14.25 IBM Operating EPS (Non-GAAP) $14.75 - $15.75 Adjustments Acquisition-Related Charges * $0.70 Non-Operating Retirement-Related Items $0.80 * Includes acquisitions through September 30, 2015 The above serves to reconcile the Non-GAAP financial information contained in the “Full-Year Expectations“ and “Summary” discussions in the company’s earnings presentation. See Slide 21 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 23 23 Supplemental Materials Non-GAAP Supplemental Materials GAAP to OperaZng (Non-‐GAAP) Bridge – 3Q 2015 $ in Millions, except EPS GAAP Acquisition-related Adjustments* Retirement-related Adjustments** Operating (Non-GAAP) $9,436 $89 $118 $9,643 SG&A 4,731 (76) (74) 4,581 RD&E 1,287 - (12) 1,275 Other Income & Expense (133) 0 - (133) Total Operating Expense & Other Income 5,815 (76) (86) 5,652 Pre-Tax Income from Continuing Operations 3,621 165 204 3,991 659 (5) 64 718 Net Income from Continuing Operations 2,962 170 140 3,272 Diluted Earnings Per Share from Continuing Operations $3.02 $0.18 $0.14 $3.34 Gross Profit Tax *** * Includes amor/za/on of purchased Intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs and acquisi/on integra/on tax charges ** Includes re/rement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amor/za/on of transi/on assets, other se@lements, curtailments, mul/-‐employer plans and insolvency insurance ***The tax impact on the Opera/ng (Non-‐GAAP) Pre-‐Tax Income from con/nuing opera/ons is calculated under the same accoun/ng principles applied to the As Reported Pre-‐Tax Income under ASC 740, which employs an annual effec/ve tax rate method to the results. The above serves to reconcile the Non-GAAP financial information contained in the “3Q Overview”, “Key Financial Metrics” and “Expense Summary” discussions in the company’s earnings presentation. See Slide 21 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 24 Supplemental Materials Non-GAAP Supplemental Materials GAAP to OperaZng (Non-‐GAAP) Bridge – 3Q 2014 $ in Millions, except EPS GAAP Acquisition-related Adjustments* Retirement-related Adjustments** Operating (Non-GAAP) $10,874 $106 $43 $11,023 SG&A 5,281 (96) (48) 5,137 RD&E 1,354 - 19 1,373 Other Income & Expense (103) 0 - (103) Total Operating Expense & Other Income 6,513 (96) (29) 6,389 Pre-Tax Income from Continuing Operations 4,361 202 71 4,634 906 42 14 963 Net Income from Continuing Operations 3,455 159 57 3,671 Diluted Earnings Per Share from Continuing Operations $3.46 $0.16 $0.06 $3.68 Gross Profit Tax *** * Includes amor/za/on of purchased Intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs and acquisi/on integra/on tax charges. ** Includes re/rement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amor/za/on of transi/on assets, other se@lements, curtailments, mul/-‐employer plans and insolvency insurance. ***The tax impact on the Opera/ng (Non-‐GAAP) Pre-‐Tax Income from con/nuing opera/ons is calculated under the same accoun/ng principles applied to the As Reported Pre-‐Tax Income under ASC 740, which employs an annual effec/ve tax rate method to the results. The above serves to reconcile the Non-GAAP financial information contained in the “3Q Overview”, “Key Financial Metrics” and “Expense Summary” discussions in the company’s earnings presentation. See Slide 21 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 25 Supplemental Materials Non-GAAP Supplemental Materials GAAP to OperaZng (Non-‐GAAP) Bridge – 3Q YTD 2015 $ in Millions, except EPS GAAP Acquisition-related Adjustments* Retirement-related Adjustments** Operating (Non-GAAP) $29,278 $268 $350 $29,896 SG&A 15,273 (230) (445) 14,598 RD&E 3,885 - (36) 3,849 Other Income & Expense (578) (5) - (583) Total Operating Expense & Other Income 18,431 (235) (481) 17,715 Pre-Tax Income from Continuing Operations 10,846 503 831 12,181 Tax *** 1,943 52 234 2,228 Net Income from Continuing Operations 8,904 452 597 9,953 Diluted Earnings Per Share from Continuing Operations $9.03 $0.46 $0.60 $10.09 Gross Profit * Includes amor/za/on of purchased Intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs and acquisi/on integra/on tax charges ** Includes re/rement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amor/za/on of transi/on assets, other se@lements, curtailments, mul/-‐employer plans and insolvency insurance ***The tax impact on the Opera/ng (Non-‐GAAP) Pre-‐Tax Income from con/nuing opera/ons is calculated under the same accoun/ng principles applied to the As Reported Pre-‐Tax Income under ASC 740, which employs an annual effec/ve tax rate method to the results. The above serves to reconcile the Non-GAAP financial information contained in the “Year-To-Date 2015 Results” discussions in the company’s earnings presentation. See Slide 21 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 26 Supplemental Materials Non-GAAP Supplemental Materials GAAP to OperaZng (Non-‐GAAP) Bridge – 3Q YTD 2014 $ in Millions, except EPS GAAP Acquisition-related Adjustments* Retirement-related Adjustments** Operating (Non-GAAP) $33,545 $315 $141 $34,001 SG&A 17,146 (291) (162) 16,693 RD&E 4,117 - 56 4,173 Other Income & Expense (433) 0 - (433) Total Operating Expense & Other Income 20,654 (292) (106) 20,257 Pre-Tax Income from Continuing Operations 12,891 607 246 13,744 2,655 123 49 2,827 Net Income from Continuing Operations 10,237 483 197 10,917 Diluted Earnings Per Share from Continuing Operations $10.09 $0.48 $0.19 $10.76 Gross Profit Tax *** * Includes amor/za/on of purchased Intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs and acquisi/on integra/on tax charges ** Includes re/rement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amor/za/on of transi/on assets, other se@lements, curtailments, mul/-‐employer plans and insolvency insurance ***The tax impact on the Opera/ng (Non-‐GAAP) Pre-‐Tax Income from con/nuing opera/ons is calculated under the same accoun/ng principles applied to the As Reported Pre-‐Tax Income under ASC 740, which employs an annual effec/ve tax rate method to the results. The above serves to reconcile the Non-GAAP financial information contained in the “Year-To-Date 2015 Results” discussions in the company’s earnings presentation. See Slide 21 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 27 Supplemental Materials Non-GAAP Supplemental Materials GAAP to OperaZng (Non-‐GAAP) Bridge – 3Q 2015 and 3Q 2014 GAAP Acquisitionrelated Adjustments* Retirement-related Adjustments ** Operating (Non-GAAP) Gross Profit Margin from Continuing Operations 48.9% 0.5 pts 0.6 pts 50.0% PTI Margin from Continuing Operations 18.8% 0.9 pts 1.1 pts 20.7% Tax Rate *** 18.2% -0.9 pts 0.7 pts 18.0% Net Income Margin from Continuing Operations 15.4% 0.9 pts 0.7 pts 17.0% Gross Profit Margin from Continuing Operations 48.6% 0.5 pts 0.2 pts 49.2% PTI Margin from Continuing Operations 19.5% 0.9 pts 0.3 pts 20.7% Tax Rate *** 20.8% 0.0 pts 0.0 pts 20.8% Net Income Margin from Continuing Operations 15.4% 0.7 pts 0.3 pts 16.4% 3Q 2015 3Q 2014 * Includes amor/za/on of purchased Intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs and acquisi/on integra/on tax charges ** Includes re/rement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amor/za/on of transi/on assets, other se@lements, curtailments, mul/-‐employer plans and insolvency insurance ***The tax impact on the Opera/ng (Non-‐GAAP) Pre-‐Tax Income from con/nuing opera/ons is calculated under the same accoun/ng principles applied to the As Reported Pre-‐Tax Income under ASC 740, which employs an annual effec/ve 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 21 of this presentation for additional information on the use of these NonGAAP financial measures. www.ibm.com/investor 28 Supplemental Materials Non-GAAP Supplemental Materials ReconciliaZon of Free Cash Flow (excluding GF Receivables) 12 months ended 9/30/15 $ 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) $17.8 0.5 17.3 (3.7) $13.6 The above serves to reconcile the Non-GAAP financial information contained in the “Key Financial Metrics” discussions in the company’s earnings presentation. See Slide 22 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 29 29 Supplemental Materials Non-GAAP Supplemental Materials ReconciliaZon of Debt-‐to-‐Capital RaZo Sept. 2015 Dec. 2014 Sept. 2014 Non-Global Financing Debt / Capital 58% 59% 62% IBM Consolidated Debt / Capital 75% 77% 76% 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 22 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 30 Supplemental Materials Non-GAAP Supplemental Materials ReconciliaZon of Revenue Growth 3Q YTD 2015 Yr/Yr IBM GAAP @CC (13%) (5%) @CC excl. Divested Businesses (1%) 3Q 2015 Yr/Yr GAAP Total Strategic Imperatives 17% @CC 25% @CC excl. Divested Business 27% The above serves to reconcile the Non-GAAP financial information contained in the “Strategic Imperatives” and “Year-To-Date 2015 Results” discussions in the company’s earnings presentation. See Slides 21-22 of this presentation for additional information on the use of these NonGAAP financial measures. www.ibm.com/investor 31 Supplemental Materials Non-GAAP Supplemental Materials ReconciliaZon of Revenue Growth 3Q15 Yr/Yr Americas U.S. Europe/ME/Africa Asia Pacific Japan Major Markets Growth Markets BRIC Countries Brazil China GAAP (10%) (7%) (16%) (19%) (11%) (11%) (22%) (30%) (35%) (35%) @CC (5%) (7%) (3%) (8%) 4% (3%) (11%) (18%) (6%) (34%) @CC excl. Divested Business (3%) (4%) 1% (1%) 7% (1%) (3%) (7%) (4%) (17%) 2Q15 Yr/Yr Growth Markets BRIC Countries GAAP (21%) (35%) @CC (13%) (28%) @CC excl. Divested Business (5%) (18%) The above serves to reconcile the Non-GAAP financial information contained in the “Revenue by Geography” discussions in the company’s earnings presentation. See Slides 21-22 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 ReconciliaZon of Revenue Growth 3Q15 Yr/Yr GTS Outsourcing Integrated Technology Services GBS Outsourcing Consulting & Systems Integration Total Outsourcing Total Transactional GAAP (11%) (6%) (8%) (15%) (11%) (11%) @CC Flat 4% 1% (7%) Flat (2%) 3Q15 Yr/Yr Global Technology Services (GTS) Maintenance GAAP (10%) (13%) @CC 1% (3%) @CC excl. Divested Business 1% 1% The above serves to reconcile the Non-GAAP financial information contained in the “Revenue and Gross Profit Margin by Segment”, “Services Segment” and “Supplemental Segment Information-3Q 2015” discussions in the company’s earnings presentation. See Slides 21-22 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 ReconciliaZon of Revenue Growth 3Q15 Yr/Yr GAAP (5%) (7%) (8%) (10%) (17%) (9%) (15%) (16%) WebSphere Information Management Tivoli Workforce Solutions Rational Total Middleware Other Middleware Other Software/Services @CC 1% 1% (2%) (3%) (11%) (2%) (7%) (10%) 3Q15 Yr/Yr Systems Hardware Segment GAAP (39%) @CC (35%) @CC excl. Divested Business (2%) The above serves to reconcile the Non-GAAP financial information contained in the “Revenue and Gross Profit Margin by Segment”, “Software Segment”, “Systems Hardware Segment” and “Supplemental Segment Information-3Q 2015” discussions in the company’s earnings presentation. See Slides 21-22 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 34 www.ibm.com/investor 35