® 3Q 2011 Earnings Presentation October 17, 2011 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 supplementary materials entitled “Non-GAAP Supplementary Materials” that are posted on the Company’s investor relations web site at http://www.ibm.com/investor/3q11/ The Non-GAAP Supplementary Materials are also included as Attachment II to the Company’s Form 8-K dated October 17, 2011. www.ibm.com/investor 2 3Q 2011 Highlights Revenue $26.2B +8%, 3% yr/yr @CC Operating (Non-GAAP) EPS $3.28 +15% yr/yr ¾ Performance driven by: • • • • Software PTI +12% yr/yr; Key Branded Middleware revenue +17% Hardware PTI +8% yr/yr; Power Systems revenue +15% Services PTI +13% yr/yr; revenue led by Growth Markets Growth Markets revenue +19%, +13% @CC ¾ Continued strength across growth initiatives ¾ Expanded operating gross, pre-tax and net margins ¾ Returned over $4B to shareholders Increasing 2011 Operating (Non-GAAP) EPS expectations to at least $13.35 www.ibm.com/investor 3 Key Financial Metrics $ in Billions, except EPS P&L Highlights Revenue 3Q11 B/(W) Yr/Yr $26.2 8% @CC 3% P&L Ratios (Operating) 3Q11 B/(W) Yr/Yr GP Margin 46.8% 1.5 pts PTI Margin 19.8% 0.4 pts 0.2 pts PTI – Operating $5.2 10% NI Margin 15.1% EPS – Operating $3.28 15% Tax Rate 23.6% (0.6 pts) Cash Highlights 3Q11 Last 12 Mos. $3.5 $16.3 Share Repurchase 3.4 15.1 Dividends 0.9 3.4 Free Cash Flow (excl GF Receivables) Cash Balance @ Sept. 30 11.3 www.ibm.com/investor 4 Revenue by Geography $ in Billions Americas 3Q11 B/(W) Yr/Yr Rptd @CC $10.9 7% 6% Europe/ME/A 8.0 9% Flat Asia Pacific 6.5 10% 1% OEM 0.7 (8%) IBM $26.2 Major Markets Growth Markets BRIC Countries (8%) 8% 3% 5% Flat 19% 13% 17% 13% Canada/ LA EMEA U.S. +4% Japan - 10% @CC APac OEM Performance led by Growth Markets and North America www.ibm.com/investor 5 Revenue and Gross Profit Margin by Segment Operating Gross Profit Margin Revenue $ in Billions 3Q11 Global Technology Services B/(W) Yr/Yr Rptd @CC 3Q11 B/(W) Yr/Yr Pts $10.3 9% 3% 35.7% 0.6 pts Global Business Services 4.8 6% Flat 29.4% 0.8 pts Software 5.8 13% 8% 88.1% 0.2 pts Systems & Technology 4.5 4% 1% 39.8% 3.4 pts Global Financing 0.5 (2%) (6%) 47.4% (5.9 pts) 8% 3% 46.8% 1.5 pts Total Revenue & Operating GP Margin $26.2 Revenue growth led by Software; broad-based margin expansion www.ibm.com/investor 6 Expense Summary B/(W) Yr/Yr Drivers $ in Billions 3Q11 B/(W) Yr/Yr SG&A – Operating $5.6 (10%) (5 pts) (2 pts) (3 pts) RD&E – Operating 1.6 (5%) (2 pts) (4 pts) 2 pts (0.3) 7% (7 pts) (3 pts) (2 pts) IP and Development Income Other (Income)/Expense 0.1 nm Interest Expense 0.1 (14%) $7.1 (12%) Operating Expense & Other Income Currency Acq.* Base * 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 3Q11 Revenue (External) Gross Margin (External) $10.3 35.7% Pre-Tax Income $1.7 PTI Margin 15.9% Global Business Services (GBS) B/(W) Yr/Yr @CC Rptd 9% 0.6 pts 3% 0.7 pts PTI Margin B/(W) Yr/Yr Rptd @CC 6% 29.4% 0.8 pts $0.8 13% 15.4% 1.0 pts Flat 3Q11 Revenues (% of Total Services) Rptd 9% 11% 5% @CC 3% 5% (1%) GBS GBS Outsourcing Consulting & Systems Integration 11% 4% 5% (1%) +$2B $4.8 Pre-Tax Income GTS GTS Outsourcing Integrated Technology Services Maintenance Services Backlog Revenue (External) Yr/Yr 3Q11 $137B 3Q11 Gross Margin (External) 13% 3Q11 Revenue $ in Billions +$2B Maint. 12% GTS Outsourcing 40% GBS Outsourcing 7% ITS 16% GBS C&SI 25% Profit growth and margin expansion www.ibm.com/investor 8 Software Segment $ in Billions 3Q11 $5.8 88.1% $2.2 33.4% Revenue (External) Gross Margin (External) Pre-Tax Income PTI Margin 3Q11 Revenue Yr/Yr Rptd @CC WebSphere Family 52% 46% Information Management 12% 7% Tivoli 8% 3% Lotus 6% 1% Rational 7% 3% Key Branded Middleware 17% 12% Total Middleware 13% 8% Total Software 13% 8% B/(W) Yr/Yr Rptd @CC 13% 8% 0.2 pts 12% (0.2 pts) 3Q11 Revenue (% of Total Software) Key Branded Middleware 63% Other Middleware 19% Operating Systems Other 10% 8% Middleware share gains for 16th consecutive quarter www.ibm.com/investor 9 Systems & Technology Segment 3Q11 B/(W) Yr/Yr Rptd @CC $4.5 4% 39.8% 3.4 pts Pre-Tax Income $0.3 8% PTI Margin 6.8% $ in Billions Revenue (External) Gross Margin (External) 3Q11 Revenue Yr/Yr System z Power Systems System x Storage Retail Store Solutions Total Systems Microelectronics OEM Total Systems & Technology Rptd (5%) 15% 1% 8% 14% 6% (6%) 4% @CC (7%) 12% (3%) 5% 11% 2% (6%) 1% 1% 0.3 pts 3Q11 Revenue (% of Total Sys & Tech) Storage 19% Servers 64% RSS Micr o OE 14% M Power Systems extend Unix leadership www.ibm.com/investor 10 Cash Flow Analysis $ in Billions Net Cash from Operations Less: Global Financing Receivables 3Q11 B/(W) Yr/Yr YTD 3Q11 B/(W) Yr/Yr $4.7 $0.1 $12.7 $0.0 0.2 (0.2) 4.5 0.3 10.6 (1.0) 0.0 (3.0) (0.1) 3.5 0.3 7.6 0.0 Acquisitions (0.1) 1.9 (0.2) 2.8 Divestitures 0.0 0.0 0.0 0.0 Dividends (0.9) (0.1) (2.6) (0.2) Share Repurchases (3.4) 0.2 Non-GF Debt 0.1 (0.2) 1.1 (0.4) Other (includes GF A/R & GF Debt) 0.4 (1.5) 5.2 0.1 Net Cash from Operations (excluding GF Receivables) Net Capital Expenditures Free Cash Flow (excluding GF Receivables) Change in Cash & Marketable Securities ($0.5) www.ibm.com/investor $0.7 2.1 (11.5) ($0.3) (0.1) 0.1 0.3 $2.5 11 Balance Sheet Summary Sept. 10 Dec. 10 Sept. 11 $11.1 $11.7 $11.3 Non-GF Assets* 65.7 67.3 67.5 Global Financing Assets 30.4 34.5 31.4 107.2 113.5 110.2 Other Liabilities 57.4 61.7 57.6 Non-GF Debt* 5.5 5.8 7.4 22.0 22.8 22.8 27.5 28.6 30.2 Total Liabilities 84.8 90.3 87.8 Equity 22.4 23.2 22.4 22% 23% 28% 7.1 7.0 7.1 $ 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 – 3Q10 to 3Q11 $0.18 $0.22 $3.28 $0.03 Gross Margin 0.23 $2.85 Expense E/R (0.17) Tax (0.03) 3Q10 Operating EPS Revenue Growth @ Actual Margin Expansion www.ibm.com/investor Share Repurchases 3Q11 Operating EPS 13 2015 At least $20 3Q 2011 Summary ¾ Continued strength in growth initiatives • Growth markets YTD revenue up 20% yr/yr, 13% @CC, more than half of IBM’s revenue growth @CC • Business analytics YTD revenue up 19% yr/yr 2010 $11.67 • Cloud YTD revenue doubled full year 2010 revenue • Smarter Planet YTD revenue up ~50% yr/yr ¾ Expanded operating gross, pre-tax and net income margins ¾ Leveraging cash generation to return value to shareholders Operating EPS Increasing 2011 Operating (Non-GAAP) EPS expectations to at least $13.35 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 ¾ ¾ ¾ ¾ ¾ ¾ ¾ Currency – Year/Year Comparison Supplemental Segment Information – Global Services Supplemental Segment Information – Systems & Technology, Software Global Financing Portfolio Revenue by Key Industry Sales Unit Cash Flow (FAS 95) Non-GAAP Supplementary Materials • Operating (Non-GAAP) Earnings Per Share and Related Income Statement Items, Constant Currency • Cash Flow, Debt-to-Capital Ratio, Income Tax Settlement • Reconciliation of Operating Earnings Per Share • GAAP to Operating (Non-GAAP) Bridge – 3Q 2011 • GAAP to Operating (Non-GAAP) Bridge – 3Q 2010 • GAAP to Operating (Non-GAAP) Bridge – YTD • GAAP to Operating (Non-GAAP) Bridge – 3Q 2011 • GAAP to Operating (Non-GAAP) Bridge – 3Q 2010 • GAAP to Operating (Non-GAAP) Bridge – YTD 3Q 2011 • GAAP to Operating (Non-GAAP) Bridge – YTD 3Q 2010 • Reconciliation of Free Cash Flow (excluding GF Receivables) • Reconciliation of Revenue Growth Rates – Geographies • Reconciliation of B/(W) Yr/Yr Expense Drivers • Reconciliation of Debt-to-Capital Ratio • Reconciliation of Operating EPS Bridge 3Q10 to 3Q11 www.ibm.com/investor 16 Supplemental Materials Currency – Year/Year Comparison Quarterly Averages per US $ @ 10/14 Spot 4Q11 FY11 1Q11 Yr/Yr 2Q11 Yr/Yr 3Q11 Yr/Yr 10/14 Spot Euro 0.73 (1%) 0.69 12% 0.71 8% 0.72 2% 5% Pound 0.62 3% 0.61 9% 0.62 4% 0.63 0% 4% 82 9% 82 78 9% 77 6% 9% 5 pts 1 pts 4 pts (0.3 pts) (1.7 pts) ($0.1) ($0.5) Yen Revenue Impact - Pts 11% 3 pts 7 pts Vs. 7/18 View - Pts B/(W) - $B B/(W) (US$B) Revenue As Reported $26.2 Currency Impact Revenue @CC 1.2 $24.9 www.ibm.com/investor Yr/Yr 8% 5 pts 3% 17 Supplemental Materials Supplemental Segment Information – 3Q 2011 Supplemental Revenue Information Supplemental Backlog / Signings Information Revenue Growth $ in Billions Yr/Yr @CC Global Services 3Q11 Yr/Yr @CC GTS Outsourcing 9% 3% Total Backlog $137 +2 +2 Integrated Tech Services 11% 5% Outsourcing Backlog 90 Flat Flat Global Services Maintenance Total GTS GBS Outsourcing GBS C&SI 5% (1%) 9% 3% 11% 5% 4% (1%) Total GBS 6% Flat Total Outsourcing 9% 3% Total Transactional 7% 1% Maintenance 5% (1%) Backlog $ in Billions Signings Global Services 3Q11 Yr/Yr @CC Outsourcing $5.8 16% 10% 6.5 8% 3% $12.3 12% 6% - GTS O/S, GBS O/S (AMS) Transactional - ITS, Consulting & AMS SI (incl. US Federal) Total Signings Note: YTY signings growth reflects 2010 signings categories consistent with 2011 Actual backlog calculated using September 30 currency spot rates www.ibm.com/investor 18 Supplemental Materials Supplemental Segment Information – 3Q 2011 Revenue Growth Revenue Growth Systems & Technology Yr/Yr @CC GP% System z (5%) (7%) Power Systems 15% 12% System x 1% (3%) Storage 8% 5% 14% 11% 6% 2% (6%) (6%) 4% 1% Retail Store Solutions Total Systems Microelectronics OEM Total Systems & Technology Share = = Software Yr/Yr @CC WebSphere Family 52% 46% Information Management 12% 7% Tivoli 8% 3% Lotus 6% 1% Rational 7% 3% 17% 12% Key Branded Middleware Other Middleware Total Middleware 4% (1%) 13% 8% 9% 4% Other Software/Services 14% 10% Total Software 13% 8% Operating Systems www.ibm.com/investor 19 Supplemental Materials Global Financing Portfolio 3Q11 – $23.3B Net External Receivables Investm ent Grade 65% Non-Investm ent Grade 35% 50% 40% 30% 20% 10% 39% 26% 19% 10% 4% 2% Ba3-B1 B2-B3 Caa-D 0% Aaa-A3 Baa1-Baa3 Ba1-Ba2 3Q11 2Q11 3Q10 Identified Loss Rate 1.0% 1.0% 1.6% Anticipated Loss Rate 0.3% 0.3% 0.3% Reserve Coverage 1.3% 1.3% 1.9% 2.7 2.4 3.2 $46M $32M $36M Client Days Delinquent Outstanding Commercial A/R > 30 Days 20 www.ibm.com/investor 20 Supplemental Materials Revenue by Key Industry Sales Unit $ in Billions Financial Services 3Q11 B/(W) Yr/Yr Rptd @CC $7.7 10% 3% Public 4.0 5% 1% Industrial 2.6 8% 2% Distribution 2.6 11% 7% Communications 2.6 9% 5% General Business 5.4 16% 11% $26.2 8% 3% Total IBM www.ibm.com/investor Public Financial Services Industrial Distribution Comms General Business 21 Supplemental Materials $ in Billions Cash Flow (FAS 95) QTD 3Q11 QTD 3Q10 YTD 3Q11 YTD 3Q10 $3.8 $3.6 $10.4 $9.6 Depreciation / Amortization of Intangibles 1.2 1.2 3.6 3.6 Stock-based Compensation 0.2 0.2 0.5 0.5 (0.7) (0.8) (3.9) (3.1) 0.2 0.4 2.1 2.3 4.7 4.6 12.7 12.8 (1.0) (1.0) (3.0) (2.9) 0.0 0.0 0.0 0.0 (0.1) (2.0) (0.2) (3.0) 0.2 1.2 2.3 1.4 (0.8) (1.8) (0.9) (4.4) 0.2 0.2 1.1 0.9 Dividends (0.9) (0.8) (2.6) (2.4) Common Stock Repurchases (3.4) (3.7) (11.5) (11.8) 0.5 0.8 Net Cash used in Financing Activities (3.7) (3.5) Effect of Exchange Rate changes on Cash (0.6) 0.2 Net Income from Operations Working Capital / Other 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 Common Stock Transactions - Other Net Change in Cash & Cash Equivalents ($0.4) www.ibm.com/investor ($0.5) 2.0 2.6 (10.9) (10.6) (0.3) (0.1) $0.6 ($2.3) 22 Supplemental Materials Non-GAAP Supplementary 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. Effective January 1, 2011, 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 Supplementary 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. Income Tax Settlement Management presents free cash flow excluding the effects of certain income tax settlement payments. Management believes that presenting free cash flow without this item is more representative of the company’s operational performance and provides additional insight into, and clarifies the basis for, historical and/or future performance, which may be more useful for investors. www.ibm.com/investor 24 Supplemental Materials Non -GAAP Supplementary Materials Non-GAAP Reconciliation of Operating Earnings Per Share 2011 Expectations IBM GAAP EPS $12.95+ IBM Operating EPS (Non-GAAP) $13.35+ Adjustments Acquisition-Related Charges * $0.42 Amortization of Purchased Intangibles $0.39 Other Acquisition-Related Charges $0.03 Non-Operating Retirement-Related Items ($0.02) * Includes acquisitions closed as of 9/30/2011 The above serves to reconcile the Non-GAAP financial information contained in the “3Q 2011 Highlights” and “3Q 2011 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 Supplementary Materials GAAP to Operating (Non-GAAP) Bridge – 3Q 2011 $ in Millions, except EPS Gross Profit GAAP Acquisition-related Adjustments* Retirement-related Adjustments** Operating (Non-GAAP) $12,173 $87 ($7) $12,253 SG&A 5,662 RD&E 1,546 Other Income & Expense (75) 0 0 5,587 22 1,568 128 (18) 0 111 Total Operating Expense & Other Income 7,146 (92) 21 7,075 Pre-Tax Income 5,027 180 (29) 5,178 Tax *** 1,188 47 (11) 1,224 Net Income 3,839 133 (17) 3,954 $0.11 ($0.01) Diluted Earnings Per Share $3.19 $3.28 * Includes amortization of purchased intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, and deal costs ** Includes retirement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amortization of transition assets, other settlements, curtailments, multi-employer plans and insolvency insurance ***The tax impact on the Operating (Non-GAAP) Pre-Tax Income is calculated under the same accounting principles applied to the As Reported Pre-Tax Income under ASC 740, which employs an annual effective tax rate method to the results. The above serves to reconcile the Non-GAAP financial information contained in the “3Q 2011 Highlights,” “Key Financial Metrics” and “Expense Summary” discussion 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 Supplementary Materials GAAP to Operating (Non-GAAP) Bridge – 3Q 2010 $ in Millions, except EPS Gross Profit GAAP Acquisition-related Adjustments* Retirement-related Adjustments** Operating (Non-GAAP) $11,001 $65 ($53) $11,013 SG&A 5,149 RD&E 1,464 Other Income & Expense (106) (76) 20 5,094 0 31 1,495 1 0 Total Operating Expense & Other Income 6,324 (75) Pre-Tax Income 4,677 139 (104) 4,712 Tax *** 1,088 34 (38) 1,084 Net Income 3,589 105 (66) 3,628 Diluted Earnings Per Share $2.82 $0.08 51 (105) ($0.05) 6,301 $2.85 * Includes amortization of purchased Intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, and deal costs ** Includes retirement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amortization of transition assets, other settlements, curtailments, multi-employer plans and insolvency insurance ***The tax impact on the Operating (Non-GAAP) Pre-Tax Income is calculated under the same accounting principles applied to the As Reported Pre-Tax Income under ASC 740, which employs an annual effective tax rate method to the results. The above serves to reconcile the Non-GAAP financial information contained in the “3Q 2011 Highlights,” “Key Financial Metrics” and “Expense Summary” discussion 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 Supplementary Materials GAAP to Operating (Non-GAAP) Bridge – YTD $ in Millions, except EPS GAAP Acquisition-related Adjustments* Retirement-related Adjustments** Operating (Non-GAAP) Total Operating Expense & Other Income 21,687 (249) 49 21,487 Pre-Tax Income 13,729 508 (37) 14,200 Net Income 10,365 376 $8.48 $0.31 ($0.02) $8.77 Total Operating Expense & Other Income 19,019 (200) 149 18,968 Pre-Tax Income 12,767 378 (293) 12,853 YTD 3Q 2011 Diluted Earnings Per Share (20) 10,721 YTD 3Q 2010 Net Income 9,576 272 (179) 9,669 Diluted Earnings Per Share $7.38 $0.21 ($0.14) $7.45 * Includes amortization of purchased Intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, and deal costs ** Includes retirement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amortization of transition assets, other settlements, curtailments, multi-employer plans and insolvency insurance The above serves to reconcile the Non-GAAP financial information contained in the “3Q 2011 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 28 Supplemental Materials Non-GAAP Supplementary Materials GAAP to Operating (Non-GAAP) Bridge -- 3Q 2011 GAAP Acquisitionrelated * adjustments Retirementrelated ** adjustments Operating (Non-GAAP) Gross Profit Margin 46.5% 0.3 pts 0.0 pts 46.8% PTI Margin 19.2% 0.7 pts (0.1) pts 19.8% Tax Rate *** 23.6% 0.1 pts (0.1) pts 23.6% Net Income Margin 14.7 % 0.5 pts (0.1) pts 15.1% * Includes Amortization of Purchased Intangibles, In Process R&D, Severance Cost for Acquired employees, vacant space for acquired companies, deal costs ** Includes Retirement Related Interest Cost, Expected ROA, Recognized actuarial losses or gains, amortization of transition assets, other settlements, curtailments, multi-employer plans and insolvency insurance *** The tax impact on the Operating (Non-GAAP) Pre-Tax Income is calculated under the same accounting principles applied to the As Reported Pre-Tax Income under ASC 740, which employs an annual effective tax rate method to the results. The above serves to reconcile the Non-GAAP financial information contained in the “Key Financial Metrics” and “3Q 2011 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 Supplementary Materials GAAP to Operating (Non-GAAP) Bridge -- 3Q 2010 GAAP Acquisitionrelated * adjustments Retirementrelated ** adjustments Operating (Non-GAAP) Gross Profit Margin 45.3% 0.3 pts (0.2) pts 45.4 % PTI Margin 19.3% 0.6 pts (0.4) pts 19.4 % Tax Rate *** 23.3 % 0.0 pts (0.3) pts 23.0 % Net Income Margin 14.8 % 0.4 pts (0.3) pts 14.9 % * Includes Amortization of Purchased Intangibles, In Process R&D, Severance Cost for Acquired employees, vacant space for acquired companies, deal costs ** Includes Retirement Related Interest Cost, Expected ROA, Recognized actuarial losses or gains, amortization of transition assets, other settlements, curtailments, multi-employer plans and insolvency insurance *** The tax impact on the Operating (Non-GAAP) Pre-Tax Income is calculated under the same accounting principles applied to the As Reported Pre-Tax Income under ASC 740, which employs an annual effective tax rate method to the results. The above serves to reconcile the Non-GAAP financial information contained in the “Key Financial Metrics” and “3Q 2011 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 30 Supplemental Materials Non-GAAP Supplementary Materials GAAP to Operating (Non-GAAP) Bridge – YTD 3Q 2011 GAAP Acquisitionrelated * adjustments Retirementrelated ** adjustments Operating (Non-GAAP) Gross Profit Margin 45.7% 0.3 pts 0.0 pts 46.1 % PTI Margin 17.7% 0.7 pts 0.0 pts 18.3 % Tax Rate *** 24.5 % 0.1 pts (0.1) pts 24.5 % Net Income Margin 13.4 % 0.5 pts 0.0 pts 13.8% * Includes Amortization of Purchased Intangibles, In Process R&D, Severance Cost for Acquired employees, vacant space for acquired companies, deal costs ** Includes Retirement Related Interest Cost, Expected ROA, Recognized actuarial losses or gains, amortization of transition assets, other settlements, curtailments, multi-employer plans and insolvency insurance *** The tax impact on the Operating (Non-GAAP) Pre-Tax Income is calculated under the same accounting principles applied to the As Reported Pre-Tax Income under ASC 740, which employs an annual effective tax rate method to the results. The above serves to reconcile the Non-GAAP financial information contained in the “3Q 2011 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 31 Supplemental Materials Non-GAAP Supplementary Materials GAAP to Operating (Non-GAAP) Bridge – YTD 3Q 2010 GAAP Acquisitionrelated * adjustments Retirementrelated ** adjustments Operating (Non-GAAP) Gross Profit Margin 44.9% 0.3 pts (0.2) pts 44.9 % PTI Margin 18.0% 0.5 pts (0.4) pts 18.1 % Tax Rate *** 25.0 % 0.1 pts (0.3) pts 24.8 % Net Income Margin 13.5 % 0.4 pts (0.3) pts 13.6 % * Includes Amortization of Purchased Intangibles, In Process R&D, Severance Cost for Acquired employees, vacant space for acquired companies, deal costs ** Includes Retirement Related Interest Cost, Expected ROA, Recognized actuarial losses or gains, amortization of transition assets, other settlements, curtailments, multi-employer plans and insolvency insurance *** The tax impact on the Operating (Non-GAAP) Pre-Tax Income is calculated under the same accounting principles applied to the As Reported Pre-Tax Income under ASC 740, which employs an annual effective tax rate method to the results. The above serves to reconcile the Non-GAAP financial information contained in the “3Q 2011 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 32 Supplemental Materials Non-GAAP Supplementary Materials Reconciliation of Free Cash Flow (excluding GF Receivables) $ in Billions 12 months ended 9/30/11 Net Cash from Operations $19.5 Less: Global Financing Receivables Net Cash from Operations (excluding GF Receivables) Net Capital Expenditures (0.9) 20.4 (4.1) Free Cash Flow (excluding GF Receivables) $16.3 The above serves to reconcile the Non-GAAP financial information contained in the “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 33 Supplemental Materials Non-GAAP Supplementary Materials Reconciliation of Revenue Growth 3Q11 Yr/Yr As Rptd @CC Canada Spain UK Japan 14% 19% 9% (0%) 7% 9% 5% (10%) Growth Markets GTS Outsourcing Systems & Technology System x 20% 16% 21% 10% 12% 15% The above serves to reconcile the Non-GAAP financial information contained in the "Revenue by Geography,” “Services Segments,” and “Systems & Technology Segment” 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 Supplementary Materials Reconciliation of B/(W) Yr/Yr Expense Drivers GAAP Non-GAAP Adjustments Operating (Non-GAAP) Currency (5 pts) 0 pts (5 pts) Acquisitions (3 pts) 0 pts (2 pts) Base (2 pts) 0 pts (3 pts) Currency (2 pts) 0 pts (2 pts) Acquisitions (4 pts) 0 pts (4 pts) 1 pts 1 pt 2 pts Currency (7 pts) 0 pts (7 pts) Acquisitions (3 pts) 0 pts (3 pts) Base (2 pts) 0 pts (2 pts) SG&A RD&E Base Operating Expense & Other Income 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 35 Supplemental Materials Non-GAAP Supplementary Materials Reconciliation of Debt-to-Capital Ratio 3Q11 FY10 3Q10 Non-Global Financing Debt / Capital 28% 23% 22% IBM Consolidated Debt / Capital 57% 55% 55% The above serves to reconcile the Non-GAAP financial information contained in the “Balance Sheet Summary” discussion regarding the non-Global Financing debt-to-capital ratio 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 36 Supplemental Materials Non-GAAP Supplementary Materials Reconciliation of Operating EPS Bridge 3Q10 to 3Q11 GAAP Acquisitionrelated Adjustments* Retirement-related Adjustments** Operating (Non-GAAP) 3Q10 EPS $2.82 $0.08 ($0.05) $2.85 Revenue growth @ actual 0.22 0.01 (0.01) 0.22 Margin expansion Gross Margin Expense Tax 0.19 (0.20) (0.01) 0.01 0.01 (0.01) 0.04 0.02 (0.01) 0.23 (0.17) (0.03) Share repurchases 0.17 0.01 0.00 3Q11 EPS $3.19 $0.11 ($0.01) 0.18 $3.28 * Includes amortization of purchased intangibles, in process R&D, severance cost for acquired employees, vacant space for acquired companies, deal costs ** Includes retirement related interest cost, expected return on plan assets, recognized actuarial losses or gains, amortization of transition assets, other settlements, curtailments, multi-employer plans and insolvency insurance The above serves to reconcile the Non-GAAP financial information contained in the “Operating EPS Bridge – 3Q10 to 3Q11” 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 37 www.ibm.com/investor 38