IBM Business Perspective 2011 Patricia Murphy Vice President, - PowerPoint PPT Presentation

IBM Business Perspective 2011 Patricia Murphy Vice President, Investor Relations

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. Information regarding the Company's financial roadmap, which was previously communicated to investors, is being presented for purposes of historical information and is not being updated during this presentation. 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), these materials contain 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 as Attachment II (“Non-GAAP Supplementary Materials”) to the Company’s Form 8-Ks dated March 8, 2011 and July 18, 2011.

Agenda � Strategy and Historical Performance � 2015 Roadmap � Appendix: IBM Growth Initiatives 1

The industry economics have changed over time Total IT at Constant Currency % Growth Source: IBM Market Insights analysis using GMV Jul 2011 (2H11) 2

IBM’s strategy addresses shifts in the IT industry Changes in world markets: We are at the forefront of global integration Changes in IT: We are shifting to higher value segments Changes in client needs: We are focused on integration and innovation 3

IT industry positioning is changing over time High Value Consumer/ Large SMB Enterprise Low Cost 4

We have been remixing our business to higher value areas Major Divestitures / Acquisitions % of Segment Profit* DRAM 1999 Network 1999 Flat Panel Displays 2001 HDD 2002 44% PCs 2005 Printers 2007 25% 39% 40% 35% 17% 2000** 2010 Hardware/Financing Services Software Business Continuity Services Business Continuity Services * 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 and excludes Enterprise Investments 5

Our shift to higher value, global integration and productivity have driven superior financial results Free Cash Flow* Margins * Excluding GF Receivables 6

In May 2007, we introduced the 2010 EPS Roadmap to deliver $10 to $11 of earnings per share 14% 16% 10% CGR CGR CGR ~ $11 ~ $10 ~$0.90 10% -12% CGR EPS Model ~ $9 ~$1.10 ~$1.20 ~$1.00 ~$0.75 $6.05 5% +1 to 2 pts Revenue Revenue Growth Growth 2006 EPS Historical Margin Share Estimated Growth Future 2010 EPS Retirement 2010 EPS Revenue Expansion Repurchases 2010 EPS Initiatives Acquisitions w/o Related Objective Growth (Base) Retirement Yr/Yr of 3% Related Yr/Yr Costs Note: 2006 EPS reflects the adoption of amendments to ASC 260, “ Earnings Per Share” 7

We achieved the low end of the roadmap one year ahead of schedule, and beat the high end by ~ 50 cents $11.52 $10.01 $8.89 15% $10 Yr/Yr 13% $7.15 Yr/Yr $6.05 24% Yr/Yr 18% Yr/Yr +17% CAGR 2006 2007 2008 2009 2010 Note: 2006-2008 EPS reflects the adoption of amendments to ASC 260, “ Earnings Per Share” 8

The success of our business model rewarded shareholders 3Q 10 4Q’10 4Q 06 1Q 07 2Q 07 3Q 07 4Q 07 1Q 08 2Q 08 3Q 08 4Q 08 1Q 09 2Q 09 3Q 09 4Q 09 1Q 10 2Q 10 2.00 +17% IBM EPS Indexed with S&P 500 CAGR 1.75 1.50 1.25 IBM EPS $6.05 ~0% 1.00 CAGR S&P 500 EPS ~$85 0.75 0.50 0.25 Cum. Total Return Created $58B of Shareholder Value $47B Market Capitalization + $11B Dividends Paid 72% (1%) IBM S&P 500 Source: Bloomberg/Capital IQ Total Return as of 1/19/2011 9

IBM’s transformation drove strong financial performance over a decade $ 11.52 Highlights since 2000 GAAP PTI / EPS Segment PTI$ � Added $10B revenue in growth markets EPS • 21% of geo revenue � Tripled Software profit to $9.1B • 44% of segment profit, up from 25% � Added $10B of Pre-Tax Income � EPS nearly tripled � Generated $109B Free Cash Flow � Returned $107B to shareholders � Invested $32B to acquire 116 companies '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 Sum of external segment pre-tax income not equal to IBM pre-tax income Hardware / Financing Services Software 2000 & 2001 segments not restated for stock based compensation 10

Agenda � Strategy and Historical Performance � 2015 Roadmap � Appendix: IBM Growth Initiatives 11

IBM’s 2015 Roadmap: at least $20 of Operating EPS Base revenue Shift to faster Enterprise Shift to a higher ~$20B of ~$50B returned growth ~2% growing business Productivity value portfolio acquisition spend through share excluding mix provides ~1% yields margin continues to provides ~2% repurchase divestitures revenue growth expansion provide leverage revenue growth 11% Shares CAGR At Least $20 Margin Mix Enterprise Productivity ~$ 2.80 ~$0.75 Acquisitions Revenue Mix Base Revenue ~$1.75 Growth ~$0.90 ~$0.70 ~$1.45 $11.67 Operating Leverage ~$2.50 Revenue Growth ~$3.05 2010 Operating 2015 Operating * Non-GAAP: Excludes acquisition-related charges and non-operating retirement-related expense EPS* EPS* Assumes current tax policy and Non-GAAP tax rate of 25% 12

Key initiatives support the revenue and profit objectives Smarter Planet Share Repurchase Grows to ~$10B business by 2015 Approximately 400 recent client Operating engagements illustrate reach Leverage Growth Markets Business Analytics Revenue Growth • Approaches 30% of • Grows to ~$16B ~$3.05 IBM’s geographic business by 2015 revenue by 2015 • Contributes ~20% of $11.67 • Contributes ~50% of IBM’s growth over the IBM’s growth over Roadmap the Roadmap Cloud Grows to ~$7B business by 2015, of which ~$3B is incremental 2015 Operating EPS 13

We have allocated $20B for future acquisitions Forward Looking Revenue Growth Estimates Share Repurchase Operating Leverage � Scalable intellectual Revenue Growth property ~$3.05 Forward Looking PTI Margin Estimates � Key to solutions 30% $11.67 27% offerings 23% 20% 18% 20% PTI Margin 11% 15% 10% 10% � Drive synergies 2% 2% 0% through global -10% distribution -20% -20% Yr1 Yr2 Yr3 Yr4 Yr5 2015 PTI Margin Margin excl. amortization of intangibles and acquisition-related charges Operating EPS 14

IBM expands margins through a shift to higher value…. Share Repurchase % of Operating Segments Profit* Operating Leverage ~$ 2.50 ~50% Revenue Growth ~$3.05 45% $11.67 ~36% 27% 38% 38% ~13% 16% 35% 2000** 2010 2015 Hardware/Financing Services Software * Sum of operating segment pre-tax income not equal to IBM operating pre-tax income 2015 ** Stock-based compensation expense was not recorded at the segment level and excludes Enterprise Investments Operating EPS 15

… and enterprise productivity savings of $8B Cumulative Enterprise Productivity Savings ($B) Share Next Five Years Repurchase ~$8B savings Operating Leverage ~$2.50 Revenue Growth ~$3.05 Last Five Years ~40% of gross ~$6B savings savings taken to bottom-line $11.67 2006 2007 2008 2009 2010 2011e 2012e 2013e 2014e 2015e Shared Services End-to-End Process Transformation Integrated Operations 2015 Operating EPS 16

IBM cash generation enables reinvestment and returns Free Cash Flow* ~$100B Share $B Repurchase $25 $69B ~$ 2.80 $20 Operating Leverage $15 ~$2.50 $10 Revenue Growth $5 ~$3.05 $0 2006 2007 2008 2009 2010 2011e 2012e 2013e 2014e 2015e $11.67 Primary Uses of Cash Next 5 Years Last 5 Years $B $B Share Repurchase ~$50 Share Repurchase $60 Capital ~$25 Capital $22 Dividends Dividends $12 ~$20 Acquisitions 2015 Acquisitions $18 ~$20 Operating EPS * Excluding GF Receivables 17

IBM’s model supports the roadmap base and provides opportunity for upside At Least $20 ~2.80 Share +1 to 2% Repurchase � Full execution on Additional business unit objectives ~2.50 Operating Revenue Growth Leverage ~3.05 Revenue � Full benefit of $8B in Growth +$5B enterprise productivity savings Profit $11.67 to the bottom line � Cash generation and +$40B capital structure Financial Flexibility 2015 Operating EPS 18