Download - TBR 4Q10 IBM Global Services Report

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IBM Global Services

PROFESSIONAL SERVICES BUSINESS QUARTERLYSM

Publish Date: Feb. 8, 2011Author: Elitsa Bakalova ([email protected]), PSBQ AnalystContent Editor: Alison Crawford, PSBQ Senior Analyst/Project Manager

Fourth Calendar Quarter 2010Fourth Fiscal Quarter 2010 Ended Dec. 31, 2010

TBR

IGS 4Q10 | Professional Services Business Quarterly ©2011 Technology Business Research, Inc.3

Company Analysis3 Executive Summary 8 Strategy Overview 11 Corporate SWOT Analysis15 Financial Model Strategy18 Go to Market & Services Strategies

23 Alliance & Acquisition Strategies25 Geographic Analysis26 Resource Management Strategy28 Future Outlook32 Appendix

Company Data Models29 Income Statements31 Balance Sheet32 Service Line Model33 Geographic Model34 Vertical Revenue Model35 Operating Expenses36 Headcount Model37 Financial Strategy Graphs39 Go-to-Market Graphs40 Resource Management Graphs42 Acquisitions Tables46 Portfolio of Services47 Vertical Offerings48 Quarterly Signings Tables54 Strategic Alliance Tables56 Worldwide Locations Table58 About TBR

Contents

TBR


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Key Developments

Momentum is building across services, and Big Blue is charging ahead at full speed

• IBM hit $142 billion in services backlog during 4Q10, up $8 billion sequentially and $5 billion year-to-year. IBM identifies this as a momentum builder and expects to keep pushing forward in its backlog during 2011, especially in outsourcing. IBM has clear visibility into its outsourcing business performance. The company forecasts revenue from its outsourcing backlog will grow 3% year-to-year during 2011, accounting for a major share of outsourcing revenue. Growing signings (up 18% year-to-year to a record $22.1 billion) due to improving demand in consulting & SI and in the mature markets, along with traction in the growth markets, will shape IBM’s performance in 2011.

IBM is developing its business analytics capabilities to capture market share from competition

• IBM is investing in the development of its business analytics capabilities (a cross-business unit) to capture market share and growth. Business analytics is targeted to contribute 20% of IBM’s growth over the 2015 Corporate Roadmap. IBM is investing in dedicated business analytics consultants (4,000 consultants in 2009; ended 2010 with 7,800); targeted acquisitions (has spent $12+ billion on software investments since 2005); and mathematics capabilities and analytics solutions centers to serve local clients. Competition may create temporary challenges, but TBR believes IBM is well-positioned in terms of capabilities (e.g., Cognos and SPSS gained through acquisitions) and client reach.

IBM is working with clients to create a Smarter Planet

• IBM’s ultimate ambition is to expand the Smarter Planet business (a cross-business unit) to ~$10 billion in total for IBM by 2015 (up from $3 billion at the end of 2010). TBR believes this is an achievable goal given IBM’s ability to provide a combination of software, services and hardware addressing key client needs from specific verticals.

IBM has rebranded its BPO-related business, investing in growth

• IBM’s BPO services is now called IBM Global Process Services (previously called Managed Business Process Services). TBR believes transformation has been at the forefront of IBM’s BPO offerings, and in addition to cost savings from outsourcing, IBM has provided its clients with business advantages from high-end strategic consulting and integration services. The addition of analytics to BPO creates a unique offering in TBR’s view and a strong differentiator for IBM.

Executive Summary

IBM’s growth investments will generate more signings in the near term

TBR


(in $ millions) Consensus Guidance Range ActualIBM Revenue $27,910 $27,240 - $28,420 $29,019IBM Services Revenue (external) N/A $14,000 - $15,000 $14,923IBM Services Operating Income N/A N/A $2,403.00IBM Non-GAAP EPS $4.00 $3.74 - $4.11 $4.18

(in $ millions) TBR Estimate Consensus Guidance RangeIBM Revenue $25,000 $23,680 $23,380 - $24,130IBM Services Revenue (external) $14,196 N/A $14,000 - $15,000IBM Services Operating Income $2,178.39 N/A N/AIBM Non-GAAP EPS N/A $2.23 $2.11 - $2.41

IBM AND IGS 4Q10 PERFORMANCE VS. EXPECTATIONS

IBM AND IGS 1Q11 GUIDANCE AND EXPECTATIONS

IGS’ Strategies• Build a resilient, global business model that generates

revenue and profit improvement opportunities• Grow services business at/above market growth and

expand pretax income by 8% to 10% CAGR through 2015• Shift portfolio toward higher-value, rapid-growth areas

(Smarter Planet, business analytics and cloud computing)• Invest in skills and capabilities in emerging markets; drive

productivity in developed markets• Diversify geographic revenue base and satisfy demand

for services in growth markets• Strengthen global service delivery network

• Leverage inorganic growth to expand capabilities

TBR PositionIBM Global Services (IGS) is leading its major competitors in terms of offerings and capabilities due to its offensive strategy, vision for opportunistic investments, and geographic diversification.

• IGS will continue to grow its top line in 2011, albeit at mid-single digits in TBR estimates, in line with IT services market growth anticipation for the year. IGS will benefit from stabilization of the global economy as well as from its growth initiatives, which will attract clients and projects.

• IGS has significantly improved its competitive standing and has the potential to expand its client reach and amass additional market share. To support its long-term, top-line growth, IGS has invested in high-value offerings, such as business analytics, cloud computing and vertical-specific offerings (part of Smarter Planet initiative), as well as investing in growth markets (expanding beyond the BRIC region).

• IGS will continue its gradual operating margin expansion (growing pretax income by 8% to 10% CAGR through 2015). IGS will see more benefits from its global integration, its focus on higher-value offerings and productivity initiatives.

Executive Summary

The improving momentum in the IT services market, coupled with IBM’s investments in growth, will create business opportunities

TBR


Executive Summary

Quarterly Segment Performance

Segment Key Changes & Drivers 4Q10Revenue

Growth Y/Y Trends to Monitor

IBM Global Services

Services revenue was driven by growth in outsourcing (albeit in the low-single digits), a return to growth in consulting & SI and strong performance in growth initiatives (business analytics grew 40% year-to-year).

$14.9 billion 2.0%

Increasing outsourcing backlog with key contribution from growth markets looking to build their IT infrastructures, as well as improved spending from base (existing) accounts, will contribute to outsourcing revenue growth in 2011.

IBM Software

Group

• IBM’s 4Q10 software revenue was driven by expanding middleware demand in growth markets.

• The company’s 14 acquisitions throughout 2010 are increasingly integrated and boosting revenue.

$7.0 billion 11.0%

IBM SW is focusing on high-growth areas such as business intelligence, business analytics, cloud, Smarter Planet and growth markets.

Systems & Technology

Group

IBM STG leveraged upgrades to its System z and POWER lineups, while meeting continued demand for Xeon-based, high-end System x, to drive over 20% revenue growth from 4Q09.

$6.3 billion 21.4%

We anticipate strong STG growth going into 1H11, as IBM works to better integrate its portfolio and expand into emerging markets.

Global Financing

Beneficial interest rate environments and higher margins on equipment sales boosted Global Financing.

$628 million 1.1%

We believe IBM will focus on constructing financing offers and incentives to drive growth in emerging markets.

Continued revenue growth will create new opportunities for increased software and services revenue in the coming quarters

TBR


Revenues• IGS’ external revenue increased 2.0% year-to-year,

demonstrating growth in Global Technology Services, an outsourcing business, and improving performance in Global Business Services, a transactional content business that was challenged during the recession (now seeing gains in consulting and in SI).

Expenses• IGS’ cost of services increased 4.2% year-to-year to $10

billion in 4Q10, accounting for 67.3% of external revenue, up 140 basis points from 65.9%. Increased leverage of lower-cost resources for service delivery will help IGS improve its gross margin.

• IGS’ SG&A contracted 160 basis points to 16.6% of external revenue, as IGS’ focus on productivity had a positive impact in lowering operating costs.

Margins• IGS’ pretax operating margin improved 30 basis points to

15.6%, while GTS operating margin improved 80 basis points to 15.8% (both year-to-year).

• TBR believes IGS will continue to see improving profitability. Levers include: continued global integration of IGS' capabilities and skills, augmented by expansion into higher-value service offerings; use of IP/assets and new capabilities to drive performance (use of analytics and cloud computing internally); and productivity initiatives.

* Pretax Income as a % of total GTS (external + internal revenue) and total GBS, respectively.

$14.63 $13.72 $13.72 $14.07 $14.92 $14.20

$2.32 $1.41 $2.11 $2.22 $2.40 $2.18

2.1% 4.3% 2.0% 2.1% 2.0% 3.5%

-25%-20%-15%-10%-5%0%5%10%15%20%25%

$0

$3

$6

$9

$12

$15

$18

4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 Est.

Reve

nue

Gro

wth

Yea

r-to

-yea

r

Pret

ax In

com

e/Re

venu

eIn

$ B

illio

ns

IGS' EXTERNAL REVENUE GROWTH AND PROFITABILITY

Revenue Pretax Income Revenue Growth Year-to-year

SOURCE: TBR AND IBM

TBR

35.8% 34.4% 34.4% 35.3% 34.7% 34.7%

15.0% 10.0% 14.9% 15.5% 15.8% 15.1%

30.3%27.3% 27.3% 28.9% 28.3% 33.9%

16.0%9.7%

14.6% 14.6% 15.0%14.3%

0%10%20%30%40%50%60%70%80%90%

100%

4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 Est.

% o

f Ext

erna

l Rev

enue

IGS' OPERATING RATIOS

GBS Operating Margin* GBS Gross MarginGTS Operating Margin* GTS Gross Margin

TBR

SOURCE: TBR AND IBM

Executive Summary

IGS’ global integration, higher-value offerings and productivity initiatives will continue to drive sustained margin advances

TBR


IGS’ large revenue base, improving backlog and stable profitability have enabled the organization to outperform its peers

IBM’s strong backlog, stable profitability, and improving outsourcing business generated higher-than-average scores across all TBR metrics. TBR expects IGS’ scores to continue to outperform peers as its growth accelerates into 2011. TBR also expects IGS’ focus on strengthening its geographic footprint, offshore service delivery and automation to drive profitability benefits.

Executive Summary

FINANCIAL METRICSTBR

ScoreCompany

FigureAverage in Class

Standard Deviation

Operating Margin 5.96 15.6% 9.7% 5.8%Current Ratio 3.88 1.19 1.77 49.7%Debt-to-Asset Ratio 3.23 0.80 0.57 12.4%Return on Assets (TTM) 6.39 13.8% 8.1% 3.7%Return on Equity (TTM) 9.11 66.4% 19.2% 12.9%

TOTAL AVERAGE TBR SCORE

GO-TO-MARKET & SERVICES METRICSTBR

ScoreCompany


Standard Deviation

Revenue (in $ Mill ions) 10.00 $14,923 $2,421 $1,324Revenue Growth YTY 4.43 2.0% 9.6% 7.8%Backlog/Revenue 6.57 2.41 1.92 0.35 Day Sales Outstanding 7.42 37.12 64.96 9.75

TOTAL AVERAGE TBR SCORE

RESOURCE MANAGEMENT METRICSTBR

ScoreCompany


Standard Deviation

Gross Margin 5.33 32.7% 30.7% 5.9%Operating Expenses as a % of Revenue 5.68 16.6% 19.8% 4.2%Revenue per Employee (TTM) 5.77 $235,345 $182,013 $65,064Operating Income per Employee (TTM) 5.73 $33,940 $18,169 $22,232Utilization Rate 8.01 86.0% 77.2% 2.9%Turnover 4.45 15.4% 14.1% 1.8%

TOTAL AVERAGE TBR SCORE 5.75

6.32

6.98

4Q09 1Q10 2Q10 3Q10 4Q10

Financial Model Strategy: 5.85 6.14 6.25 6.22 6.32 Go-to-Market & Services Strategies: 7.28 7.35 7.15 7.00 6.98 Resource Management Strategy: 5.73 5.47 5.66 5.70 5.75 TOTAL AVERAGE TBR SCORE: 6.29 6.32 6.36 6.31 6.35

TBR SCORING SUMMARY:CALENDAR QUARTER RESULTS

Key Represents an area where IGS is currently challenged versus peersRepresents an area where IGS is outperforming its peersRepresents an area where IGS is neither significantly outperforming nor underperforming its peers

TBR


Building a business model that is resilient to external market factors and profitable growth is a top priority for IBM/IGS

Strategy Overview

Function Key Strategies TBR Assessment

Overall• Build a resilient, global

business model that generates revenue and profit improvement opportunities.

►• IBM Global Services’ (IGS) business mix transformation

(focusing on higher-value services), growth investments and focus on productivity continued to support services revenue and margins in 4Q10.

Financial

• Grow services business at/above market growth and expand pretax income by 8% to 10% CAGR through 2015.

►

• Both IBM GTS and IBM GBS will see success from their growth and margin initiatives (listed on slide 10). TBR expects improvement in IBM’s services financials during 2011 as the company works to achieve its 2015 Roadmap for profitable growth.

Go to Market

• Gain traction in outsourcing; benefit from improving consulting & SI demand.

• Grow in line with IBM’s four growth areas (business analytics, Smarter Planet, cloud computing and growth markets).

• Provide client insight, influencing the market.

►

►

►

• We expect IGS to see revenue growth in 2011, though at mid-single digits in TBR estimates. Outsourcing is seeing stable outsourcing backlog; expected revenue from outsourcing backlog to account for a major share of outsourcing revenue in 2011 and to grow 3% year-to-year. Consulting & SI signings are improving and quickly transforming into revenue.

• Following IBM’s overall growth agenda will help IGS develop its offerings portfolio, provide cross-IBM solutions (software, hardware and research), and gain clients through IBM’s marketing and business development activities in the four areas.

• Investments in research and studies helps IGS develop and shape its go-to-market strategies, according to current market trends and client demand.

TBR


IBM is investing profit dollars in inorganic growth, integrated global service delivery and in its people to support growth

Strategy Overview

Function Key Strategies TBR Assessment

Alliances & Acquisitions

• Partner with IT companies, educational and government institutions.

• Support investments with inorganic growth to expand capabilities.

►

►

• IBM will continue to successfully enter into strategic alliances to provide a full range of services, software and hardware. IBM uses alliance partners to strengthen its Smarter Planet, analytics and cloud computing offerings.

• IBM has been successful in acquiring companies with intellectual property, high growth and margin opportunities to help shift its overall business mix and position the company for growth. TBR expects IBM/IGS will continue to invest its profit dollars in software and services acquisitions to support the company’s business analytics and Smarter Planet offerings.

Resource & Investments

• Leverage integrated global delivery capabilities for service delivery, globalize support functions and improve productivity.

• Focus on attracting and retaining top talent.

►

• An integrated global service delivery with high focus on low-cost regions, coupled with high use of assets/tools that aid/automate service delivery, are benefiting IGS’ bottom line. IGS’ nearshore/offshore headcount has grown sharply since 2006, reaching ~130,000 FTEs (53.1% of total in TBR estimates) at the end of 2010.

• TBR believes IBM has started to hire across key regions and service areas as demand improves to support growth. Growing its own talent and attracting lateral hires and freshers by selling them on the IBM brand and career opportunities are strengths of IBM.

►

TBR


Higher-value offerings, growth market expansion and thought leadership will help IBM grow its services business through 2015 TBR Assessment of Key Strategy: Grow services business at/above market growth and expand pretax income by 8% to 10% CAGR through 2015

IBM’s services business will see positive financial

results driven by its growth initiatives and

positive market outlook; IBM

anticipates both GTS’ and GBS’ target

markets to grow at ~4% CAGR from 2009

through 2015

With the gradual stabilization of the economic environment, IBM has outlined a set of initiatives to boost services revenue and operating margin through 2015.

• GTS (outsourcing, integrated technology services and maintenance) • On the revenue side, GTS is shifting its portfolio to higher-value offerings, looking to

grow BPO business (e.g., Global Process Services) faster than the market, expanding in growth markets, leveraging business analytics in sales and delivery, investing in skills and quality processes, and growing asset-based offerings to complement portfolio.

• On the margin side, GTS is driving $1 billion+ of productivity per year, integrating IP from IBM’s businesses and research and innovating through cloud computing.

• GBS (consulting, SI and applications outsourcing) • On the revenue side, GBS is aligning with IBM’s growth initiatives (60% of growth),

offering differentiated cross-IBM solutions (software, hardware, research), providing client insight and influencing the market and clients’ decisions.

Strategy Overview

• On the margin side, GBS is broadening the globally integrated delivery model (60% of centers), offering differentiated solutions (high-value, asset use) and driving operational excellence (improved project management, enterprise productivity).

• IBM has significantly improved its services business model and offerings to expand its client base and gain market share. IBM’s multifaceted approach to margin improvement will help services profitability reach the target levels through 2015.

$5.0 $8.1 $8.1 $8.9 $13.2

$48.3 $55.0 $56.4 $58.8

$72.5

$- $10 $20 $30 $40 $50 $60 $70 $80 $90

CY06 CY09 CY10 CY11 Est. CY15 Est.

In $

Bill

ions

IGS' EXTERNAL REVENUE AND PRETAX INCOME

Exernal Revenue Pretax Income (PTI)

TBR

SOURCE: TBR AND IBM

2.6% Y/Y

0.6% Y/Y

4.2% Y/Y

9.1% Y/Y

4.7% CAGR '09 - '15

8.4% CAGR

4.4% CAGR '06 - '09

17.4% CAGR '06 - '09

TBR


IBM/IGS’ strength lies in its well-developed resources and capabilities and its ability to adjust its offerings to demand

Opportunities• Demand for analytics brings investments in IBM’s

business analytics and optimization• Growth potential of cloud computing can help IBM

gain traction• European markets are now even more open to

outsourcing functions to outside vendors• Gain traction in emerging markets due to demand

and IBM’s growth investments• Stabilizing consulting/SI demand can help IBM

Global Business Services grow in the long run

Weaknesses• Partnership network is difficult to manage• Perceived as biased toward “Big Blue” solutions• IBM/IGS’ size can sometimes slow down decision-

making and implementation processes• Disjointed go-to-market approach in smaller

geographies may decrease win rate• Perception as complex IT provider does not match

simple, low-cost messaging around cloud

Strengths• Able to successfully integrate acquisitions• Strong relationships with alliance partners• Strong IBM brand associated with reliability;

backing from IBM as a whole• IBM’s Smarter Planet concept is a strong

competitive differentiator• Integrated global delivery network and presence in

low-cost locations• Ability to adjust offerings to demand and create

value for the client• Internal initiatives used to develop client offerings

Threats• Slower and uneven economic recovery in Europe

may challenge IGS’ near-term performance.• Indian vendors are becoming more active in

business consulting and remote management ITO.• Competition from other MNCs (e.g., Accenture, HP,

etc.) and European and Indian firms for top clients • Rising attrition and intensifying competition in the

labor market (especially in India)

Corporate SWOT Analysis

TBR


IBM's global integration provides convenient sourcing for the clientTBR Strength Assessment: Integrated global delivery network and presence in low-cost locations

IBM is ahead of other MNCs and

Indian and European IT service

providers in the integration of its global network

IBM has been investing to establish a network of globally spread, well integrated service delivery capabilities with strong nearshore/offshore presence.

• IBM has integrated its global delivery (aggregation of its centers, LEAN and globalization strategy), achieving delivery efficiency and client value leading to margin benefits.

• IBM uses common processes, methods and tools for service delivery, globally aligned governance models, integrated industry and domain capabilities, integrated resource capacity management, globally deployable assets and talent.

Corporate SWOT AnalysisSO

URC

E: IB

M A

ND

TBR

.

GBS’ Globally Integrated Delivery Capabilities• IBM Global Business Services’ (GBS)

integrated network for service delivery combines four types of delivery locations. A similar delivery model is also used by Global Technology Services (GTS), creating operational synergies for IBM.

• Onsite – services that require physical presence at the client (e.g., consulting)

• Local – services that need to be delivered from the same country

• Regional – services from the same continent, similar time zone, culture

• Global – standardized services to achieve savings; ongoing operations, monitoring, development

• Virtual Centers of Competency with teams of globally deployable subject matter experts with industry or service line expertise supplement local solutioning and delivery.

North AmericaCentral Europe &Eastern Europe

Argentina

Brazil

Egypt

IndiaVietnam

Philippines

China

Mexico

Regional Capability CenterGlobal Delivery CenterCenter of Competence (CoC)

Twelve CoCs: Banking; Energy & Utilities; Retail; Social Services & Healthcare; Travel & Transportation; Chemical & Petroleum; Insurance; Telco; Strategy & Transformation; Business Analytics and Optimization; SAP; Oracle.

TBR


IBM will expand around the globe and use tools for efficient deliveryTBR Strength Assessment: Integrated global delivery network and presence in low-cost locations (cont.)

The key to success for GBS is the extended global integration of its capabilities; investment in expansion of its physical presence, especially in lower-cost locations; and high use of IP/assets that aid its service delivery and create margin benefits

• GBS is shifting its delivery mix to the globally integrated capability model to drive margin expansion (goal is to grow pretax income by 8% to 10% CARG by 2015).

• During 2008 and 2009, GBS deployed the globally integrated delivery model across 40% of its global resources. This share increased beyond 50% in 2010, and the goal is to grow beyond 60% through 2015, which TBR believes is achievable given GBS’ established model, practices and resources for global service delivery.

• GBS will continue with the expansion of its global delivery capabilities from a physical standpoint, investing in suitable regions across the globe.

• The investment decision is based on where demand can be served from. • The strategy is to expand in regions where IBM can address growth in diversified

demand, rather than venturing into brand new countries.• The key is to be consistent with the rest of IBM; currently, 80% of GBS’ global delivery

centers overlap with other IBM units, creating operational efficiencies.• Annual reviews, based on factors such as costs, skills, talent, security and time zone,

help GBS decide whether to maintain, expand or reduce capacity in certain regions.• India is currently the largest global service delivery center for GBS with eight

locations throughout the country (TBR notes India is also a large global service delivery location for GTS). GBS is looking to expand in Tier 2 cities in 2011, helping to access a greater pool of talent and focusing on industry skills.

• A strength and also a margin lever for GBS is its use of resource management tools.• GBS’ global headcount of 100,000+ people (in TBR estimates) is managed by a tool

called IBM Professional Marketplace. The tool allows GBS to match its resources with clients and to move people to the right place (globally, regionally, locally, onsite). The tool functions in a manner similar to the way a supply chain system tracks and forecasts demand and inventory.


TBR


IBM is creating value to the client through analytics in its BPO offerings TBR Strength Assessment: Ability to adjust offerings to demand and create value for the client

IBM has extended its BPO offerings to help clients innovate their

business processes and differentiate their

businesses, generate both top-line growth

and bottom-line savings, and take

advantage of opportunities of the

global economy.

The addition of analytics to BPO creates a unique

offering, in TBR’s view, that allows IBM to

expand its analytics initiative.

IBM has rebranded its BPO-related business, investing in growth (the goal is to outpace market growth). IBM’s next-generation BPO services are now called IBM Global Process Services (previously Managed Business Process Services).

• IBM’s Global Process Services attracts clients with its horizontal offerings (e.g., F&A, CRM, HR and procurement), industry-specific offerings and platforms, coupled with forward-looking insights generated through analytics to drive innovation for clients.

• TBR believes transformation has been at the forefront of IBM’s BPO offerings, and in addition to cost savings from outsourcing, IBM has provided its clients with long-term business advantages from high-end strategic consulting and integration services.

• Through analytics, IBM is not only able to create value for the client, but the provision of analytics in BPO also allows IBM to grow its analytics business overall.

• Analytics was initially offered to the banking and telecommunications vertical, but it is now offered in CRM, HR, F&A and SCM BPO; IBM plans to expand into healthcare, insurance, energy & utilities and consumer products/retail.

• In addition to being well-positioned in terms of global delivery, IBM is keen on geographic diversification of its delivery capabilities. IBM is entering new regions that have potential, such as the recently opened nearshore center in Cairo for CRM BPO, which in TBR’s view may spur expansion of IBM’s delivery capabilities in the African continent.

• IBM’s bread and butter are large-scale and multitower deals, which have been scarce for the past two years given the tough economic environment.

• IBM has been able to leverage its asset-based plays to provide services to the ever-increasing midmarket, as well as to provide “start small and grow” services.

• While demand for major BPO deals is picking up, which will help IBM gain more such deals, TBR believes IBM needs to extend its focus on winning smaller-sale deals and gradually expand scope as the relationship matures. This will help IBM benefit from additional existing business opportunities.


TBR


Revenue growth remained in the low-single digits; 2011 revenue will grow in line with IGS’ addressable market growth

Revenue Performance External Revenue & Growth Drivers

4Q10 Revenue: $14.92 billion, 2.0% YTY

• IGS generated external revenue of $14.92 billion in 4Q10, improving 6.0% over 3Q10 and 2.0% year-to-year, both as reported and at constant currency from $14.63 billion in 4Q09.

• IBM’s GBS segment saw its revenue grow in 4Q10 driven by growth in outsourcing (application management services) and improvement in transactional business (consulting & SI). In 4Q10, GTS saw an increase in revenue driven by existing backlog and increase in revenue from base/existing accounts, the first reported growth since 4Q08.

Revenue and Growth Outlook

• TBR believes building backlog momentum in outsourcing, as well as improving signings in the transactional business, will enable IGS to sustain its revenue growth performance in the near term. TBR believes IGS is on track to report an increase in annual growth rates; however, revenue will grow more or less in line with overall market growth.

• IGS will increase focus on growing in emerging markets. IGS will continue bolstering its service portfolio, particularly within key focus areas of cloud computing and business analytics.

Financial Model Strategy

IGS' TWO-YEAR TRAILING 12-MONTH REVENUE

$58.89 $57.46 $55.69 $54.70 $55.00 $55.57 $55.84 $56.13 $56.42 $56.90

$-

$25

$50

$75

4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11Est.

In $

Bill

ions

SOURCE: TBR AND IBM.

TBR

CY08 CY09 CY10

IGS' EXTERNAL REVENUE, GROWTH AND PROJECTIONS

61.758.856.4

14.214.914.113.713.714.6

5.0%4.2%2.6%3.5%2.0%2.1%2.0%4.3%2.1%

$0.0

$20.0

$40.0

$60.0

4Q09 1Q10 2Q10 3Q10 4Q10 1Q11Est.

CY10 CY11Est.

CY12Est.

In $

Bill

ions

-10%

0%

10%

20%

30%

Reve

nue

Gro

wth

IGS' Externa l Revenue Revenue Growth Year-to-yearNOTE: Annual revenue and projections are for calendar 2009, 2010 and 2011, respectively.SOURCE: TBR AND IBM

TBR

TBR


IGS’ global integration, productivity improvements and higher-value offerings are driving operating margin advances

Cost & Margin Performance Cost Structure & Margin Performance4Q10 Operating Expenses: $2.47 billion

Cost of Services, Gross Profit

IGS’ cost of services increased 4.2% year-to-year to $10.2 billion from $9.6 billion in 4Q09, accounting for 67.3% of external revenue, up 140 basis points from 65.9% year-to-year. Increased leverage of lower-cost resources and automation of service delivery will help IGS improve its gross margin.

Opex

IGS’ SG&A contracted 160 basis points year-to-year to 16.6% of external revenue, as IGS’ continued focus on productivity and efficiency improvements.

Operating Margin and Outlook

Operating margin (pre-tax margin) expanded 30 basis points from 15.3% in 4Q09 to 15.6% in 4Q10 (as a percentage of total IGS revenue). TBR believes the continued growth of IGS’ globally integrated capabilities, augmented by expansion into higher-value service offerings and ongoing cost management and productivity initiatives, will deliver stronger results to the organization’s profitability.


IGS' OPERATING EXPENSES AS A PERCENTAGE OF EXTERNAL REVENUE

15.3% 16.2% 14.3% 14.8% 14.0% 15.9%

2.9%5.6%

2.4% 2.6% 2.6%3.2%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 Est.

Sa les and Marketing Expense G&A Expense

SOURCE: IBM AND TBR ESTIMATES

TBR

IGS' GROSS AND OPERATING PROFITAND PROJECTIONS

34.1% 32.1% 32.1% 33.2% 32.7% 34.5% 32.5% 33.8% 34.6%

15.3%9.9%

14.8% 15.2% 15.6% 14.8% 13.9% 14.5% 15.1%

0%

10%

20%

30%

40%

4Q09 1Q10 2Q10 3Q10 4Q10 1Q11Est.

CY10 CY11Est.

CY12Est.Gross Margin

Pre-tax Margin (Operating Margin)NOTE: Annual gross and operating profit and projections are for calendar 2009, 2010 and 2011, respectively. Profit calculated as a percentage of IGS' external revenue. SOURCE: TBR AND IBM

TBR

TBR


Improved performance in GBS, coupled with stable outsourcing and maintenance growth in GTS, will support IGS’ revenue in the near term

Service Line Performance Service Line DriversService Line Financials

Outsourcing

Outsourcing revenue increased 1.0% year-to-year (first time since 4Q08), driven primarily by existing backlog (80%-90% of revenue) and revenue growth from base/existing accounts. Traction in the growth markets in addition to stable outsourcing backlog will contribute to 2011 growth.

Integrated Technology Services (ITS)

ITS revenue fell 0.6% year-to-year, accounting for 16.0% of total external revenue and down from 16.4% in 4Q09. IGS is seeing strong demand in the emerging/growth markets, which will help rebound growth in 2011.

MaintenanceMaintenance accounted for 12.8% of external revenue and supported IGS’ operations as a strong cash generator.

Global Business Services (GBS)

GBS’ revenue grew 3.9% year-to-year driven by growth in consulting & SI (gained share) and in application management services (sustained share); business analytics revenue grew 40% year-to-year, as IBM continued to grow its capabilities.


IGS' SERVICE LINE REVENUE (IN $ BILLIONS)

$5,815 $5,454 $5,364 $5,532 $5,881

$1,779 $1,772 $1,802

$4,580 $4,410 $4,483 $4,572 $4,758 $4,600

$5,607

$2,395 $2,073 $2,098 $2,162 $2,381 $2,110$1,841 $1,904 $1,879

0%

25%

50%

75%

100%

4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 Est.

% o

f Ext

erna

l Rev

enue

GBS Outsourcing ITS Maintenance

SOURCE: TBR AND IBM

TBR

GTS

68.5% 68.7% 67.8% 67.3% 67.5% 68.1% 67.6%

31.5% 31.3% 32.2% 32.7% 32.5% 31.9% 32.4%

5%

20%

35%

50%

65%

80%

3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 Est.

% o

f Ext

erna

l Rev

enue

IGS' SERVICE LINE REVENUE AND PROFITABLITY

GTS Revenue GBS RevenueGTS Pretax Margin* GBS Pretax Margin*

SOURCE: TBR AND IBM* GTS Pretax Income as a % of total GTS and GBS Pretax Income as a % of total GBS

TBR

TBR


Service Line Strategies 2015 Roadmap (top- and bottom-line growth)Global Technology Services (GTS): • Grow revenue above the market in all service lines

• Shift to higher-value offerings• Grow BTO business faster than the market• Expand in growth markets (30% of 2015 revenue)• Leverage business analytics in sales and delivery• Invest in skills and quality processes• Grow asset-based offerings to complement

portfolio• Continue with margin expansion

• Drive $1 billion+ of productivity per year• Integrate IP from IBM’s businesses and research• Innovate through cloud computing

Global Business Services (GBS): • Grow revenue at/above the market through:

• Alignment with IBM’s growth initiatives (60% of growth)

• Differentiated cross-IBM solutions (software, hardware, research)

• Provide insight, influencing the market • Continue with margin expansion through:

• Globally integrated capabilities (60%+ of centers)• Differentiated solutions (high-value, asset use)• Operational excellence (improved project

management, enterprise productivity)

Go to Market & Services Strategies

Key service offering announcements during 4Q10 include:• IBM launched new social business consulting

services. The services will draw experts from IBM’s Strategy and Transformation consulting business to help clients understand how social software can be used in an organization. The offerings include:

• Social business strategy, assessment and implementation programs

• Social network analysis readiness and maturity modeling

• Leadership and skills development• Governance, policy and privacy management

• IBM launched the IBM Municipal Shared Services Cloud, which enables internal and global sharing of information by local governments. The cloud is a combination of advanced data analytics and SaaS technology and integrates services from multiple providers. The platform supports loose coupling of applications that will help improve government productivity and service quality. The IBM Municipal Shared Services Cloud will be available through IBM Global Technology Services. It is developed by IBM’s First of a Kind program, a collaboration between IBM Research, industry experts and clients.

IGS is strengthening its portfolio through continuous investment in innovative and higher-value offerings

TBR


Services Contract Signings• Signings increased 18% to $22.1 billion due to growth

in both outsourcing and transactional signings. On a trailing 12-month basis, signings grew 1.0% (all year-to-year and as reported).

• Outsourcing/long-term signings (GTS outsourcing, app. outsourcing) increased 24% year-to-year to $14.1 billion. Outsourcing signings are volatile and uneven by quarter and in 3Q10 declined 15% year-to-year. As such, they are not a good predictor of revenue. Factors such as duration, start date, and new business versus extensions affect revenue translation. Outsourcing backlog ($97 billion in 4Q10) has been stable during the past several quarters and will be the driver for outsourcing revenue in 2011. Revenue from backlog is expected to grow 3% year-to-year.

• Transactional/short-term signings (ITS, consulting and SI) increased 8.0% year-to-year. This second consecutive quarter of signings growth reflects a turnaround in areas hit hard by the downturn, including consulting and SI, as well as a positive influence on near-term revenue (transactional signings trends are similar to revenue trends).

• IBM signed 19 deals larger than $100 million, up from 10 in 3Q10; backlog increased 4% year-to-year (as reported) at $142 billion, positioning IBM for revenue growth.

Key 4Q10 Customer Wins• Bharti Airtel, India – 10 years; deploy and manage IR

infrastructure and applications in 16 African countries• Samlink, Finland – 5 years, $37 million; manage overall

IT operations and develop a desktop cloud solution• Westpac Group, Australia– 5 years; IT infrastructure

services (datacenter, mainframe, midrange, storage, desktop, print and security operations)

• Starbev, Czech Republic – 5 years, multimillion-dollar; IT infrastructure services (datacenter, help desk, end-user support) and overall service management

• Central Norway Regional Health Authority, Norway –$120 million; create Smarter Healthcare infrastructure

• Bank of Ireland, Ireland– 5 years; IT infrastructure services (desktop, servers, mainframes, local area networks and service desk)

IGS' CONTRACT SIGNINGS

$7.4 $5.5 $5.8 $5.4 $8.0 $6.7

$11.4

$6.7 $6.5 $5.6

$14.1$12.2

$0

$5

$10

$15

$20

$25

4Q09 1Q10 2Q10 3Q10 4Q10 4Q10

(In $

Bill

ions

)

Outsourcing/Long-term (GTS outsourcing, app. outsourcing (AMS))Transactional/Short-term (ITS, Consulting, AMS SI)

SOURCE: TBR AND IBM

TBR

At constant currencyAs reported


IBM’s growing backlog and improving signings with larger-scale deals will generate revenue returns in the coming quarters

TBR


Research and thought leadership help IBM set vertical trends and shape its overall go-to-market strategies


Vertical Market Strategy• Help clients in all verticals transform and reduce costs

through business analytics• In the public sector, focus on capturing a share of the

budgets pie through Smarter Planet offerings.• Increase the number of Smarter Planet projects in

other verticals – energy, healthcare, science, education, transportation and banking

• Develop industry leadership in the growth markets (banking, energy & utilities, healthcare, transportation & rail, natural resources); invest in industry-specific skills through hiring and training.

• Invest in industry sales skills to expand client reach in the Smarter Planet initiative

IGS’ Revenue Contributions by Vertical in 4Q10

SOURCE: TBR ESTIMATES

Financial Services30.0%

Public15.8%

Industrial14.0%

Distribution11.0%

Communications10.0%

SMB17.2%

Other 2.0%

Research and Thought Leadership Strategy• IBM’s research and thought leadership reside within IBM Research, the global R&D organization and IBM’s

Institute for Business Value (IBV). Part of Global Business Services, the IBV is a research and analysis organization with 50+ consultants. The IBV develops IBM’s global C-level studies (e.g., IBM Global CFO Study, Global CEO Study, etc.), as well as industry and functional thought leadership.

• Investments in research and studies help position IBM as a thought leader in the industry, which TBR believes is of significant importance for a large multinational player like IBM, allowing it to influence the market.

• The key, in TBR’s view, is that such initiatives help the company develop and shape its go-to-market strategies according to current market trends and client demand.

TBR


Direct Sales Approach

IBM uses a three-tiered sales structure with an integrated (Tier 1), vertical (Tier 2) and geographical (Tier 3) focus:

Tier 1: Integrated Accounts• IBM’s largest accounts, where it ensures a highly integrated

experience with dedicated IBM resources.• Vertical-specific global sales team works with Managing

Account Director; Brand Category Leader assists Managing Account Director with proposals.

• Includes the top +/-100 multinational accounts (more than $20 million in IBM revenue).

Tier 2: Industry-Aligned Accounts • Industry-specific and likely to have shared IBM resources. • Includes the next +/-1,400 accounts, clustering together

1 to 10 clients from the same industry.Tier 3: Medium Accounts

• Territory-specific accounts that leverage business partners and regional ISVs.

• Large regional players with annual revenue up to $200 million.

• Includes 15,000 (growth) focus accounts, 25,000 prospects and 120,000+ SMB targets; served by partners.

TBR believes the sales model for IGS is similar to the overall IBM go-to-market model.

IBM utilizes a three-tiered direct sales approach to manage its accounts and generate new business

Tier 1Top ~100Accounts

Tier 2~1,400 Accounts

Aligned by Industry

Tier 340k Direct + 120k+ IndirectAligned by Geo/Territory

SOURCE: IBM AND TBR ESTIMATES


TBR


• Overall, TBR believes IGS’ pricing environment remains competitive. TBR sees this continuing into the foreseeable future as heightened competition from Indian vendors and stronger market conditions lead to aggressive pricing tactics from competitors.

• TBR expects IGS to experience moderate pricing traction through 2011, albeit at an uneven pace among its primary markets.

• TBR believes IGS and its competitors are getting the best pricing traction in North America as the U.S. economy recovers.

• Pockets of pricing power in EMEA will emerge (i.e., in countries that are experiencing more rapid economic recovery, such as Germany), but the broader region will stay in a flat-line state.

• APAC markets will fare similarly to the U.S. for 2011, with opportunities to gain pricing traction becoming more evident throughout the year.

The table above provides hourly pricing rates for IGS from a Mission Oriented Business Integrated Services contract with the U.S. government’s General Services Administration. The contract period is from October 1997 through September 2017 and covers such services as consulting, facilitation, survey and privatization support and documentation.

Pricing is stabilizing across markets; however, pricing increases are not expected to be significant in the near term


LABOR CATEGORY 10/09 - 09/10 10/10 - 09/11 % GROWTH

Project Executive $338 $348 3.0%Functional Specialist/Subject Matter Expert $292 $301 3.1%

Director $239 $246 2.9%

Senior Manager $193 $199 3.1%

Manager $159 $164 3.1%

Program Support $156 $161 3.2%

Consultant III $126 $130 3.2%

Consultant II $102 $105 2.9%

Consultant I $79 $81 2.5%

Project Assistant $71 $73 2.8%

Administrative Support $53 $55 3.8%

Interviewer $37 $38 2.7%

NOTE: RATES INCLUDE INDUSTRIAL FUNDING FEE (IFF)

SOURCE: TBR AND GENERAL SERVICES ADMINISTRATION

U.S. GOVERNMENT HOURLY RATES TBR

TBR

TBR


TBR Assessment of Alliance Strategy: Alliances are a key element of IBM/IGS’ strategy

IBM/IGS leverages

alliances to offer customers a full complement of

services, software and hardware and to strengthen its

competitive position in the

market

IGS has a well-established network of alliance partners that allows it to provide customers with a complete portfolio of services and solutions, while also allowing IBM to be technology-agnostic if a client so desires. Alliances provide IGS with new sales channels, incremental revenue streams and access to emerging technology.• IGS has developed and maintained relationships with numerous key players in the IT

industry, including Avaya, Cisco, Nortel, SAP, Novell and Oracle. Alliance announcements during 4Q10 included:• IBM and Premier Healthcare Alliance are jointly creating a new platform that will link

data to more than 2,400 member hospitals and 70,000+ other care sites throughout the United States starting spring 2011. The platform will integrate the nation’s health data allowing users to gain insights, measure and improve health of the population.

• IBM and Telvent will work together to provide smarter traffic solutions for smaller cities, universities and government campuses and business districts. The solution will use IBM's advanced analytics and Telvent’s traffic management capabilities to improve traffic control and congestion.

Alliances will continue to play a vital role in the success of IGS

NOTE: SEE APPENDIX OF THIS REPORT FOR A FULL LISTING AND ANALYSIS OF IBM/IGS’ ALLIANCES.

Alliance & Acquisition Strategies

TBR


Successful integration of companies with IP supports IBM’s top-line growthTBR Assessment of Acquisition Strategy: Acquisitions support IBM/IGS’ organic growth

IBM has integrated a number of

acquisitions to expand its higher-

value offerings and capabilities;

though many of the acquisitions are in software,

they present new service

opportunities

IBM’s ability to successfully integrate acquisitions to expand its capabilities and offerings across all its business segments (services, software and hardware) is a significant strength and competitive advantage.

• IBM continued to make acquisitions throughout 4Q10, spending approximately $6 billion in 2010 alone. IBM looks for companies possessing intellectual property and high-growth/margin opportunities to support its focus on shifting its business and top- and bottom-line growth.

• From 2007 to 2009, IBM spent $9 billion for 33 acquisitions, including 18 in business analytics; 91% of the acquisition spending was in software, and 2% on services.

• IBM plans to spend $20 billion on acquisitions through 2015, or $4 billion per year, focusing on the software and services segment; its goal is to double EPS in the next five years, from $10.2 billion in 2009 to at least $11.4 billion in 2010 and at least $20 billion in 2015.

NOTE: SEE APPENDIX OF THIS REPORT FOR A FULL LISTING OF IBM/IGS’ ACQUISITIONS IN 2009 AND 2010

IBM’s Acquisition Activity in 2010IBM closed 17 acquisitions in 2010, with an aggregate cost of $6.2 billion

Services:• 1Q10, National Interest Security Company

(advanced analytics for public sector); integrated in GBS

• 1Q10, Wilshire Credit Corp. (mortgage servicing platform); integrated in GTS

Software: • 4Q10, Netezza, Unica, BLADE Network, Clarity System,

OpenPages and PSS Systems, purchased for an aggregate cost of $2.9 billion

• 3Q10, BigFix, Coremetrics, Datacap, Sterling Commerce (purchased for $1.4 billion)

• 2Q10, Cast Iron Systems• 1Q10, Lombardi Software, Intelliden, Initiate Systems

Systems and Technology (STG): • 3Q10, Storwize

Alliance & Acquisition Strategies

TBR


Geo Key Changes & Drivers4Q10 Revenue,

YTY Growth and Contribution

Keep on the Radar

U.S./ Americas

GBS grew revenue in North America, up 11% year-to-year in constant currency, signifying an improved market environment in the region in TBR’s view, and we expect this growth trend to continue.

TBR believes rising demand in consulting and SI within the mature markets will drive growth well into 2011.

EMEA

Despite a year-to-year decline, EMEA sequential growth came in slightly below double-digit growth figures, as IBM saw strong demand in Southwest Europe, driven by regions such as France and Italy.

Slow and uneven economic recovery and tight public spending remain, but there are some local economies that are growing (e.g., Germany) and clients are investing in IT projects.

APAC

IGS is seeing its revenue expand as the organization increases work with clients in India, Thailand, Malaysia, Singapore, Indonesia, South Korea, China, Taiwan, Vietnam, Philippines and Australia.

IBM continues to improve itscompetitive position in APAC byfocusing on market expansion,IT infrastructure development projects and industry leadership.

Growth Markets

IBM’s Growth Markets sector grew 13%, led by growth in the BRIC region (which was up 17%). The major markets increased 5% driven by the U.S. and Southwest Europe (all year-to-year, as reported). Growth markets have generated $10 billion in annual revenue since 2000, now accounting for 21% of IBM’s total revenue, and will continue to expand in share.

IGS will continue to have success in growth markets, but will also increase growth in major markets, which are seeing a broader recovery

Americas$6.71B, up 4.2% YTY;

45.0% of revenue

EMEA$4.97B,

down 3.0% YTY;33.3% of revenue

APAC$3.25B, up

5.6% YTY;

21.8% of revenue

Geographic Analysis

TBR


IGS is able to attract talent through training, career growth and perks

IGS’ Resource Management Changes• According to TBR estimates, IBM’s services

headcount increased 4.7% year-to-year to 245,000 in 4Q10. TBR believes the company is gradually hiring across key regions and lower-cost locations as demand improves.

• IBM is taking steps to reduce rising attrition levels, especially in lower-cost locations. In addition to providing perks and allowances to motivate people, in India, the company is curbing attrition by implementing a three-month notice period for departing employees, up from the previous one- month notice (a recently implemented measure that has yet to generate results).

Strategy• IBM/IGS remains a globally integrated enterprise

(operations and functions are located anywhere in the world) that leverages its scale and innovative value proposition to capture new growth.

• IBM focuses on developing and leveraging global delivery capabilities (often in lower-cost locations around the globe) for optimum service delivery.

• IBM/IGS focuses on attracting and retaining the best talent through training, professional and career development.

• IBM achieves service excellence through specialized skills, processes, assets and tools, and information analytics.

Investments• In 4Q10, IBM opened a cloud computing lab in Hursley,

U.K. to help IBM partners develop and test new cloud services and build out go-to-market plans (i.e., explore cloud computing models, become cloud builders, application, technology and infrastructure providers, cloud resellers and aggregators).

Resource Management Strategy

IGS' SERVICES HEADCOUNT

110,000 130,000

115,000124,000

0

50,000

100,000

150,000

200,000

250,000

4Q09 4Q10

Calendar Quarter

Tota

l Hea

dcou

nt

Onshore

Offshore

Tota l headcount: 245000 (+4.7% YTY)

TBR


4Q09 4Q10Revenue per Employee 233,546$ 235,345$ ↑Operating Income per Employee 34,352$ 33,940$ ↓Utilization 83.0% 86.0% ↑Turnover 13.0% 15.4% ↑

IGS' Efficiency Metrics (In $) TBR

TBR


IGS’ senior leadership is focused on improving IBM’s top line and on growing in emerging markets

SOURCE: IBM AND TBR

TBR

Samuel J. PalmisanoChairman of the

BoardPresident & CEO

Steven A. MillsSVP,

Group ExecutiveSoftware and Systems

Michael E. Daniels

SVP, Global Technology Services,

IGS

Rodney C. AdkinsSVP,

Systems & Technology Group

Frank KernSVP, IBM Global Business Services

text

Mark Loughridge

SVP, Chief Financial Officer

Virginia Rometty

SVP, Global Sales, Marketing and

Strategy

Linda Sanford

SVP, Enterprise on Demand

Transformation & IT

Robert C. Weber

SVP, Legal & Regulatory Affairs &

General Counsel

Jon C. Iwata

SVP, Marketing/ Communications

Dr. John E. Kelly III

SVP & Director of IBM Research

J. Randall MacDonald

SVP, Human Resources

Corporate Functions

Hardware Group

Software Group

Services Group

KEY:

Resource Management Strategy

Organizational/Executive ChangesIBM is setting the stage for market expansion in Thailand and Australia, two of the 20 growth markets picked by IBM for business development.

• In Thailand, IBM appointed Pansiree Amatayakul as managing director for IBM Thailand, replacing Thanwa Laohasiriwong, who recently resigned. IBM will be looking to drive infrastructure development in Thailand though its Smarter Planet initiative with systems and software solutions to support large service projects.

• In Australia, IBM appointed Andrew Stevens managing director for Australia/New Zealand. Stevens was instrumental for the integration of the consulting business of PricewaterhouseCoopers nearly 10 years ago.

TBR


TBR Outlook

Financial

Go to Market

• IBM/IGS will continue to invest in emerging markets, acquisitions and services with strong growth and profit potential (e.g., Smarter Planet, business analytics and cloud computing).

• TBR expects IBM/IGS to focus on gaining growth in consulting & SI, as demand and signings are improving and clients are looking for revenue growth and transformation projects.

Resource Management

• IBM will continue to extend its resources in underpenetrated nearshore/offshore locations, as well as strengthen its resources in existing regions and further its global integration.

• IGS will focus on reducing cost of service and improving productivity by managing utilization and investing in enterprise productivity (IBM is targeting $8.0 billion in productivity benefits in the next five years, up from $4.7 billion in productivity benefits over last four years through shared services, process transformation and focus on value).

IGS will see more top- and bottom-line growth in 2011 as demand improves and revenue growth and productivity initiatives take effect

Future Outlook

• TBR anticipates that IGS will report top-line growth during 1Q11 with external revenue increasing by 3.5% in our estimates, higher than the 2.0% year-to-year growth reported in 4Q10. External revenue growth will remain in mid-single digits during 2011 as IGS grows at/above market growth (GTS and GBS target markets will grow by 4% CAGR through 2015).

4Q10 PSBQ VENDOR POSITION AND PROJECTION: IGS

0.001.002.003.004.005.006.007.008.009.00

10.00

1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

Quarterly Revenue Growth Year-to-year

PSBQ

Cor

pora

te S

core

SOURCE: TBR AND IBM

PSBQ Tra i l ing 12-Month Average Growth = 9.6%

TBR

3Q104Q10 1Q11 Est.

• IGS will continue to focus on improving its profitability in the long run through levers such as productivity and operational excellence, high use of IP/assets that aid delivery, innovation through cloud computing and globally integrated capabilities.

TBR


IBM CORP.

Consolidated Statement of Income

(in Thousands Except per Share Data)

Dec. '09 March '10 June'10 Sept. '10 Dec. '10 March '11

FISCAL/CALENDAR QUARTER 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 Est.

Net Sales 27,230,000$ 22,857,000$ 23,724,000$ 24,271,000$ 29,019,000$ 25,000,000$

Cost of Sales 14,085,000 12,881,000 12,915,000 13,270,000 14,792,000 13,500,000 Gross Profit 13,145,000 9,976,000 10,809,000 11,001,000 14,227,000 11,500,000

SG&A 5,560,000 5,677,000 5,061,000 5,149,000 5,951,000 5,500,000

R&D 1,461,000 1,509,000 1,475,000 1,464,000 1,578,000 1,590,000

IP and Custom Development Income (313,000) (261,000) (297,000) (278,000) (318,000) (289,000) Operating Income 6,437,000 3,051,000 4,570,000 4,666,000 7,016,000 4,699,000

Other (Income) and Expenses (24,000) (545,000) (95,000) (106,000) (42,000) (45,000)

Interest Expense 81,000 82,000 90,000 95,000 102,000 130,000 EBITD 6,380,000 3,514,000 4,575,000 4,677,000 6,956,000 4,614,000

Income Taxes 1,568,000 914,000 1,190,000 1,088,000 1,698,000 1,300,000 Net Income 4,812,000$ 2,600,000$ 3,385,000$ 3,589,000$ 5,258,000$ 3,314,000$

Net Income Per Share of Common Stock 3.59$ 2.00$ 2.61$ 2.82$ 4.18$ N/A

Common Shares Outstanding 1,340,700,000 1,301,200,000 1,296,700,000 1,272,800,000 1,258,400,000 N/A

AS A PERCENTAGE OF REVENUE

Net Sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Cost of Sales 51.7% 56.4% 54.4% 54.7% 51.0% 54.0%

Gross Margin 48.3% 43.6% 45.6% 45.3% 49.0% 46.0%

SG&A 20.4% 24.8% 21.3% 21.2% 20.5% 22.0%

R&D 5.4% 6.6% 6.2% 6.0% 5.4% 6.4%

Operating Margin 23.6% 13.3% 19.3% 19.2% 24.2% 18.8%

Other, Net -0.1% -2.4% -0.4% -0.4% -0.1% -0.2%

EBITD 23.4% 15.4% 19.3% 19.3% 24.0% 18.5%

Income Taxes 5.8% 4.0% 5.0% 4.5% 5.9% 5.2%

Net Margin 17.7% 11.4% 14.3% 14.8% 18.1% 13.3%

YEAR-TO-YEAR CHANGE

Net Sales 0.8% 5.3% 2.0% 3.0% 6.6% 9.4%

Cost of Sales 0.1% 4.9% 1.9% 2.6% 5.0% 4.8%

Gross Profit 1.6% 5.8% 2.2% 3.5% 8.2% 15.3%

SG&A -4.7% 7.8% -1.1% 2.7% 7.0% -3.1%

R&D -4.4% 2.0% 2.9% 1.2% 8.0% 5.4%

Operating Income 9.0% 3.2% 5.4% 4.6% 9.0% 54.0%

Other, Net -40.0% -177.2% -106.8% -112.4% 5.3% 118.4%

EBITD 9.8% 12.6% 7.4% 7.0% 9.0% 31.3%

Income Taxes 13.5% 10.5% 2.7% -6.1% 8.3% 42.2%

Net Income 8.7% 13.3% 9.1% 11.7% 9.3% 27.5%

SOURCE: IBM

TBR

Income Statement

TBR


CALENDAR QUARTER 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 Est.

Global Technology Services Internal Revenue 347$ 320$ 332$ 362$ 299$ 298$

Global Technology Services External Revenue 10,051$ 9,306$ 9,234$ 9,496$ 10,165$ 9,597$

Global Business Services Internal Revenue 217$ 203$ 197$ 199$ 199$ 199$

Global Business Services External Revenue 4,580$ 4,410$ 4,483$ 4,572$ 4,758$ 4,600$

Total IGS Internal Revenue 564$ 523$ 529$ 561$ 498$ 497$

Total IGS External Revenue 14,631$ 13,716$ 13,717$ 14,068$ 14,923$ 14,196$ Total IGS Revenue (Internal + External) 15,195$ 14,239$ 14,246$ 14,629$ 15,421$ 14,693$

Cost of Services 9,645$ 9,311$ 9,317$ 9,397$ 10,049$ 9,305$ Gross Profit 4,986$ 4,405$ 4,400$ 4,671$ 4,874$ 4,891$

Global Technology Services 3,598$ 3,201$ 3,176$ 3,349$ 3,527$ 3,330$

Global Business Services 1,388$ 1,204$ 1,224$ 1,322$ 1,347$ 1,561$

Operating Expenses 2,664$ 2,995$ 2,295$ 2,452$ 2,471$ 2,712$ Total IGS Operating Income (Pre-tax Income) 2,322$ 1,410$ 2,105$ 2,219$ 2,403$ 2,178$

Global Technology Services Pre-tax Income 1,556$ 965$ 1,422$ 1,524$ 1,657$ 1,491$

Global Business Services Pre-tax Income 766$ 445$ 683$ 695$ 746$ 688$

AS A PERCENTAGE OF TOTAL EXTERNAL IGS REVENUE

Global Technology Services External Revenue 68.7% 67.8% 67.3% 67.5% 68.1% 67.6%

Global Business Services External Revenue 31.3% 32.2% 32.7% 32.5% 31.9% 32.4%

Total IGS External Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Cost of Sales 65.9% 67.9% 67.9% 66.8% 67.3% 65.5%

Gross Margin 34.1% 32.1% 32.1% 33.2% 32.7% 34.5%

Global Technology Services 35.8% 34.4% 34.4% 35.3% 34.7% 34.7%

Global Business Services 30.3% 27.3% 27.3% 28.9% 28.3% 33.9%

Operating Expenses 18.2% 21.8% 16.7% 17.4% 16.6% 19.1%

Total IGS Operating Income (as % of IGS External Revenue) 15.9% 10.3% 15.3% 15.8% 16.1% 15.3%

Global Technology Services Pre-tax Income 10.6% 7.0% 10.4% 10.8% 11.1% 10.5%

Global Business Services Pre-tax Income 5.2% 3.2% 5.0% 4.9% 5.0% 4.8%Total IGS Operating Income (as % of IGS Revenue (Internal + External) 15.3% 9.9% 14.8% 15.2% 15.6% 14.8%

GTS Pre-tax Income as a % of total GTS* 15.0% 10.0% 14.9% 15.5% 15.8% 15.1%

GBS Pre-tax Income as a % of total GBS* 16.0% 9.7% 14.6% 14.6% 15.0% 14.3%

YEAR-TO-YEAR CHANGE

Global Technology Services External Revenue 4.4% 6.3% 1.4% 0.7% 1.1% 3.1%

Global Business Services External Revenue -2.7% 0.3% 3.3% 5.4% 3.9% 4.3%

Total IGS External Revenue 2.1% 4.3% 2.0% 2.1% 2.0% 3.5%

Cost of Services 0.2% 3.2% 2.4% 2.4% 4.2% -0.1%

Gross Profit 5.9% 6.6% 1.3% 1.7% -2.3% 11.0%

Global Technology Services 7.1% 7.9% 0.3% 0.0% -2.0% 4.0%

Global Business Services 2.7% 3.3% 3.9% 6.2% -3.0% 29.6%

Operating Expenses 5.4% 19.4% -1.6% -0.5% -7.3% -9.4%

Total IGS Operating Income (Pre-tax Income) 6.4% -13.2% 4.6% 4.2% 3.5% 54.5%

Global Technology Services Pre-tax Income 8.0% -12.6% 1.2% 3.6% 6.5% 54.5%

Global Business Services Pre-tax Income 3.3% -14.6% 12.3% 5.5% -2.6% 54.5%* GTS and GBS pre-tax margins are calculated based on their respective internal and external revenue as reported by IBM.SOURCE: IBM AND TBR

IGS' PRO FORMA INCOME STATEMENT (IN $ MILLIONS) TBR

Income Statement

TBR


IBM CORP.

Consolidated Balance Sheets

(in $ Thousands)

Dec. '09 March '10 June'10 Sept. '10 Dec. '10

FISCAL/CALENDAR QUARTER 4Q09 1Q10 2Q10 3Q10 4Q10

ASSETS

Current Assets

Cash & Equivalents 12,183,000$ 12,472,000$ 10,325,000$ 9,859,000$ 10,661,000$

Marketable Securities 1,791,000 1,505,000 1,916,000 1,227,000 990,000

Accounts Receivable 11,877,000 10,428,000 10,191,000 10,904,000 11,968,000

Inventory 2,494,000 2,524,000 2,595,000 2,629,000 2,450,000

Short-term Financing Receivables 14,914,000 13,083,000 13,301,000 13,592,000 16,257,000

Deferred Taxes 1,730,000 1,565,000 1,444,000 1,596,000 1,564,000

Prepaid Expenses and Other 3,946,000 4,121,000 5,124,000 4,661,000 4,226,000

Total Current Assets 48,935,000 45,698,000 44,896,000 44,468,000 48,116,000

Property, Plant, Equip. (Net of Dep.) 14,165,000 13,841,000 13,534,000 14,009,000 14,096,000

Long-term Financing Receivables 10,644,000 9,542,000 9,185,000 9,448,000 10,548,000

Prepaid Pension Assets 3,001,000 3,289,000 3,575,000 4,379,000 3,068,000

Intangible Assets 2,513,000 2,618,000 2,526,000 3,048,000 3,488,000

Goodwill 20,190,000 20,889,000 20,544,000 22,703,000 25,136,000

Other, Net 9,574,000 9,331,000 9,160,000 9,119,000 8,998,000

Total Assets 109,022,000$ 105,208,000$ 103,420,000$ 107,174,000$ 113,450,000$

LIABILITIES & EQUITY

Current Liabilities

Accounts Payable 28,008,000$ 26,787,000$ 26,465,000$ 26,979,000$ 29,568,000$

Short-term Debt 4,168,000 5,014,000 5,633,000 5,556,000 6,778,000

Income Taxes Payable 3,826,000 2,775,000 2,895,000 2,908,000 4,216,000

Total Current Liabilities 36,002,000 34,576,000 34,993,000 35,443,000 40,562,000

LT Debt, Net of Current 21,932,000 21,305,000 21,017,000 21,899,000 21,846,000

Retirement Obligations 15,953,000 15,216,000 14,598,000 15,145,000 15,978,000

Other Non-current Liabilities 12,380,000 11,962,000 11,636,000 12,329,000 11,892,000

Total Liabilities 86,267,000$ 83,059,000$ 82,244,000$ 84,816,000$ 90,278,000$

Common Stock & PIC 41,810,000 42,665,000 43,522,000 44,328,000 45,418,000

Retained Earnings 80,900,000 82,783,000 85,323,000 88,095,000 92,532,000

Translation and Other Adj. (99,955,000) (103,299,000) (107,669,000) (110,065,000) (114,778,000) Total Stockholders' Equity 22,755,000 22,149,000 21,176,000 22,358,000 23,172,000

Total Liabilities & Equity 109,022,000$ 105,208,000$ 103,420,000$ 107,174,000$ 113,450,000$

FINANCIAL RATIOS

Days Sales Outstanding 39.26 41.06 38.66 40.43 37.12

Turns on Inventory 43.22 36.44 37.08 37.17 45.71

Days Inventory Outstanding 8.44 10.02 9.84 9.82 7.99

Fixed Asset Turnover 6.75 6.92 7.11 7.12 7.11

Days Cash Outstanding 89.29 97.66 85.30 75.19 70.89

Total Asset Turnover 1.02 0.85 0.91 0.92 1.05

Debt/Asset Ratio 0.79 0.79 0.80 0.79 0.80

Current Ratio 1.36 1.32 1.28 1.25 1.19

Return on Assets 12.7% 13.1% 13.3% 13.6% 13.8%

Return on Equity 80.0% 74.2% 70.0% 67.3% 66.4%

Revenue/Employee ($ Thousands) 241,443$ 243,657$ 243,776$ 244,242$ 247,075$

Number of Employees 399,409 399,400 402,000 405,500 409,950

SOURCE: IBM

TBR

Balance Sheet

TBR


Appendix – Financial Models

CALENDAR QUARTER 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 Est.Global Technology Services External Revenue 10,051$ 9,306$ 9,234$ 9,496$ 10,165$ 9,597$

Outsourcing 5,815$ 5,454$ 5,364$ 5,532$ 5,881$ 5,607$

Integrated Technology Services 2,395$ 2,073$ 2,098$ 2,162$ 2,381$ 2,110$

Maintenance 1,841$ 1,779$ 1,772$ 1,802$ 1,904$ 1,879$ Global Business Services External Revenue 4,580$ 4,410$ 4,483$ 4,572$ 4,758$ 4,600$

Total IGS External Revenue 14,631$ 13,716$ 13,717$ 14,068$ 14,923$ 14,196$

AS A PERCENTAGE OF EXTERNAL IGS REVENUEGlobal Technology Services External Revenue 68.7% 67.8% 67.3% 67.5% 68.1% 67.6%

Outsourcing 39.7% 39.8% 39.1% 39.3% 39.4% 39.5%

Integrated Technology Services 16.4% 15.1% 15.3% 15.4% 16.0% 14.9%

Maintenance 12.6% 13.0% 12.9% 12.8% 12.8% 13.2%

Global Business Services External Revenue 31.3% 32.2% 32.7% 32.5% 31.9% 32.4%

YEAR-TO-YEAR CHANGEGlobal Technology Services External Revenue 4.4% 6.3% 1.4% 0.7% 1.1% 3.1%

Outsourcing 18.5% 7.7% 1.6% 1.2% 1.1% 2.8%

Integrated Technology Services 0.3% 1.9% -1.8% -1.9% -0.6% 1.8%

Maintenance 6.2% 7.4% 4.6% 2.1% 3.4% 5.6%

Global Business Services External Revenue -2.7% 0.3% 3.3% 5.4% 3.9% 4.3%

IGS External Revenue 2.1% 4.3% 2.0% 2.1% 2.0% 3.5%

SOURCE: IBM AND TBR

IGS' REVENUE BREAKDOWN BY BUSINESS UNIT (IN $ MILLIONS) TBR

TBR



CALENDAR QUARTER 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 Est.FISCAL QUARTER 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 Est.Total Revenue 14,631$ 13,716$ 13,717$ 14,068$ 14,923$ 14,196$

AMERICASRevenue 6,438$ 6,059$ 6,216$ 6,241$ 6,710$ 5,903$

% of Total Revenue 44.0% 44.2% 45.3% 44.4% 45.0% 41.6%

EMEARevenue 5,121$ 4,710$ 4,384$ 4,519$ 4,967$ 5,213$

% of Total Revenue 35.0% 34.3% 32.0% 32.1% 33.3% 36.7%

ASIA PACIFICRevenue 3,073$ 2,947$ 3,117$ 3,308$ 3,246$ 3,080$

% of Total Revenue 21.0% 21.5% 22.7% 23.5% 21.8% 21.7%

YEAR-TO-YEAR CHANGEAmericas 4.5% 1.8% 3.5% 3.0% 4.2% -2.6%

EMEA -3.7% 4.9% -5.0% -6.0% -3.0% 10.7%

Asia Pacific 7.7% 8.9% 10.3% 13.9% 5.6% 4.5%

SEQUENTIAL CHANGEAmericas 6.2% -5.9% 2.6% 0.4% 7.5% -12.0%

EMEA 6.5% -8.0% -6.9% 3.1% 9.9% 5.0%

Asia Pacific 5.7% -4.1% 5.8% 6.1% -1.9% -5.1%


IGS GEO REVENUE BREAKDOWN - IN $ MILLIONS TBR

TBR



CALENDAR QUARTER 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 Est.Financial Services $ 4.27 $ 4.02 $ 4.05 $ 4.22 $ 4.52 $ 4.30

Public $ 2.19 $ 2.13 $ 2.19 $ 2.22 $ 2.34 $ 2.23

Industrial $ 2.05 $ 2.08 $ 2.12 $ 1.97 $ 2.09 $ 2.09

Distribution $ 1.51 $ 1.40 $ 1.44 $ 1.55 $ 1.63 $ 1.45

Communications $ 1.48 $ 1.36 $ 1.37 $ 1.41 $ 1.51 $ 1.42

Small and Medium Business $ 2.91 $ 2.33 $ 2.35 $ 2.42 $ 2.58 $ 2.41

Other $ 0.22 $ 0.40 $ 0.20 $ 0.28 $ 0.25 $ 0.30

All Sectors $ 14.63 $ 13.72 $ 13.72 $ 14.07 $ 14.92 $ 14.20

AS A PERCENTAGE OF REVENUEFinancial Services 29.2% 29.3% 29.5% 30.0% 30.3% 30.3%

Public 15.0% 15.5% 16.0% 15.8% 15.7% 15.7%

Industrial 14.0% 15.2% 15.4% 14.0% 14.0% 14.7%

Distribution 10.3% 10.2% 10.5% 11.0% 10.9% 10.2%

Communications 10.1% 9.9% 10.0% 10.0% 10.1% 10.0%

Small and Medium Business 19.9% 17.0% 17.1% 17.2% 17.3% 17.0%

Other 1.5% 2.9% 1.5% 2.0% 1.7% 2.1%

YEAR-TO-YEAR GROWTHFinancial Services -2.3% 1.9% 0.3% 5.7% 5.8% 7.0%

Public 11.5% 14.7% 14.9% 7.6% 6.8% 4.8%

Industrial 17.4% 32.1% 31.1% 7.5% 2.0% 0.1%

Distribution 2.2% 3.3% 2.0% 6.0% 7.9% 3.5%

Communications 2.4% 2.2% 0.0% -0.8% 2.0% 4.5%

Small and Medium Business 4.0% -9.5% -10.7% -8.5% -11.3% 3.5%

Other -58.4% -22.4% -57.6% -21.4% 15.6% -25.1%

All Sectors 2.1% 4.3% 2.0% 2.1% 2.0% 3.5%


IGS REVENUE BREAKDOWN - BY INDUSTRY (IN $ BILLIONS) TBR

TBR



CALENDAR QUARTER 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 Est.FISCAL QUARTER 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 Est.IGS External Revenue 14,631,000$ 13,716,000$ 13,717,000$ 14,068,000$ 14,923,000$ 14,196,060$

Operating Expenses 2,663,998$ 2,995,144$ 2,295,355$ 2,452,000$ 2,470,769$ 2,712,409$

Sales & Marketing 2,232,683$ 2,221,992$ 1,961,531$ 2,082,064$ 2,089,220$ 2,254,437$

General & Administrative 431,315$ 773,152$ 333,824$ 369,936$ 381,549$ 457,972$

SALES & MARKETING EXPENSE BREAKOUT Sales Expense 1,755,720$ 1,755,374$ 1,553,533$ 1,644,831$ 1,650,484$ 1,783,260$

Marketing Spending 476,963$ 466,618$ 407,998$ 437,233$ 438,736$ 471,177$

Advertising 162,500$ 150,000$ 157,920$ 168,500$ 187,500$ 173,400$

Total Sales & Marketing Expense 2,232,683$ 2,221,992$ 1,961,531$ 2,082,064$ 2,089,220$ 2,254,437$

SPENDING AS A PERCENTAGE OF REVENUE Operating Expenses 18.2% 21.8% 16.7% 17.4% 16.6% 19.1%

Sales & Marketing 15.3% 16.2% 14.3% 14.8% 14.0% 15.9%

Sales Expense 12.0% 12.8% 11.3% 11.7% 11.1% 12.6%

Marketing Spending 3.3% 3.4% 3.0% 3.1% 2.9% 3.3%

Advertising 1.1% 1.1% 1.2% 1.2% 1.3% 1.2%

General & Administrative 2.9% 5.6% 2.4% 2.6% 2.6% 3.2%

SOURCE: TBR ESTIMATES AND IBM

IBM GLOBAL SERVICES OPERATING EXPENSE MODEL (IN $ THOUSANDS) TBR

TBR



CALENDAR QUARTER 4Q09 1Q10 2Q10 3Q10 4Q10EMPLOYEESIndia 72,000 72,700 75,000 80,000 83,000

Total Offshore Headcount 110,000 115,000 120,000 125,000 130,000

Total Headcount 234,000 235,000 237,000 242,000 245,000

Total Headcount YtY Growth -2.5% -1.7% 0.9% 3.4% 4.7%


IBM GLOBAL SERVICES OFFSHORE HEADCOUNT TBR

TBR


Financial Strategy Graphs

15.3%

9.9%

14.8% 15.2% 15.6%

0.0%

4.0%

8.0%

12.0%

16.0%

20.0%

4Q09 1Q10 2Q10 3Q10 4Q10

IGS OPERATING MARGIN

IGS PSBQ AVERAGE

SOURCE: TBR AND IBM

TBR

0.79 0.79 0.80 0.79 0.80

0.00

0.20

0.40

0.60

0.80

1.00

4Q09 1Q10 2Q10 3Q10 4Q10

IBM DEBT/ASSET RATIO

IBM PSBQ AVERAGE

SOURCE: TBR AND IBM

TBR

1.36 1.32 1.28 1.251.19

0.00

0.50

1.00

1.50

2.00

4Q09 1Q10 2Q10 3Q10 4Q10

IBM CURRENT RATIO

IBM PSBQ AVERAGE

SOURCE: TBR AND IBM

TBR

TBR

Appendix – Graphs

TBR


Financial Strategy Graphs

80.0%74.2% 70.0% 67.3% 66.4%

0.0%

25.0%

50.0%

75.0%

100.0%

4Q09 1Q10 2Q10 3Q10 4Q10

IBM RETURN ON EQUITY

IBM PSBQ AVERAGE

SOURCE: TBR AND IBM

TBR

Appendix – Graphs

12.7% 13.1% 13.3% 13.6% 13.8%

0.0%

4.0%

8.0%

12.0%

16.0%

4Q09 1Q10 2Q10 3Q10 4Q10

IBM RETURN ON ASSETS

IBM PSBQ AVERAGE

SOURCE: TBR AND IBM

TBR

TBR


Go-to-Market Graphs

2.49 2.41 2.31 2.39 2.52

0.00

0.50

1.00

1.50

2.00

2.50

3.00

4Q09 1Q10 2Q10 3Q10 4Q10

BACKLOG/REVENUE RATIO

IGS PSBQ AVERAGE


TBR

39.26 41.06 38.66 40.43 37.12

0.00

20.00

40.00

60.00

80.00

4Q09 1Q10 2Q10 3Q10 4Q10

Num

ber o

f Day

s

IBM DAYS SALES OUTSTANDING

IBM PSBQ AVERAGE


TBR

Appendix – Graphs

$14.6 $13.7 $13.7 $14.1 $14.9

$0.0

$5.0

$10.0

$15.0

$20.0

4Q09 1Q10 2Q10 3Q10 4Q10

IGS REVENUE (IN $ BILLIONS)

IGS PSBQ AVERAGE

SOURCE: TBR AND IBM

TBR

2.1%

4.3%

2.0% 2.1% 2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

4Q09 1Q10 2Q10 3Q10 4Q10

IGS REVENUE GROWTH

IGS PSBQ AVERAGE

SOURCE: TBR AND IBM

TBR

TBR


Resource Management Graphs

$233.5 $237.0 $237.6 $236.8 $235.3

$100.0

$160.0

$220.0

$280.0

4Q09 1Q10 2Q10 3Q10 4Q10

IGS REVENUE PER EMPLOYEE(IN $ THOUSANDS AND TTM)

IGS PSBQ AVERAGE

SOURCE: TBR AND IBM

TBR

Appendix – Graphs

34.1% 32.1% 32.1% 33.2% 32.7%

0.0%

10.0%

20.0%

30.0%

40.0%

4Q09 1Q10 2Q10 3Q10 4Q10

GROSS MARGIN

IGS PSBQ AVERAGE

SOURCE: TBR AND IBM

TBR

18.2% 21.8%

16.7%

17.4%

16.6%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

4Q09 1Q10 2Q10 3Q10 4Q10

IGS OPERATING EXPENSES AS A PERCENTAGE OF REVENUE

IGS PSBQ AVERAGE

SOURCE: TBR AND IBM

TBR

TBR

TBR


Resource Management GraphsAppendix – Graphs

83.0% 84.0% 85.0% 86.0% 86.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

4Q09 1Q10 2Q10 3Q10 4Q10

IGS UTILIZATION RATE

IGS PSBQ AVERAGE

SOURCE: TBR AND IBM

TBR

13.0% 13.5%14.6% 15.0% 15.4%

0.0%

5.0%

10.0%

15.0%

20.0%

4Q09 1Q10 2Q10 3Q10 4Q10

IGS TURNOVER RATE

IGS PSBQ AVERAGE

SOURCE: TBR AND IBM

TBR

$34.4 $33.6 $33.9 $34.0 $33.9

$0.0

$10.0

$20.0

$30.0

$40.0

4Q09 1Q10 2Q10 3Q10 4Q10

IGS OPERATING INCOME PER EMPLOYEE (IN $ THOUSANDS AND TTM)

IGS PSBQ AVERAGE

SOURCE: TBR AND IBM

TBR

TBR


IBM/IGS’ Recent Acquisitions

COMPANYACQUISITION

DATE ACQUISITION SYNERGIES ESTIMATED

NO. OF EMPLOYEES

BLADE Network Technologies

October 2010

Software and devices that route data and transactions to and from servers, helping IBM better integrate networks with its systems

N/A

OpenPages October 2010

Extends IBM’s business analytics capabilities through OpenPages software that helps identify and manage risk and compliance

140

Clarity Systems October 2010

Extends IBM’s business analytics initiatives through Clarity Systems’ financial governance software that helps organizations automate processes for financial statement management

N/A

PSS Systems October 2010

PSS Systems provides software for analyzing, automation and implementation of information governance policies. The acquisition expands IBM’s Information Lifecycle Governance solutions, IBM’s storage management and Smart Archive strategy.

100

Netezza Corporation

September 2010

Extends IBM’s business analytics initiatives through Netezza’s analytics and data warehousing appliance 500

Storwize August 2010Storwize’s data compression technology reduces storage requirements and augments IBM’s storage and analytics capabilities.

N/A

Datacap August 2010 Strengthens IBM’s capabilities to digitize, manage and automate information assets in paper intensive verticals (e.g., healthcare, insurance, public sector and finance)

40

Appendix – Tables

TBR



COMPANYACQUISITION

DATE ACQUISITION SYNERGIES ESTIMATED

NO. OF EMPLOYEES

Sterling Commerce

August 2010 Software for cross-channel commerce and integration of customers, partners and suppliers across a range of industries 2,500

Unica Corporation

August 2010(announced)

The acquisition of Unica allows IBM to increase its ability to aid organizations when predicting and analyzing customer tendencies. 500

Storwize July 2010 (announced)

Data compression technology that improves storage efficiency and data analytic capabilities N/A

BigFix July 2010 Security and compliance management and automation for desktops across the enterprise N/A

Cast Iron Systems May 2010

Strengthens IBM’s cloud computing capabilities (cloud integration software, appliances and services), business process and integration software portfolio

75

Wilshire Credit Corporation March 2010

By acquiring the core operating assets of Wilshire Credit Corporation, including the Wilshire mortgage servicing platform, IBM strengthens its mortgage BPO capabilities.

900

Intelliden February 2010 Provider of intelligent network automation software,

extending IBM’s network management offeringsN/A

Appendix – Tables

TBR



COMPANY

ACQUISITION DATE ACQUISITION SYNERGIES

ESTIMATED NO. OF

EMPLOYEESCOST

Initiate Systems

January 2010Data integrity software for information sharing among healthcare and government organizations 120 N/A

National Interest Security

Company

January 2010

Advanced analytics and IT solutions for the public sector 1,000 N/A

Lombardi January 2010Lombardi provides BPM software and services, complements IBM's enterprise-wide process management software, and adds integrated solutions that automate human tasks and workflows.

180 N/A

SPSS Inc. July 2009

SPSS will expand IBM's Information On Demand software portfolio and business analytics capabilities, including the range of offerings available through IBM’s Business Analytics and Optimization Consulting organization and network of Analytics Solution Centers.

1,200 $1.2 billion

Appendix – Tables

TBR



COMPANY

ACQUISITION DATE ACQUISITION SYNERGIES

ESTIMATED NO. OF

EMPLOYEESCOST

Ounce Labs July 2009

IBM acquired and will integrate Ounce Labs, a leading provider of enterprise source code security testing, into its Rational software business. Ounce Labs technology will be offered as part of the IBM Rational AppScan family of web application security and compliance testing solutions.

45 N/A

Exeros May 2009Exeros offers data discovery software. The acquisition strengthens IBM’s Information Agenda and BAO strategy.

50$50

million (TBR est.)

ILOG January 2009ILOG’s Business Rule Management System (BRMS), Optimization, Visualization and Supply Chain Management portfolios will build on IBM’s software and business process management.

835 $295 million

Appendix – Tables

TBR


IGS’ Portfolio of Services

BUSINESS CONSULTING: IT SERVICES:

Service Lines• Business Analytics and Optimization• Customer Relationship Management• Financial Management• Human Capital Management• Strategy and Change• Supply Chain Management• Industry Expertise• Midmarket Expertise• Thought Leadership

Service Lines• Business Continuity and Resiliency Services• End-user Services• Integrated Communications Services• Security Services• IT Strategy and Architecture Services• Maintenance and Technical Support Services• Middleware Services• Outsourcing Services• Server Services• Site and Facilities Services• Storage and Data Services

Appendix – Services Portfolio

TBR


IBM/IGS’ Vertical Industries

Communications Solutions

Telecommunication• Service Provider

Strategic Transformation (SPST)

Media & Entertainment

• Production and distribution transformation

• Customer sales and service transformation

Energy & Utilities• Utilities network

revitalization• Customer

operations transformation

Distribution Solutions

Retail• Merchandising• Consumer Driven

Supply Chain• On Demand

Workplace for Retail

Consumer Products• Integrated Market

Management• Consumer Driven

Supply Chain• CP Core Financials

& HR-SAP (Japan)• On Demand

Workplace for CP (Japan)

Travel & Transport• On Demand

Workplace for T&T• Customer Driven

Supply Chain for T&T

Financial Services Solutions

Banking• Back-office

operations• Front-office

optimization• Risk and

compliance

Financial Markets• Risk and

compliance• Trade process

transformation• FM Data

Management

Insurance• Core insurance• Insurance Front

Office• Ins. Life

Transformation

Industrial Solutions

Automotive• IBM auto mktg. sales

and service• IBM auto

manufacturing productivity

• PLM• Auto common

environment• Embedded Systems

lifecycle management

Electronics• Electronics Value

Chain Mgmt.• IBM Production

Solutions• Electronics sales &

service• PLM• Embedded Systems• Lifecycle mgmt.

Aerospace & Defense• Supply Chain

Aftermarket• PLM• SAP Full Economy

Chemical & Petroleum• Upstream Petroleum• SAP Full Economy

Public Solutions

Government• Social services &

social security• Customs, ports &

border mgmt.• Enterprise

Integration ERP/CRM

• Defense/national security

• Road Charging

Health & Life Sciences

• Life sciences transformation/pharma integration

• New compliance agenda

• Healthcare provider/aligned clinical environment

Education• Enhanced

campus communication

• IBM Learning Alignment BI/ODW

• IBM Learning Alignment SIS

Appendix – Services Portfolio

TBR


IBM/IGS’ Quarterly Services SigningsCLIENT DATE DESCRIPTION YEARS CONTRACT

VALUE

Bharti AirtelIndia

December 2010

Deploy and manage IT infrastructure and applications in 16 African countries; consolidate and transform IT environments into an integrated IT system, oversee management of all applications, datacenter operations, servers, storage and desktop services; applications support (CRM, billing, self-service)

10 N/A

Federal Health Department

AustraliaDecember

2010Contract extension to provide communications and technology support services, as well as oversee the health department’s technology renovation

4 $110 million

Allied Command

TransformationNATO

December 2010

Implement a new cloud computing model to consolidate and integrate technology capabilities for Command and Control programs; IBM will develop the computing environment to share a common operating environment.

N/A N/A

American WellUnited States

December 2010

Embed security into online care system to safeguard patient information; integrate security services and skills into application development processes

N/A N/A

Barnstable County, Mass.United States

December 2010

As part of the Smarter Cape Cod initiative, IBM will deploy technology for more efficient management of physical infrastructure, protection of natural resources, and opportunities for economic growth. Phase 1 will design a Strategic Information Office and a Center of Excellence for Water Resources.

Spring 2011

(Phase 1)N/A

Appendix – Tables

TBR


IBM/IGS’ Quarterly Services SigningsCLIENT DATE DESCRIPTION YEARS CONTRACT

VALUE

Government of Puerto Rico

November 2010

Smarter Healthcare initiative throughout the country; IBM, ActiveHealth Management and Medens Corporation will deliver cloud services to help physicians share and exchange health information.

N/A N/A

FinnairFinland

November 2010

Working with Finnair to deliver personalized customer service and analyze passenger expertise; IBM is providing consulting expertise, methodology and software to capture, mine and analyze information.

N/A N/A

Samlink Finland

November 2010

IBM will manage the IT operations for over 400 bank branches and develop a desktop cloud offering. 5

€28 million (or $37 million)

Cabinet Office United Kingdom

November 2010

IBM signed a Memorandum of Understanding to provide efficiency strategies. N/A N/A

Westpac Australia

November 2010

In a new contract, IBM is to manage Westpac’s main infrastructure services in addition to providing critical risk mitigation services.

5 N/A

StarBevCzech Republic

November 2010

IT infrastructure services (datacenter, help desk, end-user support) and overall service management 5 Multimillion

€

Bank of Ireland Ireland

November 2010

Manage the Bank’s IT infrastructure (desktop, servers, mainframes, local area networks and service desk) 5 N/A

Appendix – Tables

TBR


IBM/IGS’ Quarterly Services Signings

CLIENT DATE DESCRIPTION YEARS CONTRACT VALUE

Central Norway Regional Health

Authority Norway

November 2010

Create Smarter Healthcare infrastructure; provide IT support to all of the hospitals in Norway to improve coordination and reporting of health information; develop an SAP-based solution to be used for upgrading finance and logistic systems throughout Norway

4 $120 million

Nevada Clark County Family

ServicesUnited States

October 2010

IBM has been signed to integrate its business analytics software into the department’s process for efficient delivery of social services.

N/A N/A

PyroIndia

October 2010

IBM will develop, test and manage Pyro’s products and solutions. 5 $19 million

ABN AMRONetherlands

October 2010

ABN AMRO extended its services agreement with IBM whereby IBM will build and provide an integrated IT infrastructure platform.

N/A N/A

PetromRomania

October 2010

IBM will take over the operation of Petrom’s datacenter services, including cloud computing, hosting, installation, business continuity, on-site backup and disaster recovery.

10 N/A

Danish DefenseDenmark

October 2010

IBM will provide management services and technology infrastructure to the Ministry’s resource management system.

7 N/A

Appendix – Tables

TBR


IBM/IGS’ Quarterly Services Signings CLIENT DATE DESCRIPTION YEARS CONTRACT

VALUEAir New Zealand

New Zealand

October 2010

IBM will provide business and technology services through mainframe and virtual hosting services. 5 N/A

Jet AirwaysIndia

September 2010

Business transformation and IT services (infrastructure and application support) 10 $62 million

Bharti Airtel Limited

India

September 2010

IT infrastructure and application services to support client’s mobile communications network in 16 African countries; deal will be finalized in 4Q10

N/A N/A

SunocoUnited States

August 2010

IBM will provide managed business process services along with application support services to Sunoco. N/A N/A

OrbitzUnited States

August 2010

Orbitz will utilize IBM's Global Expense Reporting Solution to provide corporate travel customers more options and flexibility in its management and documentation of travel expenses.

N/A N/A

Blue Cross Blue Shield June 2010

Transform the client’s IT environment into a more responsive, competitive and flexible model. Services include end-user technical support and hosting of client’s external website.

5 N/A

Quippo-WTTILIndia

June 2010Provide technical support to overhaul client’s IT infrastructure in India, deploy server and storage support, provide networking and security services

5 N/A

Appendix – Tables

TBR




Canal + GroupFrance

June 2010

Digital supply chain transformation deal in which IBM will improve television programming processes and systems N/A N/A

ElectraCard Services (ECS)

India

June 2010

Manage client’s disaster recovery site at IBM’s datacenter in Bangalore and client’s primary IT infrastructure located in Mumbai

10 Multimillion-dollar

Yahoo June 2010

Provide customer care services for versions of Yahoo products in Arabic languages and provide support for Europe, the Middle East and North Africa in nine languages

N/A N/A

SulAmericaBrazil

May 2010

Provide business process management, IT infrastructure services, app. maintenance, construction of a dedicated service center

12 $200 million

National Broadband

Network Co. (NBN)

Australia

May 2010

Source, host and operate business IT infrastructure; IBM will host NBN’s procurement, asset management and accounting, provide scalable infrastructure solution that includes servers, storage and operating systems, as well as a flexible hosting environment to support NBN’s growing operations.

2 N/A

Appendix – Tables

TBR




Hilton Worldwide

April 2010

Hosting and management services for Hilton’s technology platforms N/A N/A

Broadridge Financial Solutions

United States

April2010

IT services (datacenter, network support and IT operations) and business alignment agreements 10 N/A

TelstraClearNew Zealand

March2010

Core IP network maintenance and support services; critical maintenance and support management services

3 Multimillion-dollar

U.S. General Services

AdministrationFebruary

2010IT system modernization; next-generation IT architecture to support the GSA’s Integrated Acquisition Environment

8 $74.4 million

Ministry of Finance, Slovak

Republic February

2010Design, develop and implement a finance information system 3

€56 million (or $75 million)

U.S. Air ForceUnited States

February 2010

Cybersecurity and analytics for an IGS-developed cloud computing infrastructure to support defense and intelligence networks

10 months N/A

Sandhar Technologies

Ltd.India

February 2010

Remote infrastructure management covering server, network and security management 5 N/A

Appendix – Tables

TBR


IBM/IGS’ Application Vendors Partnership Highlights

COMPANY SCOPE OF PARTNERSHIP

SAP

IBM and SAP have helped customers build end-to-end CRM solutions, including mySAP CRM, IBM DB2, WebSphere MQ, IBM eServer iSeries and IBM eServer xSeries. The two also have joint solutions for business intelligence, ERP, PLM and SCM. The latest development of the IBM/SAP relationship is the expansion of the partnership through the introduction of an optimized DB2 Database that improves performance and availability of SAP solutions running on DB2.

Oracle

IGS was one of Oracle’s first global strategic alliance partners and is recognized as an Oracle Global Certified Advantage Partner, a title reserved for partners that have consistently demonstrated the highest level of competency and commitment to Oracle. IBM BCS has teamed with Oracle for more than 16 years. IBM delivers industry and process expertise, along with implementation methods, tools and accelerators.

Siebel Systems (part of Oracle)

Since 1999, IBM and Siebel Systems have worked together to deliver a broad range of open, scalable and carefully integrated solutions. The latest development in the IBM/Siebel relationship is an extension of the partnership to offer hosted CRM solutions.

Cisco Systems

IBM and Cisco leverage their strengths in internet infrastructure, e-business systems (applications, middleware, servers) and services (systems integration, support, outsourcing etc.) and deliver end to end internet business solutions for e-business transformation. The ‑ ‑alliance offers customers e business security, availability and applications performance, as well ‑as speech-enabled self-service solutions to contact centers. In the alliance’s latest development, Cisco will sell IBM’s Lotus Sametime directly through its 1,200 channel partners spread throughout the world.

Appendix – Tables

TBR


IBM/IGS’ Application Vendors Partnership Highlights

COMPANY SCOPE OF PARTNERSHIP

Dassault Systemes

IBM BCS and Dassault Systemes provide customers with product lifecycle management services, which optimize product development processes. The partnership provides business transformation consulting, implementation, integration and managed services for the CATIA, ENOVIA and SMARTEAM families of products, and also introduces, integrates and implements Dassault Systemes’ software solutions.

i2 TechnologiesIBM BCS and i2 manage other companies’ value chains by providing comprehensive solutions for supply and demand chains. The services accelerate optimization and collaboration across the entire value chain and allow supply and demand management and timely response to unpredictable events.

Red Hat

IBM and Red Hat have joined together to help customers accelerate Linux adoption on the IBM eServer zSeries mainframe. The solutions include IBM’s Integrated Facility for Linux engine and subscription of Red Hat Linux Enterprise v.4 for zSeries systems. The two companies are also working together with educators on Linux skills-building and curriculum development. The alliance will help institutions educate students and develop their skills on Linux and IBM software and servers.

Avaya

IBM and Avaya formed an alliance to integrate Avaya’s VoIP technology with IBM’s enterprise e mail, web conferencing and instant messaging offerings (Lotus Notes and ‑Domino). The alliance will enable “click-to-call” capabilities in e-mail and instant messaging products across Lotus Notes, Domino and IBM Lotus Sametime. IBM will use audio conferencing provided by Avaya Meeting Exchange with Lotus’ web conferencing solutions.

Appendix – Tables

TBR


Physical Infrastructure and Worldwide LocationsIGS’ Global Delivery Center Network

IBM’s Technology and Business CapabilitiesAmericas EMEA APAC

Global Delivery Centers

• Brazil• Argentina

• Slovakia• Poland• Romania• Hungary• Egypt• South Africa

• China• India• Vietnam• Philippines• Australia

Research Labs • San Jose, CA• Maryland• New York• Austin, TX

• Israel (Haifa)• Switzerland (Zurich)

• India (New Delhi, Bangalore)

• China (Beijing)• Japan (Tokyo)

Software & Hardware Labs

• Mexico• Brazil• Argentina

• Poland• Israel• Egypt• Russia

• China• India• South Korea• Vietnam• Malaysia• Singapore• Australia

Cloud Computing Centers

• Brazil • South Africa• Poland• Germany

• China• India• South Korea• Vietnam

Appendix – Tables

TBR


Physical Infrastructure and Worldwide LocationsIGS’ Global Delivery Center Network

IBM’s Technology and Business Capabilities

Americas EMEA APACInnovation Centers • Brazil

• Austin, TX• Chicago, IL• Dallas, TX• San Mateo, CA• Waltham, MA

• Czech Republic• Denmark• France• Germany• Hungary • Ireland• Israel• Italy• Morocco• Netherlands• Poland• Romania• Russia• Slovakia• South Africa• Spain• Sweden• Switzerland• Turkey • Ukraine• U.K.

• Australia• China• India• Japan• South Korea• Malaysia• Philippines• Vietnam

Market and Industry Leadership Centers

• Mexico (retail)• Brazil (finance)

• Russia (oil & gas) • India (telecom, finance)• Australia (electricity)• South Korea (finance)• China (rail, telecom,

health, electricity)

Appendix – Tables

TBR


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