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Generating Higher
Value at IBM

 

Over the past decade, IBM has built a record of leadership
by pursuing the most transformational opportunities, inventing
the breakthrough technologies to capture them and building an
organization able to deliver superior results over the long term.

This wasn’t new. It’s what we have been doing for 100 years.

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As the new century dawned, we saw change coming.
The IT industry and the broader economy were being
transformed by the rising tide of global integration,
by a new computing model and by new client needs for
integration and innovation.

And that meant we needed to transform ourselves.

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1

We changed our business mix toward higher-value,
more profitable technologies and market opportunities.

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2

We became a globally integrated enterprise,
improving productivity and capturing new growth.

Since 2005, global integration has enabled IBM to gain $6 billion in productivity
savings while improving service quality. We have shifted resources toward
building client relationships and employee skills, while positioning IBM for new
market opportunities, such as business analytics, Smarter Cities and infrastructure
build-outs underway in emerging markets.

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3

By aligning our business model with our clients’
needs we generated superior financial results.

We achieved record earnings per share.
Diluted earnings per share in 2010 were $11.52, having nearly tripled since the end
of 2000, and marking eight consecutive years of double-digit growth. Our focus on
productivity and a continuing shift in our business mix to more profitable segments
has helped drive our performance.

And record cash performance.
In 2010 our free cash flow, excluding the year-to-year change in Global Financing
receivables, was $16.3 billion—an increase of $1.2 billion from 2009. Since the end
of 2000 we have generated $109 billion in free cash flow.

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4

We invested in future sources of growth
and provided record returns to shareholders…

Since the end of 2000, we invested $43 billion in capital expenditures and $27 billion
net on acquisitions (116 companies) targeted toward high-value areas.

We returned $89 billion to our shareholders as share repurchases and increased
our dividend each year over the last decade. At the end of 2010 our quarterly dividend
per share was five times higher than in 2000.

…while continuing to invest in R&D—
nearly $60 billion since the end of 2000.

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5

Today, we run a business model that delivers
long-term value and high performance.

Early in 2007, we established our earnings per share road map to 2010. It provided
clarity about our business model, objectives and key factors driving performance.
The road map also aligned all IBMers against a set of long-term objectives.

We achieved $11.52 of EPS in 2010, well above the high end of the range
of $10 to $11 during one of the toughest economic environments in decades.

This resulted in superior returns to investors over the road map period.

Now, our 2015 Road Map continues the drive to higher value—with the expectation
of at least $20 operating EPS in five years (non-GAAP).

Key objectives over the next five years:

  • $100 billion in free cash flow
  • $70 billion of capital returned to shareholders
  • $20 billion in spending on acquisitions
  • Software becomes about half of
    segment profit
  • Growth markets approach 30 percent
    of geographic revenue

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Today our investments are fueling growth initiatives that are expected to drive $20 billion in incremental revenue by 2015.

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Growth Markets

A historic economic expansion is underway in the emerging markets of the world—as their populations join the middle class and their economies join the global marketplace. In the largest of these emerging markets, such as China, India and Brazil, IBM is broadening its well-established base of skills and capabilities, nearly doubling our number of branch locations. In less developed markets, such as Africa, we are leveraging anchor clients in sectors like communications and banking. Our recent partnership with Bharti Airtel Africa to provide 21st century wireless telecommunications across 16 countries of Sub-Saharan Africa is one example.

Opportunity:
The emerging market GDP growth rate—expected to be
5 percent through 2015—is more than double that of major markets.

2015 Road Map Objective:
Growth Markets revenue approaches 30 percent of IBM’s geographic revenue by 2015.

 

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Cloud

IBM has helped thousands of clients in areas as diverse as banking, healthcare and government build their own clouds or securely tap into IBM cloud-based business and infrastructure services. IBM manages millions of cloud-based transactions every day, and provides cloud analytics services to clients like Seton Hall University, Petco, Speedo and Crocs.

ING, a major player in the financial services industry, engaged IBM to design and build a cloud platform that will speed the delivery of new services to millions of clients and employees. Danone is working with IBM to provide a secure cloud trading network for its customers and business partners, while ADP is using IBM’s cloud integration software to expand its tax filing offerings to new markets serving employers of all sizes.

Opportunity:
Cloud is a new, highly efficient model for consuming and delivering IT-based services. It is made possible by virtualizing resources, automating processes and standardizing tasks so they can be offered as easy-to-use services.

2015 Road Map Objective:
Cloud revenue is expected to be $7 billion by 2015, of which
$3 billion is incremental.

 

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Business Analytics

Enterprises need a way to manage and mine the deluge of potentially valuable information, and the key is advanced data analytics. IBM spotted this emerging need early, building the world’s leading analytics practice
—with 7,800 expert consultants, the world’s premier nonacademic mathematics function and the acquisition of 25 companies, for $14 billion in gross spending, to deepen our capabilities.

Our scientists have received more than 500 analytics patents. They are expanding technology frontiers through breakthroughs like the powerful new computer named Watson, which competed and won on the television quiz show Jeopardy! Applying Watson’s use of advanced analytics to decipher natural language, IBM is working to identify better healthcare diagnoses, potential drug interactions and “what if” scenarios in finance and compliance.

Opportunity:
Global data volumes are predicted to increase by 29 times over the next 10 years to 35 zettabytes*. (A zettabyte is a
1 followed by 21 zeros.)

2015 Road Map Objective:
Business analytics revenue is expected to be $16 billion
by 2015.

*David Reinsel, vice president, Storage Group, IDC Research

 

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Smarter Planet

In 2008 and 2009, we articulated a point of view on ways the world can become smarter, and in 2010, we deployed significant resources to capture the opportunity in key, high-growth industries where our experience and solution delivery is strongest. We also expanded our Smarter Cities initiative, targeting local leaders who influence trillions in spending worldwide. In Rio de Janeiro, IBM is developing a system to integrate real-time information and processes across many city departments, including civil defense, transportation and meterology, for a sustainable operations infrastructure in the face of unprecedented growth.

Similar city infrastructure projects are underway in cities across the world such as Ho Chi Minh City, Shanghai, Seoul, Sydney, Helsinki, Amsterdam, Rotterdam, San Francisco and Washington, D.C.

Opportunity:
The infusion of digital intelligence into industries, infrastructures, processes and cities can make them more productive, efficient and responsive.

2015 Road Map Objective:
Smarter Planet revenue is expected to be $10 billion by 2015.

 

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In our second century, as in our first, IBM’s business
model is based on continuous forward motion.

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Through 100 years of a commitment
to innovation and progress…

Inventing core technologies…

Through breakthroughs like the FORTRAN programming language in 1957, computer memory in the 1960s, the relational database in the 1970s, reduced instruction set computing (RISC) in the early 1980s, and materials science advances in the 1990s (now in millions of mobile devices), IBM built the foundations for a world of instrumented, interconnected and intelligent systems.

 

Defining computing architectures…

From punched card tabulators in the 1920s, to the compatible mainframe System/360 in the 1960s, to the PC in the 1980s, to parallel computing in the 1990s, IBM has shaped the modern IT industry. Today IBM is leading shifts to enterprise cloud computing and building highly optimized systems like Watson able to understand and analyze natural language.

 

A commitment to research…

IBM has invested more than $150 billion in R&D, and has received more than 75,000 U.S. patents. Five IBMers were Nobel Laureates. Today we have
10 global research labs pioneering breakthroughs, advancing technologies
and helping define open standards. IBM Research is engaged in long-term collaborations with universities, government agencies and businesses, in fields as varied as nanotechnology, deep analytics and the evolution of the Internet.

 

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For 100 years, IBM has transformed industries and advanced the world’s most critical systems.

  • 1915
    Nearly all major U.S. railroads used tabulating technology to automate scheduling and accounting operations, starting with New York Central and Hudson River Railroad.
  • 2010
    Helped Russian Railways move
    1.3 billion passengers and freight more efficiently.
  • 1922
    Tabulating technology used to conducted Brazil’s first mechanized census.
  • 2010
    Helped New York State save nearly $1 billion preventing tax fraud with advanced analytics.
  • 1930
    IBM receives patent for traffic signal timing system.
  • 2010
    Helped speed development of GM’s Chevrolet Volt electric vehicle with sophisticated design and simulation software.
  • 1962
    Created the Sabre airline reservation system for American Airlines—a precursor of everything from the ATM to e-commerce.
  • 2010
    Helping New Delhi’s International Airport manage growth in air travel from 28 million passengers today to an expected 150 million passengers in 2020.
  • 1965
    Physicians detected changes in temperature, blood pressure and heartbeat with data collected and visualized by an IBM monitoring system.
  • 2010
    Stream computing technology and advanced analytics research at the University of Ontario Institute of Technology are used to monitor the health of premature babies at the Hospital for Sick Children, Toronto.
  • 1965
    Analyzed ways to increase power output of hydroelectric dams in France.
  • 2009
    Helped implement the world’s first nationwide smart grid for Malta’s energy and water systems.
  • 1974
    Supermarkets start scanning
    UPC barcodes, invented by IBM.
  • 2010
    Collaborated with Thailand’s Ministry of Agriculture and Cooperatives
    to implement food traceability technologies with farmers, exporters and retailers.
  • 1997
    Created first global settlement system for currency exchange, averaging $4 trillion a day, with the CLS Group, an industry consortium.
  • 2008
    Introduced world’s first real-time securities settlement system for Mexico.

One hundred years of driving progress gives
us confidence that we can continue to do
so—and to deliver superior returns—in our
second century.

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On June 16, 2011, IBM marks its centennial.
As we reflect on our first century, it has sparked new
thinking about the possibilities for our second.

Join us at IBM100.com

"Generating Higher Value at IBM" includes selected references to certain non-GAAP financial measures that are made to facilitate a comparative view of the company's ongoing operational performance. For information about the company's financial results related to (i) free cash flow excluding Global Financing receivables and (ii) operating (non-GAAP) earnings, which are in each case non-GAAP measures, see the company's Form 8-K submitted to the SEC on January 18, 2011 (Attachment II -- Non-GAAP Supplementary Materials).

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