2Q 2015 Earnings Presentation July!20,!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/2q15.html The Non-GAAP Supplemental Materials are also included as Attachment II to the Company’s Form 8-K dated July 20, 2015. www.ibm.com/investor 2 2Q and 1H 2015 Overview Revenue ($B) Yr/Yr As Reported Operating (Non-GAAP) EPS 2Q15 Yr/Yr 1H15 Yr/Yr $20.8 (1%)* (13%) (13%) $40.4 0%* (13%) (5%) $3.84 $6.75 * Revenue growth rate @CC and excluding divested businesses ! First half revenue roughly flat yr/yr • Strategic imperatives up >30% yr/yr • Services improving revenue trend, Backlog up yr/yr • Systems strength driven by z and Power Systems • BRIC countries impact growth ! Margin expansion reflects shift to higher value ! Shifting investments to address long-term opportunities in Enterprise IT www.ibm.com/investor 3 Key Financial Metrics $ in Billions, except EPS P&L Highlights 2Q15 Yr/Yr P&L Ratios (Operating) $20.8 (1%) PTI – Operating $4.6 NI – Operating 2Q15 B/(W) Yr/Yr GP Margin 50.9% 0.2 pts (18%) PTI Margin 22.0% (1.3 pts) $3.8 (15%) Tax Rate 17.2% 3.3 pts $3.84 (13%) NI Margin 18.2% (0.3 pts) 2Q15 Last 12 Mos. $3.4 $13.2 Share Repurchase (Gross) 1.1 4.2 Dividends 1.3 4.5 Cash Balance @ June 30 8.8 Revenue EPS – Operating Revenue growth rate @CC and excluding System x business Cash Highlights Free Cash Flow (excl. GF Receivables) www.ibm.com/investor 4 Revenue by Geography $ in Billions Americas 2Q15 Yr/Yr $9.8 (2%) Europe/ME/Africa 6.6 1% Asia Pacific 4.3 (1%) $20.8 (1%) IBM Major Markets Growth Markets BRIC Countries Flat Canada/!!!!! LA!!! U.S.! 23%!! EMEA! !!!! Japan! AP! ex.!Japan! +7%! (5%) (18%) Revenue growth rate @CC and excluding System x business www.ibm.com/investor 5 Revenue and Gross Profit Margin by Segment $ in Billions Global Technology Services Revenue Operating Gross Profit Margin 2Q15 Yr/Yr 2Q15 Yr/Yr Pts $8.1 1% 36.6% (2.3 pts) Global Business Services 4.3 (3%) 27.4% (2.4 pts) Software 5.8 (3%) 87.8% (1.0 pts) Systems Hardware 2.1 5% 48.2% 8.5 pts Global Financing 0.5 7% 44.7% (10.1 pts) (1%) 50.9% 0.2 pts Total Revenue & Op. GP Margin $20.8 Revenue growth rates @CC and excluding System x business www.ibm.com/investor 6 Expense Summary $ in Billions 2Q15 B/(W) Yr/Yr SG&A – Operating $5.0 8% RD&E – Operating 1.3 7% IP and Development Income (0.1) (33%) Other (Income)/ Expense (0.3) 52% Interest Expense 0.1 15% $6.0 9% Operating Expense & Other Income Drivers B/(W) Yr/Yr Currency 11 pts System x Divestiture 2 pts Workforce Rebalancing (3 pts) Divestiture Gains (1 pts) Operating Expense & Other Income www.ibm.com/investor 9% 7 Services Segments Global!Technology!Services!(GTS)! $ in Billions 2Q15 Yr/Yr $8.1 1% Gross Margin (External) 36.6% (2.3 pts) PTI Margin 15.1% (2.9 pts) Revenue (External) GTS 2Q15 Revenue Global!Business!Services!(GBS)! $ in Billions 2Q15 Yr/Yr $4.3 (3%) Gross Margin (External) 27.4% (2.4 pts) PTI Margin 14.7% (5.3 pts) Revenue (External) Yr/Yr GTS Outsourcing Integrated Technology Services Maintenance GBS 2Q15 Revenue GBS Outsourcing Consulting & Systems Integration 1% 1% 2% Flat (4%) 2Q15 Backlog $122B 1% 2Q15!Revenue! (%!of!Total!Services)! Maint.!!! 13%! GTS! Outsourcing!!! 35%!! ITS! 17%! GBS!C&SI!!!!!!!!! 25%! GBS! Outsourcing!!! 10%!! Revenue growth rates @CC and excluding System x business; Backlog @CC www.ibm.com/investor 8 Software Segment $ in Billions Revenue (External) Gross Margin (External) PTI Margin 2Q15 Revenue Yr/Yr WebSphere 5% Information Management Flat Tivoli (1%) Workforce Solutions (3%) Rational (2%) Key Branded Middleware Flat Total Middleware (2%) Total Software (3%) 2Q15 Yr/Yr $5.8 87.8% 34.4% (3%) (1.0 pts) (2.1 pts) 2Q15!Revenue!!!!!!!!!!!!! (%!of!Total!SoUware)! Key!!!!!!! Branded! Middleware!! 69%!! Other! Middleware!! 16%! OperaZng! Systems!!!!!!! 8%! Other!!!!!!!!! 7%! Revenue growth rates @CC www.ibm.com/investor 9 Systems Hardware Segment $ in Billions Revenue (External) Gross Margin (External) PTI Margin 2Q15 Yr/Yr $2.1 48.2% 11.8% 5% 8.5 pts 5.5 pts 2Q15 Revenue Yr/Yr z Systems Power Systems Storage Total Systems Hardware 2Q15!Revenue! (%!of!Total!Sys!Hardware)! 15% 5% (4%) 5% Revenue growth rates @CC and excluding System x business www.ibm.com/investor Servers!!!!!!!! 67%!! Storage!!!!!!! 30%!! Other! 10 Cash Flow Summary 2Q15 B/(W) Yr/Yr YTD 2Q15 B/(W) Yr/Yr $3.9 $0.3 $7.5 $0.6 (0.4) (0.1) 1.2 (0.3) 4.3 0.4 6.3 0.9 (0.9) 0.0 (1.8) 0.0 3.4 0.4 4.5 0.8 Acquisitions (0.6) (0.2) (0.7) (0.1) Divestitures 0.1 0.0 0.1 (0.3) Dividends (1.3) (0.2) (2.4) (0.3) Share Repurchases (Gross) (1.1) 2.5 (2.3) 9.5 0.0 (1.4) 0.4 (4.6) (0.5) (1.3) 0.7 (3.4) ($0.1) $0.3 $ 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) Non-GF Debt Other (includes GF A/R & GF Debt) Change in Cash & Marketable Securities $0.0 www.ibm.com/investor $1.6 11 Balance Sheet Summary Jun. 14 $ in Billions Dec. 14 Jun.15 Cash & Marketable Securities $9.7 $8.5 $8.8 Non-GF Assets* 77.3 71.7 70.7 Global Financing Assets 37.3 37.3 33.3 124.3 117.5 112.7 Other Liabilities 60.3 64.7 60.2 Non-GF Debt* 17.1 11.7 12.6 Global Financing Debt 29.4 29.1 26.1 46.5 40.8 38.7 106.8 105.5 98.9 17.5 12.0 13.8 56% 59% 55% 7.1 7.2 7.0 Total Assets Total Debt Total Liabilities Equity Non-GF Debt / Capital Global Financing Leverage * Includes eliminations of inter-company activity www.ibm.com/investor 12 Summary ! Strategic imperatives up >30% yr/yr in second quarter and first half • Core portfolio declining in declining market ! Margin improvements driven by shift to higher value ! Continuing high level of investment and shareholder returns ! Full year 2015 expectations • Continue to expect Operating EPS of $15.75 to $16.50 • Now expect modest yr/yr increase in Free Cash Flow Transforming!to!address!long2term!value!in!Enterprise!IT! Revenue growth rates @CC and excluding System x business www.ibm.com/investor 13 www.ibm.com/investor 14 Supplemental Materials Supplemental Materials Some columns and rows in these materials, including the supplemental exhibits, may not add due to rounding ! ! ! ! ! ! Currency – Year/Year Comparison Supplemental Segment Information – Global Services Supplemental Segment Information – Systems Hardware, Software Global Financing Portfolio Cash Flow (FAS 95) Non-GAAP Supplemental Materials • Operating (Non-GAAP) Earnings Per Share and Related Income Statement Items, Constant Currency • Cash Flow, Debt-to-Capital Ratio, Customer Care Outsourcing and System x Business Divestiture • Reconciliation of Operating Earnings Per Share • GAAP to Operating (Non-GAAP) Bridge – 2Q 2015 • GAAP to Operating (Non-GAAP) Bridge – 2Q 2014 • GAAP to Operating (Non-GAAP) Bridge – 2Q YTD 2015 • GAAP to Operating (Non-GAAP) Bridge – 2Q YTD 2014 • GAAP to Operating (Non-GAAP) Bridge – 2Q 2015 and 2Q 2014 • Reconciliation of Free Cash Flow (excluding GF Receivables) – 12 months ended 6/30/15 • Reconciliation of Debt-to-Capital Ratio • Reconciliation of Revenue Growth • Reconciliation of Revenue Growth • Reconciliation of Revenue Growth • Reconciliation of Revenue Growth • Reconciliation of Revenue www.ibm.com/investor 15 Supplemental Materials Currency – Year/Year Comparison Quarterly!Averages!per!US!$! Yr/Yr @ 7/17 Spot 3Q15 4Q15 FY15 1Q15 Yr/Yr 2Q15 Yr/Yr 7/17 Spot Euro 0.89 (22%) 0.90 (24%) 0.92 (22%) (15%) (21%) Pound 0.66 (9%) 0.65 (10%) 0.64 (7%) (1%) (7%) Yen 119 (16%) 121 (19%) 124 (19%) (8%) (15%) IBM Revenue Impact (8 pts) (9 pts) Prior View (April 2015) Revenue As Reported Currency Impact Revenue @CC (9 pts) (US$B) Yr/Yr $20.8 (13%) (8-9 pts) (5-6 pts) (7-8 pts) (8 pts) (5 pts) ~(7 pts) (2.1) (9 pts) (5%) www.ibm.com/investor 16 Supplemental Materials Supplemental Segment Information – 2Q 2015 Global Services Revenue Global Services Backlog / Signings $!in!Billions! Revenue!Growth! Yr/Yr! Backlog! 2Q15! Yr/Yr! $122 1% GTS Outsourcing 1% Total Backlog Integrated Tech Services 1% Change in Backlog due to Currency Maintenance 2% Quarter-to-Quarter 1% Year-to-Year Total GTS GBS Outsourcing GBS C&SI Total GBS Flat (4%) ! Signings! (3%) Total Outsourcing Flat Total Transactional (2%) Maintenance Outsourcing Backlog Outsourcing - GTS O/S, GBS O/S Transactional - ITS, Consulting & AMS SI (incl. US Federal) 2% Total Signings All growth rates @CC and excluding System x business $2 ($16) $77 4% ! 2Q15! ! Yr/Yr! $6.2 46% 5.4 (5%) $11.6 17% Actual backlog calculated using June 30 currency spot rates www.ibm.com/investor 17 Supplemental Materials Supplemental Segment Information – 2Q 2015 Systems Hardware Revenue!Growth! z Systems Power Systems Storage Total Systems Hardware Yr/Yr! Software GP%! 15% 5% (4%) 5% Revenue!Growth! Yr/Yr! WebSphere 5% Information Management Flat Tivoli (1%) Workforce Solutions (3%) Rational (2%) Key Branded Middleware Other Middleware Flat (12%) Total Middleware (2%) Operating Systems (9%) Other Software/Services (4%) Total Software (3%) Revenue growth rates @CC and excluding System x business www.ibm.com/investor 18 Supplemental Materials Global Financing Portfolio 2Q15 – $26.7B Net External Receivables 40% Investment Grade 57% 35% 30% 20% Non-Investment Grade 43% 22% 21% 10% 12% 8% 2% 0% Aaa to A3 Baa1 to Baa3 Ba1 to Ba2 B2 to B3 2Q15 1Q15 2Q14 Identified Loss Rate 2.1% 1.9% 1.1% Anticipated Loss Rate 0.3% 0.4% 0.4% Reserve Coverage 2.4% 2.3% 1.5% 3.8 4.2 3.8 $45M $93M $30M Client Days Delinquent Outstanding Commercial A/R > 30 days 19 Ba3 to B1 www.ibm.com/investor Caa1 to D 19 Supplemental Materials Cash Flow (FAS 95) $ in Billions QTD 2Q15 QTD 2Q14 YTD 2Q15 YTD 2Q14 Net Income from Operations $3.4 $4.1 $5.8 $6.5 Depreciation / Amortization of Intangibles 1.0 1.2 1.9 2.3 Stock-based Compensation 0.1 0.1 0.3 0.3 Working Capital / Other (0.3) (1.6) (1.7) (3.7) Global Financing A/R (0.4) (0.3) 1.2 1.5 3.9 3.6 7.5 6.9 (0.9) (0.9) (1.8) (1.8) 0.1 0.0 0.1 0.4 Acquisitions, net of cash acquired (0.6) (0.3) (0.7) (0.6) Marketable Securities / Other Investments, net (0.5) 0.2 1.1 1.0 Net Cash used in Investing Activities (1.9) (1.0) (1.4) (1.0) Debt, net of payments & proceeds (0.2) 2.4 (1.5) 6.6 Dividends (1.3) (1.1) (2.4) (2.1) Common Stock Repurchases (1.1) (3.7) (2.3) (11.8) 0.1 0.1 0.2 0.4 Net Cash used in Financing Activities (2.6) (2.3) (6.0) (6.9) Effect of Exchange Rate changes on Cash (0.2) 0.0 (0.2) 0.0 ($0.4) $0.3 ($0.1) Net Cash provided by Operating Activities Capital Expenditures, net of payments & proceeds Divestitures, net of cash transferred Common Stock Transactions - Other Net Change in Cash & Cash Equivalents www.ibm.com/investor ($1.0) 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 $14.25 - $15.00 IBM Operating EPS (Non-GAAP) $15.75 - $16.50 Adjustments Acquisition-Related Charges * $0.70 Non-Operating Retirement-Related Items $0.80 * Includes acquisitions through June 30, 2015 The above serves to reconcile the Non-GAAP financial information contained in 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!(Non2GAAP)!Bridge!–!2Q!2015! $ in Millions, except EPS GAAP Acquisition-related Adjustments* Retirement-related Adjustments** Operating (Non-GAAP) $10,390 $88 $112 $10,590 SG&A 5,179 (74) (63) 5,042 RD&E 1,300 - (11) 1,289 Other Income & Expense (301) (5) - (306) Total Operating Expense & Other Income 6,165 (80) (74) 6,012 Pre-Tax Income from Continuing Operations 4,224 168 186 4,578 698 28 61 788 Net Income from Continuing Operations 3,526 140 124 3,790 Diluted Earnings Per Share from Continuing Operations $3.58 $0.14 $0.12 $3.84 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/Aemployer"plans"and"insolvency"insurance" ***The"tax"impact"on"the"Opera/ng"(NonAGAAP)"PreATax"Income"from"con/nuing"opera/ons"is"calculated"under"the"same"accoun/ng"principles"applied"to"the"As" Reported"PreATax"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 “2Q and 1H 2015 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!(Non2GAAP)!Bridge!–!2Q!2014! $ in Millions, except EPS GAAP Acquisition-related Adjustments* Retirement-related Adjustments** Operating (Non-GAAP) $12,044 $105 $45 $12,195 SG&A 5,593 (98) (27) 5,468 RD&E 1,361 - 20 1,381 Other Income & Expense (202) 0 - (202) Total Operating Expense & Other Income 6,696 (98) (7) 6,591 Pre-Tax Income from Continuing Operations 5,348 203 52 5,603 Tax *** 1,096 41 10 1,147 Net Income from Continuing Operations 4,251 163 42 4,456 Diluted Earnings Per Share from Continuing Operations $4.23 $0.16 $0.04 $4.43 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/Aemployer"plans"and"insolvency"insurance." ***The"tax"impact"on"the"Opera/ng"(NonAGAAP)"PreATax"Income"from"con/nuing"opera/ons"is"calculated"under"the"same"accoun/ng"principles"applied"to"the"As" Reported"PreATax"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 “2Q and 1H 2015 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 NonGAAP financial measures. www.ibm.com/investor 25 Supplemental Materials Non-GAAP Supplemental Materials GAAP!to!OperaZng!(Non2GAAP)!Bridge!–!2Q!YTD!2015! $ in Millions, except EPS GAAP Acquisition-related Adjustments* Retirement-related Adjustments** Operating (Non-GAAP) $19,842 $179 $233 $20,253 SG&A 10,541 (154) (371) 10,017 RD&E 2,598 - (24) 2,574 Other Income & Expense (444) (5) - (450) 12,617 (159) (395) 12,063 Pre-Tax Income from Continuing Operations 7,225 338 627 8,190 Tax *** 1,283 56 170 1,510 Net Income from Continuing Operations 5,942 281 457 6,680 Diluted Earnings Per Share from Continuing Operations $6.01 $0.28 $0.46 $6.75 Gross Profit Total Operating Expense & Other Income *""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/Aemployer"plans"and"insolvency"insurance" ***The"tax"impact"on"the"Opera/ng"(NonAGAAP)"PreATax"Income"from"con/nuing"opera/ons"is"calculated"under"the"same"accoun/ng"principles"applied"to"the"As" Reported"PreATax"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 “2Q and 1H 2015 Overview” 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 26 Supplemental Materials Non-GAAP Supplemental Materials GAAP!to!OperaZng!(Non2GAAP)!Bridge!–!2Q!YTD!2014! $ in Millions, except EPS GAAP Acquisition-related Adjustments* Retirement-related Adjustments** Operating (Non-GAAP) $22,671 $209 $98 $22,978 SG&A 11,865 (196) (114) 11,555 RD&E 2,763 - 37 2,800 Other Income & Expense (330) 0 - (330) 14,140 (196) (77) 13,868 Pre-Tax Income from Continuing Operations 8,531 405 175 9,110 Tax *** 1,749 81 35 1,865 Net Income from Continuing Operations 6,782 324 140 7,246 Diluted Earnings Per Share from Continuing Operations $6.62 $0.32 $0.14 $7.08 Gross Profit Total Operating Expense & Other Income *""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/Aemployer"plans"and"insolvency"insurance" ***The"tax"impact"on"the"Opera/ng"(NonAGAAP)"PreATax"Income"from"con/nuing"opera/ons"is"calculated"under"the"same"accoun/ng"principles"applied"to"the"As" Reported"PreATax"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 “2Q and 1H 2015 Overview” 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 27 Supplemental Materials Non-GAAP Supplemental Materials GAAP!to!OperaZng!(Non2GAAP)!Bridge!–!2Q!2015!and!2Q!2014! GAAP Acquisitionrelated Adjustments* Retirement-related Adjustments ** Operating (Non-GAAP) Gross Profit Margin from Continuing Operations 49.9% 0.4 pts 0.5 pts 50.9% PTI Margin from Continuing Operations 20.3% 0.8 pts 0.9 pts 22.0% Tax Rate *** 16.5% 0.0 pts 0.7 pts 17.2% Net Income Margin from Continuing Operations 16.9% 0.7 pts 0.6 pts 18.2% Gross Profit Margin from Continuing Operations 50.1% 0.4 pts 0.2 pts 50.7% PTI Margin from Continuing Operations 22.2% 0.8 pts 0.2 pts 23.3% Tax Rate *** 20.5% 0.0 pts 0.0 pts 20.5% Net Income Margin from Continuing Operations 17.7% 0.7 pts 0.2 pts 18.5% 2Q 2015 2Q 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/Aemployer"plans"and"insolvency"insurance" ***The"tax"impact"on"the"Opera/ng"(NonAGAAP)"PreATax"Income"from"con/nuing"opera/ons"is"calculated"under"the"same"accoun/ng"principles"applied"to"the"As" Reported"PreATax"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 6/30/15 $ 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) $17.5 0.4 17.0 (3.8) $13.2 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!Debt2to2Capital!RaZo! June 2015 Dec. 2014 June 2014 Non-Global Financing Debt / Capital 55% 59% 56% IBM Consolidated Debt / Capital 74% 77% 73% 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!! 2Q15 Yr/Yr GAAP @CC 1Q15 Yr/Yr @CC excl. Divested Businesses IBM excluding BRIC countries (11%) (2%) 1% Growth Markets excluding BRIC countries (11%) (2%) 5% GAAP (13%) @CC (6%) @CC excl. Divested Businesses 1% 2Q YTD 2015 Yr/Yr Security GAAP @CC 3% 10% The above serves to reconcile the Non-GAAP financial information contained in the Revenue by Geography” and “2Q and 1H 2015 Overview” 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!! 2Q15 Yr/Yr Americas U.S. Europe/ME/A Asia Pacific Japan Major Markets Growth Markets BRIC Countries Brazil China GAAP (8%) (5%) (17%) (19%) (13%) (11%) (21%) (35%) (37%) (40%) @CC (5%) (5%) (2%) (8%) 4% (2%) (13%) (28%) (17%) (40%) @CC excl. Divested Businesses (2%) (3%) 1% (1%) 7% Flat (5%) (18%) (16%) (25%) 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!! 2Q15 Yr/Yr GTS Outsourcing Integrated Technology Services GBS Outsourcing Consulting & Systems Integration Total Outsourcing Total Transactional GAAP (11%) (8%) (9%) (13%) (11%) (11%) @CC 1% 1% Flat (4%) Flat (2%) 2Q15 Yr/Yr Global Technology Services (GTS) Maintenance GAAP (10%) (11%) @CC Flat (1%) @CC excl. Divested Businesses 1% 2% @CC (2%) @CC excl. Divested Businesses (1%) 1Q15 Yr/Yr Global Technology Services (GTS) GAAP (11%) 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-2Q 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!! 2Q15 Yr/Yr GAAP (2%) (8%) (8%) (12%) (9%) (9%) (19%) (11%) WebSphere Information Management Tivoli Workforce Solutions Rational Total Middleware Other Middleware Other Software/Services @CC 5% Flat (1%) (3%) (2%) (2%) (12%) (4%) 2Q15 Yr/Yr Systems Hardware Segment GAAP (32%) @CC (28%) @CC excl. Divested Businesses 5% 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-2Q 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 Supplemental Materials Non-GAAP Supplemental Materials ReconciliaZon!of!Revenue!!! Trailing 12 months as of June 30, 2015 $ in Billions Cloud GAAP $8.8 Excl. Divested Business $8.7 The above serves to reconcile the Non-GAAP financial information contained in the “2Q and 1H2015 Overview” 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 35 www.ibm.com/investor 36