IBM 4Q 2016 Earnings January 19, 2017 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 January filings with the SEC. Copies are available from the SEC, 19, 2017. 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/4q16.html associated remarks and comments are integrally related, and are intended to be presented and understood together.
Overview 3 $21.8B $ 5.01 4Q16 FY16 $79.9B $13.59 $11.6B Revenue Operating EPS Free Cash Flow Continued strength in strategic imperatives Progress in building new businesses and creating new markets Delivering innovation in more traditional businesses and monetizing core technologies Returning capital to shareholders
A Cognitive Solutions & Cloud Platform Company 4 4Q16 Performance $33B 41% FY16 • Strategic Imperatives revenue $10B, up 12% yr/yr Strategic Imperatives of IBM Revenue Revenue 2016 Progress • Solving real business problems in new era requires: Cognitive + Cloud + Industry FY16 Yr/Yr Strategic Imperatives Revenue Total $32.8 14% • Expanding cognitive offerings and capabilities − Watson Health, Watson IOT, Analytics $19.5 9% Watson Financial Services … Cloud $13.7 35% − Building scale through data, expertise, partnerships aaS annual run rate $8.6 63% • Expanding capabilities and reach of IBM Cloud Mobile $4.1 35% − Cloud centers, cloud video platform, Bluemix − Partnerships to accelerate adoption Security $2.0 14% • Social $1.0 (10%) Building blockchain platforms and services Revenue growth rates @CC, $ in billions Overlap in Strategic Imperatives revenue primarily reflects solutions delivered via cloud
Key Financial Metrics 5 B/(W) 4Q16 FY16 P&L Highlights 4Q16 Yr/Yr Cash Highlights Free Cash Flow Revenue $21.8 (1%) $4.7 $11.6 (excl. GF Receivables) Expense - Operating $5.7 7% Share Repurchase (Gross) $0.9 $3.5 PTI - Operating $5.4 (2%) Dividends $1.3 $5.3 NI - Operating $4.8 1% Cash Balance @ Dec 31 $8.5 EPS - Operating $5.01 4% P&L Ratios (Operating) • Continued growth in annuity businesses GP Margin 51.0% (1.8 pts) • Gross margin reflects high level of investment and mix to as-a-Service Expense E/R 26.2% 1.6 pts • Expense reflects continued high level of investment, PTI Margin 24.8% (0.2 pts) yield from workforce savings and success in rebuilding Tax Rate 11.5% 3.1 pts IP income NI Margin 21.9% 0.6 pts Revenue growth rates @CC, $ in billions except for EPS
Cognitive Solutions Segment 6 4Q16 Yr/Yr Segment Results Segment Revenue Elements Revenue (External) $5.3 2% Gross Margin (External) 82.7% (3.0 pts) Solutions Software PTI $2.3 1% +5% Yr/Yr Transaction Processing PTI Margin 38.6% (1.4 pts) Software (4%) Yr/Yr Strategic Imperatives Revenue Highlights 4Q16 Yr/Yr within Cognitive Solutions • Analytics including Watson and security led growth Strategic Imperatives $3.5 7% in Solutions Software Cloud $0.6 53% • Continuing to scale our platforms and extend cognitive across offerings as-a-Service annual run rate $1.8 • Margins impacted by investment levels and SaaS ramp Revenue growth rates @CC, $ in billions
Global Business Services Segment 7 Segment Revenue Elements Segment Results 4Q16 Yr/Yr Consulting Revenue (External) $4.1 (4%) (5%) Yr/Yr Application Gross Margin (External) 26.9% (1.3 pts) Management Global Process PTI $0.5 (26%) (2%) Yr/Yr Services PTI Margin 12.4% (3.6 pts) (4%) Yr/Yr Strategic Imperatives Revenue Highlights 4Q16 Yr/Yr within Global Business Services • Accelerated growth in digital practices led by cloud and Strategic Imperatives $2.4 19% mobile Cloud $0.9 77% • Revenue declines in more traditional areas like ERP as-a-Service annual run rate $1.1 • Margins reflect continued investment to shift the business to new areas Revenue growth rates @CC, $ in billions
Technology Services and Cloud Platforms Segment 8 Segment Results 4Q16 Yr/Yr Segment Revenue Elements Infrastructure Revenue (External) $9.3 2% Services Gross Margin (External) 42.9% (1.4 pts) +3% Yr/Yr Integration PTI $1.9 4% Technical Software Support Services PTI Margin 19.8% 0.4 pts +1% Yr/Yr Flat Yr/Yr Strategic Imperatives Revenue Highlights 4Q16 Yr/Yr within Technology Svcs & Cloud Platforms • Leader in hybrid services integration with growth in Strategic Imperatives $2.6 37% Infrastructure Services Cloud $1.8 50% • Growth in Integration Software driven by hybrid cloud and as-a-Service annual run rate $5.8 WebSphere • Gross margin reflects business mix Revenue growth rates @CC, $ in billions
Systems Segment 9 Segment Results 4Q16 Yr/Yr Segment Revenue Elements Revenue (External) $2.5 (12%) Operating Systems Gross Margin (External) 56.9% 1.1 pts Systems Hardware Software (12%) Yr/Yr PTI $0.6 (14%) (12%) Yr/Yr PTI Margin 21.6% (0.2 pts) Strategic Imperatives Revenue Highlights 4Q16 Yr/Yr within Systems • Systems revenue and gross margin reflect growth in Strategic Imperatives $1.1 (18%) z Systems offset by Power and Storage declines Cloud $0.9 (15%) • Strong performance in z Systems, with revenue growth, margin expansion and new workloads added • Continued to address shifting markets in Power and Storage Revenue growth rates @CC, $ in billions
Software Revenue 10 Highlights Software Revenue Composition • Growth in total software revenue in 4Q and full year 4Q16 - $7.1B Total Software revenue, +1% Yr/Yr • Continued growth in Cognitive Solutions and Integration Cognitive Solutions Software, while Operating Systems declined Annuity +5% Yr/Yr • Continued growth in annuity content led by SaaS; moderation of transaction weakness Integration Software Annuity +3% Yr/Yr Transactional (4%) Yr/Yr Operating Systems Annuity (7%) Yr/Yr Revenue growth rates @CC
Cash Flow and Balance Sheet Highlights 11 4Q16 Yr/Yr FY16 Balance Sheet Dec 16 Dec 15 Cash Flow Cash & Marketable Securities $8.5 $8.2 Net Cash from Operations* $5.6 ($1.4) $15.3 Free Cash Flow* $4.7 ($1.4) $11.6 Total Debt $42.2 $39.9 Global Financing Debt $27.9 $27.2 Selected Uses of Cash Global Financing Leverage 7.3 7.3 Net Capital Expenditures $0.9 $3.7 Non-GF Debt $14.3 $12.7 Acquisitions $0.2 $5.7 Non-GF Debt/Capital 50% 54% Dividends/Share Repurchase $2.2 $8.8 • • Free Cash Flow realization of 97%, in line with longer Pension funding levels remain solid term model • Implementing changes to financing structure in 2017 • 15 acquisitions in 2016 add to capabilities in cognitive and • Positioned to support business over the longer term analytics, cloud and security • Returned ~75% of free cash flow to shareholders $ in billions *Excludes Global Financing receivables
Summary 12 • Continued strength in strategic imperatives; growing annuity base • Significant investments; remixing to best opportunity areas • Building new businesses and creating new markets • Delivering innovation in more traditional businesses and monetizing core technologies • 2016 progress supports 2017 expectations • Operating EPS of at least $13.80, compared with $13.59 in 2016 • Free cash flow realization >90% of GAAP net income
13 ibm.com/investor
Supplemental Materials 14 • Currency – Impact on Revenue Growth • Strategic Imperatives Revenue • Geographic Revenue • Segment Revenue & Gross Profit • Additional Revenue & Backlog Information • Expense Summary • Global Financing Portfolio • Balance Sheet Summary • Cash Flow Summary • Cash Flow (ASC 230) • Key Financial Metrics – FY 2016 • Segment Revenue & Gross Profit – FY 2016 • Expense Summary – FY 2016 • Retirement – Related Summary • 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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