International Business Machines: 2022 Corporate Report

Arvind Krishna

Chairman and CEO IBM Annual Meeting of Shareholders 2022

April 26, 2022

Hello everyone.

2021 has been a pivotal year for IBM. From strengthening our portfolio, to expanding our partner ecosystem, to successfully spinning off parts of our business, we have taken a series of bold steps to execute on our strategy.

Thanks to this hard work, which I will describe in more detail in my remarks, we were able to put your business back on the path to growth. Broadly, there are three topics I will be discussing today.

  • I’ll start by giving you an overview of our financial performance in 2021.

  • Then I will update you on our strategy and execution.

  • Finally, I will close by briefly discussing IBM’s long-standing commitment to science, innovation and responsible stewardship and how these serve as drivers of long-term growth.

Financial performance 2021

So let’s start by looking at our financial performance in 2021.

For the year, we generated $57.4 billion in revenue and $12.8 billion in operating cash. Revenue growth accelerated at constant currency throughout 2021. We gained strong momentum towards the end of the year with growth of 8.6% in the fourth quarter. Meanwhile, hybrid cloud revenue grew 19% at constant currency and now accounts for 35% of IBM’s revenue.

If we look at the three pillars of IBM’s portfolio:

  • IBM Software grew 4% at constant exchange rates.

  • IBM Consulting grew 8% at constant exchange rates.

  • and IBM Infrastructure declined 3% at constant currency, reflecting product cycle dynamics.

As you can see, IBM already looks like a very different company. Today, more than 70% of our annual revenue comes from software and consulting, both of which generate healthy and sustainable growth. IBM is a higher growth, higher value company with strong and growing free cash flow, lower capital intensity and attractive returns for shareholders.

I am also pleased to say that our improved financial performance has enabled us to return capital to you, our shareholders. We’ve returned $6 billion to shareholders in dividends in 2021. We’ve also reduced debt by $10 billion in 2021 and $21 billion since acquiring Red Hat in 2019. Of course, we’ve does all this while continuing to invest in skills, innovation and our ecosystem, including $3 billion in acquisitions during the year.

And today, I am pleased to share with you that the Board of Directors has approved an increase in our dividend per share to $1.65 per quarter.. We are extremely proud to have increased the dividend for 27 consecutive years.

Let me now introduce you to our strategy around hybrid cloud and AI.

Strategy and execution

IBM’s improved financial performance is a direct reflection of our ability to execute on our strategy, which resonates strongly with our stakeholders.

In 2021, we continued to align our portfolio with the two most transformational enterprise technologies of our time: hybrid cloud and AI. To seize what is a $1 trillion hybrid cloud opportunity, we have a platform-centric approach that enables our customers to develop and deploy applications across private and public clouds and consume innovation from anywhere.

In addition to significant organic investments, we made 15 strategic acquisitions last year, all designed to strengthen our hybrid cloud and AI offerings.

For example, Waeg, Bluetab and Taos reinforce our expertise in cloud consulting. Turbonomic integrates with Instana and Watson AIOps to create an industry-leading suite of automation software. And ReaQta extends our AI-based threat detection and response capabilities into IBM Security.

We’ve also made many important changes to the way we engage our customers. Our new customer engagement model is based on two central principles: experiential selling and co-creation. And our customers have responded very well to these changes so far.

Another critical change we’ve made is the expansion of IBM’s partner ecosystem. We now have an extensive, carefully selected network of system integrators, independent software vendors, service providers, channel partners and developers. This makes it possible to approach a much broader opportunity.

To give you a few examples, we have strengthened existing relationships with companies like Adobe, Oracle and EY. We created new consulting services in collaboration with SAP and co-created an AI-based 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’ve seen our support consulting revenue from AWS, Azure, and Salesforce grow by more than 50%.

All of these efforts are part of a broader cultural shift at IBM towards customer centricity – which is already paying off.

For example, we are helping Spain’s Telefónica modernize its network platform, combining the potential of 5G with the personalization and intelligence of hybrid cloud. National Grid, a leading electric and gas utility in the United States, is working with IBM and Boston Dynamics to analyze data at the edge in real time to improve equipment availability and avoid outages. power outages = blackout. Australia’s federal government is working with IBM on the technology platform that powers the country’s COVID-19 vaccine program. And IBM Consulting and PNC Bank have partnered on a next-generation solution that empowers customers to make banking decisions based on real-time data – a massive change for the banking industry.

This customer-focused, problem-solving approach is why our customer renewal rates are increasing and our recurring revenue base is growing. That’s why long-time customers like CVS, Verizon, and Anthem continue to trust our people and our technology. And that’s why we now have more than 3,800 hybrid cloud platform customers and nearly 3,000 co-creating customers in IBM garages.

Commitment to science, innovation and responsible stewardship

As we focus on meeting the needs of today’s customers, we continue to shape the technologies of tomorrow. That’s why IBM Research continues to advance the basic science of computing, driving innovation and ushering in a new era of accelerated discovery.

The work we do around quantum computing is a great example of this focus. Last year, we rolled out the world’s first 127-qubit processor, and we’re now on our way to a 1,000-qubit processor by the end of 2023. We’ve 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, IBM also unveiled a major breakthrough in semiconductor design. IBM has introduced the world’s first 2-nanometer chip technology, which will allow 50 billion transistors to fit on a fingernail-sized chip. This, and other innovations, could help keep Moore’s Law alive for years to come.

Another long-term and unwavering commitment is IBM’s role in defining what good technology means in the digital age. Let me tell you what I mean by that.

One of the most pressing challenges facing our society today is closing the digital skills gap. To help solve this problem, IBM is committed to equipping 30 million people of all ages with essential skills by 2030. In addition, we are investing an additional $250 million in our learning program.

We also continue to make progress on diversity and inclusion, which we believe is essential to the health of our business and society. In 2021, IBM again increased the percentage of women and underrepresented minorities in our overall workforce, as well as in our leadership ranks. We also added a diversity modifier to our executive compensation program to highlight the importance of a diverse workplace.

The Human Rights Campaign Foundation named IBM a “Best Workplace for LGBTQ+ Equality” with a rating of 100%. These efforts – and others – were recently recognized by JUST Capital, which named IBM the fairest company in our industry.

In 2021, we also took important steps in sustainability.

Most notably, we announced our goal of net zero greenhouse gas emissions by 2030 in all countries where we operate. And IBM’s pioneering work in AI-based solutions for sustainability puts us in an elite group of companies, including

recognized in the annual TIME100 list of most influential companies.

Overall, I strongly believe these actions have made IBM a stronger and better company.

Conclusion

Allow me to end now by sharing my confidence in the future of this company.

One thing is certain, 2021 marked a very important change in the trajectory of our company.

We entered 2022 more strategically focused and more technologically capable. IBM is a company now more open to partnerships and more open to innovation through co-creation.

Our hard work over the past few years has brought us to this moment. It gives us confidence in our ability to deliver single-digit revenue growth in 2022. And it has enabled IBM to play a critical role in the digital transformation of mission-critical global enterprises.

Let me close by thanking you – our shareholders – for your continued confidence in IBM.

I appreciate your support as we position IBM as the catalyst that makes the world work better for decades to come.

Disclosure of Non-GAAP Financial Measures and Corporate Report.

In order to provide additional and useful information regarding the Company’s financial results and other financial information, as determined by generally accepted accounting principles (GAAP), this document contains non-GAAP financial measures on a business basis. continued, including constant currency adjusted revenue growth rates. The rationale for management’s use of this non-GAAP information is included in Appendix 13 of

Form 10-K filed with the SEC on February 22, 2022. For a reconciliation of these non-GAAP financial measures to GAAP and other information, please see pages 9, 17 and 32 of the 2021 Annual Report of the society. Cash from operations is presented on a consolidated basis, which includes discontinued operations related to the separation of Kyndryl.

James G. Williams