Letter from the President and CEO has that had Cash flow IBM consistently generated am pleased to report IBM strong cash flow key indicator of real business performance another in 2011 Your strong year In 2011 our free cash flow was $16.6 billion We have continued to company outperform improved our free cash flow by nearly $10 billion over and the market our industry at large the past decade We ended 2011 with $11.9 billion of cash and marketable securities We capped IBMs first century by achieving record revenue profit Investment and return to shareholders Our cash flow has enabled us to invest in the business and to free cash flow and earnings per share generate substantial returns to investors while spending At the same time we continued to $6.3 billion on RD In 2011 we invested $1.8 billion for deliver returns to and we superior you five acquisitions in key areas of software and $4.1 billion well for future in are positioned growth net capital expenditures We were able to return $18.5 billion to you$15 billion through share in globally integrating economy and repurchases $3.5 billion through dividends Last years dividend increase was 15 the 16th Revenue and income Our revenue in 2011 was percent marking in in year row which we have raised our dividend and $107 billion up percent We grew operating pre-tax the 96th consecutive year in which we have paid one income by percent to $21.6 billion our highest ever IBMs income for Margins operating pre-tax margin rose road map to the future the ninth consecutive yearto 20.2 percent up 10 points This performance was the result of disciplined execution since 2000 We achieved this to shift our by continuing than by more 400000 IBMers and the strategic business mix to more profitable segments and by driving repositioning of the company over the past decade productivity More than 90 percent of our segment profit We have steadily realigned our business to lead in in 2011 was from software services and financing new era of computing and to enable our clients to benefit from the new that era is Earnings per share We have continued to achieve capabilities creating As consequence our investors benefit from business strong EPS growth Last year was another record with model that is both sustainable over the long term diluted operating earnings per share of$13.44 up and fueled by some of the worlds most attractive high 15 percent This marked nine straight years of double- growth markets and technologies digit EPS growth Letter from the President and CEO road Cloud IBM has thousands of clients You see this expressed in financial terms in our EPS helped adopt introduced our first in and of cloud where IT resources are maps We 2007 surpassed aspects computing track toward automated and accessed self-service our 2010 objectives Now we are well on our virtualized highly by Our cloud in 2011 than three times 2015 Road Map goal of at least $20 in operating earnings revenue was more the per share prioryear As before the road map is not simply list of targets but management model built on exploiting multiple will ways to create value Operating leverage come Our strong strategic positioning from our continuing shift to higher-margin businesses and to solid balance improving enterprise productivityexpected sheet recurring be billion this We will $8 over five-year period create robust revenue profit streams value for shareholders through an anticipated $50 billion and unmatched in share repurchases and $20 billion in dividends global reach that focused us When it comes to growth strategies we are give confidence drive on four high-growth spaces that should we will achieve success in approximately $20 billion in revenue growth by 2015 the nextfive years as we have Growth Markets Revenue for our Growth Markets during the decade 11 for the second past Unit was up percent at constant currency Growth markets contributed 22 year in row percent of in from 11 in IBMs geographic revenue 2011 up percent them 30 2015 Smarter Planet All of this in our 2000 and we expect to approach percent by comes together solutions to build Smarter Planet systems transforming BusinessAnalytics Our analytics business grew such systems as supply chains retail energy transportation 16 for the the percent year Having spotted early telecommunications food and water It includes the emergence of big data IBM built the worlds leading successful establishment of large new market categories and analytics software and consulting practice we are such as Smarter Cities and Smarter Commerce Smarter translating it into powerful new capabilities which Planet revenue grew by almost 50 percent in 2011 enable our clients to identify manage and even predict outcomes that matter to their success In solid balance The fact that IBMs second with such sum our strong strategic positioning sheet we enter century recurring revenue robust profit streams and unmatched strength and confidence is testament to the extraordinary global reach give us confidence that we will achieve success leadership of Sam Palmisano as IBMs CEO Iwill leave five of in the next years as we have during the past decade to Sam the description our historic transformation The information on pages to 15 Generating Higher But there is no doubt that IBM today is far stronger than Value how it decade in both its and its at IBM explains was ago performance impact on the world The decade ahead Let me close by expressing my pride in the worldwide for The next decade holds enormous promise IBM IBM team for bringing us to this point and my gratitude most importantly because of what it holds for business to you our shareholders for your unwavering support and society at large We are uniquely positioned to deliver share excitement about trust you our your companys the benefits of vast new natural resourcea gusher performance and the way in which IBMers are building of data from both man-made and natural that systems storied build future on our past to an even brighter can now be tapped to help businesses and institutions succeed in an increasingly complex and dynamic global economy Together we can create economic and societal value of incalculable potential across the developed and developing worlds as well as in new global markets such as those in Afi-ica Virginia Rometty President and Chief Executive Officer Without question the world is undergoing disruption But IBM now stands out among our industry peers and in business at large as distinctively able to keep moving to the future and to keep generating differentiating value for our clients our employees and the citizens of the world And that in turn promises to continue generating high value for our owners This letter includes selected that made refirences to certain nonGAApfinancial measures are to facilitate comparative view of the companys ongoing operational peoformance For about the results related to tax income and and cash injirmation companysfinancial operating pre income operating pietax maiigin operating earningspershare iifree which are in each case nonGAAP the 8Kvubooitted the SEC 2012 flow measures see compauysFoon to on January 19 Attachment IINonGAAP Supplementary Materials Letter from the Chairmanof the Board how have we done in would As we look back on our strong First answering Why someone invest in us Some technology companies performance in 2011 the culmination particularly start-ups are attractive to investors because of an impressive decade Ginni they grow meteoricallybut often without profit or and it be thought would appropriate positive cash flow Others provide broad portfolio of and servicesbut their breadth makes for me to share perspective on this products very them mystifying to the investor most recent phase of IBMs 100-year decade we cOmmitted to our owners journey and to offer some thoughts ago providing with clarity about our business model strategies finances on what it has taught us and would and governance principles We manage grow IBM the cash through basicsrevenue profit earnings recently took look at my notes from my first meeting and margins And we pledged to deliver consistent investor with IBMs senior leadership after becoming chairman returns through dividends and repurchased shares in January 2003.1 was surprised to see how little had At the same time we believed we could provide unique written down At the top were just four questions investment opportunity participation in attractive Why would someone invest in us new growth areas in technology and in emerging markets Why would customers buy from us with confidence that IBM would safeguard shareholders Why would society allow us to operate investments Why would someone work here It all came together in our 2010 Road Map and we Our teaches us that IBM became one of the worlds history demonstrate are continuing to progress against our by continually creating value for all great companies Road The for 2015 Map results investors speak for of these stakeholders that was the IBM Certainly joined themselves five Over the past years we have increased And chairman 38 years ago as IBMs incoming nine years our market capitalization by $70 billion and returned ago couldnt imagine an agenda that wasnt built on that $50 billion to shareholders in net share repurchases multidimensional goal and $14 billion in dividendscreating approximately $135 billion in value for our owners Lets consider how we have done against each of these fundamental questions Second why would customers buy from US The result Client after clientfrom Bharti which is IBMs business model