2021 IBM Annual Report

A letter from Arvind Krishna

Chairman and Chief Executive Officer

Arvind Krishna

Dear IBM Investor:

Today’s IBM has defined a clear strategy to lead in the era of hybrid cloud and AI.

In 2021, we took a series of dramatic steps to execute against that strategy, strengthening our portfolio, expanding our partner ecosystem, and returning your company to growth.

As a result, we enter 2022 more strategically focused and more technologically capable. We are integrating technology and expertise—from IBM, our partners, and even our competitors—to meet the urgent needs of our clients, who see hybrid cloud and AI as crucial sources of competitive advantage. And we are ready to be the catalyst of progress for our clients as they pursue the digital transformation of the world’s mission-critical businesses.

As you will see in this report, our strategy is resonating with clients and partners, our technology and business expertise are in high demand, and our company is more nimble, focused, and positioned for sustainable growth.

2021 performance

For the year, IBM generated $57.4 billion in revenue and $12.8 billion in cash from operations.

Revenue growth accelerated at constant currency throughout 2021, and we exited the year with 8.6% growth in the fourth quarter, including approximately 3.5 points from incremental external sales to Kyndryl. Hybrid cloud revenue grew 19% at constant currency in 2021 and now makes up 35% of IBM revenue. Today, over 70% of our annual revenue is in software and consulting, both delivering healthy, sustainable growth.

70%

Today, over 70% of our annual revenue is in software and consulting, both delivering healthy, sustainable growth.

Our performance was driven by our unique ability to combine IBM’s technology and expertise to create value for our clients and partners. We integrate IBM Software, IBM Consulting, and IBM Infrastructure to deliver this value.

IBM Software allows clients to leverage the full power of hybrid cloud and AI. Software revenues were up 4% at constant currency. Red Hat continues to gain momentum, growing nearly 21% at constant currency in the fourth quarter, benefiting from its integration with IBM’s portfolio and reflecting strong demand for open source innovation.

IBM Consulting revenues were up 8% at constant currency, driven by clients that rely on IBM as their trusted partner for digital transformation.

IBM Infrastructure revenues declined 3% at constant currency, reflecting product cycle dynamics. Clients continue to leverage our Power servers, storage, and IBM Z systems as foundational elements of their hybrid cloud infrastructure. In fact, we have shipped more MIPs in the z15 than any program in our history.

With this revenue and cash generation, we returned $6 billion to stockholders through dividends in 2021. We reduced debt by $10 billion in 2021 and by $21 billion since acquiring Red Hat in 2019. We did all of this while we continued to invest in skills, innovation, and our ecosystem, including $3 billion on acquisitions in the year.

$6B

We returned $6 billion to stockholders through dividends in 2021.

IBM now has a higher-growth, higher-value business, with strong and growing free cash flow, lower capital intensity, and attractive shareholder returns.

Strategy and execution

We entered 2021 with a series of clear but ambitious goals: to strengthen our portfolio, simplify our operations, and broaden our ecosystem. Our financial performance is a direct reflection of our ability to execute against these goals.

Throughout the year, we continued to align our offerings with the two most transformational technologies of our time: hybrid cloud and AI. Our platform-centric approach starts with Red Hat, which allows our clients to develop and deploy their applications on private and public clouds, achieve consistent security across their computing infrastructure, and consume innovation from anywhere.

Our portfolio is positioned to capture the $1 trillion hybrid cloud opportunity, enabling our clients to access and deploy our AI capabilities on IBM’s cloud or those of other major providers. Our software has been enhanced and bundled to help clients become more data-driven, and to automate, secure, and modernize their business and IT operations. IBM Consulting has transformed itself by deepening its technical expertise and embracing a co-creation model with clients.

15

To complement our organic investments, we made 15 strategic acquisitions to strengthen and extend our hybrid cloud and AI offerings.

To complement our organic investments, we made 15 strategic acquisitions to strengthen and extend our hybrid cloud and AI offerings. For example, Waeg, Bluetab, and Taos reinforce our cloud consulting expertise. Turbonomic integrates with Instana and Watson AIOps to create an industry-leading suite of automation software. The recent acquisition of Envizi builds on our existing asset management and supply chain solutions to help organizations develop more resilient and sustainable operations. And ReaQta expands our AI-based threat detection and response capabilities in IBM Security.

To improve how we deliver the value of these offerings to our clients, we have updated our client engagement model to emphasize experiential selling and co-creation. We have also greatly expanded our partner ecosystem. This network of systems integrators, independent software vendors, service providers, channel partners, and developers has been carefully selected to deliver value to our clients, our partners, and IBM. In 2021, we strengthened existing relationships with companies like Adobe, Oracle, and EY. We created new consulting services in collaboration with SAP and co-created an AI-enabled analytics solution with Deloitte. We announced new strategic partnerships with Cisco, Palo Alto Networks, and Telus, all focused on 5G, Edge, and network automation. And we saw our partnership revenue with AWS, Azure, and Salesforce grow more than 50%.

+50%

We saw our partnership revenue with AWS, Azure, and Salesforce grow more than 50 percent.

A client-centric culture

Our efforts have been designed to accelerate the delivery of value to our clients and partners, part of a larger cultural shift at IBM toward total client-centricity. We believe that IBM has a unique ability to solve our clients’ most pressing business problems, bringing together all the necessary hardware, software, and consulting, regardless of whether those solutions come from IBM or our ecosystem partners.

We are seeing high demand for our capabilities in many areas. Clients want to automate as many business tasks as possible given the current workforce dynamics. They are increasingly using AI and predictive capabilities to improve their supply chains. Security remains a major focus area, as the cost of cybercrime continues to rise. As clients deal with these challenges and opportunities, they are looking for a trusted partner with a proven track record of delivering strategic transformation.

For example, we are helping Spain’s Telefónica to modernize its network platform, combining the potential of 5G with the customization and intelligence of hybrid cloud. National Grid, a leading US electric and gas utility, is working with IBM and Boston Dynamics to analyze data at the edge in real time to improve equipment uptime and prevent power outages. The Australian federal government is working with IBM on the technology platform that powers the country’s COVID-19 vaccination program. And IBM Consulting and PNC Bank partnered on a next-generation solution that allows customers to make banking decisions based on real-time data—a massive change for the banking industry.

3,800+

We now have more than 3,800 hybrid cloud platform clients.

This client-first, problem-solving approach is the reason why our client renewal rates are increasing and our recurring revenue base is growing. It is the reason why longtime clients like CVS, Verizon, and Anthem continue to put their trust in our people and our technology. And it is the reason why we now have more than 3,800 hybrid cloud platform clients and nearly 3,000 clients co-creating in IBM Garages.

Our commitment to science and innovation

While we are focused on meeting the needs of clients today, we continue to shape the technologies of tomorrow. That is why IBM Research continues to advance the fundamental science of computing, driving innovation and pioneering a new era of accelerated discovery.

IBM continues to lead the development of quantum computing. This year, we delivered operational quantum computers to Japan and Germany, deployed the world’s first 127-qubit processor, and are now on our way to a 1,000-qubit processor by the end of 2023. We also forged a series of long-term partnerships with universities, governments, and hospitals to develop quantum applications that will accelerate the discovery of everything from medicine to materials.

50B

In 2021, we unveiled the world’s first 2-nanometer chip technology, which will allow 50 billion transistors to fit on a chip the size of a fingernail.

In 2021, we unveiled not one, but two, major breakthroughs in semiconductor design. First, the world’s first 2-nanometer chip technology, which will allow 50 billion transistors to fit on a chip the size of a fingernail. The chips are expected to achieve 45% higher performance than today’s 7-nanometer chips. Second, in collaboration with our Albany Research Alliance partner Samsung, IBM Research introduced a completely new approach to semiconductor design called Vertical-Transport Nanosheet Field Effect Transistor, or VTFET, which could help keep Moore’s law alive for years to come.

Responsible stewardship for the digital age

At IBM, we have always understood that our responsibilities extend far beyond the bottom line. That is why we embrace our leadership role in defining good tech in the digital age.

Among the most pressing challenges facing our society today is closing the STEM skills gap, which holds back both technological and socioeconomic progress. To address this issue, IBM regularly engages at the highest levels of government to improve access to the education and skills needed for modern, rewarding jobs. In addition, IBM has committed to providing 30 million people of all ages with critical skills by 2030, by fostering more than 50 new partnerships for the IBM SkillsBuild program.

We also continue to make progress on diversity and inclusion, which we believe is imperative for the health of our business and our society. In 2021, we added a diversity modifier to our executive compensation program to reinforce the importance of a diverse workplace. The Human Rights Campaign Foundation designated IBM as a “Best Place to Work for LGBTQ+ Equality” with a 100% rating. These efforts—and others—were recently recognized by JUST Capital, which named IBM the most just company in our industry.

100%

The Human Rights Campaign Foundation designated IBM as a “Best Place to Work for LGBTQ+ Equality” with a 100% rating.

In 2021, we furthered our tradition of leadership in sustainability, announcing a goal of net-zero greenhouse gas emissions by 2030 across all the countries in which we operate. Our commitment to the environment is also evident in our products, including the new IBM Environmental Intelligence Suite, which combines weather, climate, and operational data to measure and manage environmental performance. And in May, IBM launched the 2021 Call for Code Global Challenge, which invited the world’s software developers to combat climate change with technology powered by open source software. The top prize this year went to Saaf Water, an accessible water quality sensor and analytics platform for people living in rural localities.

The catalyst that makes the world work better

On the cover of this report is a simple phrase: “Let’s create.” This is a signal to the world that IBM has changed. We are more open to partnership, more open to ideas, and more open to innovation than ever before. “Let’s create” is an invitation to all of our stakeholders to join us in solving the most complex problems facing business and society today.

As the nature of those problems changes over time, so too will IBM, reinventing itself to overcome whatever obstacles stand in the way of progress. And while many things about our company change, there are some things that will always stay the same. We will always be dedicated to our clients’ success, pursue innovation that matters, and set the standard for trust and responsibility.

Why do we hold ourselves to such high standards? Because IBM’s clients own and operate the planet’s mission-critical systems: electrical grids, airlines, telecommunications networks, banks, government services, and many others. These systems are more than just engines of economic growth. They are the systems that support modern society. In making them faster, more productive, and more secure, we don’t just make business work better; we make the world work better. We don’t just create business value; we create progress.

I believe IBM is now positioned to be the catalyst of that progress for decades to come.

 
Arvind Krishna’s signature

Arvind Krishna
Chairman and Chief Executive Officer

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 non-GAAP financial measures on a continuing operations basis, including revenue growth rates adjusted for constant currency. The rationale for management’s use of this non-GAAP information is included on page 6 of the company’s 2021 Annual Report, which is Exhibit 13 to the Form 10-K submitted with the SEC on February 22, 2022. For reconciliation of these non-GAAP financial measures to GAAP and other information, please refer to pages 9, 17, and 32 of the company’s 2021 Annual Report. Cash from operations is presented on a consolidated basis, which includes activity from discontinued operations related to the separation of Kyndryl.