IBM 3Q 2016 Earnings October 17, 2016 ibm.com/investor
Forward Looking Statements and Non-GAAP Information 2 Certain comments made in this presentation may be In an effort to provide additional and useful information regarding the company ’ s financial results and other characterized as forward looking under the Private Securities Litigation Reform Act of 1995. Forward-looking financial information as determined by generally accepted statements are based on the company ’ s current accounting principles (GAAP), the company also assumptions regarding future business and financial discusses, in its earnings press release and earning performance. Those statements by their nature address presentation materials, certain non-GAAP information including “ operating earnings ” and other “ operating ” matters that are uncertain to different degrees. Those statements involve a number of factors that could cause financial measures. The rationale for management ’ s use of actual results to differ materially. Additional information this non-GAAP information is included as Exhibit 99.2 to concerning these factors is contained in the Company ’ s the company’s Form 8 -K submitted to the SEC on October filings with the SEC. Copies are available from the SEC, 17, 2016. The reconciliation of non-GAAP information to GAAP is included on the slides entitled “Non -GAAP from the IBM web site, or from IBM Investor Relations. Any forward-looking statement made during this presentation Supplemental Materials” in this presentation. For other speaks only as of the date on which it is made. The related information please visit the Company’s investor company assumes no obligation to update or revise any relations web site at: forward-looking statements. These charts and the http://www.ibm.com/investor/events/earnings/3q16.html associated remarks and comments are integrally related, and are intended to be presented and understood together.
Overview 3 $19.2B $3.29 $12.9B 3Q16 Revenue Operating EPS Free Cash Flow Last 12 Months Continued strength in strategic imperatives − Growth led by cloud and analytics Solid recurring revenue base Addressing new opportunities and creating new markets, while delivering innovation in existing businesses − Investing organically and through acquisitions Shifting spending and skills − − Monetizing core technologies
A Cognitive Solutions & Cloud Platform Company 4 3Q16 Progress $32B 40% Last • 12 months Significant ramp in cloud as-a-Service revenue Strategic Imperatives of IBM over the last two quarters Revenue Revenue • Continued global expansion of cloud centers Strategic Imperatives Revenue 3Q16 Yr/Yr • Expanded partnerships to accelerate cloud adoption Total $8.0 15% • New Cognitive offerings and capabilities in Watson platform, Analytics $4.8 14% Watson Health and Watson IoT Cloud $3.4 42% aaS-exit annual run rate $7.5 65% • Launched Industry Platforms Mobile $1.2 19% − Building blockchain platform and services Security $0.5 11% − Formed Watson Financial Services, and announced acquisition of Promontory Financial Group Social $0.2 (21%) Revenue growth rates @CC, $ in billions Overlap in Strategic Imperatives revenue primarily reflects solutions delivered via cloud
Key Financial Metrics 5 Last 12 B/(W) Cash Highlights 3Q16 Months P&L Highlights 3Q16 Yr/Yr Free Cash Flow Revenue $19.2 (1%) $2.4 $12.9 (excl. GF Receivables) Expense $5.6 2% Share Repurchase (Gross) $0.9 $3.4 PTI - Operating $3.7 (8%) Dividends $1.3 $5.2 NI - Operating $3.1 (4%) Cash Balance @ Sept 30 $10.0 EPS - Operating $3.29 (1%) P&L Ratios (Operating) • Gross margin across the segments reflects higher level of investment and mix to as-a-Service GP Margin 48.0% (2.1 pts) • Expense reflects higher levels of investment, currency Expense E/R 28.9% 0.4 pts impact and benefits from IP licensing PTI Margin 19.1% (1.6 pts) Tax Rate 14.2% 3.8 pts NI Margin 16.4% (0.6 pts) Revenue growth rates @CC, $ in billions except for EPS
Cognitive Solutions Segment 6 3Q16 Yr/Yr Segment Results Segment Revenue Elements Revenue (External) $4.2 5% Gross Margin (External) 80.4% (3.9 pts) Solutions Software PTI $1.6 (1%) +8% Yr/Yr Transaction Processing PTI Margin 32.1% (2.7 pts) Software (2%) Yr/Yr Strategic Imperatives Revenue Highlights 3Q16 Yr/Yr within Cognitive Solutions • Sequential improvement in Solutions Software revenue, Strategic Imperatives $2.7 11% led by analytics including Watson Cloud $0.6 75% • Margin reflects high value content, increased investment levels and SaaS ramp as-a-Service annual run rate $1.6 • Expanding Watson capabilities and enhancing industry focus Revenue growth rates @CC, $ in billions
Global Business Services Segment 7 Segment Revenue Elements Segment Results 3Q16 Yr/Yr Consulting Revenue (External) $4.2 (2%) (5%) Yr/Yr Application Gross Margin (External) 28.8% (0.9 pts) Management Global Process PTI $0.5 (18%) +2% Yr/Yr Services PTI Margin 12.7% (2.6 pts) (1%) Yr/Yr Strategic Imperatives Revenue Highlights 3Q16 Yr/Yr within Global Business Services • Growth in digital practices offset by declines in traditional Strategic Imperatives $2.3 12% consulting areas Cloud $0.8 69% • Engineered shift to digital practices with strong growth in cloud, analytics and mobility as-a-Service annual run rate $0.8 • Margin decline driven by Consulting Revenue growth rates @CC, $ in billions
Technology Services and Cloud Platforms Segment 8 Segment Results 3Q16 Yr/Yr Segment Revenue Elements Infrastructure Revenue (External) $8.7 1% Services Gross Margin (External) 42.0% (0.2 pts) +2% Yr/Yr Integration PTI $1.3 (2%) Technical Software Support Services PTI Margin 14.4% (0.7 pts) +4% Yr/Yr (1%) Yr/Yr Strategic Imperatives Revenue Highlights 3Q16 Yr/Yr within Technology Svcs & Cloud Platforms • Continued momentum in hybrid cloud with growth in Strategic Imperatives $2.3 42% Infrastructure Services Cloud $1.5 55% • Growth in Integration Software driven by Connect products as-a-Service annual run rate $5.1 and mission critical offerings • Margin expansion in Infrastructure Services offset by decline in Technical Support Services Revenue growth rates @CC, $ in billions
Systems Segment 9 Segment Results 3Q16 Yr/Yr Segment Revenue Elements Revenue (External) $1.6 (21%) Operating Systems Gross Margin (External) 51.1% (4.8 pts) Systems Hardware Software (25%) Yr/Yr PTI $0.1 (45%) (11%) Yr/Yr PTI Margin 7.8% (3.5 pts) Strategic Imperatives Revenue Highlights 3Q16 Yr/Yr within Systems • z Systems performance reflects product cycle, with revenue Strategic Imperatives $0.7 (18%) down and margin expansion Cloud $0.5 (16%) • Power impacted by Unix decline, while transitioning to Linux • Storage value continues to shift to software • Gross Margin expansion in z Systems offset by Power and Storage Revenue growth rates @CC, $ in billions
Software Revenue 10 Highlights Software Revenue Composition - 3Q16 • Software portfolio is broad, open and runs across IBM and 3Q16 - $5.7B Total Software revenue, +3% Yr/Yr non-IBM environments Cognitive Solutions • Solid growth in Cognitive Solutions and Integration Software, Annuity Operating Systems declined +7% Yr/Yr • Growth in annuity revenue mitigated by transaction decline Integration Software Annuity +2% Yr/Yr Transactional (5%) Yr/Yr Operating Systems Annuity (9%) Yr/Yr Revenue growth rates @CC
Cash Flow and Balance Sheet Highlights 11 Last 12 3Q16 Yr/Yr Months Balance Sheet Sep 16 Dec 15 **Sep 15 Cash Flow Cash & Marketable Securities $10.0 $8.2 $9.6 Net Cash from Operations* $3.3 ($0.2) $16.7 Free Cash Flow* $2.4 ($0.1) $12.9 Total Debt $42.5 $39.9 $39.6 Global Financing Debt $26.1 $27.2 $26.0 Selected Uses of Cash Global Financing Leverage 7.3 7.3 7.0 Net Capital Expenditures $0.9 $3.8 Non-GF Debt $16.4 $12.7 $13.6 Acquisitions $0.0 $8.0 Non-GF Debt/Capital 55% 54% 58% Dividends/Share Repurchase $2.2 $8.6 • • Free Cash Flow realization over 100% on a Positioned to support business over the longer term trailing twelve month basis • 12 acquisitions through September $ in billions *Excludes Global Financing receivables; **Prior year reclassified for the adoption of the FASB guidance (Debt issuance cost)
Summary 12 • 3Q results demonstrate stability in IBM’s business • Continued strength in cloud, analytics • Investing to address new opportunities and create new markets • Continue to expect at least $13.50 of operating earnings per share for the year and free cash flow at higher end of the range provided in January
13 ibm.com/investor
Supplemental Materials 14 • 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
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