Let’s create Annual Report

1 Let's create 2021. Annual Report 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.

2 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 $ billion in revenue and $ billion in cash from operations. Revenue growth accelerated at constant currency throughout 2021, and we exited the year with growth in the fourth quarter, including approximately 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. Our performance was driven by our unique ability to combine IBM's technology and expertise to create value for our clients and partners.

3 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.

4 In fact, we have shipped more MIPs in the z15 than any program in our history. 2 . With this revenue and cash generation, we returned To improve how we deliver the value of these offerings to $6 billion to stockholders through dividends in 2021. We reduced our clients, we have updated our client engagement model to debt by $10 billion in 2021 and by $21 billion since acquiring emphasize experiential selling and co-creation. We have also Red Hat in 2019. We did all of this while we continued to invest greatly expanded our partner ecosystem. This network of systems in skills, innovation, and our ecosystem, including $3 billion integrators, independent software vendors, service providers, on acquisitions in the year. channel partners, and developers has been carefully selected IBM now has a higher-growth, higher-value business, with to deliver value to our clients, our partners, and IBM.

5 In 2021, strong and growing free cash flow, lower capital intensity, and we strengthened existing relationships with companies like attractive shareholder returns. Adobe, Oracle, and EY. We created new consulting services in collaboration with SAP and co-created an AI-enabled Strategy and execution analytics solution with Deloitte. We announced new strategic We entered 2021 with a series of clear but ambitious goals: partnerships with Cisco, Palo Alto Networks, and Telus, all to strengthen our portfolio, simplify our operations, and broaden focused on 5G, Edge, and network automation. And we saw our ecosystem. Our financial performance is a direct reflection our partnership revenue with AWS, Azure, and Salesforce of our ability to execute against these goals.

6 Grow more than 50%. Throughout the year, we continued to align our offerings with the two most transformational technologies of our time: A client-centric culture hybrid cloud and AI. Our platform-centric approach starts with Our efforts have been designed to accelerate the delivery of value Red Hat, which allows our clients to develop and deploy their to our clients and partners, part of a larger cultural shift at IBM. applications on private and public clouds, achieve consistent toward total client-centricity. We believe that IBM has a unique security across their computing infrastructure, and consume ability to solve our clients' most pressing business problems, innovation from anywhere. bringing together all the necessary hardware, software, and Our portfolio is positioned to capture the $1 trillion hybrid consulting, regardless of whether those solutions come from cloud opportunity, enabling our clients to access and deploy our IBM or our ecosystem partners.

7 AI capabilities on IBM's cloud or those of other major providers. We are seeing high demand for our capabilities in many areas. Our software has been enhanced and bundled to help clients Clients want to automate as many business tasks as possible become more data-driven, and to automate, secure, and given the current workforce dynamics. They are increasingly using modernize their business and IT operations. IBM Consulting AI and predictive capabilities to improve their supply chains. has transformed itself by deepening its technical expertise Security remains a major focus area, as the cost of cybercrime and embracing a co-creation model with clients. continues to rise. As clients deal with these challenges and To complement our organic investments, we made 15 opportunities, they are looking for a trusted partner with a strategic acquisitions to strengthen and extend our hybrid cloud proven track record of delivering strategic transformation.

8 And AI offerings. For example, Waeg, Bluetab, and Taos reinforce For example, we are helping Spain's Telef nica to modernize our cloud consulting expertise. Turbonomic integrates with its network platform, combining the potential of 5G with the Instana and Watson AIOps to create an industry-leading suite of customization and intelligence of hybrid cloud. National Grid, automation software. The recent acquisition of Envizi builds on a leading US electric and gas utility, is working with IBM. our existing asset management and supply chain solutions to help and Boston Dynamics to analyze data at the edge in real time organizations develop more resilient and sustainable operations. to improve equipment uptime and prevent power outages. And ReaQta expands our AI-based threat detection and response The Australian federal government is working with IBM on capabilities in IBM Security.

9 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. 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. 3. 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.

10 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. 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.