<Page>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: October 16, 2001
(Date of earliest event reported)
INTERNATIONAL BUSINESS MACHINES CORPORATION
(Exact name of registrant as specified in its charter)
New York 1-2360 13-0871985
(State of Incorporation) (Commission File Number) (IRS employer
Identification No.)
ARMONK, NEW YORK 10504
(Address of principal executive offices) (Zip Code)
914-499-1900
(Registrant's telephone number)
<Page>
Item 5. Other Events
The registrant's press release dated October 16, 2001, regarding its
financial results for the periods ended September 30, 2001, including unaudited
consolidated financial statements for the periods ended September 30, 2001, is
Attachment I of this Form 8-K.
Attachment II of this Form 8-K is IBM's Chief Financial Officer John R.
Joyce's third quarter earnings presentation to securities analysts on Tuesday,
October 16, 2001.
IBM's web site (www.ibm.com) contains a significant amount of information
about IBM, including financial and other information for investors
(www.ibm.com/investor/). IBM encourages investors to visit its various web sites
from time to time, as information is updated and new information is posted.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
Date: October 16, 2001
By: /s/ Mark Loughridge
------------------------------
(Mark Loughridge)
Vice President and Controller
<Page>
ATTACHMENT I
IBM ANNOUNCES THIRD-QUARTER 2001 RESULTS
ARMONK, N.Y., October 16, 2001 . . . IBM today announced third-quarter
2001 diluted earnings per common share of $.90, a 17 percent decrease compared
with diluted earnings per common share of $1.08 in the third quarter of 2000.
Third-quarter 2001 net income was $1.6 billion, a 19 percent decline from $2.0
billion in the year-earlier period. IBM's third-quarter 2001 revenues totaled
$20.4 billion, down 6 percent (3 percent at constant currency) compared with the
third quarter of 2000.
Louis V. Gerstner, Jr., IBM chairman and chief executive officer, said:
"The third quarter saw an acceleration of the fundamental shift in customer
buying behavior that is altering our industry's landscape. Customers now
allocate an increasing percentage of their spending to solutions, not boxes. The
major beneficiary of this change, of course, has been IBM Global Services.
Another very important beneficiary, however, has been IBM's middleware software,
since many of the major software solutions providers now recommend IBM
middleware as their preferred platform.
"Finally, and perhaps surprising to some, another major beneficiary of the
industry shift has been IBM's powerful high-end zSeries servers, as customers
all over the world see the value of server consolidation. In the third quarter,
zSeries MIPS grew 42 percent and have grown by more than 40 percent in each
quarter of 2001.
"Turning to our individual units, Services continued its double-digit
growth, excluding maintenance, and the backlog increased by nearly $2 billion
from last quarter. Software had an outstanding quarter and we are increasing
share in every important area of our software portfolio. Servers also had a
strong quarter with major share gains in the UNIX market. The PC segment of our
industry remains in trouble, and this negatively affected our PC and hard disk
drive businesses. As expected, our Microelectronics business was weak," Mr.
Gerstner said.
"IBM's results for the first nine months of this year include $63 billion
of revenue, $5.4 billion of net profit -- both even with last year -- and $2.2
billion of free cash flow, double last year's amount. This is a remarkable
record, given that many technology companies have been reporting huge revenue
declines and vastly lower profits or losses for the first time in many years.
IBM's balance sheet remains among the strongest in the technology industry or
any industry."
In the Americas, third-quarter revenues were $9.1 billion, a decline of 6
percent (5 percent at constant currency) from the same period of 2000. Revenues
from Europe/Middle East/Africa were $5.7 billion, up 1 percent (4 percent at
constant currency). Asia-Pacific revenues fell 5 percent (up 5 percent at
constant currency) to $4.1 billion. OEM revenues decreased 28 percent (27
percent at constant currency) to $1.5 billion.
Revenues from Global Services, including maintenance, grew 5 percent (9
percent at constant currency) in the third quarter to $8.7 billion. Global
Services revenues, excluding maintenance, increased 7 percent (11 percent at
constant currency). IBM signed $10 billion in services contracts and concluded
the quarter with a total services contract backlog of approximately $97 billion.
The overall gross profit margin in Global Services improved by 1.8 points year
over year to 28.4 percent.
Page 1
<Page>
Hardware revenues declined 21 percent (18 percent at constant currency) to
$7.5 billion from the 2000 third quarter. Revenues from z900 mainframe servers
grew strongly. Revenues from the iSeries mid-market servers increased in all
geographic areas, while pSeries revenues declined in part because customers were
awaiting the new high-end "Regatta" servers, which were announced in early
October. Personal computer revenues fell significantly, reflecting continued
weakness and price pressures in this market. Revenues from IBM's high-end
storage product family -- known as "Shark" -- increased year over year.
Microelectronics revenues decreased substantially, as expected, principally due
to the cyclical downturn that is affecting the worldwide semiconductor and OEM
markets.
Software revenues grew 10 percent (14 percent in constant currency) to
$3.2 billion compared to the prior year's third quarter. Middleware revenues,
which comprise approximately 80 percent of IBM's overall software revenues, grew
18 percent at constant currency and operating system revenues increased 3
percent year over year. WebSphere revenues increased 75 percent, MQ Series
revenues more than doubled and DB2 revenues climbed 31 percent (excluding
revenues from the acquisition of the Informix database business, which was
successfully completed in the third quarter).
Global Financing revenues decreased 4 percent (2 percent at constant
currency) in the third quarter to $822 million.
Revenues from the Enterprise Investments/Other area, which includes
products for specialized customer uses, declined 24 percent (21 percent at
constant currency) year over year to $244 million. This decline was expected,
resulting from IBM's strategy to shift development and distribution of these
products to third-party companies.
The company's total gross profit margin improved to 36.2 percent in the
2001 third quarter from 35.4 percent in the third quarter of 2000.
Total third-quarter expenses were $5.1 billion, up 5 percent compared with
the year-earlier period. Selling, general and administrative expenses were flat
and include a charge resulting from workforce-balancing actions. Research and
development expenses also were flat. Other income declined primarily due to
writedowns of certain equity investments. The company continues to focus on
expense reductions through increased use of e-procurement, on-line learning and
other actions related to IBM's ongoing e-business transformation.
IBM's tax rate in the third quarter was 29.5 percent compared with 30.0
percent in the third quarter of last year.
IBM spent approximately $1.8 billion on share repurchases in the third
quarter. The average number of basic common shares outstanding in the quarter
was 1.73 billion compared with 1.76 billion shares in the same period of 2000.
There were 1.72 billion basic common shares outstanding at September 30, 2001.
Net income for the nine months ended September 30, 2001 was $5.4 billion,
or $3.03 per diluted common share, compared with net income of $5.4 billion, or
$2.97 per diluted common share, in the year-earlier period. Revenues for the
nine months ended September 30, 2001 were $63.0 billion, flat (up 5 percent at
constant currency) compared with $62.8 billion for the nine months of 2000.
The company's debt in support of operations, excluding global financing,
increased $1.1 billion from year-end 2000 to $2.2 billion, reflecting the
acquisition of the Informix database business. This resulted in a
debt-to-capitalization ratio of 11 percent at September 30, 2001. Global
financing debt declined $1.1 billion from year-end 2000 to a total of $26.4
billion, resulting in a debt-to-equity ratio of 6.7 to 1.
Forward-Looking and Cautionary Statements
Page 2
<Page>
Except for the historical information and discussions contained herein,
statements contained in this release may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements involve a number of risks, uncertainties and other
factors that could cause actual results to differ materially, as discussed in
the company's filings with the Securities and Exchange Commission.
Financial Results Attached
INTERNATIONAL BUSINESS MACHINES CORPORATION
COMPARATIVE FINANCIAL RESULTS
(Unaudited; Dollars in millions except per share amounts)
<Table>
<Caption>
Three Months Nine Months
Ended September 30, Ended September 30,
Percent Percent
2001 2000* Change 2001 2000* Change
------- ------- ------- ------- ------- -------
REVENUE
Global Services $8,682 $8,230 5.4% $25,895 $23,966 8.0%
Gross margin 28.4% 26.6% 27.2% 26.5%
Hardware 7,479 9,451 -20.9% 24,678 26,314 -6.2%
Gross margin 24.0% 27.9% 28.2% 27.6%
Software 3,201 2,918 9.7% 9,155 9,027 1.4%
Gross margin 81.5% 81.2% 81.4% 81.3%
Global Financing 822 859 -4.3% 2,499 2,494 0.2%
Gross margin 51.0% 41.7% 48.8% 43.4%
Enterprise Investments/
Other 244 323 -24.2% 813 979 -16.9%
Gross margin 40.8% 47.5% 44.6% 47.6%
TOTAL REVENUE 20,428 21,781 -6.2% 63,040 62,780 0.4%
GROSS PROFIT 7,391 7,704 -4.1% 23,037 22,501 2.4%
Gross margin 36.2% 35.4% 36.5% 35.8%
EXPENSE
S,G&A 3,741 3,726 0.4% 11,314 11,299 0.1%
% of revenue 18.3% 17.1% 17.9% 18.0%
R,D&E 1,261 1,261 0.0% 3,743 3,702 1.1%
% of revenue 6.2% 5.8% 5.9% 5.9%
Other income 73 (173) -141.8% 143 (492) -128.9%
Interest expense 54 86 -36.9% 184 245 -24.9%
TOTAL EXPENSE 5,129 4,900 4.7% 15,384 14,754 4.3%
% of revenue 25.1% 22.5% 24.4% 23.5%
</Table>
Page 3
<Page>
<Table>
INCOME BEFORE
INCOME TAXES 2,262 2,804 -19.3% 7,653 7,747 -1.2%
Pre-tax margin 11.1% 12.9% 12.1% 12.3%
Provision for
income taxes 667 841 -20.7% 2,263 2,324 -2.6%
Effective tax
rate 29.5% 30.0% 29.6% 30.0%
NET INCOME $1,595 $1,963 -18.7% $5,390 $5,423 -0.6%
Net margin 7.8% 9.0% 8.6% 8.6%
Preferred stock
dividends 0 5 10 15
NET INCOME
APPLICABLE TO COMMON
SHAREHOLDERS $1,595 $1,958 -18.5% $5,380 $5,408 -0.5%
====== ====== ====== ======
EARNINGS PER
SHARE OF COMMON
STOCK - ASSUMING
DILUTION $0.90 $1.08 -16.7% $3.03 $2.97 2.0%
====== ====== ====== ======
EARNINGS PER
SHARE OF COMMON
STOCK - BASIC $0.92 $1.11 -17.1% $3.10 $3.06 1.3%
====== ====== ====== ======
AVERAGE NUMBER OF
COMMON SHARES OUT-
STANDING (M's)
DILUTED 1,767.9 1,809.8 1,775.6 1,819.3
BASIC 1,731.8 1,758.1 1,737.0 1,767.6
</Table>
* Reclassified to conform with 2001 presentation.
Page 4
<Page>
INTERNATIONAL BUSINESS MACHINES CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Unaudited)
<Table>
<Caption>
At At
(Dollars in millions) September 30, December 31, Percent
2001 2000 Change
------------ ----------- -------
ASSETS
Cash, cash equivalents,
and marketable securities $4,012 $3,722 7.8%
Receivables - net, inventories,
and prepaid expenses 36,297 40,158 -9.6%
Plant, rental machines,
and other property - net 16,820 16,714 0.6%
Investments and other assets 27,965 27,755 0.8%
-------- --------
TOTAL ASSETS $85,094 $88,349 -3.7%
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt $10,907 $10,205 6.9%
Long-term debt 17,654 18,371 -3.9%
-------- --------
Total debt 28,561 28,576 -0.1%
Accounts payable, taxes,
and accruals 21,969 26,201 -16.2%
Other liabilities 12,587 12,948 -2.8%
-------- --------
TOTAL LIABILITIES 63,117 67,725 -6.8%
STOCKHOLDERS' EQUITY 21,977 20,624 6.6%
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $85,094 $88,349 -3.7%
======== ========
</Table>
Page 5
<Page>
INTERNATIONAL BUSINESS MACHINES CORPORATION
SEGMENT DATA
(Unaudited)
<Table>
<Caption>
THIRD QUARTER 2001
--------------------------------------------
Pre-tax
(Dollars in millions) ------- Revenue ---------- Pre-tax Income
External Internal Total Income Margin
-------- -------- ------- ------- -------
SEGMENTS
Global Services $8,682 $684 $9,366 $1,373 14.7%
% change 5.4% 4.6% 5.4% 19.7%
Technology 1,654 628 2,282 (258) -11.3%
% change -26.5% -6.5% -21.9% -242.5%
Personal and Printing
Systems 2,829 18 2,847 (70) -2.5%
% change -28.8% -18.2% -28.7% -179.5%
Enterprise Systems 3,056 175 3,231 194 6.0%
% change -3.4% 26.8% -2.2% -29.2%
Software 3,201 236 3,437 704 20.5%
% change 9.7% 11.8% 9.8% 36.7%
Global Financing 814 204 1,018 314 30.8%
% change -6.2% -9.3% -6.9% 6.8%
Enterprise Investments 242 1 243 (76) -31.3%
% change -12.6% 0.0% -12.6% -38.2%
TOTAL SEGMENTS 20,478 1,946 22,424 2,181 9.7%
% change -5.5% 1.2% -5.0% -10.8%
Eliminations / Other (50) (1,946) (1,996) 81
TOTAL IBM $20,428 $0 $20,428 $2,262 11.1%
% change -6.2% -6.2% -19.3%
<Caption>
THIRD QUARTER 2000*
--------------------------------------------
Pre-tax
(Dollars in millions) ------- Revenue ---------- Pre-tax Income
External Internal Total Income Margin
-------- -------- ------- ------- -------
SEGMENTS
Global Services $8,230 $654 $8,884 $1,147 12.9%
Technology 2,250 672 2,922 181 6.2%
Personal and Printing
Systems 3,971 22 3,993 88 2.2%
Enterprise Systems 3,164 138 3,302 274 8.3%
Software 2,918 211 3,129 515 16.5%
Global Financing 868 225 1,093 294 26.9%
Enterprise Investments 277 1 278 (55) -19.8%
TOTAL SEGMENTS 21,678 1,923 23,601 2,444 10.4%
Eliminations / Other 103 (1,923) (1,820) 360
TOTAL IBM $21,781 $0 $21,781 $2,804 12.9%
</Table>
* Reclassified to conform with 2001 presentation.
Page 6
<Page>
INTERNATIONAL BUSINESS MACHINES CORPORATION
SEGMENT DATA
(Unaudited)
<Table>
<Caption>
NINE MONTHS 2001
--------------------------------------------
Pre-tax
(Dollars in millions) ------- Revenue ---------- Pre-tax Income
External Internal Total Income Margin
-------- -------- ------- ------- -------
SEGMENTS
Global Services $25,895 $1,923 $27,818 $3,748 13.5%
% change 8.0% 4.0% 7.8% 16.6%
Technology 6,091 1,795 7,886 (81) -1.0%
% change 4.5% -17.4% -1.4% -120.9%
Personal and Printing
Systems 9,072 50 9,122 (136) -1.5%
% change -16.2% 13.6% -16.0% nm
Enterprise Systems 9,669 547 10,216 1,111 10.9%
% change 1.8% 15.2% 2.4% 6.3%
Software 9,155 686 9,841 2,001 20.3%
% change 1.4% 15.3% 2.3% 9.2%
Global Financing 2,486 647 3,133 878 28.0%
% change -1.5% -6.9% -2.7% -1.1%
Enterprise Investments 782 2 784 (243) -31.0%
% change -16.7% -33.3% -16.8% -15.7%
TOTAL SEGMENTS 63,150 5,650 68,800 7,278 10.6%
% change 0.9% -3.1% 0.5% 1.7%
Eliminations / Other (110) (5,650) (5,760) 375
TOTAL IBM $63,040 $0 $63,040 $7,653 12.1%
% change 0.4% 0.4% -1.2%
nm - not meaningful
<Caption>
NINE MONTHS 2000*
--------------------------------------------
Pre-tax
(Dollars in millions) ------- Revenue ---------- Pre-tax Income
External Internal Total Income Margin
-------- -------- ------- ------- -------
SEGMENTS
Global Services $23,966 $1,849 $25,815 $3,214 12.5%
Technology 5,826 2,172 7,998 388 4.9%
Personal and Printing
Systems 10,820 44 10,864 (4) 0.0%
Enterprise Systems 9,500 475 9,975 1,045 10.5%
Software 9,027 595 9,622 1,832 19.0%
Global Financing 2,525 695 3,220 888 27.6%
Enterprise Investments 939 3 942 (210) -22.3%
TOTAL SEGMENTS 62,603 5,833 68,436 7,153 10.5%
Eliminations / Other 177 (5,833) (5,656) 594
TOTAL IBM $62,780 $0 $62,780 $7,747 12.3%
</Table>
* Reclassified to conform with 2001 presentation.
Page 7
<Page>
-1-
ATTACHMENT II
--------------------------------------------------------------------------------
IBM 3Q 2001
EARNINGS PRESENTATION
OCTOBER 2001
<Page>
Thank you, Mandy. Good afternoon. This is Hervey Parke, Vice President of
Investor Relations for IBM, thank you all for joining us today. Let me quickly
give you a few pieces of information.
At this time, the opening page of the presentation should have
automatically loaded -- and you should be on Chart 1 -- the title page.
After the last chart in the presentation -- we will provide you an index
to go back to specific slides during the Q&A. Or, you can jump to the
index at any time by clicking on the index link located on the navigation
bar on the left side of your screen.
For printing slides, there are two alternatives:
As in previous quarter, there is a link on the index pages so you
can download the entire set of charts for printing.
Or, we have added a link to the navigation bar on the left side of
your screen so you can download the charts at any time.
In about 45 minutes, you will also be able to link to the prepared remarks
off that same navigation bar.
And finally, a replay of this webcast will be available on this website by
this time tomorrow.
Now, please click on the NEXT button and move to Chart 2.
<Page>
Certain comments made by John Joyce or myself during this call 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 filing with the SEC. Copies are available from the SEC, from the
IBM web site, or from us in Investor Relations.
Now, please click again on the NEXT button for Chart 3.
<Page>
And at this time, let me turn the call over to John Joyce, IBM's Senior Vice
President and Chief Financial Officer.
Thanks, Hervey. Good afternoon.
We're pleased with our 3rd-quarter results -- especially in this tough
environment.
o $1 billion 600 million in AFTER-TAX profit.
o $2 billion in Free Cash Flow -- generated from
o Over $20 billion in revenues.
Our results continued to show strong resilience -- for the same two fundamental
reasons as in prior quarters --
o First, we again gained share in key business areas -- services,
high-end servers, and software -- because we had the products and
services -- in other words, the solutions -- that customers wanted
in this environment.
o Second, we continued to benefit from the strength of our broad
portfolio and our business model -- with its financial core of
annuity-like businesses.
And just as important -- particularly in this economy -- our balance
sheet remains very strong.
Before I get into the details of our 3rd quarter, let me describe how September
11 affected our results. Here's what we generally saw:
o For that third of our business that is annuity-like and generated by
ongoing operations -- outsourcing, maintenance, host-based software
-- revenue was unaffected.
o In hardware and distributed software -- which is driven by new
orders and new shipments of products -- a significant amount of
revenue comes in the last month of any given quarter. September
business, therefore, is critical.
o As best we can measure, deferrals were mainly in the U.S.
<Page>
o The biggest impacts were to storage subsystems, Business
Innovation Services, and Intel-based servers.
o Let me add that we saw further slowing of already weak orders
for PCs, associated HDDs, as well as OEM Microelectronics.
o On the other hand, our software and high-end servers remained
very strong.
o The heaviest concentration of all these deferrals was in the
Financial Services and Insurance sectors, as you would expect. And
we are working with these customers as they deal with their
priorities. While it is too early to know how much of this business
will eventually be booked -- in some areas like Outsourcing, we see
a very strong pipeline of opportunity.
Clearly, this environment is putting more pressure on many technology companies.
But it is also providing the investment community a very useful tool for
identifying long-term winners.
We have said that history will not necessarily repeat itself, and we continue to
believe this.
The next generation of e-business is about a powerful industry shift --
the integration of computing and communications to achieve competitive
advantage. It's not about just piece-parts.
So, a major shift is underway in customer buying patterns -- in favor of
powerful, fully integrated servers, software, and services. This shift plays
directly to the strength of IBM's product, services, and technology portfolio.
Even though customers may have slowed their investment in IT in this
economic environment -- they remain focused on this shift towards
integration.
o They're still building an infrastructure that is scalable,
robust and secure.
o They're focused on returns -- on how fast can they get their
cash back.
o But they also want to make sure the investments they make
today are consistent with long-term plans to tie front-end
processes to
<Page>
back-end processes, and to exploit the flow of information
in-between.
As you've seen all year long, this customer shift clearly is helping us -- even
during these difficult times -- in terms of revenue growth and market share
gains in key segments. The important point is that we believe these trends will
continue to accelerate in our favor once the economy begins to improve.
So what does this all mean for the 4th quarter.
What I just told you about September can help set expectations for the 4th
quarter:
o We will benefit from the steady flow of revenue and profit from our
annuity-like services, host-based software, maintenance, and
financing.
o We expect our customers to continue to prioritize hardware and
software decisions towards products that yield sure paybacks.
o In these decisions, we expect to benefit in three ways:
1. We now have product leadership over our piece-part
competitors.
2. Some of our competitors are going through significant changes,
brought on by increased competition in these difficult times.
Their business models are under pressure, so their product and
support levels may have to change.
3. And finally, we have leadership in helping customers build
total business solutions -- which means the decisions they
make with us today will fit into their business needs
tomorrow.
The 4th quarter will certainly be challenging.
The current consensus is that we will grow Earnings Per Share by 50% over
the 3rd quarter -- and deliver well over $2 billion in after-tax profit,
at the same time that some of our competitors will lose money.
It is extremely difficult to make predictions in this environment.
However, based on everything we know today, we believe the current
Earnings Per Share consensus for the 4th quarter is reasonable.
We'll address 2002 after our discussion of the 3rd quarter results, so let's get
started. Click on the NEXT button for Chart 4.
<Page>
RESULTS
Here's a financial overview of the 3rd quarter:
o I've mentioned that Revenue -- at $20.4 billion -- was down 3% at
constant currency -- and 6%, as reported.
Obviously, currency's impact was 3 points.
Let me just note here that -- based on current spot rates -- the
negative effect of currency on revenue for the 4th quarter would
be only about one point -- so sequentially from the 3rd quarter
we're going to get a little help.
o Pre-tax income was down 19% -- principally due to the slowing demand
in our Technology OEM businesses that we discussed back in July, but
also reflecting business impacts in September.
o Our tax rate was 29.5% -- down half a point from a year ago -- but
the same as last quarter.
Our year-to-date tax rate remains at 29.6%.
o Average diluted shares outstanding for the quarter were 1 billion,
768 million -- down 2.3% from last year.
o And earnings per share were 90 cents -- down 18 cents or 17%.
In these results we've absorbed currency, equity write-downs
and workload-balancing initiatives. These three factors alone
contributed about 13 cents to our year-to-year decline.
Now, let's turn to Revenue in the 3rd quarter -- starting with a geographic
perspective. Click the NEXT button for Chart 5.
<Page>
3Q01 GEOGRAPHIC REVENUE
Just over 90% of our revenue comes from sales to end-user customers, which we
break into three geographic areas.
o Constant currency is the best measure of comparative business
growth.
o The Americas declined 5% at constant currency.
As I've already mentioned, business in the U.S. had the greatest
disruption in September.
o Europe grew 4% in constant currency, before a 3-point currency
impact.
Strong performance in Services and Software offset Hardware
declines.
o Asia Pacific grew 5% in constant currency, before the 10 points of
currency impact.
The deceleration in Asia Pacific's growth from the 2nd quarter
is mostly due to the decline in PC revenue as we shift away from
the less profitable consumer sector.
Our OEM business -- the other 10% of our revenues -- declined 27% in the 3rd
quarter.
We indicated in July that we expected a substantial decline in our
Microelectronics business, based on the rapid deceleration in orders from
our OEM customers that began in the 2nd quarter.
And in our hard disk drive business, we experienced sustained weakness in
demand, along with the rest of the industry, due to declining PC volumes.
Now, if you'll click on the NEXT button for Chart 6 -- I'll touch on Revenue by
major line item.
<Page>
3Q01 REVENUE
Let me start with Global Services, which at 41% of revenue is our largest
segment.
Revenue was $8.7 billion -- growing 9% at constant currency.
Services without Maintenance grew 11%.
Hardware revenue in the 3rd quarter was $7.5 billion -- an 18% decline at
constant currency.
While we had strong growth in zSeries mainframes and Shark storage
subsystems, our OEM businesses -- Microelectronics and hard disk drives
-- as well as PC's -- faced even weaker markets than anticipated. Let me
add that the falloff in PC revenue has little impact on our profit.
Software -- at $3.2 billion dollars -- had strong growth of 14% at constant
currency.
We had terrific performance across all geographies and across all product
lines.
We gained share on key competitors -- even before the Informix acquisition
-- with continued strong performance in our data base and WebSphere
application server businesses.
Global Financing revenue -- at $822 million -- declined 2% at constant currency.
Income-generating assets were flat from last year -- and financing
originations were $8.8 billion in the quarter.
But hardware remarketing was down in the quarter -- driven principally by
a falloff in the U.S.
Now let's review gross profit margin -- Chart 7.
<Page>
3Q01 GROSS PROFIT MARGIN
Total gross profit margin for the 3rd quarter was 36.2% -- up 8 tenths of a
point from last year.
Global Services gross profit margin improved nearly 2 points.
We benefited from the cost-reduction actions in both Services and
Maintenance, as well as from improved productivity in our
outsourcing contracts.
Hardware gross profit margin declined nearly 4 points.
As expected, the key drivers were lower volumes in our technology
group and pricing pressures in PCs and hard disk drives.
Software gross profit margin improved 3 tenths of a point.
And our Global Financing gross profit margin improved 9 points --
reflecting lower funding rates and lower used hardware sales.
Now let's turn to Expense -- Chart 8.
<Page>
3Q01 EXPENSE SUMMARY CHART
Total expense was $5.1 billion -- up 5% from last year -- so that total
expense-to-revenue increased by two and a half points.
However, both SG&A and R&D were flat year-to-year -- and down slightly
from the 2nd quarter.
Again, a major factor impacting total expense was a $156 million
write-down of certain equity investments for other-than-temporary market
declines.
While SG&A is flat, there are many changes under the surface -- and these will
continue.
For example, at the beginning of the year, we targeted a $2 billion
reduction in infrastructure expenses by the end of next year -- and we're
already well on our way.
As we reduce these expenses, we continue to increase investments in key
areas where we can gain competitive advantage and prepare for 2002.
For example, we spent more on direct sales, on technical sales
support, on development, and, yes, on information technology.
And we put it where we're gaining share -- Servers, Storage
subsystems, Software, and Global Services.
We're also using technology to improve our efficiency.
IBM's e-Procurement is one of the largest private exchanges in the
world -- purchasing 98% of its goods and services electronically.
That's over $40 billion on an annualized rate.
IBM.com and e-Care for customer support also continued to improve
our productivity.
Now let's move to Cash Flow -- Chart 9.
<Page>
3Q01 - CASH FLOW
Cash generation for the 3rd quarter was solid -- with Free Cash Flow of $2
billion -- the same as last year. And we expect it to remain strong through the
rest of this year.
Our ongoing focus on working capital management was a key contributor.
Capital expenditures were up slightly year-to-year, with Services being a
key driver.
Also in the third quarter --
We spent $1.8 billion to repurchase about 18 million shares.
This left us with $1.8 billion under our last Board authorization at the
end of the 3rd quarter.
This continued strong cash flow -- even in a difficult economic environment --
gives us the flexibility to make necessary, appropriate investments for the
future of our business -- for internal growth, such as Outsourcing Services --
for acquisitions -- or for share repurchase.
Now let's look at the Balance Sheet, Chart 10.
<Page>
3Q01 - BALANCE SHEET
The balance sheet remains very healthy.
Total debt decreased $800 million from the same time last year.
Our $26.4 billion of Global Financing debt -- which was 92% of IBM's debt
-- was leveraged at a comfortable 6.7 to 1.
We increased our cash on hand, and we funded the Informix acquisition,
while maintaining our core debt to capital at a very comfortable 11% --
the same level as last year.
As I have said in previous quarters, this is not the environment to have growing
inventories or accounts receivable problems. Asset and debt levels continue to
receive high focus, and it shows in our results.
While for some companies, focus on the balance sheet and cash flow has now
become more fashionable, it has always been important to us -- and it pays in
many ways.
Since 1994, we've put $50 billion of free cash flow to work -- after
investing $38 billion in capital expenditures.
Or consider that IBM reopened the investment-grade bond market in
September with a heavily over-subscribed $1.5 billion bond issue.
Now let me turn to a discussion of some of our individual businesses -- starting
with Global Services -- Chart 11.
<Page>
GLOBAL SERVICES
Global Services -- at $8.7 billion -- was up 9% at constant currency.
o Services grew 11%, and
o Maintenance revenue was up 1%.
$10 billion of signings grew our backlog to $97 billion.
We did have delays in September signings, particularly for Business
Innovation Services in the Americas. But our Outsourcing Services pipeline
going into the 4th quarter is as strong as we've ever seen.
So, even in a challenging environment:
o we had seven deals greater than $100 million,
o our 6th straight quarter of signings at $10 billion or more,
o and nearly $600 million of web-hosting signings -- bringing our
total web-hosting signings to $1.7 billion year-to-date.
Now let me review the three major services segments.
First, Outsourcing and e-Sourcing -- slightly more than 40% of Global Services
this quarter -- grew a healthy 13% at constant currency.
o New businesses like e-Sourcing -- IBM's web hosting, co-location and
managed application hosting -- continued to drive revenue growth.
e-Sourcing revenue was up 50% this quarter, and was nearly three
quarters of a billion dollars year-to-date.
o And finally, leveraging the scale and scope of our outsourcing
business, cost management initiatives drove another point of margin
improvement this quarter, extending our lead against the
competition.
Integrated Technology Services -- which includes product support services and
maintenance -- is about a third of Global Services.
o IT Services -- excluding maintenance -- was up 16%.
<Page>
o We continued to see strength across all geographies, driven by
server and infrastructure consolidations.
o We also saw a slight up-tick in business continuity and recovery
services this quarter, which grew 14%.
Next is Business Innovation Services, which includes consulting and systems
integration. It's slightly less than a quarter of Global Services revenue and
grew 6%.
In the Americas, BIS revenue dropped off substantially, leading to a
year-to-year decline in the geography. The events of September 11 further
impacted an already weak consulting and integration environment.
In Europe and Asia-Pacific, we had double-digit BIS growth.
And worldwide, we continued to see good growth in key e-business areas:
Supply chain revenue grew more than 50% worldwide -- and e-business
integration revenue more than doubled.
Overall, this was a good quarter for Global Services.
We have again gained share, because our services capabilities provide
compelling value for our customers by helping them drive efficiencies in
their IT infrastructures and processes. As a result:
o Outsourcing demand remains strong.
o Server consolidations are driving a healthy ITS business.
o And although Business Innovation Services in the U.S. has
weakened, many customers continue to integrate business
applications across their enterprises.
Our opportunity pipeline going into the fourth quarter is as strong as
we've ever seen, giving us good visibility that signings will again
accelerate -- just as they did after Y2K.
Click on the NEXT button for Chart 12, and I'll discuss eServers and Storage
<Page>
eSERVERS AND STORAGE
Customers are shifting their priorities to high-end servers as they enhance
their infrastructure.
This strong momentum behind zSeries began a year ago and continued in the 3rd
quarter, with MIPS growth of more than 40%.
Mainframe growth is driven by a number of factors. Customers are using
mainframes --
o for consolidation, adopting Linux to centralize dispersed workloads
like file, mail or print serving --
o for new workloads, like web and e-commerce enablement, and
o for greater reliability, security, workload management and reduced
cost.
In the UNIX server market, almost every competitor has preannounced significant
revenue shortfalls, and we believe this market may be down as much as 35%. While
pSeries revenue was down 9%, we will again gain share.
Earlier this month, right on schedule, IBM announced Regatta.
This eServer p690 is the first product to use Power4 processors
-- combining copper, silicon on insulator and low-k dielectric. These are
the most advanced chips ever offered.
But the p690 is more than just a hot chip. While the competition chooses
to provide reliability through expensive redundant hardware, the p690 uses
the mainframe's predictive technologies to keep applications up and
running -- at far less cost to the customer.
The advanced architecture of the p690 gives customers 25% better
performance -- at half the price.
The iSeries -- our integrated server platform -- grew 10% this quarter, posting
gains in all geographies.
In July, I told you about the release of the new operating system.
<Page>
o It allows customers to leverage multiple environments, including
Java, WebSphere and Linux.
o We added dynamic partitioning capabilities to the iSeries.
o And this quarter, it won Best of Show at Linux World.
Recent reports by IDC and the Gartner Group highlighted the iSeries' ease
of use, low cost of ownership, 64-bit capability, and high reliability --
all attributes that customers have exploited for server consolidation.
The Intel server market continues to be under intense pressure, and our xSeries
revenues were down 25% year-to-year, in line with the market.
We recently announced an advanced set of technologies from our high-end
servers, called Summit, which will bring best-of-breed availability,
scalability and performance to the xSeries.
So, the real world is made up of multiple server platforms, and our customers
recognize IBM's unique ability to offer the best server to meet customers' many
different requirements.
Shark, our high-end disk storage device, grew 14% and continued to gain market
share.
We've seen strong customer demand for native FICON which we announced this
quarter -- and Shark remains the only Enterprise Storage device to offer
this feature.
We continue to see wide customer recognition of our competitive
advantages. Just yesterday, Wal-Mart announced their decision to utilize
z/900s and Shark storage as the backbone of their worldwide data center.
Complementing our disk solutions, we offer our customers low-cost,
high-performance tape storage. Tape continues to do well and grew by more than
20%.
Now click on the NEXT button for Personal Systems Chart 13.
<Page>
PERSONAL SYSTEMS
The PC industry slowdown and severe price pressures seen in the 1st half
-- intensified in the 3rd quarter.
Our PC revenue was down 29% year to year.
From the 2nd quarter, revenue was down 9% -- and we expect that,
when all the data is in, this will be in line with industry trends.
We are fine-tuning our business model and have taken aggressive actions to
bring our structure in line with these revenue levels.
o Plant inventories have been reduced 25% this year, and channel
inventories have been reduced 35%.
o Expenses have been reduced by leveraging the IBM.com sales channel.
o And earlier this month, we refreshed the entire product line --
bringing new wireless, security and management capabilities to our
ThinkPads and desktops.
Now if you'll move to Chart 14, we'll cover Technology.
<Page>
TECHNOLOGY
The semiconductor industry's severe downturn has led to competitors announcing
year-to-year revenue declines ranging from 20% to 50% -- and IBM
Microelectronics declined 30%. But we believe the 3rd and 4th quarter will be
the bottom.
While we are disappointed with these results, we recognize that, in any new
business, growth does not happen in a straight line -- as we found out in the
early years of Global Services.
But you know that technology has always been a key part of this industry -- and
as applications reach into new areas like pervasive computing and brand-new
customer sets, we fully expect technology to maintain this vital role. With our
leadership in custom logic -- leveraged by continued breakthroughs in IBM
Research and an expanding patent portfolio -- we will continue to make great
progress over the long term.
So, we'll leverage our leading-edge technologies based on copper, including
advances like SOI and low-k dielectric. For example, Regatta uses all of these,
and just last week we took it a step further with the announcement of ultra-low
power chips that can be exploited in portable devices.
And we are accelerating our use of these technologies, away from older
technologies, to meet our OEM customers' advancing requirements.
Like Global Services and Software, our Microelectronics business is an integral
part of our e-business strategy.
Before I move on, let me touch on the OEM hard disk drive. While we do expect to
gain share in both desktop and mobile drives in the 3rd quarter, our results
reflect the same issues of low volumes and price pressures as in the PC
industry.
Now click on the NEXT button for Software... Chart 15.
<Page>
SOFTWARE
Our software business -- at $3.2 billion -- was up 14% at constant currency.
o Operating System revenues, which make up about 20% of total
software, were up 3% at constant currency, driven by server
consolidation onto the z- and i-series platforms.
o Middleware, the majority of our software revenue at 80% of the
total, grew 18%.
These results reflect broad-based success: across our portfolio -- across
operating platforms -- and across customer sets.
Across the portfolio:
o Our transaction-processing leadership continued as WebSphere revenue
grew 75% and MQ Series revenue more than 100%.
o DB2 continued its success in the marketplace with 31% growth overall
and an even higher 56% growth on UNIX and NT. And these numbers are
without Informix.
o Tivoli turned the corner with continued sequential revenue growth
and profitability improvements.
o And Lotus real-time collaboration software grew 18%.
We also had success across platforms:
o Our middleware software grew 32% on UNIX and NT.
o On host platforms, 14% middleware growth was led by our database
tools business. We're aggressively going after this market, and
should achieve about $400 million in revenue this year.
And we continue to have success across customer sets:
o We signed important new middleware deals with existing customers and
new customers, like eBay which selected WebSphere as its technology
foundation.
<Page>
As a result, we continue to gain share in key middleware sectors.
o BEA Systems, our largest competitor in application servers,
reportedly expects flat to modest revenue growth this quarter,
versus our 75% growth in WebSphere.
In September, GIGA projected that IBM WebSphere will more than
double its market share to 34%. They projected that BEA is
increasing share by only 5 points to 36%. We are now virtually
tied for the lead in this market, and expect to be number 1,
shortly.
o In database, Oracle had declining database revenues this quarter
versus our 31% DB2 growth.
And, our successful Informix database acquisition this quarter --
o more than doubled our distributed database revenue,
o Added 2500 skilled resources, and
o strengthened our presence in the small and midsize customer
segments with the addition of 100,000 customers.
o And in real-time web conferencing, Lotus Sametime leads with a 33%
market share and almost three million corporate users, according to
a July IDC study.
Finally, our ISV alliances continue to drive revenue growth. More than $1
billion of IBM revenue was generated this quarter by 70 global strategic
alliances. Our partnering strategy is paying off -- for our customers, our
software partners, and us.
We have talked to you a lot about IBM's unique ability to integrate
multi-platform e-business solutions for our customers. You can see this in our
Server results -- in our Services results -- and here in our Software results.
Now, if you'll hit the NEXT button, let me summarize my remarks.
<Page>
CLOSING REMARKS
Let me conclude by looking ahead to 2002.
In many respects this is an economic call -- when does worldwide GDP bottom out,
and what's the timing and strength of the recovery? But that's a call I'm going
to leave to you.
In a weak economy, our recent results have demonstrated our ability to sustain
strong profit. And, we will leverage our strengths and continue to invest for
the future. For example --
o We've recently acquired Informix, to double our revenue for
database software on distributed platforms -- and Mainspring,
to add their expertise to our consulting practices.
o And while we are carefully controlling our total expense, we
are also aggressively cutting infrastructure to enable
increased investments in areas that can directly drive growth.
When the economy picks up, the emerging changes in the competitive landscape
will accelerate. We've already seen evidence of that, even though some of our
piece-part competitors are hoping that history will repeat itself.
o We've been consistently gaining share on key piece-part competitors
-- Sun, EMC, Oracle, BEA. Check out industry reports.
o Our sustained track record for new patents, our rollout of new
technology, and our timely use of that technology in new products
means that our leadership has been widening. Check out industry
reports.
o Open standards have been gaining momentum. IDC reported that Linux
was 27% of new operating system shipments -- last year -- even at
this early stage in its capabilities. And they projected 24%
compound growth over the next five years. That compares to 17% for
Windows NT. IBM revamped its strategy around open standards because
it's what our customers want. Our competitors have not, because it's
not what our competitors want.
<Page>
o As customers get into the more sophisticated applications of
e-business -- integration front to back -- they are turning to IBM
because of our experience, because of our ability to provide
business solutions, not just product solutions. Even some of our
competitors are starting to recognize this and are trying to imitate
us.
o IBM's business model has been building momentum over the past
several years. Yet many of our competitors are facing major
disruptions. They're reporting significant declines in revenue and,
more importantly, profit declines -- if not operating losses -- as
they adjust their structure to reflect the realities of competitive
pricing.
These are all metrics that point to IBM as the emerging leader.
And we continue to expect long-term growth in IT spending. As worldwide GDP
growth settles out at 2 to 3 percent, many observers believe that IT spending
should grow around 10%.
From an economic perspective -- information technology drives
productivity, which drives earnings.
Leading companies around the world understand the important shift that is
taking place in our industry, as computers and telecommunications continue
to converge -- tied together and supported by powerful servers,
sophisticated middleware software, and global services integration
capabilities.
That's exactly what our strategy has been built to address. Even during these
challenging times, it's given us a competitive advantage.
And when the economy recovers, we expect to be in an even stronger
competitive position -- and return to our model of high single-digit
revenue growth and low double-digit growth in earnings per share.
In closing, IBM has managed through these tough times before. We benefit from
our experience.
And we continue to feel good about our strategies, our products and our
services, and the value we provide to our customers as the computing model
<Page>
continues to shift in our direction. We're very encouraged about our
prospects.
<Page>
CLOSING - Hervey C. Parke
Thanks, John.
Before we take your questions, let me give you an update on our Fall Analyst
Meeting. To minimize a scheduling conflict for many investors, we have moved
this meeting ahead one day, to the afternoon of November 14. Additional details
will be forthcoming.
Now, if you will all go to the next chart -- you will find an index of all our
slides that may be helpful during the Q&A.
<Page>
-1-
================================================================================
IBM 3Q 2001
EARNINGS PRESENTATION
OCTOBER 2001
<Page>
-2-
================================================================================
CERTAIN COMMENTS MADE IN THIS 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
FILING WITH THE SEC. COPIES ARE AVAILABLE FROM THE SEC, FROM THE IBM WEB SITE,
OR FROM IBM INVESTOR RELATIONS.
<Page>
-3-
IBM
<Page>
-4-
IBM 3Q 2001 RESULTS
==============================
<Table>
<Caption>
B/(W) B/(W) B/(W)
($B) 1Q01 YR/YR 2Q01 YR/YR 3Q01 YR/YR
---- ----- ---- ----- ---- -----
-------------------------------------------------------------------------
Revenue - as reported 21.0 9% 21.6 -- 20.4 (6%)
@CC 14% 5% (3%)
-------------------------------------------------------------------------
GP% 36.1% 0.3 pts 37.3% 1.0 pts 36.2% 0.8 pts
E/R% 24.3% 0.3 pts 23.8% (0.3 pts) 25.1% (2.6 pts)
Pre-tax Income 2.5 15% 2.9 5% 2.3 (19%)
Pre-tax Income Margin 11.8% 0.6 pts 13.5% 0.6 pts 11.1% (1.8 pts)
-------------------------------------------------------------------------
Tax Rate% 29.7% 0.3 pts 29.5% 0.5 pts 29.5% 0.5 pts
Net Income 1.7 15% 2.0 5% 1.6 (19%)
Net Income Margin 8.3% 0.5 pts 9.5% 0.5 pts 7.8% (1.2 pts)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average Shares - Diluted (M) 1781 2.7% 1778 2.2% 1768 2.3%
EPS - Diluted $0.98 18% $1.15 8% $0.90 (17%)
-------------------------------------------------------------------------
</Table>
<Page>
-5-
IBM 3Q 2001 GEOGRAPHIC REVENUE
===============================================
<Table>
<Caption>
($B) B/(W) Yr/Yr B/(W) Yr/Yr B/(W) Yr/Yr % of
------------- -------------- ------------ Rev
1Q01 Rptd @CC 2Q01 Rptd @CC 3Q01 Rptd @CC 3Q YTD
---- ---- --- ---- ---- --- ---- ---- --- ------
---------------------- ----------------------- ---------------------- -------
Americas 9.0 6% 7% 9.6 (1%) -- 9.1 (6%) (5%) 44%
Europe/ME/A 5.6 3% 11% 5.8 (1%) 7% 5.7 1% 4% 27%
Asia Pacific 4.3 8% 18% 4.3 (2%) 10% 4.1 (5%) 5% 20%
OEM 2.1 48% 49% 1.9 11% 12% 1.5 (28%) (27%) 9%
---------------------- ----------------------- ---------------------- -------
---------------------- ----------------------- ---------------------- -------
IBM 21.0 9% 14% 21.6 -- 5% 20.4 (6%) (3%) 100%
---------------------- ----------------------- ---------------------- -------
</Table>
<Page>
-6-
IBM 3Q 2001 REVENUE
===============================================
<Table>
<Caption>
($B) B/(W) YR/YR B/(W) YR/YR B/(W) YR/YR % OF
------------- -------------- ------------ REV
1Q01 RPTD @CC 2Q01 RPTD @CC 3Q01 RPTD @CC 3Q YTD
---- ---- --- ---- ---- --- ---- ---- --- ------
---------------------- ------------------------- ---------------------- --------
Global Services 8.5 12% 18% 8.7 7% 13% 8.7 5% 9% 41%
Hardware 8.5 11% 15% 8.7 (5%) (1%) 7.5 (21%) (18%) 39%
Software 2.9 -- 5% 3.0 (5%) -- 3.2 10% 14% 15%
Global Financing 0.8 2% 5% 0.8 3% 7% 0.8 (4%) (2%) 4%
Enterprise Inv./ 0.3 (19%) (14%) 0.3 (7%) -- 0.2 (24%) (21%) 1%
Other
---------------------- ------------------------- ---------------------- --------
---------------------- ------------------------- ---------------------- --------
IBM 21.0 9% 14% 21.6* -- 5% 20.4 (6%) (3%) 100%
---------------------- ------------------------- ---------------------- --------
</Table>
* Rounding
<Page>
-7-
IBM 3Q 2001 GROSS PROFIT MARGIN
===============================================
<Table>
<Caption>
B/(W) B/(W) B/(W)
1Q01 YR/YR 2Q01 YR/YR 3Q01 YR/YR
---- ----- ---- ----- ---- -----
------------------------------------------------- ------------------------ ----------------------
Global Services 25.5% (0.4 pts) 27.6% 0.5 pts 28.4% 1.8 pts
Hardware 30.2% 2.8 pts 29.9% 2.6 pts 24.0% (3.9 pts)
Software 80.2% 0.2 pts 82.4% (0.1 pts) 81.5% 0.3 pts
Global Financing 47.3% 3.8 pts 48.2% 3.0 pts 51.0% 9.3 pts
Enterprise Inv./Other 49.5% 1.9 pts 43.3% (4.6 pts) 40.8% (6.7 pts)
------------------------------------------------- ------------------------ ----------------------
------------------------------------------------- ------------------------ ----------------------
IBM 36.1% 0.3 pts 37.3% 1.0 pts 36.2% 0.8 pts
------------------------------------------------- ------------------------ ----------------------
</Table>
<Page>
-8-
IBM 3Q 2001 EXPENSE SUMMARY
===============================================
<Table>
<Caption>
B/(W) B/(W) B/(W)
($B) 1Q01 YR/YR 2Q01 YR/YR 3Q01 YR/YR
---- ----- ---- ----- ---- -----
Operating Expenses
----------------------- ---------------------------- --------------------------
SG&A 3.8 (3%) 3.8 3% 3.7 --
R&D 1.2 (3%) 1.3 (1%) 1.3 --
----------------------- ---------------------------- --------------------------
----------------------- ---------------------------- --------------------------
Net Interest/ 0.1 NA 0.1 NA 0.1 NA
Other Income
----------------------- ---------------------------- --------------------------
----------------------- ---------------------------- --------------------------
Total Expense 5.1 (7%) 5.1* (1%) 5.1 (5%)
E/R% 24.3% 0.3 pts 23.8% (0.3 pts) 25.1% (2.6 pts)
----------------------- ---------------------------- --------------------------
</Table>
* Rounding
<Page>
-9-
IBM CASH FLOW
<Table>
<Caption>
($B)
3Q00 FY00 3Q01
---- ---- ----
Net Income 2.0 8.1 1.6
Depreciation/Amortization 1.2 5.0 1.2
Working Capital / Other (0.1) (0.8) 0.5
--------------------------------------------------------------------------------
Total Operating Sources 3.0 12.3 3.4
--------------------------------------------------------------------------------
Capital Expenditures, Net (1.1) (4.6) (1.3)
Other Operating Uses 0.1 (0.5) --
--------------------------------------------------------------------------------
Total Operating Uses (1.0) (5.0) (1.3)
================================================================================
Free Cash Flow 2.0 7.3 2.0
--------------------------------------------------------------------------------
Dividends (0.2) (0.9) (0.2)
Acquisitions (0.1) (0.3) (0.9)
Share Repurchase (1.4) (6.7) (1.8)
Other (0.2) 0.2 --
Global Financing, Net 0.5 (0.8) 0.5
Core Debt, Net (0.8) (0.9) 0.7
--------------------------------------------------------------------------------
Net Cash Flow (0.2) (2.1) 0.2
--------------------------------------------------------------------------------
</Table>
<Page>
-10-
IBM BALANCE SHEET
===============================================
<Table>
<Caption>
SEPT DEC SEPT
($B) 2000 2000 2001
---- ---- ----
-----------------------------------
Cash 3.0 3.7 4.0
Core Assets* 45.0 45.1 45.7
Global Fin. Assets* 35.9 39.6 35.4
---- ---- ----
Total Assets 83.9 88.3 85.1
-----------------------------------
-----------------------------------
Other Liabilities 34.9 39.1 34.6
Core Debt 1.8 1.1 2.2
Global Fin. Debt 27.6 27.5 26.4
---- ---- ----
Total Debt 29.4 28.6 28.6
---- ---- ----
Total Liabilities 64.3 67.7 63.1
-----------------------------------
-----------------------------------
Equity 19.5 20.6 22.0
-----------------------------------
-----------------------------------
Core Debt/Cap 11% 6% 11%
Global Fin. Leverage 6.1 6.6 6.7
-----------------------------------
</Table>
*Excluding Cash
<Page>
-11-
GLOBAL SERVICES
===============================================
Revenue $8.7B, +9% @CC
--------------------- --------------------
Services +11% Signings $10B
Maintenance + 1% Backlog $97B
--------------------- --------------------
o Backlog continued to grow
> $1.7 Billion of Web-hosting signings year-to-date
> Strong outsourcing pipeline
o Outsourcing and eSourcing up 13%
> Web-hosting revenue up 50%
> Continued margin improvement
o Integrated Technology Services up 16%
> Server consolidations driving growth
> Business Continuity and Recovery Services revenue up 14%
o Business Innovation Services up 6%
> Americas revenue declined year-to-year
> Signings dropped off in September
<Page>
-12-
eSERVERS AND STORAGE
==============================================
o IBM eServers: leveraging technology leadership
-- Infrastructure & server consolidation
-- eServers gaining share
> zSeries - mainframe - continued momentum
-- MIPS up >40%, MIPS inventory up >30%
> pSeries - revenue down 9%
-- Estimate 5-6 point share gain, market down 35%
-- New p690 (Regatta): 25% more performance at half the price of
competition
> iSeries - revenue growth 10%; up in all geographies
-- New capabilities - Linux, dynamic partitioning
o Storage: TotalStorage Solutions
> Shark revenue up 14% - gaining share
> Tape revenue up > 20%
<Page>
-13-
PERSONAL SYSTEMS
==============================================
o PC revenue down 29% yr/yr @CC
> Industry price and demand pressure
> ThinkPads - down 28%
> Desktop - down 30%
o Actions
> Plant inventory down 25%
> Channel inventory down 35%
> Expense down significantly yr/yr
o Full product refresh - October, 2001
<Page>
-14-
TECHNOLOGY
==============================================
o OEM Microelectronics
> Current environment
-- Severe industry downturn
-- Down 30% sequentially
> Longer-term
-- Strategic importance
o Fundamental building block of e-business
-- Leveraging IBM Research
o OEM Storage
> PC industry - driving component price pressure and demand softness
> Mobile leadership
<Page>
-15-
SOFTWARE
==============================================
Revenue $3.2B, +14% @CC
Operating Systems +3%
UNIX/NT +32%
Middleware +18%
Host +14%
o Strong growth across the portfolio, platforms, and customer sets
o Continued to gain share in middleware
> WebSphere + 75% yr/yr
> MQ Series + 129% yr/yr
> Database + 31% yr/yr (w/o Informix)
> Lotus Collaboration + 18% yr/yr
> DB Tools + 300% yr/yr
o Tivoli business stabilizing, and gaining in key areas
o Successfully completed Informix acquisition
o Leverage ISV alliances
<Page>
-16-
IBM
<Page>
CURRENCY: YEAR-TO-YEAR COMPARISON
==============================================
QUARTERLY AVERAGES PER US$
<Table>
<Caption>
@ 10/15
SPOT
10/15 ----
1Q01 2Q01 3Q01 SPOT 4Q01
----------- ----------- ----------- ----- ---------
Euro 1.08 1.15 1.12 1.10
Yr/Yr -7% -7% -2% 4%
Pound 0.69 0.70 0.70 0.69
Yr/Yr -10% -8% -3% 0%
Yen 118 123 121 121
Yr/Yr -10% -15% -13% -10%
----------------------------------------------------------------
Negative IBM 5 pts 5 pts 3 pts 1-2 pts
Rev. Impact
</Table>
Negative Yr/Yr growth signifies a translation hurt