1Q 2013 Earnings Presentation April 18, 2013 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 linked to the Company’s investor relations web site at http://www.ibm.com/investor/events/1q13.phtml The Non-GAAP Supplemental Materials are also included as Attachment II to the Company’s Form 8-K dated April 18, 2013. www.ibm.com/investor 2 1Q 2013 Highlights Revenue $23.4B Operating (Non-GAAP) EPS $3.00 -5%, -3% yr/yr @CC +8% yr/yr Ø Shift to higher value and productivity initiatives drove margin expansion • Expanded operating gross, pre-tax and net margins Ø Services profit +10% yr/yr; Services backlog +1% yr/yr or +5% @CC Ø Software and System z impacted by transaction closures; rollover to 2Q Ø Growth initiatives performance mixed • Smarter Planet +>25%, Business Analytics +7%, Cloud +>70% • Growth Markets +1% @CC Expect at least $16.70 of Opera9ng EPS in 2013 www.ibm.com/investor 3 Key Financial Metrics $ in Billions, except EPS P&L Highlights Revenue 1Q13 B/(W) Yr/Yr P&L Ratios (Operating) $23.4 (5%) @CC 1Q13 B/(W) Yr/Yr GP Margin 46.7% 1.0 pts (3%) PTI Margin 17.4% 0.8 pts PTI – Operating $4.1 (1%) Tax Rate 17.3% 3.2 pts NI – Operating $3.4 3% NI Margin 14.4% 1.2 pts $3.00 8% EPS – Operating Cash Highlights 1Q13 Last 12 Mos. $1.7 $18.0 Share Repurchase (Gross) 2.6 11.6 Dividends 0.9 3.9 Free Cash Flow (excl GF Receivables) Cash Balance @ Mar. 31 12.0 www.ibm.com/investor 4 Revenue and Gross Profit Margin by Segment Operating Gross Profit Margin Revenue $ in Billions B/(W) Yr/Yr Rptd @CC 1Q13 B/(W) Yr/Yr Pts $9.6 (4%) (2%) 36.7% 1.5 pts Global Business Services 4.5 (3%) Flat 28.6% 0.6 pts Software 5.6 Flat 1% 87.2% 0.3 pts Systems & Technology 3.1 (17%) (16%) 32.3% (1.9 pts) (14%) (13%) 1Q13 Global Technology Services excl. Retail Store Solutions Global Financing Total Revenue & Op. GP Margin excl. Retail Store Solutions 0.5 $23.4 2% 4% 45.8% (4.9 pts) (5%) (3%) 46.7% 1.0 pts (5%) (3%) Con9nued margin expansion in Services and SoDware www.ibm.com/investor 5 Revenue by Geography 1Q13 B/(W) Yr/Yr Rptd @CC $10.0 (4%) (3%) Europe/ME/A 7.3 (4%) (4%) Asia Pacific 5.7 (7%) (1%) $ in Billions Americas Total Geographies excl. Retail Store Solutions IBM excl. Retail Store Solutions $23.0 (3%) (2%) (5%) (5%) (3%) (3%) Major Markets (6%) (4%) Growth Markets (1%) 1% (1%) 3% BRIC Countries $23.4 (5%) (4%) Canada/ LA U.S. -‐5% EMEA Japan APac +3% @CC OEM -‐16% Growth Markets impacted by mid and low end systems www.ibm.com/investor 6 Expense Summary 1Q13 B/(W) Yr/Yr SG&A – Operating $5.4 RD&E – Operating 1.6 $ in Billions Currency Acq.* Base 7% 1 pts (1 pts) 7 pts (1%) 0 pts (3 pts) 1 pts 1 pts (2 pts) 5 pts IP and Development Income (0.2) (28%) Other (Income)/Expense (0.1) 14% 0.1 14% $6.9 4% Interest Expense Operating Expense & Other Income B/(W) Yr/Yr Drivers * Includes acquisitions made in the last twelve months, net of non-operating acquisition-related charges www.ibm.com/investor 7 Services Segments Global Technology Services (GTS) $ in Billions 1Q13 $9.6 36.7% $1.6 16.1% Revenue (External) Gross Margin (External) Pre-Tax Income PTI Margin Global Business Services (GBS) B/(W) Yr/Yr Rptd @CC (4%) (2%) 1.5 pts 7% 1.8 pts 1Q13 Revenue $ in Billions Revenue (External) Gross Margin (External) Pre-Tax Income PTI Margin Yr/Yr GTS GTS Outsourcing Integrated Technology Services Maintenance Rptd (6%) (1%) (4%) @CC (3%) 2% (2%) (1%) (4%) 3% (1%) 1% 5% GBS GBS Outsourcing Consulting & Systems Integration Services Backlog 1Q13 $141B 1Q13 $4.5 28.6% $0.7 15.1% B/(W) Yr/Yr Rptd @CC (3%) Flat 0.6 pts 17% 2.6 pts 1Q13 Revenue (% of Total Services) Maint. 13% GTS Outsourcing 40% ITS 16% GBS C&SI 24% GBS Outsourcing 7% Backlog growth and con9nued margin expansion www.ibm.com/investor 8 Software Segment $ in Billions 1Q13 $5.6 87.2% $2.0 31.5% Revenue (External) Gross Margin (External) Pre-Tax Income PTI Margin 1Q13 Revenue Yr/Yr Rptd @CC 6% 7% (2%) (1%) Tivoli 1% 3% Social Workforce Solutions 8% 9% (2%) (1%) Key Branded Middleware 1% 2% Total Middleware Flat 1% Total Software Flat 1% WebSphere Family Information Management Rational B/(W) Yr/Yr Rptd @CC Flat 1% 0.3 pts 4% 1.2 pts 1Q13 Revenue (% of Total SoDware) Key Branded Middleware 63% Other Middleware 19% Opera9ng Systems 10% Other 8% Rollover deals impacted 1Q performance www.ibm.com/investor 9 Systems & Technology Segment B/(W) Yr/Yr $ in Billions Revenue (External) – including RSS excluding RSS Gross Margin (External) Pre-Tax Income PTI Margin 1Q13 Revenue System z Power Systems System x Storage Total Systems excl. RSS Microelectronics OEM Total Systems & Technology excl. RSS 1Q13 Rptd @CC $3.1 (17%) (14%) (1.9 pts) (287%) (9.9 pts) (16%) (13%) 32.3% ($0.4) (12.5%) Yr/Yr Rptd 7% (32%) (9%) (11%) (13%) (16%) (14%) @CC 8% (31%) (8%) (10%) (13%) (16%) (13%) 1Q13 Revenue (% of Total Sys & Tech) Servers 67% Storage 21% Micr o OE 12% M System z growth offset by declines in Power, System x and Storage www.ibm.com/investor 10 Cash Flow Analysis $ in Billions Net Cash from Operations Less: Global Financing Receivables 1Q13 B/(W) Yr/Yr FY12 $4.0 ($0.3) $19.6 1.6 0.2 2.4 (0.4) (0.7) 0.3 1.7 (0.2) Acquisitions (0.1) 1.3 (3.7) Divestitures 0.0 0.0 0.6 Dividends (0.9) (0.1) (3.8) Share Repurchases (Gross) (2.6) 0.4 Non-GF Debt (0.7) (1.4) 0.7 3.5 0.4 (0.8) $0.9 $0.5 ($0.8) Net Cash from Operations (excluding GF Receivables) Net Capital Expenditures Free Cash Flow (excluding GF Receivables) Other (includes GF A/R & GF Debt) Change in Cash & Marketable Securities www.ibm.com/investor (2.9) 22.5 (4.3) 18.2 (12.0) 11 Balance Sheet Summary Mar. 12 Dec. 12 Mar. 13 $12.3 $11.1 $12.0 Non-GF Assets* 70.3 70.6 70.7 Global Financing Assets 32.7 37.5 34.5 115.3 119.2 117.3 Other Liabilities 62.5 67.0 64.6 Non-GF Debt* 8.5 8.8 8.2 23.6 24.5 25.2 32.1 33.3 33.4 Total Liabilities 94.6 100.2 98.0 Equity 20.8 19.0 19.2 33% 36% 34% 7.0 7.0 7.2 $ in Billions Cash & Marketable Securities Total Assets Global Financing Debt Total Debt Non-GF Debt / Capital Global Financing Leverage * Includes eliminations of inter-company activity www.ibm.com/investor 12 Operating EPS Bridge – 1Q12 to 1Q13 $2.78 ($0.14) $0.23 $0.13 $3.00 Gross Margin 0.16 Expense E/R (0.04) Tax Rate 1Q12 Opera9ng EPS Revenue Growth @ Actual 0.11 Margin Expansion www.ibm.com/investor Share Repurchases 1Q13 Opera9ng EPS 13 2015e At least $20 1Q 2013 Summary Ø EPS growth of 8% • Expanded operating gross, pre-tax, and net margins 2013e $16.70+ 2012 $15.25 2011 $13.44 2010 $11.67 Operating EPS Ø Improved backlog performance • +1% yr/yr, +5% @CC Ø Actions to improve performance • Improve sales execution – Close rollover transactions in Software and System z mainframe – Recover position in growth markets • Rebalance workforce in 2Q • Improve underperforming businesses – Capitalize on Power Linux opportunity – Leverage investments in flash and mid-range storage solutions Ø Deliver on our business model • Continue shift to higher value • Leverage key growth initiatives • Drive productivity across the enterprise • Invest in innovation • Return value to shareholders Expect at least $16.70 of Opera9ng EPS in 2013 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 Currency – Year/Year Comparison Ø Supplemental Segment Information – Global Services Ø Supplemental Segment Information – Systems & Technology, Software Ø Global Financing Portfolio Ø Revenue by Key Industry Sales Unit Ø Cash Flow (FAS 95) Ø Non-GAAP Supplemental Materials • Operating (Non-GAAP) Earnings Per Share and Related Income Statement Items, Constant Currency • Cash Flow, Debt-to-Capital Ratio, Retail Store Solutions (RSS) Divestiture • Reconciliation of Operating Earnings Per Share • GAAP to Operating (Non-GAAP) Bridge – 1Q 2013 • GAAP to Operating (Non-GAAP) Bridge – 1Q 2012 • GAAP to Operating (Non-GAAP) Bridge – 1Q 2013 and 1Q 2012 • Reconciliation of B/(W) Yr/Yr Expense Drivers – 1Q13 • Reconciliation of Free Cash Flow (excluding GF Receivables) – 12 months ended 3/31/13, 3 months ended 3/31/12 • Reconciliation of Debt-to-Capital Ratio • Reconciliation of Operating EPS Bridge – 1Q 2012 to 1Q 2013 • Reconciliation of Consolidated EPS • Reconciliation of Revenue Growth www.ibm.com/investor 16 Supplemental Materials Currency – Year/Year Comparison Quarterly Averages per US $ Yr/Yr @ 4/17 Spot 3Q13 4Q13 1Q13 Yr/Yr 4/17 Spot Euro 0.76 1% 0.77 2% 4% 1% 2% Pound 0.65 (1%) 0.66 (4%) (4%) (5%) (4%) (22%) (24%) (20%) (21%) ~(1-2 pts) ~(1-2 pts) ~(2 pts) ~(2 pts) Yen 92 IBM Revenue Impact Revenue As Reported Currency Impact Revenue @CC (16%) (2 pts) (US$B) Yr/Yr $23.4 (5%) (0.5) 98 2Q13 FY13 (2 pts) (3%) www.ibm.com/investor 17 Supplemental Materials Supplemental Segment Information – 1Q 2013 Global Services Revenue Global Services Backlog / Signings Revenue Growth Yr/Yr @CC GTS Outsourcing (6%) (3%) Integrated Tech Services (1%) 2% Maintenance (4%) (2%) (4%) (2%) GBS Outsourcing (1%) 3% GBS C&SI (4%) (1%) (3%) Flat Total GTS Total GBS Total Outsourcing (5%) (3%) Total Transactional (3%) Flat Maintenance (4%) (2%) $ in Billions Total Backlog Backlog 1Q13 Yr/Yr @CC $141 1% 5% Flat 4% Change in Backlog due to Currency Quarter-to-Quarter ($3) Year-to-Year ($5) Outsourcing Backlog $91 Signings Outsourcing 1Q13 Yr/Yr @CC $10.7 97% 103% - GTS O/S, GBS O/S (AMS) Transactional 6.2 (2%) 1% - ITS, Consulting & AMS SI (incl. US Federal) Total Signings $16.9 44% 48% Note: Actual backlog calculated using March 31 currency spot rates www.ibm.com/investor 18 Supplemental Materials Supplemental Segment Information – 1Q 2013 Systems & Technology Software Revenue Growth Revenue Growth System z Power Systems Yr/Yr @CC 7% 8% (31%) (9%) (8%) (11%) (10%) Total Systems excl. RSS (13%) (13%) Microelectronics OEM (16%) (16%) Total Sys & Tech excl. RSS (14%) (13%) Storage @CC 6% 7% (2%) (1%) Tivoli 1% 3% Social Workforce Sols. 8% 9% (2%) (1%) 1% 2% (2%) (1%) Flat 1% Operating Systems (2%) (1%) Other Software/Services (5%) (4%) Flat 1% WebSphere Family (32%) System x Yr/Yr GP% Share Information Management Rational Key Branded Middleware Other Middleware Total Middleware Total Software www.ibm.com/investor 19 Supplemental Materials Global Financing Portfolio 1Q13 – $27.5B Net External Receivables 40% Investment Grade 60% Non-Investment Grade 40% 38% 30% 20% 22% 19% 10% 12% 7% 2% B to B- CCC+ to D 0% AAA to A- BBB+ to BBB- BB+ to BB 1Q13 4Q12 1Q12 Identified Loss Rate 0.8% 0.8% 0.8% Anticipated Loss Rate 0.4% 0.4% 0.5% Reserve Coverage 1.2% 1.2% 1.3% 3.2 2.5 2.8 $42M $22M $68M Client Days Delinquent Outstanding Commercial A/R > 30 days 20 BB- to B+ www.ibm.com/investor 20 Supplemental Materials Revenue by Key Industry Sales Unit $ in Billions Financial Services B/(W) Yr/Yr* Rptd @CC 1Q13 $6.4 (3%) Flat Public 3.1 (7%) (7%) Industrial 2.1 (2%) 1% Distribution 1.9 (8%) (7%) Communications 1.9 (9%) (7%) General Business 6.7 (3%) (1%) $23.4 (5%) (3%) Total IBM Public Industrial Distribu9on Financial Services Comms General Business * Reclassified to conform with 2013 presentation www.ibm.com/investor 21 Supplemental Materials Cash Flow (FAS 95) $ in Billions 1Q13 1Q12 Net Income from Operations $3.0 $3.1 Depreciation / Amortization of Intangibles 1.2 1.2 Stock-based Compensation 0.1 0.2 (1.9) (1.5) 1.6 1.4 4.0 4.3 (0.7) (1.0) 0.0 0.0 Acquisitions, net of cash acquired (0.1) (1.3) Marketable Securities / Other Investments, net (0.2) 0.1 (1.0) (2.2) 0.5 1.0 Dividends (0.9) (0.9) Common Stock Repurchases (Gross) (2.6) (3.0) Common Stock Transactions - Other 0.4 0.6 Net Cash used in Financing Activities (2.7) (2.3) Effect of Exchange Rate changes on Cash (0.1) 0.2 Net Change in Cash & Cash Equivalents $0.2 Working Capital / Other Global Financing A/R Net Cash provided by Operating Activities Capital Expenditures, net of payments & proceeds Divestitures, net of cash transferred Net Cash used in Investing Activities Debt, net of payments & proceeds www.ibm.com/investor ($0.1) 22 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 23 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. Retail Store Solutions (RSS) Divestiture On April 17, 2012, the company announced that it had signed a definitive agreement with Toshiba Tec for the sale of its RSS business to Toshiba Tec. Management presents certain financial results excluding the effects of the RSS divestiture. Management believes that presenting financial information regarding revenue 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 24 Supplemental Materials Non-GAAP Supplemental Materials Reconcilia9on of Opera9ng Earnings Per Share 2013 Expectations IBM GAAP EPS $15.53+ IBM Operating EPS (Non-GAAP) $16.70+ Adjustments Acquisition-Related Charges * $0.48 Amortization of Purchased Intangibles $0.47 Other Acquisition-Related Charges $0.01 Non-Operating Retirement-Related Items $0.69 * Includes acquisitions through March 31, 2013 The above serves to reconcile the Non-GAAP financial information contained in “1Q 2013 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 25 Supplemental Materials Non-GAAP Supplemental Materials GAAP to Opera9ng (Non-‐GAAP) Bridge – 1Q 2013 $ in Millions, except EPS Gross Profit GAAP Acquisition-related Adjustments* Retirement-related Adjustments** Operating (Non-GAAP) $10,678 $95 $164 $10,937 SG&A 5,577 (92) (104) 5,381 RD&E 1,644 0 (16) 1,628 (60) (7) 0 Total Operating Expense & Other Income 7,072 (99) (120) 6,853 Pre-Tax Income 3,606 194 283 4,084 574 54 79 708 Net Income 3,032 140 204 3,376 Diluted Earnings Per Share $2.70 $0.12 $0.18 $3.00 Other Income & Expense Tax *** (67) * 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 seAlements, 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 “1Q 2013 Highlights,” “Key Financial Metrics” and “Expense Summary” discussions in the company’s earnings presentation. See Slide 23 of this presentation for additional information on the use of these NonGAAP financial measures. www.ibm.com/investor 26 Supplemental Materials Non-GAAP Supplemental Materials GAAP to Opera9ng (Non-‐GAAP) Bridge – 1Q 2012 $ in Millions, except EPS Gross Profit GAAP Acquisition-related Adjustments* Retirement-related Adjustments** Operating (Non-GAAP) $11,118 $89 $71 $11,278 (84) (36) 5,766 1,605 SG&A 5,886 RD&E 1,601 0 4 (58) (1) 0 Other Income & Expense (59) Total Operating Expense & Other Income 7,283 (85) (32) 7,166 Pre-Tax Income 3,836 173 102 4,111 47 30 846 73 3,265 Tax *** 769 Net Income 3,066 126 Diluted Earnings Per Share $2.61 $0.11 $0.06 $2.78 * 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 seAlements, 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 “1Q 2013 Highlights,” “Key Financial Metrics” and “Expense Summary” discussions in the company’s earnings presentation. See Slide 23 of this presentation for additional information on the use of these NonGAAP financial measures. www.ibm.com/investor 27 Supplemental Materials Non-GAAP Supplemental Materials GAAP to Opera9ng (Non-‐GAAP) Bridge – 1Q 2013 and 1Q 2012 1Q 2013 GAAP Acquisitionrelated Adjustments* Retirementrelated Adjustments ** Operating (Non-GAAP) Gross Profit Margin 45.6% 0.4 pts 0.7 pts 46.7% PTI Margin 15.4% 0.8 pts 1.2 pts 17.4% Tax Rate *** 15.9% 0.6 pts 0.9 pts 17.3% Net Income Margin 13.0% 0.6 pts 0.9 pts 14.4% Gross Profit Margin 45.1% 0.4 pts 0.3 pts 45.7% PTI Margin 15.5% 0.7 pts 0.4 pts 16.7% Tax Rate *** 20.1% 0.3 pts 0.2 pts 20.6% Net Income Margin 12.4% 0.5 pts 0.3 pts 13.2% 1Q 2012 * 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 seAlements, 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”1Q 2013 Summary” and “Key Financial Metrics” discussions 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 28 Supplemental Materials Non-GAAP Supplemental Materials Reconcilia9on of B/(W) Yr/Yr Expense Drivers – 1Q13 GAAP Non-GAAP Adjustments Operating (Non-GAAP) 1 pts 0 pts 1 pts (2 pts) 0 pts (1 pts) 6 pts 1 pts 7 pts 0 pts 0 pts 0 pts Acquisitions (3 pts) 0 pts (3 pts) Base (1 pts) 1 pts 1 pts 1 pts 0 pts 1 pts (2 pts) 0 pts (2 pts) 4 pts 1 pts 5 pts SG&A Currency Acquisitions Base RD&E Currency Operating Expense & Other Income Currency Acquisitions Base The above serves to reconcile the Non-GAAP financial information contained in the “Expense 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 29 Supplemental Materials Non-GAAP Supplemental Materials Reconcilia9on of Free Cash Flow (excluding GF Receivables) $ 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) 12 months ended 3/31/13 3 months ended 3/31/12 $19.3 $4.3 (2.7) 1.4 22.1 2.9 (4.0) $18.0 (1.0) $1.9 The above serves to reconcile the Non-GAAP financial information contained in the “1Q 2013 Financial Highlights,” and “Key Financial Metrics” discussion in the company’s earnings presentation. See Slide 24 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 Reconcilia9on of Debt-‐to-‐Capital Ra9o Dec. 2012 March 2013 March 2012 Non-Global Financing Debt / Capital 36% 34% 33% IBM Consolidated Debt / Capital 64% 63% 61% 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 24 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 Reconcilia9on of Opera9ng EPS Bridge – 1Q 2012 to 1Q 2013 GAAP Acquisitionrelated Adjustments* Retirementrelated Adjustments** Operating (Non-GAAP) 1Q12 EPS $2.61 $0.11 $0.06 $2.78 Revenue growth @ actual (0.13) (0.01) 0.00 (0.14) Margin expansion 0.11 0.01 0.11 0.23 Share repurchases 0.11 0.01 0.01 0.13 $2.70 $0.12 $0.18 $3.00 1Q13 EPS * 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 seAlements, curtailments, mul/-‐employer plans and insolvency insurance. The above serves to reconcile the Non-GAAP financial information contained in the “Operating EPS Bridge – 1Q12 to 1Q13” 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 32 Supplemental Materials Non-GAAP Supplemental Materials Reconcilia9on of Consolidated EPS EPS (As Reported) AcquisitionRelated Non-Operating RetirementRelated 2010 $11.52 $0.34 ($0.20) $11.67 2011 13.06 0.41 (0.03) 13.44 2012 14.37 0.55 0.33 15.25 Operating EPS The above serves to reconcile the Non-GAAP financial information contained in the “1Q 2013 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 Reconcilia9on of Revenue Growth 4Q12 Yr/Yr Global Business Services IBM Global Services Japan Tivoli Security software Tivoli Storage software As Rptd (3%) (2%) @CC (2%) (1%) 4Q12 Yr/Yr Europe/ ME/A As Rptd (5%) @CC (3%) 1Q13 Yr/Yr As Rptd (3%) (4%) (12%) 13% 10% @CC Flat (1%) 3% 15% 11% 1Q13 Yr/Yr As Rptd (4%) @CC (4%) The above serves to reconcile the Non-GAAP financial information contained in the “Key Financial Metrics,” “Revenue by Geography,” “Services Segments,” “Software Segment,” “Systems & Technology Segment,” discussions 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 www.ibm.com/investor 35