® 4Q 2009 Earnings Presentation January 19, 2010 www.ibm.com/investor Forward Looking Statements Certain comments made in this presentation may be characterized as forward looking under the Private Securities Litigation Reform Act of 1995. 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. These charts and the associated remarks and comments are integrally related, and are intended to be presented and understood together. www.ibm.com/investor 2 2009 Financial Highlights 4Q 2009 Full Year ¾EPS $3.59 +10% yr/yr ¾EPS $10.01 +13% yr/yr ¾Hardware / Software Share Gains ¾Hardware / Software Share Gains •POWER, System x, Blades, Storage •WebSphere, Tivoli, Branded MW ¾Services Signings $18.8B @ Actual •POWER, System x, Blades, Storage, Total Servers •Middleware, WebSphere, Tivoli, Rational ¾Signings $57B @ Actual, Backlog $137B •Outsourcing +9% yr/yr, 11% @CC ¾PTI Margin +1.9 pts yr/yr ¾PTI Margin +2.8 pts yr/yr ¾ $7.2B Free Cash Flow* ¾ $15.1B Free Cash Flow* +$800M yr/yr * Excluding GF Receivables 7th consecutive year of double-digit EPS growth in 2009 Expect at least $11.00 EPS in 2010 www.ibm.com/investor 3 IBM Financial Performance History $22 $11 $20 $10 $18 $9 Pre-tax income $16 $8 EPS $14 $7 $12 $6 $10 $5 $8 $4 $6 $3 $4 $2 Divested Revenue Free Cash Flow* 2000 2001 2002 2003 2004 2005 2006 2007 2008 Note: 2005-2008 EPS reflects the adoption of amendments to ASC 260, “Earnings Per Share” www.ibm.com/investor 2009 EPS Pre-tax Income & Free Cash Flow ($B) Revenue * Excluding GF Receivables 4 Transformational Impact on Profit Mix Segment Pre-tax Income * % of Segments $8.1B 42% $8.1B 42% $1.7B $1.4B 9% 7% % of Segments $2.8B 25% $4.5B 40% $1.2B 11% $2.7B 24% 2000** Hardware 2009 Financing Services Software * Sum of external segment pre-tax income not equal to IBM pre-tax income ** Stock-based compensation expense was not recorded at the segment level www.ibm.com/investor 5 Transformational Drivers Initiative 2009 Result ¾ Shifting to Higher Value Areas ¾ Software $8B PTI Î 42% of total segments ¾ Services $8B PTI Î 42% of total segments ¾ Continued acquisitions; 108 companies since 2000 ¾ Improving Operating Leverage through Productivity ¾ $3.7B cost & expense savings ¾ 9% operational expense improvement ¾ Expanded margins ¾ Investing for Growth ¾ Growth Markets revenue +8 pts > Major Markets ¾ #1 patents for 17th consecutive year ¾ Business Analytics acquisitions +9% revenue growth @CC www.ibm.com/investor 6 4Q / FY 2009 Financial Summary $ in Billions, except EPS Revenue 4Q09 B/(W) Yr/Yr FY09 B/(W) Yr/Yr $27.2 1% $95.8 (8%) @CC (5%) GP % 48.3% 0.4 pts (5%) 45.7% 1.7 pts Expense $6.8 5% $25.6 11% Pre-Tax Income $6.4 10% $18.1 9% PTI Margin 23.4% 1.9 pts 18.9% 2.8 pts Tax Rate 24.6% (0.8 pts) 26.0% 0.2 pts Net Income $4.8 Shares (Diluted) (M) EPS 1,340.7 $3.59 9% $13.4 9% 1% 1,341.4 3% 10% $10.01 13% Strong margins drive record profit performance www.ibm.com/investor 7 Revenue by Geography $ in Billions Americas 4Q09 $11.1 B/(W) Yr/Yr Rptd @CC (3%) (6%) Europe/ME/A 9.7 2% (7%) Asia Pacific 5.8 6% (3%) Total Geographies $26.6 1% (6%) IBM $27.2 1% (5%) Major Markets (2%) (7%) Growth Markets 14% 2% 18% 7% BRIC Countries Canada/ LA U.S. -8% EMEA APac Japan +3% -9% @CC @CC OEM +5% Growth markets outpace major markets by 8 points in 2009 www.ibm.com/investor 8 Revenue and Gross Margin by Segment Revenue $ in Billions 4Q09 Global Technology Services $10.1 Gross Profit Margin B/(W) Yr/Yr Rptd @CC 4Q09 B/(W) Yr/Yr Pts 4% (3%) 35.8% 0.9 pts Global Business Services 4.6 (3%) (9%) 30.3% 1.7 pts Software 6.6 2% (4%) 87.7% Flat Systems & Technology 5.2 (4%) (9%) 42.5% 2.6 pts Global Financing 0.6 (6%) (12%) 52.0% 2.0 pts Total Segments $27.0 1% (6%) 49.1% 1.3 pts Total IBM $27.2 1% (5%) 48.3% 0.4 pts Margin expansion in 21 of last 22 quarters www.ibm.com/investor 9 Expense Summary $ in Billions 4Q09 B/(W) Yr/Yr SG&A $5.6 RD&E IP and Development Income Currency Acq.* Ops 5% (7 pts) (1 pts) 13 pts 1.5 4% (3 pts) (1 pts) 8 pts (0.3) (5%) (9 pts) (1 pts) 15 pts Other (Income)/Expense 0.0 nm Interest Expense 0.1 58% $6.8 5% Total Expense & Other Income B/(W) Yr/Yr Drivers * Includes acquisitions made in the last twelve months Improving operating leverage through productivity www.ibm.com/investor 10 Margins by Segment External Gross Profit Margins Total Pre-Tax Margins 4Q09 B/(W) Yr/Yr Pts 4Q09 B/(W) Yr/Yr Pts Global Technology Services 35.8% 0.9 pts 15.0% 0.6 pts Global Business Services 30.3% 1.7 pts 16.0% 1.1 pts Software 87.7% Flat 41.5% 2.4 pts Systems & Technology 42.5% 2.6 pts 15.4% 2.6 pts Global Financing 52.0% 2.0 pts 43.6% 5.5 pts Total Segments 49.1% 1.3 pts 23.0% 1.9 pts Total IBM 48.3% 0.4 pts 23.4% 1.9 pts Broad-based margin expansion www.ibm.com/investor 11 Services Segments Global Technology Services (GTS) Global Business Services (GBS) 4Q09 B/(W) Yr/Yr Rptd @CC $ in Billions Revenue (External) $10.1 4% Revenue (External) Gross Margin (External) 35.8% 0.9 pts PTI Margin 15.0% 0.6 pts $ in Billions GTS Signings 4Q09 Integrated Technology Svcs GTS Outsourcing $2.7 Yr/Yr (3%) (3%) @CC (10%) 8.6 5% (1%) Total GTS Signings $11.4 3% (4%) GBS Signings 4Q09 Yr/Yr $4.6 3% 2.8 65% 55% $7.4 20% 13% $18.8 9% 2% Consulting & Systems Integ. Application Outsourcing Total GBS Signings Total Global Services Signings @CC (3%) 4Q09 B/(W) Yr/Yr Rptd @CC $4.6 (3%) Gross Margin (External) 30.3% 1.7 pts PTI Margin 16.0% 1.1 pts (9%) (7%) Yr/Yr 4Q09 Revenues Integrated (1%) (% of Total Services) Technology Yr/Yr (Growth @CC) Services Maint. 16% 13% Strategic +1% (2%) Outsourcing BTO 4% Yr/Yr Yr/Yr 36% Global Business Services 31% (9%) Yr/Yr Services profit +7% yr/yr, growth in both GTS and GBS www.ibm.com/investor 12 Software Segment B/(W) Yr/Yr 4Q09 Rptd @CC $6.6 2% (4%) Gross Margin (External) 87.7% Flat PTI Margin 41.5% 2.4 pts $ in Billions Revenue (External) 4Q09 Revenue WebSphere Family Information Management 4Q09 Revenue (% of Total Software) Yr/Yr Rptd @CC 13% 6% 7% 1% 1% Tivoli 7% Lotus (5%) (11%) Rational (4%) (10%) Key Branded Middleware 6% Flat Total Middleware 4% (3%) Total Software 2% (4%) Key Branded Middleware 63% Other Middleware 19% Operating Systems Other 9% 9% Share gain in Branded Middleware, 10% yr/yr profit growth www.ibm.com/investor 13 Systems & Technology Segment B/(W) Yr/Yr $ in Billions 4Q09 Rptd @CC $5.2 (4%) (9%) Gross Margin (External) 42.5% 2.6 pts PTI Margin 15.4% 2.6 pts Revenue (External) 4Q09 Revenue Yr/Yr Rptd @CC System z (27%) (31%) Converged System p (14%) (18%) 37% 31% System x Servers Storage 1% (4%) Retail Store Solutions (5%) (9%) Total Systems (5%) (10%) Microelectronics OEM Total Systems & Technology 2% 2% (4%) (9%) 4Q09 Revenue (% of Total Sys & Tech) Servers 66% Storage 21% RSS Micr o OE 9% M Share gains in System x, System p and Storage; 15% yr/yr profit growth www.ibm.com/investor 14 Cash Flow Analysis $ in Billions Net Cash from Operations Less: Global Financing Receivables 4Q09 B/(W) Yr/Yr FY09 B/(W) Yr/Yr $6.4 ($0.2) $20.8 $2.0 1.9 1.9 (1.9) 0.3 8.4 (0.5) 18.9 0.0 (1.1) (0.1) (3.7) 0.8 7.2 (0.6) 15.1 0.8 Acquisitions (1.1) (0.8) (1.2) 5.1 Divestitures 0.0 0.0 0.4 0.3 Dividends (0.7) (0.1) (2.9) (0.3) Share Repurchases (3.1) (2.3) (7.4) 3.1 1.5 3.3 (4.7) (1.5) (1.4) (0.1) 1.7 (3.3) ($0.7) $1.1 $4.3 Net Cash from Operations (excluding GF Receivables) Net Capital Expenditures Free Cash Flow (excluding GF Receivables) Non-GF Debt Other (includes GF A/R & GF Debt) Change in Cash & Marketable Securities $2.5 www.ibm.com/investor 15 Balance Sheet Summary Dec. 08 $ in Billions Cash & Marketable Securities Dec. 09 $12.9 $14.0 Non-GF Assets* 61.8 61.7 Global Financing Assets 34.9 33.3 109.5 109.0 Other Liabilities 62.0 60.2 Non-GF Debt* 9.6 3.7 24.4 22.4 33.9 26.1 Total Liabilities 95.9 86.3 Equity 13.6 22.8 Total Assets Global Financing Debt Total Debt Non-GF Debt / Capital Global Financing Leverage 49% 16% 7.0 7.1 * Includes eliminations of inter-company activity www.ibm.com/investor 16 EPS Bridge – 4Q08 to 4Q09 $0.24 $3.27 $0.03 ($0.04) $0.03 $3.59 Share Repurchases 4Q09 EPS $0.06 Operating Leverage 4Q08 EPS* Revenue Growth @ Actual Gross Margin Expense Productivity Tax Rate * Reflects the adoption of amendments to ASC 260, “Earnings Per Share” www.ibm.com/investor 17 EPS Bridge – FY08 to FY09 $0.58 $8.89 ($0.68) $0.34 $10.01 Share Repurchases 2009 EPS $0.03 $0.85 Operating Leverage 2008 EPS* Revenue Growth @ Actual Gross Margin Expense Productivity Tax Rate * Reflects the adoption of amendments to ASC 260, “Earnings Per Share” www.ibm.com/investor 18 2010 $11.00+ 2009 $10.01 2008 $8.89 2007 $7.15 2006 $6.05 Well-Positioned for 2010 ¾ Shifting portfolio to higher value spaces ¾ Improving operating leverage through productivity ¾ Investing in skills and capabilities to drive future growth EPS Expect EPS of at least $11.00 in 2010 Note: 2006-2008 EPS reflects the adoption of amendments to ASC 260, “Earnings Per Share” www.ibm.com/investor 19 www.ibm.com/investor 20 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 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 – 4Q and FY 2009 Revenue by Geography – FY 2009 Revenue by Segment – FY 2009 Expense Summary – FY 2009 Margins by Segment – FY 2009 Summary and Selected Items – FY 2009 Cash Flow (FAS 95) Computation of 2009 Global Financing Return on Equity Supplemental EPS Information – Acquisition-Related Activity Non-GAAP Supplementary Materials • Constant Currency, Cash Flow, Debt-to-Capital Ratio • Reconciliation of Free Cash Flows (excluding GF Receivables) • Reconciliation of Acquired Business Revenue Growth • Reconciliation of Geography Revenue Growth • Reconciliation of Software Segment Revenue Growth • Reconciliation of Debt-to-Capital Ratio www.ibm.com/investor 21 Currency – Year/Year Comparison Quarterly Averages per US $ 3Q09 Yr/Yr 4Q09 Yr/Yr 1/18 Spot Euro 0.70 (5%) 0.68 11% 0.70 Pound 0.61 (15%) 0.61 4% 0.61 94 13% 90 6% 91 Yen IBM Revenue Impact (2 pts) Revenue As Reported Currency Impact Revenue @CC 6 pts (US$B) Yr/Yr $27.2 1% 1.7 6 pts $25.5 (5%) Yr/Yr @ 1/18 Spot 1Q10 2Q10 3Q10 4Q10 9% 5% 1% (3%) 12% 5% 0% 0% 3% 7% 3% (1%) ~6-7 pts ~4-5 pts ~1-2 pts ~(1)-0 pts IBM hedges its major cross-border cash flows to mitigate the effect of currency volatility. The impact of these hedging programs is principally reflected in Other Income and Expense, as well as Cost of Goods Sold. Negative Yr/Yr growth signifies a translation hurt www.ibm.com/investor 22 Supplemental Segment Information – 4Q 2009 Revenue Growth Global Services Signings ($B) Yr/Yr @CC Global Services Strategic Outsourcing 6% (2%) Global Services (C&SI / ITS) Business Transformation Outsourcing 7% 1% Integrated Tech Services Flat (7%) Maintenance 6% (1%) 4% (3%) Global Business Services (3%) (9%) Backlog $137B Global Technology Services 4Q09 Yr/Yr @CC $7.4 1% (6%) GBS (C&SI) 4.6 3% (3%) GTS (ITS) 2.7 (3%) Global Services Outsourcing (10%) $11.4 15% 8% GBS (App. Outsourcing) 2.8 65% 55% GTS (SO & BTO) 8.6 5% (1%) Change in Backlog due to Currency Quarter-to-Quarter Year-to-Year ($1B) $6B www.ibm.com/investor 23 Supplemental Segment Information – 4Q 2009 Revenue Growth Revenue Growth Systems & Technology Yr/Yr @CC System z (27%) (31%) Converged System p (14%) (18%) 37% 31% System x Servers Storage Retail Store Solutions Total Systems Microelectronics OEM Total Systems & Technology GP% 1% (4%) (5%) (9%) (5%) (10%) 2% 2% (4%) (9%) Share Software Yr/Yr @CC 13% 6% Information Management 7% 1% Tivoli 7% 1% Lotus (5%) (11%) Rational (4%) (10%) 6% Flat (4%) (10%) WebSphere Family = = = Key Branded Middleware Other Middleware Total Middleware 4% (3%) Operating Systems Flat (1%) Other Software/Services (4%) Total Software www.ibm.com/investor 2% (10%) (4%) 24 Global Financing Portfolio 4Q09 – $25.0B Net External Receivables Investment Grade 59% Non-Investment Grade 41% 40% 35% 30% 25% 20% 15% 10% 35% 24% 22% 11% 5% 3% 5% 0% Aaa-A3 Baa1-Baa3 Ba1-Ba2 Identified Loss Rate Anticipated Loss Rate Reserve Coverage Client Days Delinquent Outstanding Commercial A/R > 30 Days Ba3-B1 B2-B3 4Q09 1.6% 0.5% 2.1% 3Q09 1.7% 0.6% 2.3% 4Q08 1.4% 0.6% 2.0% 2.4 $28M 3.1 $34M 3.2 $41M www.ibm.com/investor Caa-D 25 Revenue by Key Industry Sales Unit $ in Billions Financial Services 4Q09 B/(W) Yr/Yr Rptd @CC FY09 B/(W) Yr/Yr Rptd @CC $27.2 (6%) (4%) 1% 4% $7.9 1% (6%) Public 4.3 5% Flat 15.6 Industrial 2.8 (9%) (15%) 10.1 Distribution 2.6 (1%) Communications 2.6 General Business (17%) (15%) (6%) 9.0 (10%) (8%) (3%) (9%) 9.4 (8%) (5%) 5.6 5% (2%) 19.1 (8%) (5%) All Sectors $26.7 1% (6%) $93.6 (7%) (5%) Total IBM $27.2 1% (5%) $95.8 (8%) (5%) www.ibm.com/investor 26 Revenue by Geography – FY 2009 $ in Billions Americas FY09 B/(W) Yr/Yr Rptd @CC $40.2 (6%) (5%) Europe/ME/A 32.6 (12%) (6%) Asia Pacific 20.7 (2%) (4%) Total Geographies $93.5 (7%) (5%) IBM $95.8 (8%) (5%) Major Markets (8%) (6%) Growth Markets (3%) 1% 1% 4% BRIC Countries www.ibm.com/investor Canada/ LA U.S. -6% EMEA APac Japan +3% -10% @CC @CC OEM -15% 27 Revenue by Segment – FY 2009 Revenue $ in Billions FY09 Global Technology Services B/(W) Yr/Yr Rptd @CC $37.3 (5%) (2%) Global Business Services 17.7 (10%) (8%) Software 21.4 (3%) (1%) Systems & Technology 16.2 (16%) (15%) 2.3 (10%) (7%) Total Segments $94.9 (8%) (5%) Total IBM $95.8 (8%) (5%) Global Financing www.ibm.com/investor Global Business Systems & Services Technology Global Technology Services Software Global Financing 28 Expense Summary – FY 2009 B/(W) Yr/Yr Drivers FY09 B/(W) Yr/Yr Currency Acq.* Ops SG&A $21.0 10% 3 pts (1 pts) 9 pts RD&E 5.8 8% 2 pts (2 pts) 8 pts IP and Development Income (1.2) 2% Other (Income)/Expense (0.4) 18% 0.4 40% $25.6 11% 4 pts (1 pts) 9 pts $ in Billions Interest Expense Total Expense & Other Income * Includes acquisitions made in the last twelve months www.ibm.com/investor 29 Margins by Segment – FY 2009 External Gross Profit Margins Total Pre-Tax Margins FY09 B/(W) Yr/Yr Pts FY09 B/(W) Yr/Yr Pts Global Technology Services 35.0% 2.4 pts 14.3% 3.0 pts Global Business Services 28.2% 1.5 pts 13.8% 0.8 pts Software 86.0% 0.6 pts 33.6% 5.2 pts Systems & Technology 37.8% (0.2 pts) 8.3% 0.6 pts Global Financing 47.5% (3.8 pts) 42.4% 6.1 pts Total Segments 46.0% 1.7 pts 18.9% 3.1 pts Total IBM 45.7% 1.7 pts 18.9% 2.8 pts www.ibm.com/investor 30 Summary and Selected Items – FY 2009 $ in Billions, except EPS Revenue FY09 B/(W) Yr/Yr $95.8 (8%) Pre-Tax Income $18.1 PTI Margin 18.9% Net Income $13.4 9% EPS $10.01 13% Includes: Pre-Tax Income Retirement-Related Benefits (1.4) Stock-Based Compensation (0.6) Amort. of Purchased Intangibles (0.5) Workforce Rebalancing (0.5) 9% 2.8 pts Reported results include almost $3B PTI impact from selected items www.ibm.com/investor 31 Cash Flow (FAS 95) 4Q09 4Q08 FY09 FY08 $4.8 $4.4 $13.4 $12.3 Depreciation / Amortization of Intangibles 1.3 1.3 5.0 5.4 Stock-based Compensation 0.1 0.2 0.6 0.7 Working Capital / Other 2.2 3.0 (0.1) 0.4 (1.9) (2.3) 1.9 0.0 6.4 6.6 20.8 18.8 (1.1) (1.0) (3.7) (4.5) 0.0 0.0 0.4 0.1 Acquisitions, net of cash acquired (1.1) (0.3) (1.2) (6.3) Marketable Securities / Other Investments, net (0.3) 0.4 (2.2) 1.5 (2.5) (0.9) (6.7) (9.3) 1.0 (1.6) (7.5) (2.4) Dividends (0.7) (0.7) (2.9) (2.6) Common Stock Repurchases (3.1) (0.7) (7.4) (10.6) 1.5 0.1 3.1 Net Cash used in Financing Activities (1.2) (2.9) Effect of Exchange Rate changes on Cash (0.1) 0.1 Net Change in Cash & Cash Equivalents $2.7 $ in Billions 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 Net Cash used in Investing Activities Debt, net of payments & proceeds Common Stock Transactions - Other www.ibm.com/investor $3.0 (14.7) 0.1 ($0.6) 3.8 (11.8) 0.1 ($2.2) 32 Computation of 2009 Global Financing Return on Equity The following are details on the computation of IBM’s Global Financing Return on Equity. The Global Financing segment is in the business of providing financing to IBM’s clients and its business partners, and is measured as if it were a standalone entity. A financing business is managed on a leveraged basis and therefore, we measure the profitability of a financing entity based on its after-tax earnings in relation to the equity employed in the business. FY 2009 $ in Billions Numerator: (a) $1,138 Average Global Financing Equity** (b) $3,312 Global Financing Return on Equity (a)/(b) 34%* Global Financing After Tax Income* Denominator: * Calculated based upon an estimated tax rate principally based on Global Financing’s geographic mix of earnings as IBM’s provision for income taxes is determined on a consolidated basis. ** Average of ending equity for the Global Financing Segment for the last five quarters. www.ibm.com/investor 33 Supplemental EPS Information – Acquisition-Related Activity The company is including a view of the impact of certain acquisitionrelated charges on IBM’s earnings results. Management’s view is that this supplemental information provides additional insight into the company’s ongoing operations and enables a more meaningful comparison to other companies in the technology sector who present similar information. www.ibm.com/investor 34 Supplemental EPS Information – Acquisition-Related Activity - 2009 1Q09 2Q09 3Q09 4Q09 FY09 Pre-Tax Income $3,122 $4,262 $4,373 $6,381 $18,138 Net Income $2,295 $3,103 $3,214 $4,813 $13,425 EPS $1.70 $2.32 $2.40 $3.59 $10.01 $ in Millions, except EPS As Reported Adjustments Pre-Tax Income Total $125 $122 $124 $127 $498 125 122 122 120 489 In Process R&D 0 0 0 0 0 Acquisition-Related Charges 0 0 2 7 9 $90 $88 $89 $91 $357 Amortization of Acquired Intangibles Net Income EPS $0.07 $0.07 $0.07 $0.07 $0.27 Pre-Tax Income $3,247 $4,384 $4,496 $6,507 $18,635 Net Income $2,385 $3,191 $3,303 $4,904 $13,781 EPS $1.77 $2.39 $2.47 $3.66 $10.27 Results excluding Acquisition-Related Activity www.ibm.com/investor 35 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/or earnings presentation materials, the following Non-GAAP information which management believes provides useful information to investors. Constant Currency Management refers to growth rates at constant currency or adjusting for currency so that the business 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. Constant currency revenue results are calculated by translating current period revenue in local currency using the prior year's currency conversion rate. This consistent approach is based on the pricing currency for each country which is typically the functional 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. Cash Flow Management includes presentations of both cash flow from operations and free cash flow that exclude the effect of Global Financing Receivables. For a financing business, increasing receivables is the basis for growth. Receivables are viewed as an investment and an income-producing asset. Therefore, management presents financing receivables as an investing activity. Management’s view is that this presentation gives the investor the best perspective of cash available for new investment or for distribution to shareholders. 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. www.ibm.com/investor 36 Non-GAAP Supplementary Materials Reconciliation of Free Cash Flows (excluding GF Receivables) $ in Billions 2000 2001 2002 2003 2004 Net Cash from Operations $8.6 $13.7 $13.8 $14.5 $15.3 (2.5) 2.0 3.3 1.9 2.5 11.1 11.7 10.5 12.6 12.9 (4.3) (4.9) (4.6) (3.9) (3.7) 6.7 6.8 5.9 8.7 9.1 2005 2006 2007 2008 2009 $14.9 $15.0 $16.1 $18.8 $20.8 1.8 (0.3) (1.3) 0.0 1.9 13.1 15.3 17.4 18.8 18.9 (3.5) (4.7) (5.0) (4.5) (3.7) 9.6 10.5 12.4 14.3 15.1 Less: Global Financing Receivables Net Cash from Operations (excluding GF Receivables) Net Capital Expenditures Free Cash Flow (excluding GF Receivables) Net Cash from Operations Less: Global Financing Receivables Net Cash from Operations (excluding GF Receivables) Net Capital Expenditures Free Cash Flow (excluding GF Receivables) The above serves to reconcile the Non-GAAP financial information contained in the discussion regarding Cash Flow in the company’s earnings presentation. See Slide 36 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 37 Non-GAAP Supplementary Materials Reconciliation of Acquired Business Revenue Growth FY09 Yr/Yr Business Analytics Acquisitions – Software As Rptd @CC 7% 9% The above serves to reconcile the Non-GAAP financial information contained in the “Transformational Drivers” discussion regarding revenue growth of acquired businesses in the company’s earnings presentation. See Slide 36 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 38 Non-GAAP Supplementary Materials Reconciliation of Geography Revenue Growth 4Q09 Yr/Yr As Rptd @CC Asia Pacific, other than Japan 14% 3% Japan (3%) (9%) FY09 Yr/Yr As Rptd 11% @CC 10% Asia Pacific, other than Japan (2%) 3% Japan (1%) China (10%) The above serves to reconcile the Non-GAAP financial information contained in the “Revenue by Geography” discussion regarding revenue growth in certain geographies/countries in the company’s earnings presentation. See Slide 36 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 39 Non-GAAP Supplementary Materials Reconciliation of Software Segment Revenue Growth 4Q09 Yr/Yr Enterprise Asset Management – Emerging Markets As Rptd @CC 63% 40% The above serves to reconcile the Non-GAAP financial information contained in the “Software Segment” discussion regarding revenue growth in certain products in the company’s earnings presentation. See Slide 36 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 40 Non-GAAP Supplementary Materials Reconciliation of Debt-to-Capital Ratio FY08 FY09 Non-GF Debt / Capital 49% 16% IBM Consolidated Debt / Capital 71% 53% The above serves to reconcile the Non-GAAP financial information contained in the “Balance Sheet Summary” discussion regarding the non-GF debt to capital ratio in the company’s earnings presentation. See Slide 36 of this presentation for additional information on the use of these Non-GAAP financial measures. www.ibm.com/investor 41 www.ibm.com/investor 42