IBM 1Q 2016 Earnings April 18, 2016 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 earning 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/1q16.html The Non-GAAP Supplemental Materials are also included as Attachment II to the Company’s Form 8-K dated April 18, 2016. Overview 1Q16 $18.7B $2.35 $14.3B Revenue Operating EPS Free Cash Flow Last 12 Months Progress in transformation of business reflected in revenue dynamics − Strategic Imperatives represent 37% of IBM revenue over last 12 months Continuing to invest and partner to enhance cognitive solutions and cloud platform capabilities Actions to accelerate the transformation Strategic Imperatives Last 12 Months $30B 37% Revenue IBM Revenue 1Q16 $7B Revenue 17% Year/Year 1Q16 Yr/Yr Analytics $4.2 9% Cloud $2.6 36% $5.4 46% Mobile $0.8 93% Security $0.4 20% Social $0.2 (1%) 1Q16 Transformation Progress • Acquisitions enhance existing capabilities in cloud video services, cloud consulting and digital experience • Key partnerships to accelerate adoption of enterprise hybrid clouds • Expanding Watson ecosystem and reach • Enhanced Watson Health platform with acquisition of Truven (announced) Revenue growth rates @CC, $ in billions Overlap in Strategic Imperatives primarily reflects solutions delivered via cloud aaS-exit annual run rate Key Financial Metrics P&L Highlights 1Q16 B/(W) Yr/Yr Revenue $18.7 (2%) Expense $7.5 PTI - Operating NI - Operating Last 12 1Q16 Months $2.3 $14.3 (24%) Free Cash Flow (excl. GF Receivables) $1.4 (62%) Share Repurchase (Gross) $0.9 $4.4 $2.3 (21%) Dividends $1.2 $5.1 $2.35 (19%) Cash Balance @ March 31 GP Margin 47.5% (1.8 pts) Expense E/R 40.2% (9.3 pts) 7.3% (11.2 pts) Tax Rate (66.8%) 86.8 pts NI Margin 12.1% (2.6 pts) EPS – Operating P&L Ratios (Operating) PTI Margin Revenue growth rates @CC, $ in billions except for EPS Cash Highlights $14.9 • Gross margin reflects higher level of investments and mix within segments • Expense and pre-tax income also reflects charges for actions to accelerate the transformation • Tax includes benefit from resolution of tax case Current Segment Structure • IBM emerging as a cognitive solutions and cloud platform company • Segment structure reflects management system - Introduced at IBM’s investor briefing in February 2016 - Historical financial information provided in March 2016 Cognitive Solutions & Industry Services Cognitive Solutions • Solutions Software • Transaction Processing Software Global Business Services Technology Services & Cloud Platforms • Consulting • Global Process Services • Application Management • Infrastructure Services • Technical Support Services • Integration Software Systems Global Financing • Systems Hardware • Operating Systems Software • Financing • Used Sales Cognitive Solutions Segment Segment Results Revenue (External) Gross Margin (External) PTI * PTI Margin * 1Q16 Yr/Yr $4.0 Flat 82.0% (2.5 pts) $1.0 (34%) 21.8% (10.8 pts) Segment Revenue Elements Solutions Software 3% Yr/Yr Transaction Processing Software (5%) Yr/Yr Highlights • Solutions software growth led by security and analytics including Watson solutions • Enhancing security capabilities by ramping security experts and acquisition of Resilient • Continuing to build higher value solutions; announced addition of Truven to Watson Health platform Revenue growth rates @CC, $ in billions *includes impact of 1Q16 charges: ($230M) PTI, (5.0 pts) PTI margin Strategic Imperatives Revenue 1Q16 Yr/Yr Strategic Imperatives $2.5 4% Cloud $0.4 34% as-a-Service exit run rate $1.2 within Cognitive Solutions Global Business Services Segment Segment Results Revenue (External) Gross Margin (External) PTI * PTI Margin * 1Q16 Yr/Yr $4.1 (2%) 25.8% (1.6 pts) $0.2 (68%) 4.5% (8.7 pts) Highlights • Engineering shift to strategic imperatives with growth across cloud, analytics, mobility, and security practices • Expanded digital design capabilities with 3 acquisitions to join IBM Interactive Experience, the largest global digital agency • Announced the acquisition of Bluewolf Revenue growth rates @CC, $ in billions * includes impact of 1Q16 charges: ($330M) PTI, (7.7 pts) PTI margin Segment Revenue Elements Consulting (4%) Yr/Yr Application Management (1%) Yr/Yr Strategic Imperatives Revenue Global Process Services (1%) Yr/Yr 1Q16 Yr/Yr Strategic Imperatives $2.0 22% Cloud $0.6 55% as-a-Service exit run rate $0.5 within Global Business Services Technology Services and Cloud Platforms Segment Segment Results Revenue (External) Gross Margin (External) PTI * PTI Margin * 1Q16 Yr/Yr $8.4 2% 40.9% (1.1 pts) $0.3 (77%) 3.0% (10.0 pts) Highlights Segment Revenue Elements Infrastructure Services +4% Yr/Yr Integration Software (2%) Yr/Yr Technical Support Services (1%) Yr/Yr Strategic Imperatives Revenue within Technology Svcs & Cloud Platforms • 1Q16 Yr/Yr Growth in infrastructure services; shifting from systems integration to services integration, driven by move to hybrid cloud Strategic Imperatives $1.8 45% Cloud $1.2 50% • Continued momentum in SoftLayer with strong double-digit growth as-a-Service exit run rate $3.7 • Cloud-enabled 100% of relevant IBM software and announced key partnerships with VMware, GitHub Revenue growth rates @CC, $ in billions *includes impact of 1Q16 charges: ($700M) PTI, (8.1 pts) PTI margin Systems Segment Segment Results Revenue (External) Gross Margin (External) PTI * PTI Margin * 1Q16 Yr/Yr $1.7 (21%) 57.2% 2.4 pts $0.0 n/m -0.5% (11.8 pts) Highlights • z Systems performance reflects product cycle • Linux on Power ~10% of the total Power revenue • Continue to see momentum in OpenPOWER foundation • Margin expansion across all hardware platforms Revenue growth rates @CC, $ in billions *includes impact of 1Q16 charges: ($130M) PTI, (6.9 pts) PTI margin Segment Revenue Elements Operating Systems Software (7%) Yr/Yr Strategic Imperatives Revenue Systems Hardware (25)% Yr/Yr 1Q16 Yr/Yr Strategic Imperatives $0.7 (5%) Cloud $0.5 2% within Systems Cash Flow and Balance Sheet Highlights Last 12 Months 1Q16 Yr/Yr Net Cash from Operations* $3.3 $1.3 $18.1 Free Cash Flow* $2.3 $1.2 $14.3 Cash Flow Balance Sheet Selected Uses of Cash $14.9 $8.2 $8.8 Total Debt $45.6 $39.9 $38.7 Global Financing Debt $26.8 $27.2 $26.2 7.3 7.3 7.0 $18.8 $12.7 $12.5 62% 54% 59% $1.0 $3.8 Global Financing Leverage Acquisitions $2.6 $5.8 Non-GF Debt Dividends/Share Repurchase $2.2 $9.4 Non-GF Debt/Capital Free Cash Flow up yr/yr; includes cash received from tax refund • Free Cash Flow realization of 110% on a trailing twelve month basis • Acquired 6 companies in the quarter • Dec 15 **Mar 15 Cash & Marketable Securities Net Capital Expenditures • Mar 16 Higher cash and debt levels driven by timing of debt issuances $ in billions *Excludes Global Financing receivables; **Prior year reclassified for the adoption of the FASB guidance (Debt issuance cost) 1Q 2016 Significant Items EPS Pre-Tax Income % Realized 1Q16 2Q-4Q16 2Q16 3Q16 4Q16 Annualized Workforce Transformation ($0.84) >$500M ~10% ~30-35% ~55-60% ~$2B Real Estate ($0.28) ~$0 Latin America Actions ($0.11) Tax Discretes +$1.21 Period contribution Minimal savings Reduced exposure • Transformation requires skills shift; actions free up spending to invest in strategic imperatives • Reflected in full year 2016 EPS and free cash flow expectations <$50M Summary • Continued progress in transformation of business - Strong growth in strategic imperatives revenue - Added to capabilities – organic, acquisitions, partnerships - Significant actions to accelerate transformation • Profit dynamics reflect higher levels of investment and impact of actions • Continue to expect at least $13.50 of operating earnings per share for 2016 − Improved view of free cash flow Supplemental Materials • Key Financial Metrics – 1Q 2016 Significant Items • Currency – Impact on Revenue Growth • Geographic Revenue • Segment Revenue & Gross Profit Margin • Additional Revenue & Backlog Information • Expense Summary • Global Financing Portfolio • Balance Sheet Summary • Cash Flow Summary • Cash Flow (ASC 230) • Non-GAAP Supplemental Materials Some columns and rows in these materials, including the supplemental exhibits, may not add due to rounding Key Financial Metrics – 1Q 2016 Significant Items Impact of charges/benefit 1Q16 B/(W) Yr/Yr $18.7 (2%) Expense $7.5 (24%) $1.4 PTI - Operating $1.4 (62%) ($1.5) NI - Operating $2.3 (21%) $0.0 $2.35 (19%) ($0.01) P&L Ratios (Operating) GP Margin 47.5% (1.8 pts) (0.1 pts) Expense E/R 40.2% (9.3 pts) 7.6 pts 7.3% (11.2 pts) (7.8 pts) Tax Rate (66.8%) 86.8 pts (85.8 pts) NI Margin 12.1% (2.6 pts) (0.1 pts) P&L Highlights Revenue EPS – Operating PTI Margin Revenue growth rates @CC, $ in billions except for EPS Supplemental Materials 1Q16 Currency – Impact on Revenue Growth 4/15/16 Yr/Yr @ 4/15/16 Spot 1Q16 Yr/Yr Spot 2Q16 3Q16 4Q16 FY16 Euro 0.91 (2%) 0.89 2% 2% 3% 1% Pound 0.70 (6%) 0.71 (8%) (9%) (7%) (7%) Yen 115 3% 109 10% 11% 10% 9% -1 to 0 pts 1 pts 1 to 2 pts 0 pts Quarterly Averages per US $ IBM Revenue Impact Revenue As Reported Currency Impact Revenue @ CC Supplemental Materials (2.6 pts) (US$B) Yr/Yr $18.7 (5%) (0.5) (2.6 pts) (2%) Geographic Revenue 1Q16 Yr/Yr Americas $8.7 (4%) Europe/ME/Africa $5.9 (1%) Asia Pacific $4.0 1% Geography Revenue Revenue growth rates @CC, $ in billions Supplemental Materials • Americas performance consistent with 4Q15, with sequential improvement in the US (-4%) offset by weakness in Brazil • EMEA reflects modest decline in Europe, strong performance in Middle East/Africa • Asia Pacific returned to growth led by improvement in AP growth markets and continued growth in Japan (+2%) • Total growth markets down 3% Segment Revenue & Gross Profit Revenue Yr/Yr GP% GP Yr/Yr Cognitive Solutions $4.0 Flat 82.0% (2.5) pts Global Business Services $4.1 (2%) 25.8% (1.6) pts Cognitive Solutions & Industry Services $8.1 (1%) 53.4% (1.6) pts Technology Services & Cloud Platforms $8.4 2% 40.9% (1.1) pts Global Technology Services $7.4 2% 35.1% (0.9) pts Integration Software $1.0 (2%) 83.3% (1.5) pts $1.7 (21%) 57.2% 2.4 pts Systems Hardware $1.2 (25%) 46.4% 1.7 pts Operating Systems Software $0.4 (7%) 87.8% (1.9) pts $0.4 (6%) 42.4% (7.1) pts Segment Revenue & Profit Metrics Systems Global Financing Revenue growth rates @CC, $ in billions Supplemental Materials Additional Revenue & Backlog Information 1Q16 Yr/Yr Software Revenue* $5.4 (1%) Cognitive Solutions $4.0 Flat Solutions Software $2.7 3% Transaction Processing Software $1.3 (5%) Integration Software $1.0 (2%) Operating Systems Software $0.4 (7%) Hardware Revenue $1.2 1Q16 Yr/Yr $7.4 2% Infrastructure Services $5.6 4% Technical Support Services $1.8 (1%) $4.1 (2%) Consulting $1.8 (4%) Global Processing Services $0.3 (1%) Application Management $1.9 (1%) Services Revenue Global Technology Services Global Business Services (25%) z Systems (42%) Signings** $8.0 (17%) Power (14%) Services Backlog $122 (1%) Storage (6%) Currency Impact Year to Year Currency Impact Qtr to Qtr Growth rates @CC, $ in billions, Actual backlog calculated using March 31 currency spot rates *Total Software = Cognitive Solutions + Integration Software + Operating Systems Software **Prior year reclassified to reflect current segment structure. Supplemental Materials $1 $3 Expense Summary Expense Metrics 1Q16 B/(W) Yr/Yr Currency Acq. * Base SG&A – Operating $5.9 (18%) 2 pts (2 pts) (18 pts) RD&E – Operating $1.4 (13%) 2 pts (5 pts) (10 pts) ($0.2) 26% Other (Income)/Expense $0.2 N/M Interest Expense $0.1 (37%) Operating Expense & Other Income $7.5 (24%) 1 pts (3 pts) (22 pts) IP and Development Income $ in billions *includes acquisitions made in the last twelve months, net of non-operating acquisition-related charges Supplemental Materials Global Financing Portfolio 1Q16 – $25.4B Net External Receivables 40% Investment Grade 51% Non-Investment Grade 49% 30% 30% 20% 9% 1% B2 to B3 Caa1 to D 0% Baa1 to Baa3 Supplemental Materials 4Q15 1Q15 Identified Loss Rate 2.0% 1.8% 1.9% Anticipated Loss Rate 0.6% 0.3% 0.4% Reserve Coverage 2.6% 2.1% 2.3% 4.2 3.8 4.2 $25M $15M $93M Commercial A/R > 30 days 15% 10% Aaa to A3 1Q16 Client Days Delinquent Outstanding 24% 21% Global Financing Metrics Ba1 to Ba2 Ba3 to B1 Balance Sheet Summary Mar 16 Dec 15 Mar 15* Cash & Marketable Securities $14.9 $8.2 $8.8 Non-GF Assets ** $72.3 $67.7 $70.5 Global Financing Assets $31.7 $34.6 $32.5 $118.9 $110.5 $111.8 $58.2 $56.2 $60.7 Non-GF Debt ** $18.8 $12.7 $12.5 Global Financing Debt $26.8 $27.2 $26.2 $45.6 $39.9 $38.7 $103.8 $96.1 $99.5 $15.1 $14.4 $12.3 62% 54% 59% 7.3 7.3 7.0 Total Assets Other Liabilities Total Debt Total Liabilities Equity Non-GF Debt / Capital Global Financing Leverage $ in billions * Prior year reclassified for the adoption of the FASB guidance (Debt issuance cost and Deferred Tax classification) **includes eliminations of inter-company activity Supplemental Materials Cash Flow Summary B/(W) 1Q16 Yr/Yr FY15 $5.6 $2.0 $17.0 $2.4 $0.8 $0.2 $3.3 $1.3 $16.9 ($1.0) ($0.0) ($3.8) $2.3 $1.2 $13.1 Acquisitions ($2.6) ($2.4) ($3.3) Divestitures $0.0 $0.0 ($0.4) Dividends ($1.2) ($0.2) ($4.9) Share Repurchases (Gross) ($0.9) $0.2 ($4.6) Non-GF Debt $5.9 $5.5 ($0.1) Other (includes GF A/R & GF Debt) $3.2 $2.0 $0.0 $6.7 $6.3 ($0.3) 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 $ in billions Supplemental Materials Cash Flow (ASC 230) 1Q16 1Q15 $2.0 $2.3 Depreciation / Amortization of Intangibles $1.0 $1.0 Stock-based Compensation $0.1 $0.1 Working Capital / Other $0.1 ($1.4) $2.4 $5.6 ($1.0) $1.6 $3.6 ($0.9) $0.0 $0.0 ($2.6) ($0.1) $1.5 $1.6 ($2.0) $0.6 $5.0 ($1.3) Dividends ($1.2) ($1.1) Common Stock Repurchases ($0.9) ($1.2) Common Stock Transactions - Other $0.1 $0.2 Net Cash used in Financing Activities $2.8 ($3.4) Effect of Exchange Rate changes on Cash $0.2 ($0.4) Net Change in Cash & Cash Equivalents $6.7 $0.3 Net Income from Operations Global Financing A/R 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 $ in billions 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 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 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, multiemployer 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. 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 profit-generating 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. . Supplemental Materials Non-GAAP Supplemental Materials Reconciliation of Operating Earnings Per Share IBM GAAP EPS 2016 Expectations at least $12.35 IBM Operating EPS (Non-GAAP) at least $13.50 EPS Guidance Adjustments Acquisition Related Charges* $0.76 Non-Operating Retirement-Related Items $0.39 * Includes acquisitions through March 31, 2016 The above reconciles the Non-GAAP financial information contained in the “Full-Year 2016 Expectations“ and “Summary” discussions in the company’s earnings presentation. See Slide 26 of this presentation for additional information on the use of these Non-GAAP financial measures. Supplemental Materials Non-GAAP Supplemental Materials Reconciliation of Revenue Growth-1Q 2016 1Q16 Yr/Yr GAAP @CC Americas (7%) (4%) Europe/ME/Africa (4%) (1%) Asia Pacific (1%) 1% U.S. (4%) (4%) 5% 2% (11%) (3%) Japan Growth Markets The above reconciles the Non-GAAP financial information contained in the “Geographic Revenue” discussions in the company’s earnings presentation. See Slide 26-27 of this presentation for additional information on the use of these Non-GAAP financial measures. Supplemental Materials Non-GAAP Supplemental Materials Reconciliation of Revenue Growth-1Q 2016 and 4Q 2015 1Q16 Yr/Yr 4Q15 Yr/Yr GAAP @CC GAAP @CC Strategic Imperatives 14% 17% 10% 16% Analytics 7% 9% Cloud 34% 36% Mobile 88% 93% Security 18% 20% Social (4%) (1%) The above reconciles the Non-GAAP financial information contained in the “Strategic Imperatives” discussions in the company’s earnings presentation. See Slide 26 of this presentation for additional information on the use of these Non-GAAP financial measures. Supplemental Materials Non-GAAP Supplemental Materials Reconciliation of Revenue Growth-1Q 2016 Cognitive Solutions Solutions Software Transaction Processing Software Strategic Imperatives Cloud Global Business Services Consulting Global Processing Services Application Management Strategic Imperatives Cloud Cognitive Solutions & Industry Svcs 1Q16 Yr/Yr GAAP @CC (2%) Flat 1% 3% (8%) (5%) 2% 4% 32% 34% (4%) (2%) (6%) (4%) (3%) (1%) (3%) (1%) 19% 22% 54% 55% (3%) (1%) Tech Svcs & Cloud Platforms Global Technology Services Infrastructure Services Technical Support Services Integration Software Strategic Imperatives Cloud Systems Systems Hardware z Systems Power Storage Operating Systems Strategic Imperatives Cloud Global Financing Total Software 1Q16 Yr/Yr GAAP @CC (2%) 2% (1%) 2% Flat 4% (5%) (1%) (4%) (2%) 41% 45% 46% 50% (22%) (21%) (25%) (25%) (43%) (42%) (14%) (14%) (7%) (6%) (9%) (7%) (6%) (5%) 1% 2% (11%) (6%) (3%) (1%) The above reconciles the Non-GAAP financial information contained in the “Segment Revenue & Gross Profit”, “Additional Revenue & Backlog Information”, “Cognitive Solutions Segment”, “Global Business Services Segment”, “Technology Services & Cloud Platforms Segment” and “Systems Segment” discussions in the company’s earnings presentation. See Slide 26 of this presentation for additional information on the use of these Non-GAAP financial measures. Supplemental Materials Non-GAAP Supplemental Materials Reconciliation of Revenue Growth – 1Q 2016, 4Q 2015 and 1Q 2015 1Q16 Yr/Yr GAAP 4Q15 Yr/Yr @CC GAAP @CC z Systems IBM (5%) (2%) (9%) (2%) IBM excluding mainframe cycle & acquisitions (4%) (1%) (10%) (3%) Flat 2% (11%) (6%) Total Software Annuity Total Software 1Q15 Yr/Yr GAAP @CC 118% 130% The above reconciles the Non-GAAP financial information contained in the “Overview”, “Key Financial Metrics” , and “Systems Segment” discussions in the company’s earnings presentation. See Slides 26 of this presentation for additional information on the use of these NonGAAP financial measures. Supplemental Materials Non-GAAP Supplemental Materials Reconciliation of Debt-to-Capital Ratio Non-Global Financing Debt/Capital IBM Consolidated Debt/Capital Mar 2016 62% Dec 2015 54% Mar 2015* 59% 75% 73% 76% * Prior year reclassified for the adoption of the FASB guidance (Debt issuance cost) The above reconciles the Non-GAAP financial information contained in the “Cash Flow and Balance Highlights” and “Balance Sheet Summary” discussions in the company’s earnings presentation. See Slide 27 of this presentation for additional information on the use of these Non-GAAP financial measures. Supplemental Materials Non-GAAP Supplemental Materials Reconciliation of Free Cash Flow for the Last 12 Months 12 Months Ended Mar 2016 Net Cash from Operating Activities per GAAP: Less: the change in Global Financing (GF) Receivables Net Cash from Operating Activities (Excluding GF Receivables) Capital Expenditures, Net Free Cash Flow (Excluding GF Receivables) $19.0 $0.9 $18.1 ($3.8) $14.3 $ in billions The above reconciles the Non-GAAP financial information contained in the “Overview” and “Key Financial Metrics” discussions in the company’s earnings presentation. See Slide 27 of this presentation for additional information on the use of these Non-GAAP financial measures. Supplemental Materials ibm.com/investor