IBM Transformation A story of highs and lows

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1 IBM Transformation A story of highs and lows Carlos Passi Assistant Controller, Business Transformation

2 IBM Transformation The first major transformation event for IBM came out of necessity

3 Business Mix IBM s 1990 s business mix was weighted towards commoditizing business lines with eroding profit margins Business Mix 1996 Revenue Transaction Mix 1996 Revenue Financial Trends* Transactional Annuity Solutions GPM Point Products Commodity E:R ** 2000 * Does not include Equity Compensation; As Reported; Continuing Operations ** Excludes Special Actions

4 Remaking an Icon

5 Remaking an Icon Changing the business mix Shift portfolio to higher value Employ aggressive acquisition strategy Divest outside of core strategy Developing higher value Infuse IBM Research into business

6 Remaking an Icon DRAM Network Flat Panel Displays HDD PCs Printers 2007

7 Remaking an Icon Growth Markets Unit Invest in high-growth countries Organize growth market teams New Solutions Invest in solutions Smarter Planet Analytics Cloud

8 Remaking an Icon Globally integrated enterprise Consolidate support functions Take advantage of global skills Client value Shift to integrated solution offerings Create client facing units Lower center of gravity Move decision-making / accountability close to customer

9 Remaking an Icon We saw Change Coming Global Enterprise Reality of Global Integration 2000 and beyond Emergence of a New Computing Model Innovation and Integration Multi-national and transformed IBM! " # " International " Up to 1990s " "$ %# '! $ % $% "$ # & (

10 Progress to Date Productivity improvements of $6.2B were achieved through 2010 Shared Services Spend ($B) $4.8B spending reduction in Shared Services from 2005 through 2010 Year-to-Year Enterprise Productivity Savings ($B) $1.4B productivity improvement in end-to-end process transformation and integrated operations Shared Services End-to-End Process Transformation Integrated Operations

11 Remaking an Icon Performance Management System IBM values and Leadership Financial Roadmap

12 IBM Transformation IBM s transformational shift in the portfolio has resulted in higher margins Financial Trends Late 90s* Financial Trends Today* Gross Profit Margin Gross Profit Margin Expense to Revenue Expense to Revenue ** ** ** 2005** * As Reported; Continuing Operations; includes Equity Compensation ** Excludes Special Actions

13 Remaking an Icon Achieved low end of Roadmap one year ahead of objective Beat high end of target by $ % Yr/Yr 24% Yr/Yr +17% CAGR 13% Yr/Yr 15% Yr/Yr !"#$ %&

14 IBM Transformation Strong Performance through the decade driven by IBM transformation GAAP PTI / EPS Segment PTI$ EPS $11.52 Highlights since 2000 Added $10B revenue in growth markets 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 Hardware / Financing Services Software Sum of external segment pre-tax income not equal to IBM pretax income 2000 & 2001 segments not restated for stock based compensation

15 Our 2015 Roadmap objective aims for at least $20 Operating EPS Base revenue growth ~2% excluding divestitures Shift to faster ~$20B of growing business acquisition spend mix provides ~1% provides ~2% revenue growth revenue growth Enterprise Productivity yields margin expansion Shift to a higher value portfolio continues to provide leverage ~$50B returned through share repurchase Shares $11.67 Base Revenue Revenue Mix Growth ~$1.45 ~$0.70 Revenue Growth ~$3.05 Future Acquisitions ~$0.90 Enterprise Productivity ~$1.75 Margin Mix ~$0.75 Operating Leverage ~$2.50 ~$2.80 At Least $ Operating EPS* * Non-GAAP: Excludes acquisition-related charges and non- operating retirement-related expense Assumes current tax policy and Non- GAAP tax rate of 25% Source: 2015 EPS Roadmap as used on March 8 th Investor Day Operating EPS*

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

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

18 2015 Roadmap Operating PTI / EPS * Segment Operating PTI Operating EPS $13.44 At Least $ Roadmap Software contributes about half of our segment profit Growth initiatives deliver $20B in revenue growth Growth markets revenue approaches 30% of IBM s total Enterprise productivity delivers $8B in gross savings '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12e '13e '14e '15e Hardware / Financing Services Software * Non-GAAP: Excludes acquisition-related charges and non-operating retirementrelated charges 2000 & 2001 segments not restated for stock based compensation Sum of external segment pre-tax income not equal to IBM pretax income IBM generates $100B in free cash flow, returning 70% to shareholders

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