2Q 2014 Earnings Presentation July 17, 2014 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/2q14.html The Non-GAAP Supplemental Materials are also included as Attachment II to the Company’s Form 8-K dated July 17, 2014. www.ibm.com/investor 2 2Q 2014 Overview Revenue @CC excl. Cust. Care BPO Operating (Non-GAAP) EPS 2Q14 $ Yr/Yr $24.4 (2%) (1%) $4.32 34% Ø 2Q and 1H results reflect portfolio dynamics: • • • • Strategic imperatives deliver double-digit revenue growth Core franchises stable Some high value transactional businesses impacted by secular shifts Divested customer care business Ø Continuing investment aligned with strategic shifts of Data, Cloud, Engagement Ø Expanded margins; yr/yr profit metrics reflect charge in prior year Ø Continuing returns to shareholders Con+nuing shi1 to growth and high value www.ibm.com/investor 3 Key Financial Metrics – 2Q 2014 $ in Billions, except EPS P&L Highlights Revenue @CC @CC excl. Cust. Care PTI – Operating NI – Operating EPS – Operating 2Q14 $24.4 $5.4 $4.3 $4.32 B/(W) Yr/Yr (2%) (3%) (1%) 18% 21% 34% P&L Ratios (Operating) 2Q14 B/(W) Yr/Yr GP Margin 49.8% 0.1 pts PTI Margin 22.3% 3.9 pts Tax Rate 20.0% 2.0 pts NI Margin 17.8% 3.5 pts Yr/Yr PTI and NI profit metrics reflect Workforce Rebalancing pre-tax charge of $1B in 2Q13 Cash Highlights 2Q14 Last 12 Mos. $3.0 $14.2 Share Repurchase (Gross) 3.7 19.5 Dividends 1.1 4.1 Cash Balance @ June 30 9.7 Free Cash Flow (excl GF Receivables) www.ibm.com/investor 4 Key Financial Metrics – 1H 2014 $ in Billions, except EPS P&L Highlights Revenue @CC excl. Cust. Care PTI – Operating NI – Operating EPS – Operating 1H14 $46.8 $8.7 $7.0 $6.82 B/(W) Yr/Yr (3%) (1%) 1% Flat 9% Cash Highlights P&L Ratios (Operating) 1H14 B/(W) Yr/Yr GP Margin 48.7% 0.5 pts PTI Margin 18.6% 0.7 pts Tax Rate 20.0% (0.2 pts) NI Margin 14.9% 0.5 pts 1H14 Free Cash Flow (excl GF Receivables) $3.6 Share Repurchase (Gross) 11.8 Dividends 2.1 Cash Balance @ June 30 9.7 www.ibm.com/investor 5 Revenue by Geography $ in Billions Americas 2Q14 B/(W) Yr/Yr Rptd @CC $10.6 (1%) 1% Europe/ME/A 7.9 1% (3%) Asia Pacific 5.3 (9%) (6%) Total Geographies IBM excl. Cust. Care BPO Major Markets Growth Markets BRIC Countries $23.9 $24.4 (2%) (2%) (1%) (2%) Canada/ LA U.S. -‐1% (3%) (1%) Flat (1%) (7%) (4%) (2%) 1% www.ibm.com/investor OEM -‐19% EMEA AP Japan ex. Japan +2% @CC 6 Revenue and Gross Profit Margin by Segment Operating Gross Profit Margin Revenue $ in Billions 2Q14 B/(W) Yr/Yr Rptd @CC 2Q14 B/(W) Yr/Yr Pts $9.4 (1%) 2% (1%) 2% 38.4% 0.6 pts Global Business Services 4.5 (2%) (2%) 30.0% (1.2 pts) Software 6.5 1% Flat 88.8% 0.0 pts Systems & Technology 3.3 (12%) 33.9% (2.8 pts) Global Financing 0.5 Global Technology Services excl. Cust. Care BPO Total Revenue & Op. GP Margin excl. Cust. Care BPO $24.4 (11%) 4% 4% 54.8% 8.5 pts (2%) (3%) 49.8% 0.1 pts (1%) (1%) www.ibm.com/investor 7 Expense Summary $ in Billions 2Q14 SG&A – Operating $5.5 RD&E – Operating 1.5 B/(W) Yr/Yr Currency Acq.* Base 16%** 0 pts (2 pts) 17 pts 4% 0 pts (2 pts) 6 pts (1 pts) (2 pts) 17 pts IP and Development Income (0.2) (23%) Other (Income)/Expense (0.2) 120% Interest Expense Operating Expense & Other Income 0.1 $6.7 B/(W) Yr/Yr Drivers (38%) 14%** * Includes acquisitions made in the last twelve months, net of non-operating acquisition-related charges ** Yr/Yr reflects Workforce Rebalancing charge of $1.0B in 2Q13 www.ibm.com/investor 8 Services Segments Global Technology Services (GTS) $ in Billions Revenue (External) excl. Cust. Care BPO Gross Margin (External) PTI Margin 2Q14 $9.4 38.4% 19.2% Global Business Services (GBS) B/(W) Yr/Yr Rptd @CC (1%) (1%) 2% 2% 0.6 pts 3.7 pts* * GTS yr/yr reflects Workforce Rebalancing charge in 2Q13 $ in Billions Revenue (External) 2Q14 $4.5 Gross Margin (External) PTI Margin 30.0% 17.8% (1.2 pts) 4.8 pts* * GBS yr/yr reflects Workforce Rebalancing charge in 2Q13 GTS 2Q14 Revenue GTS Outsourcing excl. Cust. Care BPO Integrated Technology Services Maintenance Yr/Yr Rptd @CC (4%) (4%) 2% 2% 5% 5% (1%) (1%) GBS 2Q14 Revenue GBS Outsourcing Consulting & Systems Integration (9%) 1% (9%) Flat (1%) (3%) 2Q14 Backlog adj. for Cust. Care BPO $136B B/(W) Yr/Yr Rptd @CC (2%) (2%) 2Q14 Revenue (% of Total Services) Maint. 12% GTS Outsourcing 38% ITS 17% GBS C&SI 26% GBS Outsourcing 7% Growth in total Services revenue, excluding divested business www.ibm.com/investor 9 Software Segment $ in Billions 2Q14 $6.5 88.8% 36.5% Revenue (External) Gross Margin (External) PTI Margin B/(W) Yr/Yr Rptd @CC 1% Flat 0.0 pts 2.4 pts* * Yr/Yr reflects Workforce Rebalancing charge in 2Q13 2Q14 Revenue Yr/Yr Rptd @CC 5% 5% (1%) (2%) 4% 3% Workforce Solutions (7%) (8%) Rational (9%) (10%) Key Branded Middleware 1% Flat Total Middleware 3% 3% Total Software 1% Flat WebSphere Information Management Tivoli 2Q14 Revenue (% of Total So1ware) Key Branded Middleware 67% Other Middleware 18% Opera+ng Systems Other 8% 7% Growth in Middleware; strength in strategic impera+ves www.ibm.com/investor 10 Systems & Technology Segment B/(W) Yr/Yr $ in Billions Revenue (External) Gross Margin (External) PTI Margin 2Q14 Rptd @CC $3.3 33.9% 0.7% (11%) (2.8 pts) 4.3 pts* (12%) * Yr/Yr reflects Workforce Rebalancing charge in 2Q13 2Q14 Revenue Yr/Yr Rptd @CC (1%) (1%) (28%) (29%) (3%) (3%) Storage (12%) (13%) Total Systems (11%) (11%) Microelectronics OEM (18%) (18%) Total Systems & Technology (11%) (12%) System z Power Systems System x 2Q14 Revenue (% of Total Sys & Tech) Servers 68% Storage 21% Significant sequen+al improvement; on track to stabilize full year profit www.ibm.com/investor 11 Cash Flow Analysis 2Q14 B/(W) Yr/Yr YTD 2Q14 B/(W) Yr/Yr $3.6 $0.4 $6.9 ($0.3) (0.3) 0.1 1.5 0.4 3.9 0.3 5.4 (0.6) (0.9) 0.0 (1.8) (0.1) 3.0 0.3 3.6 (0.8) Acquisitions (0.3) (0.2) (0.6) (0.4) Divestitures 0.0 0.0 0.4 0.4 Dividends (1.1) 0.0 (2.1) (0.1) Share Repurchases (Gross) (3.7) (0.1) (11.8) (5.7) Non-GF Debt 1.4 0.5 5.0 4.8 Other (includes GF A/R & GF Debt) 0.7 1.3 4.1 1.2 $0.0 $1.7 $ 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 ($1.3) ($0.6) 12 Balance Sheet Summary June 13 Dec. 13 $10.4 $11.1 $9.7 Non-GF Assets* 70.1 76.5 77.3 Global Financing Assets 34.7 38.7 37.3 115.2 126.2 124.3 Other Liabilities 63.1 63.6 60.3 Non-GF Debt* 9.3 12.2 17.1 24.9 27.5 29.4 34.1 39.7 46.5 Total Liabilities 97.3 103.3 106.8 Equity 17.9 22.9 17.5 39% 39% 56% 7.2 7.2 7.1 $ in Billions Cash & Marketable Securities Total Assets Global Financing Debt Total Debt Non-GF Debt / Capital Global Financing Leverage June 14 * Includes eliminations of inter-company activity www.ibm.com/investor 13 1H 2014 Summary Ø 1H results reflect portfolio dynamics: • • • • Strategic imperatives deliver double-digit revenue growth Core franchises stable Some high value transactional businesses impacted by secular shifts Divested customer care business Ø Continuing investment aligned with strategic shifts of Data, Cloud, Engagement Ø Expanded operating margins • Gross margin +50 bps, pre-tax margin +70 bps, net income margin +50 bps Ø Continuing returns to shareholders Ø Allocating capital and managing business for long-term • Along the way, continue to expect to deliver at least $20.00 of Operating EPS in 2015 Con+nue to expect at least $18.00 of Opera+ng EPS in 2014 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 Currency – Year/Year Comparison Supplemental Segment Information – Global Services Supplemental Segment Information – Systems & Technology, 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 Business Divestiture, Workforce Rebalancing, • Reconciliation of Operating Earnings Per Share • GAAP to Operating (Non-GAAP) Bridge – 2Q 2014 • GAAP to Operating (Non-GAAP) Bridge – 2Q 2013 • GAAP to Operating (Non-GAAP) Bridge – 2Q YTD 2014 • GAAP to Operating (Non-GAAP) Bridge – 2Q YTD 2013 • GAAP to Operating (Non-GAAP) Bridge – 2Q 2014 and 2Q 2013 • GAAP to Operating (Non-GAAP) Bridge – 2Q YTD 2014 and 2Q YTD 2013 • Reconciliation of B/(W) Yr/Yr Expense Drivers – 2Q14 • Reconciliation of B/(W) Yr/Yr Expense Drivers – 2Q14 • Reconciliation of Debt-to-Capital Ratio • Reconciliation of Free Cash Flow (excluding GF Receivables) – 12 months ended 6/30/14 • Reconciliation of Revenue Growth www.ibm.com/investor 16 Supplemental Materials Currency – Year/Year Comparison Quarterly Averages per US $ Yr/Yr @ 7/16 Spot 3Q14 4Q14 FY14 1Q14 Yr/Yr 2Q14 Yr/Yr 7/16 Spot Euro 0.73 4% 0.73 5% 0.74 2% Pound 0.60 6% 0.59 9% 0.58 10% Yen 103 102 (3%) 102 (3%) IBM Revenue Impact 2Q14 Revenue As Reported Currency Impact Revenue @CC (11%) (2 pts) 0 pts (US$B) Yr/Yr $24.4 (2%) (0.1) ~0-1 pts (1%) 3% 6% 8% (1%) (5%) ~0 pts ~0 pts 0 pts (3%) www.ibm.com/investor 17 Supplemental Materials Supplemental Segment Information – 2Q 2014 Global Services Revenue Global Services Backlog / Signings Revenue Growth $ in Billions Backlog Yr/Yr @CC (4%) 2% (4%) 2% 5% 5% (1%) (1%) Quarter-to-Quarter $1 (1%) 2% (1%) 2% Year-to-Year $3 Outsourcing Backlog (9%) (9%) 1% Flat Total GBS (2%) (2%) Total Outsourcing (5%) (5%) Total Transactional 2% 2% (1%) (1%) GTS Outsourcing excl. Cust. Care BPO Integrated Tech Services Maintenance Total GTS excl. Cust. Care BPO GBS Outsourcing GBS C&SI Maintenance Total Backlog excl. Cust. Care BPO 2Q14 Yr/Yr @CC $136 (3%) (1%) (5%) (3%) (6%) (8%) Change in Backlog due to Currency $85 Signings Outsourcing 2Q14 Yr/Yr @CC $4.8 (46%) (46%) 6.2 (17%) (17%) $11.0 (33%) (33%) - GTS O/S, GBS O/S (AMS) Transactional - ITS, Consulting & AMS SI (incl. US Federal) Total Signings Note: Actual backlog calculated using June 30 currency spot rates www.ibm.com/investor 18 Supplemental Materials Supplemental Segment Information – 2Q 2014 Systems & Technology Software Revenue Growth Revenue Growth Yr/Yr @CC (1%) (1%) (28%) (29%) (3%) (3%) (12%) (13%) Total Systems (11%) (11%) Microelectronics OEM (18%) (18%) Total Sys & Tech (11%) (12%) System z Power Systems System x Storage Yr/Yr @CC 5% 5% (1%) (2%) 4% 3% Workforce Solutions (7%) (8%) Rational (9%) (10%) 1% Flat 16% 15% 3% 3% GP% WebSphere Information Management Tivoli Key Branded Middleware Other Middleware Total Middleware Operating Systems Other Software/Services Total Software www.ibm.com/investor (13%) (13%) (8%) (8%) 1% Flat 19 Supplemental Materials Global Financing Portfolio 2Q14 – $30.1B Net External Receivables 50% Investment Grade 59% Non-Investment Grade 41% 40% 40% 30% 20% 20% 19% 12% 10% 7% 2% 0% AAA to A-‐ BBB+ to B BB-‐ BB+ to BB B to B -‐ 2Q14 1Q14 2Q13 Identified Loss Rate 1.1% 1.0% 0.8% Anticipated Loss Rate 0.4% 0.4% 0.4% Reserve Coverage 1.5% 1.4% 1.2% 3.8 3.6 3.4 $ 30 M $ 36 M $ 67 M Client Days Delinquent Outstanding Commercial A/R > 30 Days 20 BB-‐ to B+ www.ibm.com/investor CCC+ to D 20 Supplemental Materials $ in Billions Cash Flow (FAS 95) QTD 2Q14 QTD 2Q13 YTD 2Q14 YTD 2Q13 $4.1 $3.2 $6.5 $6.3 Depreciation / Amortization of Intangibles 1.2 1.1 2.3 2.3 Stock-based Compensation 0.1 0.2 0.3 0.3 Working Capital / Other (1.6) (0.9) (3.7) (2.8) Global Financing A/R (0.3) (0.5) 1.5 1.1 3.6 3.2 6.9 7.2 (0.9) (0.9) (1.8) (1.7) 0.0 0.0 0.4 0.0 (0.3) (0.1) (0.6) (0.2) 0.2 0.2 1.0 0.0 (1.0) (0.9) (1.0) (1.9) 2.4 1.0 6.6 1.4 Dividends (1.1) (1.0) (2.1) (2.0) Common Stock Repurchases (3.7) (3.6) (11.8) (6.1) 0.1 0.3 0.4 0.7 (2.3) (3.3) (6.9) (6.0) 0.0 0.0 0.0 (0.1) Net Income from Operations Net Cash provided by Operating Activities Capital Expenditures, net of payments & proceeds Divestitures, net of cash transferred Acquisitions, net of cash acquired 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 Effect of Exchange Rate changes on Cash Net Change in Cash & Cash Equivalents $0.3 www.ibm.com/investor ($1.0) ($1.0) ($0.9) 21 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 excluding the effects of certain acquisition-related 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 retirementrelated 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 the 2015 earnings per share roadmap, 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 22 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 Business Divestiture On September 10, 2013, the company announced that it had signed a definitive agreement with SYNNEX for the sale of its worldwide customer care process outsourcing services business. Management presents certain financial results excluding the effects of the customer care outsourcing business divestiture. Management believes that presenting financial information without this item 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. Workforce Rebalancing Management presents certain financial results excluding the effects of charges in connection with workforce rebalancing actions. Management believes that presenting financial information without this item 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 23 Supplemental Materials Non-GAAP Supplemental Materials Reconcilia+on of Opera+ng Earnings Per Share 2014 Expectations IBM GAAP EPS $17.00+ IBM Operating EPS (Non-GAAP) $18.00+ Adjustments Acquisition-Related Charges * $0.72 Amortization of Purchased Intangibles $0.69 Other Acquisition-Related Charges $0.03 Non-Operating Retirement-Related Items $0.28 * Includes acquisitions through June 30, 2014 The above serves to reconcile the Non-GAAP financial information contained in “2Q 2014 Summary” discussion 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 24 Supplemental Materials Non-GAAP Supplemental Materials GAAP to Opera+ng (Non-‐GAAP) Bridge – 2Q 2014 $ in Millions, except EPS Gross Profit GAAP Acquisition-related Adjustments* Retirement-related Adjustments** Operating (Non-GAAP) $11,975 $105 $45 $12,126 SG&A 5,603 RD&E 1,457 Other Income & Expense (201) (98) (27) 5,478 0 20 1,477 0 0 (201) Total Operating Expense & Other Income 6,804 (98) (7) 6,699 Pre-Tax Income 5,171 203 52 5,427 Tax *** 1,034 41 10 1,085 Net Income 4,137 163 42 4,341 Diluted Earnings Per Share $4.12 $0.16 $0.04 $4.32 * 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 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 “2Q 2014 Overview”, “Key Financial Metrics - 2Q 2014” and “Expense 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 25 Supplemental Materials Non-GAAP Supplemental Materials GAAP to Opera+ng (Non-‐GAAP) Bridge – 2Q 2013 $ in Millions, except EPS Gross Profit GAAP Acquisition-related Adjustments* Retirement-related Adjustments** Operating (Non-GAAP) $12,132 $91 $156 $12,379 SG&A 6,680 RD&E 1,548 Other Income & Expense (91) (91) 0 0 Total Operating Expense & Other Income 7,988 (91) Pre-Tax Income 4,144 (93) 6,496 (13) 1,535 0 (91) (106) 7,791 182 262 4,588 918 9 82 1,009 Net Income 3,226 173 180 3,579 Diluted Earnings Per Share $2.91 $0.15 $0.16 $3.22 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 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 – 2Q 2014” and “Expense 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 26 Supplemental Materials Non-GAAP Supplemental Materials GAAP to Opera+ng (Non-‐GAAP) Bridge – 2Q YTD 2014 $ in Millions, except EPS Gross Profit GAAP Acquisition-related Adjustments* Retirement-related Adjustments** Operating (Non-GAAP) $22,518 $209 $98 $22,825 SG&A 11,892 RD&E 2,958 Other Income & Expense Total Operating Expense & Other Income (326) 14,367 (196) (114) 0 37 0 0 (196) (77) 11, 583 2,995 (326) 14,094 Pre-Tax Income 8,151 405 175 8,731 Tax *** 1,630 81 35 1,746 Net Income 6,521 324 140 6,985 Diluted Earnings Per Share $6.37 $0.31 $0.14 $6.82 * 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 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 -1H 2014” 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 27 Supplemental Materials Non-GAAP Supplemental Materials GAAP to Opera+ng (Non-‐GAAP) Bridge – 2Q YTD 2013 $ in Millions, except EPS Gross Profit GAAP Acquisition-related Adjustments* Retirement-related Adjustments** Operating (Non-GAAP) $22,810 $186 $320 $23,316 (183) (197) 11,878 (29) 3,163 SG&A 12,257 RD&E 3,193 Other Income & Expense Total Operating Expense & Other Income (151) 15,060 0 (7) 0 (190) (226) (158) 14,644 Pre-Tax Income 7,750 376 546 8,672 Tax *** 1,492 63 162 1,717 Net Income 6,258 313 384 6,955 Diluted Earnings Per Share $5.60 $0.28 $0.35 $6.23 * 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 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 – 1H 2014” 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 28 Supplemental Materials Non-GAAP Supplemental Materials GAAP to Opera+ng (Non-‐GAAP) Bridge – 2Q 2014 and 2Q 2013 2Q 2014 GAAP Acquisitionrelated Adjustments* Retirementrelated Adjustments ** Operating (Non-GAAP) Gross Profit Margin 49.1% 0.4 pts 0.2 pts 49.8% PTI Margin 21.2% 0.8 pts 0.2 pts 22.3% Tax Rate *** 20.0% 0.0 pts 0.0 pts 20.0% Net Income Margin 17.0% 0.7 pts 0.2 pts 17.8% Gross Profit Margin 48.7% 0.4 pts 0.6 pts 49.7% PTI Margin 16.6% 0.7 pts 1.1 pts 18.4% Tax Rate *** 22.1% (0.7 pts) 0.6 pts 22.0% Net Income Margin 12.9% 0.7 pts 0.7 pts 14.4% 2Q 2013 * 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 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 - 2Q 2014” and “1H 2014 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 29 Supplemental Materials Non-GAAP Supplemental Materials GAAP to Opera+ng (Non-‐GAAP) Bridge – 2Q YTD 2014 and 2Q YTD 2013 2Q 2014 GAAP Acquisitionrelated Adjustments* Retirementrelated Adjustments ** Operating (Non-GAAP) Gross Profit Margin 48.1% 0.4 pts 0.2 pts 48.7% PTI Margin 17.4% 0.9 pts 0.4 pts 18.6% Tax Rate *** 20.0% 0.0 pts 0.0 pts 20.0% Net Income Margin 13.9% 0.7 pts 0.3 pts 14.9% Gross Profit Margin 47.2% 0.4 pts 0.7 pts 48.2% PTI Margin 16.0% 0.8 pts 1.1 pts 17.9% Tax Rate *** 19.2% (0.1 pts) 0.7 pts 19.8% Net Income Margin 12.9% 0.6 pts 0.8 pts 14.4% 2Q 2013 * 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 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 – 1H 2014” 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 Reconcilia+on of B/(W) Yr/Yr Expense Drivers – 2Q14 GAAP Non-GAAP Adjustments Operating (Non-GAAP) SG&A Currency 0 pts 0 pts 0 pts Acquisitions (2 pts) 0 pts (2 pts) Base 18 pts (1 pts) 17 pts RD&E Currency 0 pts 0 pts 0 pts (2 pts) 0 pts (2 pts) 8 pts (2 pts) 6 pts Currency (1 pts) 0 pts (1 pts) Acquisitions (2 pts) 0 pts (2 pts) Base 18 pts Acquisitions Base Operating Expense & Other Income (1 pts) 17 pts The above serves to reconcile the Non-GAAP financial information contained in the “Expense Summary” discussion 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 31 Supplemental Materials Non-GAAP Supplemental Materials Reconcilia+on of B/(W) Yr/Yr Expense Drivers – 2Q14 GAAP Operating (Non-GAAP) 7 pts 5 pts Operating Expense & Other Income Base excluding workforce rebalancing The above serves to reconcile the Non-GAAP financial information contained in the “Expense Summary” discussion in the company’s earnings presentation. See Slides 22-23 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 Reconcilia+on of Debt-‐to-‐Capital Ra+o June 2014 March 2014 Dec. 2013 Non-Global Financing Debt / Capital 56% 55% 39% IBM Consolidated Debt / Capital 73% 72% 63% The above serves to reconcile the Non-GAAP financial information contained in the “Balance Sheet Summary” discussion in the company’s earnings presentation. See Slide 23 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 Reconcilia+on of Free Cash Flow (excluding GF Receivables) 12 months ended 6/30/14 $ in Billions Net Cash from Operations $17.2 Less: Global Financing Receivables Net Cash from Operations (excluding GF Receivables) Net Capital Expenditures (0.9) 18.1 (3.9) Free Cash Flow (excluding GF Receivables) $14.2 The above serves to reconcile the Non-GAAP financial information contained in the “Key Financial Metrics – 2Q 2014” discussion in the company’s earnings presentation. See Slide 23 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 Reconcilia+on of Revenue Growth 2Q14 Yr/Yr 1Q14 Yr/Yr At Constant Currency As Reported At Constant Currency Americas (4%) (2%) BRIC Countries (11%) (6%) As Reported Japan (2%) 2% The above serves to reconcile the Non-GAAP financial information contained in the “Revenue by Geography” 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 35 www.ibm.com/investor 36