ibm pseries qcv wave 1 general survey highlights of key insights

© 2006 IBM Corporation

IBM Business Perspective 2006

Patricia MurphyVice President, Investor RelationsIBM Corporation

© 2006 IBM Corporation1

Certain comments made in the presentation may be characterized as forward looking under the Private Securities Litigation Reform Act of 1995. 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.

In an effort to provide additional and useful information regarding the company’s results as determined by generally accepted accounting principles (GAAP), this presentation includes certain additional non-GAAP information. The rationale for management’s use of this non-GAAP information, the reconciliation of that information to GAAP, and other related information is included in supplementary materials entitled “Non-GAAP Supplementary Materials” that are posted on the Company’s investor relations web site at http://www.ibm.com/investor/.


Common Themes

Globalization

Componentization

Collaboration

Agenda

IT Industry

IBM Strategy and Transformation

IBM Financial Model

IBM Businesses


Expands pool of skilled workers

Creates social and political tension

Requires execution at both high end and cost competitive ends of markets

Trends in the Global Landscape

Enabled by open standards

Drives networked rather than vertically integrated models

Allows emergence of new architectures and business models – e.g. SOA

Collaboration with clients, as well as partners

Required for innovation

Leads to new organization and business models

Globalization Componentization Collaboration


Source: IBM Global Market View IT Spending Growth Rates

The Reality: A Different IT Marketplace

'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08-5%

0%

5%

10%

15%

% Growth

2005+: 4 - 6%

1998 – 2000: 10 - 14%

WW GDP


Traditional IT IndustryEnterprise Focused

Individual/ Consumer Focused

High Value Add

Low Cost Producer

Printing

Enterprise

PC’s

Emerging IT Industry Dynamics


The Value Landscape

IT Firms

Business Performance Services Firms

Business PerformanceServices (BPS)

2006 Opportunity: $1.7T’06-’09 CAGR: 8-10%

~$300B Overlapping

Traditional Enterprise IT Industry2006 Opportunity: $1.6T

’06-’09 CAGR: 4-6%

Infrastructure Value

BusinessValue

ComponentValue


Common Themes

Globalization

Componentization

Collaboration

Agenda

IT Industry


IBM Financial Model

IBM Businesses


Own the Innovation Conversation• Broadest range of innovation• Collaborate with clients and partners• Premier innovation forums / jams

Lead the Shift to Business Value• Global Business Services• Business Process Services• Collaborative Innovation Services

Drive Efficiency ThroughGlobal Integration• Global Supply Chain• Global infrastructure and delivery• Asset development and leverage

Deliver Flexible On Demand Infrastructure• Information on Demand• Services Oriented Architecture (SOA)• Leadership Systems and Technology

IBM Strategy

Focus on Enterprisesthat Value Innovation

Focus on Enterprisesthat Value Innovation


1999Global Network

2005

2002

2001

1999

PCs

HDD

Flat Panel Displays

DRAM

Major Divestiture / Exit

Significant CapEx Requirements

Eroding

Declining

Cash Flow

Profit Impact

Revenue

5-Year Performance Trend Prior to Exit

IBM’s Portfolio Actions: Divest Low Growth, Low Margin, Commoditizing Product Lines


ComponentValue

Infrastructure Value

Services

Software

Hardware

New Market Entry

Leverage InfrastructureCapabilitiesLeadership New Market

EntryConsolidation OpportunityCapabilitiesLeadership

Acquisitions

Divestitures / Exits

Business Value Maersk IT

CandleSchlumbergerFilenet

DakshPwCC

Rational TivoliMicromuseISS

LotusEquitantLiberty Ins SvcsMRO

Corio

Logical NetworksKeyMROHealthlinkSector7Trigo TechCyaneaAlphabloxVeneticaSystemCorpSRDAscentialGluecode

IBM’s Portfolio Actions: Acquire High Value Capabilities


Annuity

Commodity

Transactional

Business Mix 1996

Annuity

Commodity

Transactional

Business Mix Today

Business Mix: Shift from Commodity to Higher Value


42.2%

40.2%38.8%

37.8%37.2% 37.1%

31.4%

28.9%27.7% 27.4%

26.4%

23.7%

20%

25%

30%

35%

40%

45%

1995 1996 1997 1998 1999** 2000

E:R

GPM

Financial Trends Late 90s*

37.9%36.6% 36.5% 36.9%

40.1%

26.5%26.7%26.1% 26.0% 25.5%

20%

25%

30%

35%

40%

45%

2001 2002** 2003 2004** 2005**

E:R

GPM

Financial Trends Today*

Profitability Increases: Higher Gross Profit Margins and Higher Investments

* 1995-1996 As Reported; 1997-2004 Continuing Operations; 2001-2005 includes Equity Compensation** Excludes Special Actions


* Management View of Cash = Net cash from operating activities (continuing operations) excluding global financing receivables and net capital expenditures

** 1999 not restated for stock-based compensation

Cash Generation: Consistently High Cash Flow

5.9 6.7 6.85.9

8.7 9.1 9.6

1.70.7

2.1

0

2

4

6

8

10

12

1999** 2000 2001 2002 2003 2004 2005

Man

agem

ent V

iew

of C

ash

Flow

($B

) *

-3%

0%

3%

6%

9%

12%

15%

IT In

dusr

y G

row

th

1999 - 2000 2003 - 2005

US Pension Funding

Source IT Industry: IBM Internal Assessment, based on Global Market View

dot.comCrash


IBM …..Pre-tax Income Mix(2005)

Services35%

Software37%

Hardware & Financing

28%

transformed itself by divesting commodity businesses and investing in higher value solutions

has a strategically balanced portfolio of hardware, software, and services

integrates to create unique value for clients

delivers strong earnings growth and cash generation

IBM Today

Excludes 2Q restructuring charges and PCsReclassified for 2006 segmentation changes


Common Themes

Globalization

Componentization

Collaboration

Agenda

IT Industry


IBM Financial Model

IBM Businesses


Deliver 10-12% Earnings per Share Growthover the Long-Term

Revenue Growth

IBM Long-Term Financial ObjectivesEPS

Contribution

6% – 8% 5 – 6 points

-- 3 points

-- 2 points

6% - 8% 10% - 12%

Drive revenue growth through new markets, new offerings and new products –both developed and acquired

Focus on productivity to improve margin

Deploy cash to fund growth and provide shareholder returns via dividends / buybacks


Revenue Growth Objectives

Grow Strategic Middleware double-digitsHold legacy businesses flat

Gain 1 point systems share

How

Hardware

Services

Software

Includes developed and acquired capabilities

Long-Term Objective

6% - 8%

6% - 9%

6% - 7%

Grow with or better than the industry


Revenue Growth Objectives: Another Perspective

Long-Term Revenue Growth Contribution

Base Revenue 2 – 3 points

Growth Initiatives:Business Performance Svcs 1 pointEmerging Countries 1 pointNew Markets 1 point

Acquisitions 1 – 2 points

Total Revenue 6% - 8%


Emerging Countries

China

India

Russia

Brazil

FY05$4B

+14% Yr/Yr

New Markets

Retail on Demand

Sensors & Actuators

Info Based Medicine

FY05~$1B

>100% Yr/Yr

Acquisitions

Business Integration

Web-Enabled Software

Business Transformation

Application on Demand

FY05$1B+1 pt

Growth Initiatives and Acquisitions: Revenue ContributionBusiness Performance Services

Business Transformation Outsrc

Strategy & Change

Engineering & Technology Svcs

Bus Perf Mgmt Software

FY05$4B

+28% Yr/Yr

Year-to-Year growth @CC excludes PCs


Estimated Acquisition Revenue Growth

Estimated Acquisition PTI Margin

-6%4%

12% 20% 18%1%

-10%

0%

10%

20%

Yr 1 Yr 2 Yr 3 Yr 4 Yr 5

PTI (

excl

Inta

ngib

les)

%

Actual Projected excl intangibles

24%

42%

34%

19%20%

-10%

5%

20%

35%

50%

Yr 1 Yr 2 Yr 3 Yr 4 Yr 5

Reve

nue

YTY%

8%

15%

Strategic Acquisitions are:− enabled by powerful cash generation− able to leverage IBM’s global infrastructure− generally product-like − highly scalable− in growth areas − a form of new product development

Between 2002-2004 IBM completed 24 acquisitions priced below $500M

Estimated Financial Performance (24):− Revenue 5Yr CGR >25%

− IRR >20%

− Accretive Year 2

− Accretive excl. intangibles Year 1

Strategic Acquisitions: Deliver Profitable Growth


Yields:

Enhanced competitiveness

Investments to transform and enable growth

Offset labor cost increases

Three Points of EPS Growth ($300- 400M of net productivity)

2005 Cost/Expense ($79B)

Productivity Objectives: Enabled by Global Integration


Cash Flow Capital Investments ($4-5B)

$4 to $8B Stock Repurchase • Over $70B in the last 10 years

Dividend increased in each of the last 10 years

• 50% increase announced in 2006

Stock Repurchase / Dividends ($5-9B)

Systems & Technology• $1.0 - $2.0B / year @ ~20% ROIC

SO & BTO Contracts• $1.5B - $2.0B @ ~20% ROIC

Global Financing Operating Leases• $1.0B @ ~18% IGF ROE

Acquisitions ($2-4B)

BUILDLEADERSHIP

LEVERAGEINFRASTRUCTURE

NEW MARKETENTRY

CAPABILITIES

Cash Objectives: Fund Growth & Shareholder Return

Cash From Operations* $12B-$14B*Excluding GF Receivables


IBM Results: Double-digit Earnings per Share Growth

$2.00

$3.00

$4.00

$5.00

$6.00

2003

Revenue

Productivity &M

argin

Shares

2004*

Revenue

Productivity &M

argin

Shares

2005*E

PS fr

om C

ontin

uing

Ope

ratio

ns

+20%

$3.76

$4.50

$5.32

+18%

* Excludes Special Actions


Common Themes

Globalization

Componentization

Collaboration

Agenda

IT Industry


IBM Financial Model

IBM Businesses


Pre-tax Income Mix(2005)

IBM Services

Software

Hardware & Financing Services

35%


Services53%

Software


Revenue Mix(2005)


Services Market Opportunity

Services Opportunity2005 – 2009

’05 -’09CGR %5%

3%

7%4%

-1%

8%

5%

Source: IBM Internal Assessment, based on Global Market View, January 2006, at Constant Currency

$0

$100

$200

$300

$400

$500

$600

$700

$800

2005 2006 2007 2008 2009

Bill

ions

SO BTO HW Maint. ITS App Mgmt Consult

IBM Market Position (YE2005)Strategic Outsourcing #1 Consulting #1 (tie)HW Maintenance #1 Application Management #1Integrated Tech Svcs (ITS) #1

Total

Consult

App MgmtITSMaint

BTO

SO


IBM Services Profile

2005 Global Services Revenue = $47.4B, +2% yr/yr

Global Technology Services$31.5B +5% yr/yr

Business TransformationOutsourcing$1.6B, +59% yr/yr

Integrated Technology Services$7.5B, +1% yr/yr

Maintenance $5.9B, +3% yr/yr

Strategic Outsourcing$16.5B, +4% yr/yr

Global Business Services$15.9B -2% yr/yr

ConsultingSystems Integration

Application Management


Services Long-Term Revenue Growth Objective 6-8%: Grow with or Better than the Industry

Aligned around infrastructure and professional servicesDeliver unique solution offerings leveraging the full breadth of IBM

Capture the high-growth Business Performance market

Scale high volume services through SMB

Leverage global presence and delivery capability

Services Initiatives



IBM Software

ServicesHardware & Financing

Software37%


Services

Software20%


Revenue Mix(2005)


Software Industry Dynamics

8%Share

8%Share

Microsoft $15.8B

IBM $2.4BSun $0.6B

Operating Systems$33B

4% CGR

Middleware$80B

5% CGR

IBM $12.6B

Oracle $7.5B

Microsoft $5.4B

CA $3.3B

18%Share18%

Share

Enterprise Applications$92B

5% CGR

Microsoft $0.8B

SAP $7.0B

Oracle $2.7B

IBM (Dassault) $1.1B1%Share

1%Share

2005 Software Revenue

Only top market share leaders listed IBM share includes software revenue from Global Services transactionsCGR for 2005 - 2009


IBM Software Profile

2005 Software Revenue = $16.8B, +4% yr/yr

Operating Systems$2.4B, -2% yr/yr

Branded Middleware $8.0B, +9% yr/yr

WebSphereInformation Mgmt

LotusTivoli

RationalSoftware Services/Other

$0.8B, +19% yr/yr

Other Middleware $4.6B, -1% yr/yr

Host Tools & CompliersComm. ServersPrinter / Storage

PLM $1.1B, +3% yr/yr

Computer-aided design and manufacturing software

47%

5%


Software Long-Term Revenue Growth Objective 6-9%: Grow Strategic Middleware Double-digits

Improving mix towards high growth software

Lead the market in Service-Oriented Architecture (SOA)

Capitalize on “Information on Demand”

Extend Software Management capabilities / solutions

Software Initiatives



Services

Software


28%

IBM Hardware


Services

Software


27%

Revenue Mix(2005)


0%

5%

10%

15%

20%

25%

30%

35%

Q198 Q199 Q100 Q101 Q102 Q103 Q104 Q105

IBM eServer launch

Hardware Competitive Landscape

Source: IDC Server Tracker

Server Share – 4 Quarter Rolling Average


IBM Hardware Profile

2005 Hardware Revenue* = $21.5B, +5% yr/yr

Servers $12.9B, +4% yr/yr

System z -8% yr/yrSystem i +1% yr/yrSystem p +15% yr/yr System x +6% yr/yr

Technology Collaboration Sols. Microelectronics +16% yr/yrEng & Tech Svcs +39% yr/yr

Other

Storage$3.3B, +15% yr/yr

Retail Store Systems$.6B, -23% yr/yr

Printer Systems$1.1B, -9% yr/yr

* Excludes PC Revenue


Hardware Long-Term Revenue Growth Objective 6-7%: Gain 1 Point Systems Share Per Year

Continued share gains in systems

Leveraging assets to drive Technology Collaboration Solutions

Exploit infrastructure solutions

Capture strategic value through virtualization across all platforms

Hardware Initiatives


Balanced portfolio of Hardware, Software and Services

2005 Segment Revenue and Pre-Tax Profit

Services35%

Software37%


28%

Pre-tax Income Mix

Services53%

Software20%


27%

Revenue Mix



Summary

IBM’s strategy is to address the enterprise space with higher-value offerings− Divest commodity businesses and invest in higher value capabilities

Execution of this strategy has improved IBM’s financial profile− Balanced portfolio of hardware, software, and services− Strong earnings per share and cash generation

IBM is positioned to capitalize on the trends of globalization, componentization and collaboration− Globalization provides significant opportunity for productivity gains as

well as revenue growth− Componentization enables SOA and Information on Demand− These trends require both innovation and efficiency for success

ibm pseries qcv wave 1 general survey highlights of key insights

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