Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2025

Snapshot

Organization of Information:

In the first quarter of 2025, we made changes to the reported revenue categories within our Software and Consulting reportable segments. These changes did not impact our Consolidated Financial Statements or our reportable segments. The revenue categories are reported on a comparable basis for all periods. Refer to note 3, “Revenue Recognition,” for additional information.

Within the tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages presented are calculated from the underlying whole-dollar amounts. Certain prior-period amounts have been reclassified to conform to the current-period presentation. This is annotated where applicable.

Currency:

The references to “adjusted for currency” or “at constant currency” in the Management Discussion do not include operational impacts that could result from fluctuations in foreign currency rates. When we refer to growth rates at constant currency or adjust such growth rates for currency, it is done so that certain financial results can be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons of business performance. Financial results adjusted for currency are calculated by translating current period activity in local currency using the comparable prior-year period’s currency conversion rate. This approach is used for countries where the functional currency is the local currency. Generally, when the dollar either strengthens or weakens against other currencies, the growth at constant currency rates or adjusting for currency will be higher or lower than growth reported at actual exchange rates. Refer to “Currency Rate Fluctuations” for additional information.

Operating (non-GAAP) Earnings:

In an effort to provide better transparency into the operational results of the business, supplementally, management separates business results into operating and non-operating categories. Operating earnings from continuing operations is a non-GAAP measure that excludes the effects of certain acquisition-related charges and intangible asset amortization, expense resulting from basis differences on equity method investments, retirement-related costs and their related tax impacts. Due to the unique, non-recurring nature of the enactment of the U.S. Tax Cuts and Jobs Act (TCJA or U.S. tax reform), management characterizes the one-time provisional charge recorded in the fourth quarter of 2017, and adjustments to that charge as non-operating. Adjustments include the tax effect of true-ups, audit adjustments, accounting elections and new regulations or laws that impact the TCJA provisions which resulted in the one-time provisional charge. For acquisitions, operating (non-GAAP) earnings exclude the amortization of acquired intangible assets and acquisition-related charges such as in-process research and development, transaction costs, applicable retention, restructuring and related expenses, tax charges related to acquisition integration and pre-closing charges, such as financing costs. These charges are excluded as they may be inconsistent in amount and timing from period to period and are significantly impacted by the size, type and frequency of our acquisitions. Management also characterized as non-operating expense, given its unique and temporary nature, the impact on the foreign exchange derivative contracts entered into prior to the acquisition of StreamSets and webMethods from Software AG, beginning in December 2023, to economically hedge the foreign currency exposure related to the purchase price of this acquisition. These derivative contracts expired by June 28, 2024. All other spending for acquired companies is included in both earnings from continuing operations and in operating (non-GAAP) earnings. For retirement-related costs, management characterizes certain items as operating and others as non-operating, consistent with GAAP. We include defined benefit plan and nonpension postretirement benefit plan service costs, multi-employer plan costs and the cost of defined contribution plans in operating earnings. Non-operating retirement-related costs include defined benefit plan and nonpension postretirement benefit plan amortization of prior service costs, interest cost, expected return on plan assets, amortized actuarial gains/losses, the impacts of any plan curtailments/settlements and pension insolvency costs and other costs. Non-operating retirement-related costs are primarily related to changes in pension

Management Discussion – (continued)

plan assets and liabilities which are tied to financial market performance, and we consider these costs to be outside of the operational performance of the business.

Overall, management believes that supplementally providing investors with a view of operating earnings as described above provides increased transparency and clarity into both the operational results of the business and the performance of our pension plans; improves visibility to management decisions and their impacts on operational performance; enables better comparison to peer companies; and allows us to provide a long-term strategic view of the business going forward. In addition, these non-GAAP measures provide a perspective consistent with areas of interest we routinely receive from investors and analysts.

Financial Results Summary — Three Months Ended June 30:


(Dollars and shares in millions except per share amounts)							Yr.-to-Yr. Percent/ Margin Change
For the three months ended June 30:	2025			2024
Revenue (1)	$	16,977		$	15,770		7.7	%
Gross profit margin	58.8		%	56.8		%	2.0	pts.
Total expense and other (income)	$	7,380		$	6,730		9.6	%
Income from continuing operations before income taxes	$	2,597		$	2,219		17.0	%
Provision for/(benefit from) income taxes from continuing operations	$	404		$	389		3.7	%
Income from continuing operations	$	2,193		$	1,830		19.8	%
Income from continuing operations margin	12.9		%	11.6		%	1.3	pts.
Income from discontinued operations, net of tax	$	1		$	4		(83.9)	%
Net income	$	2,194		$	1,834		19.6	%
Earnings per share from continuing operations - assuming dilution	$	2.31		$	1.96		17.9	%
Consolidated earnings per share - assuming dilution	$	2.31		$	1.96		17.9	%
Weighted-average shares outstanding - assuming dilution	948.0			934.4			1.5	%

(1)Year-to-year revenue growth of 5.3 percent adjusted for currency.

The following table provides the company’s operating (non-GAAP) earnings for the second quarter of 2025 and 2024.


(Dollars in millions except per share amounts)					Yr.-to-Yr. Percent Change
For the three months ended June 30:	2025		2024
Net income as reported	$	2,194	$	1,834	19.6	%
Income from discontinued operations, net of tax	1		4		(83.9)
Income from continuing operations	$	2,193	$	1,830	19.8	%
Non-operating adjustments (net of tax):
Acquisition-related charges	$	443	$	362	22.4	%
Non-operating retirement-related costs/(income)	17		72		(76.9)
U.S. tax reform impacts	—		12		(100.0)
Operating (non-GAAP) earnings (1)	$	2,652	$	2,275	16.6	%
Diluted operating (non-GAAP) earnings per share (1)	$	2.80	$	2.43	15.2	%

(1)Refer to page 78 for a more detailed reconciliation of net income to operating earnings.

Management Discussion – (continued)

Macroeconomic Environment:

The strength of our portfolio and the resiliency of our business model underpinned by our hybrid cloud and AI strategy position us well to deliver sustainable and profitable growth. While the current economic and trade environment remains dynamic, we expect technology to continue contributing to overall economic growth and serve as a key source of competitive advantage allowing businesses to scale, drive efficiencies, and fuel growth. This was reflected in our performance in the second quarter. Our disciplined strategy and durable business model enable us to create long-term value for our partners and clients.

In the first six months of 2025, movements in global currencies continued to impact our reported year-to-year revenue and profit. We execute hedging programs which defer, but do not eliminate, the impact of currency. The (gains)/losses from these hedging programs are reflected primarily in other (income) and expense. Refer to “Currency Rate Fluctuations,” for additional information.

Financial Performance Summary — Three Months Ended June 30:

In the second quarter of 2025, we reported $17.0 billion in revenue, income from continuing operations of $2.2 billion, and operating (non-GAAP) earnings of $2.7 billion. Diluted earnings per share from continuing operations was $2.31 as reported and $2.80 on an operating (non-GAAP) basis. We generated $1.7 billion in cash from operations and $2.8 billion in free cash flow, and delivered shareholder returns of $1.6 billion in dividends. Our second-quarter performance reflects the continued success of our hybrid cloud and AI strategy. With our focus on the fundamentals of our business, we continue to maintain a strong liquidity position and solid cash flow generation which enables us to invest in our business and return value to shareholders through dividends.

Total revenue grew 7.7 percent as reported and 5.3 percent adjusted for currency compared to the prior-year period, led by Software and Infrastructure. Software delivered revenue growth of 9.6 percent as reported and 7.6 percent adjusted for currency, with solid growth in Hybrid Cloud, Automation and Data, reflecting continued growth in our high-value annual recurring revenue base. Consulting revenue increased 2.6 percent as reported and was flat adjusted for currency, as the business continued to stabilize through the second quarter of 2025. Infrastructure revenue increased 13.6 percent year to year as reported and 11.5 percent adjusted for currency, reflecting early strength in our new IBM Z platform.

From a geographic perspective, Americas revenue increased 6.1 percent as reported (6.5 percent adjusted for currency). Europe/Middle East/Africa (EMEA) increased 14.6 percent as reported (8.5 percent adjusted for currency). Asia Pacific increased 1.1 percent as reported but declined 2.7 percent adjusted for currency.

Gross margin of 58.8 percent increased 2.0 points year to year with margin expansion driven primarily by portfolio mix and productivity actions. Operating (non-GAAP) gross margin of 60.1 percent increased 2.3 points compared to the prior-year period due to the same dynamics.

Total expense and other (income) increased 9.6 percent in the second quarter of 2025 compared to the second quarter of 2024 driven by higher operating acquisition-related spending and the effects of currency. Total operating (non-GAAP) expense and other (income) increased 10.7 percent year to year, driven primarily by the same factors.

Pre-tax income from continuing operations of $2.6 billion increased 17.0 percent and pre-tax margin was 15.3 percent, an increase of 1.2 points compared to the second quarter of 2024. Performance this quarter benefited from our gross margin expansion and productivity actions taken to transform our operations; partially offset by our continued investments to drive innovation. The continuing operations provision for income taxes was $0.4 billion in both the second quarter of 2025 and the second quarter of 2024. Net income from continuing operations of $2.2 billion increased 19.8 percent and the net income from continuing operations margin was 12.9 percent, an increase of 1.3 points year to year.

Operating (non-GAAP) pre-tax income from continuing operations of $3.2 billion increased 14.5 percent compared to the second quarter of 2024 and the operating (non-GAAP) pre-tax margin from continuing operations increased 1.1 points to 18.8 percent driven by the same factors as described above. The operating (non-GAAP) provision for income taxes was $0.5 billion in both the second quarter of 2025 and the second quarter of 2024. Operating (non-GAAP) net income from continuing operations of $2.7 billion increased 16.6 percent and the operating (non-GAAP) net income margin from continuing operations of 15.6 percent increased 1.2 points year to year.

Management Discussion – (continued)

Diluted earnings per share from continuing operations of $2.31 in the second quarter of 2025 increased 18.0 percent compared to the prior-year period, and operating (non-GAAP) diluted earnings per share of $2.80 increased 15.2 percent compared to the second quarter of 2024.

Cash provided by operating activities was $1.7 billion in the second quarter of 2025, a decrease of $0.4 billion compared to the second quarter of 2024 which includes an increase in cash used by financing receivables of $0.5 billion. Free cash flow was $2.8 billion, an increase of $0.2 billion versus the prior-year period. Net cash provided by investing activities of $1.7 billion decreased $0.5 billion and net cash used in financing activities of $2.9 billion decreased $1.7 billion compared to the second quarter of 2024.

Financial Results Summary — Six Months Ended June 30:


(Dollars and shares in millions except per share amounts)							Yr.-to-Yr. Percent/ Margin Change
For the six months ended June 30:	2025			2024
Revenue (1)	$	31,519		$	30,231		4.3	%
Gross profit margin	57.1		%	55.2		%	1.9	pts.
Total expense and other (income)	$	14,253		$	13,399		6.4	%
Income from continuing operations before income taxes	$	3,755		$	3,293		14.0	%
Provision for/(benefit from) income taxes from continuing operations	$	507		$	(112)		nm
Income from continuing operations	$	3,248		$	3,405		(4.6)	%
Income from continuing operations margin	10.3		%	11.3		%	(1.0)	pts.
Income/(loss) from discontinued operations, net of tax	$	1		$	34		(96.3)	%
Net income	$	3,249		$	3,439		(5.5)	%
Earnings per share from continuing operations - assuming dilution	$	3.43		$	3.65		(6.0)	%
Consolidated earnings per share - assuming dilution	$	3.43		$	3.68		(6.8)	%
Weighted-average shares outstanding - assuming dilution	946.7			933.9			1.4	%

	At 6/30/2025			At 12/31/2024
Assets	$	148,585		$	137,175		8.3	%
Liabilities	$	120,998		$	109,783		10.2	%
Equity	$	27,588		$	27,393		0.7	%

(1)Year-to-year revenue growth of 3.9 percent adjusted for currency.

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Management Discussion – (continued)

The following table provides the company’s operating (non-GAAP) earnings for the first six months of 2025 and 2024.


(Dollars in millions except per share amounts)					Yr.-to-Yr. Percent Change
For the six months ended June 30:	2025		2024
Net income as reported	$	3,249	$	3,439	(5.5)	%
Income/(loss) from discontinued operations, net of tax	1		34		(96.3)
Income from continuing operations	$	3,248	$	3,405	(4.6)	%
Non-operating adjustments (net of tax):
Acquisition-related charges	$	872	$	707	23.3	%
Non-operating retirement-related costs/(income)	51		163		(68.4)
U.S. tax reform impacts	(2)		(436)		(99.5)

Operating (non-GAAP) earnings (1)	$	4,169	$	3,839	8.6	%
Diluted operating (non-GAAP) earnings per share (1)	$	4.40	$	4.11	7.1	%

(1)Refer to page 79 for a more detailed reconciliation of net income to operating earnings.

Financial Performance Summary —Six Months Ended June 30:

In the first six months of 2025, we reported $31.5 billion in revenue, net income from continuing operations of $3.2 billion, and operating (non-GAAP) earnings of $4.2 billion. Diluted earnings per share from continuing operations was $3.43 as reported and $4.40 on an operating (non-GAAP) basis. We generated $6.1 billion in cash from operations and $4.8 billion in free cash flow, and delivered shareholder returns of $3.1 billion in dividends. Our year-to-date performance reflects our deep focus on the business fundamentals with continued revenue growth, gross profit margin expansion and strong cash generation, and a balance sheet with financial flexibility to support our business.

Total revenue grew 4.3 percent as reported and 3.9 percent adjusted for currency compared to the prior-year period. Software delivered revenue growth of 8.6 percent as reported and 8.3 percent adjusted for currency, led by strength in our portfolio, innovation we have brought to our organic software, and contribution from the acquisitions we have made over the past twelve months. Consulting revenue was flat as reported and adjusted for currency, impacted by the current dynamic environment and client focus on discretionary spending. Infrastructure revenue increased 4.6 percent as reported and 4.3 percent adjusted for currency, reflecting product cycle dynamics, with strong growth in Hybrid Infrastructure from the newly released IBM z17, partially offset by a decline in Distributed Infrastructure, and a decrease in Infrastructure Support.

From a geographic perspective, Americas revenue increased 2.6 percent year to year as reported (3.4 percent adjusted for currency). EMEA increased 10.3 percent (8.1 percent adjusted for currency). Asia Pacific decreased 0.6 percent (1.4 percent adjusted for currency).

Gross margin of 57.1 percent increased 1.9 points year to year with gross profit margin expansion driven by our improving portfolio mix and productivity actions. Operating (non-GAAP) gross margin of 58.5 percent increased 2.1 points compared to the prior-year period due to the same dynamics.

Total expense and other (income) increased 6.4 percent in the first six months of 2025 versus the prior-year period primarily driven by higher operating acquisition-related spend and the prior-year gain on the divestiture of The Weather Company assets. Total operating (non-GAAP) expense and other (income) increased 7.3 percent year to year, driven primarily by the factors described above.

Pre-tax income from continuing operations of $3.8 billion increased 14.0 percent and pre-tax margin was 11.9 percent, an increase of 1.0 points as compared to the first six months of 2024. Performance in the first six months of 2025 benefited from our gross margin expansion and productivity actions taken to transform our operations; partially offset by our continued investments to drive innovation. Our year-to-year pre-tax income results were also impacted by the gain from the divestiture of The Weather Company assets in the prior-year period. The continuing operations provision for income taxes for the first six months of 2025 was $0.5 billion, compared to a benefit from income taxes of $0.1 billion for the first six months of 2024. The benefit from income taxes in the first six months of 2024 was primarily driven by the resolution of

Management Discussion – (continued)

certain tax audit matters in the first quarter. Net income from continuing operations of $3.2 billion decreased 4.6 percent and the net income from continuing operations margin was 10.3 percent, down 1.0 points year to year.

Operating (non-GAAP) pre-tax income from continuing operations of $4.9 billion increased 10.9 percent compared to the prior-year period and the operating (non-GAAP) pre-tax margin from continuing operations increased 0.9 points to 15.7 percent primarily driven by the same dynamics as described above. The operating (non-GAAP) provision for income taxes in the first six months of 2025 was $0.8 billion, compared to $0.6 billion in the first six months of 2024. The operating (non-GAAP) income tax provision year-to-year change was primarily driven by the same factor described above. Operating (non-GAAP) income from continuing operations of $4.2 billion increased 8.6 percent and the operating (non-GAAP) income margin from continuing operations of 13.2 percent increased 0.5 points year to year.

Diluted earnings per share from continuing operations was $3.43 for the six months ended June 30, 2025, a decrease of 6.0 percent compared to the prior-year period. Operating (non-GAAP) diluted earnings per share of $4.40 increased 7.1 percent compared to the prior-year period.

At June 30, 2025, the balance sheet remained strong with financial flexibility to support and invest in the business. Cash and cash equivalents, restricted cash and marketable securities at June 30, 2025 of $15.5 billion increased $0.7 billion from December 31, 2024 and debt of $64.2 billion at June 30, 2025 increased $9.2 billion, primarily driven by the first-quarter 2025 debt issuances.

Total assets increased $11.4 billion ($7.4 billion adjusted for currency) from December 31, 2024 primarily driven by an increase in goodwill and intangible assets mainly related to the HashiCorp acquisition. Total liabilities increased $11.2 billion ($6.4 billion adjusted for currency) from December 31, 2024 primarily driven by an increase in debt and deferred income; partially offset by a decrease in taxes payable. Total equity of $27.6 billion increased $0.2 billion from December 31, 2024 primarily driven by first-half 2025 net income and common stock; partially offset by dividends paid and an increase in accumulated other comprehensive loss.

Cash provided by operating activities was $6.1 billion in the first six months of 2025, a decrease of $0.2 billion compared to the first six months of 2024 which includes a decrease in cash provided by financing receivables of $0.3 billion. Free cash flow was $4.8 billion, an increase of $0.3 billion versus the prior-year period. Refer to page 75 for additional information on free cash flow. Net cash used in investing activities of $11.3 billion increased $9.3 billion compared to the prior-year period primarily driven by cash used for the HashiCorp acquisition. Financing activities were a net source of cash of $2.6 billion in the first six months of 2025 as compared to a use of cash of $2.6 billion in the prior-year period primarily driven by debt.

Management Discussion – (continued)

Second Quarter in Review

Results of Continuing Operations

Segment Details

As discussed in the “Organization of Information” section, in the first quarter of 2025, we made changes to the reported revenue categories within our Software and Consulting reportable segments. IBM's Software segment reports revenue and year-to-year revenue percent change for Hybrid Cloud (Red Hat), Automation, Data, and Transaction Processing. The Software segment no longer reports Hybrid Platform & Solutions or Security revenue categories. IBM's Consulting segment reports revenue and year-to-year revenue percent change for Strategy and Technology and Intelligent Operations. These changes did not impact our Consolidated Financial Statements or our reportable segments.

The following tables present each reportable segment’s revenue and gross margin results, followed by an analysis of the second quarter and first six months of 2025 versus the second quarter and first six months of 2024 reportable segments results. The reported revenue categories within our Software and Consulting reportable segments are reported on a comparable basis for all periods.


(Dollars in millions)							Yr.-to-Yr. Percent/Margin Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the three months ended June 30:	2025			2024
Revenue:
Software	$	7,387		$	6,739		9.6	%	7.6	%
Gross margin	83.9		%	83.6		%	0.3	pts.
Consulting	5,314			5,179			2.6	%	(0.3)	%
Gross margin	27.5		%	26.3		%	1.2	pts.
Infrastructure	4,142			3,645			13.6	%	11.5	%
Gross margin	61.5		%	56.5		%	5.0	pts.
Financing	166			169			(1.7)	%	(3.3)	%
Gross margin	45.7		%	48.9		%	(3.2)	pts.
Other (1)	(31)			38			nm		nm
Gross margin	nm			nm			nm
Total revenue	$	16,977		$	15,770		7.7	%	5.3	%
Total gross profit	$	9,977		$	8,950		11.5	%
Total gross margin	58.8		%	56.8		%	2.0	pts.
Non-operating adjustments:
Amortization of acquired intangible assets	225			170			32.3	%
Operating (non-GAAP) gross profit	$	10,202		$	9,120		11.9	%
Operating (non-GAAP) gross margin	60.1		%	57.8		%	2.3	pts.

(1)Includes reductions in revenue for estimated residual value less related unearned income on sales-type leases, which reflects the new z17 launch in June 2025. Refer to note A, "Significant Accounting Policies," in the company's 2024 Annual Report for additional information.

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Management Discussion – (continued)


(Dollars in millions)							Yr.-to-Yr. Percent/Margin Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the six months ended June 30:	2025			2024
Revenue:
Software	$	13,722		$	12,637		8.6	%	8.3	%
Gross margin	83.7		%	83.0		%	0.7	pts.
Consulting	10,382			10,365			0.2	%	(0.4)	%
Gross margin	27.4		%	25.8		%	1.6	pts.
Infrastructure	7,027			6,721			4.6	%	4.3	%
Gross margin	57.9		%	55.4		%	2.5	pts.
Financing	357			362			(1.2)	%	(0.3)	%
Gross margin	45.8		%	48.7		%	(2.9)	pts.
Other (1)	30			146			(79.7)	%	(80.7)	%
Gross margin	nm			(260.7)		%	nm
Total revenue	$	31,519		$	30,231		4.3	%	3.9	%
Total gross profit	$	18,008		$	16,692		7.9	%
Total gross margin	57.1		%	55.2		%	1.9	pts.
Non-operating adjustments:
Amortization of acquired intangible assets	426			341			24.9	%
Operating (non-GAAP) gross profit	$	18,434		$	17,033		8.2	%
Operating (non-GAAP) gross margin	58.5		%	56.3		%	2.1	pts.

nm - not meaningful

Software


(Dollars in millions)					Yr.-to-Yr. Percent Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the three months ended June 30:	2025		2024 (1)
Software revenue:	$	7,387	$	6,739	9.6	%	7.6	%
Hybrid Cloud	$	1,796	$	1,547	16.1	%	14.4	%
Automation	1,883		1,620		16.2		14.4
Data	1,499		1,378		8.8		7.2
Transaction Processing	2,208		2,194		0.6		(1.9)

(1)Recast to reflect January 2025 changes to the reported revenue categories.

Management Discussion – (continued)


(Dollars in millions)					Yr.-to-Yr. Percent Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the six months ended June 30:	2025		2024 (1)
Software revenue:	$	13,722	$	12,637	8.6	%	8.3	%
Hybrid Cloud	$	3,483	$	3,057	13.9	%	13.9	%
Automation	3,467		3,012		15.1		14.8
Data	2,736		2,550		7.3		7.0
Transaction Processing	4,037		4,019		0.4		(0.2)

(1)Recast to reflect January 2025 changes to the reported revenue categories.

Software revenue of $7,387 million increased 9.6 percent as reported (7.6 percent adjusted for currency) in the second quarter of 2025 compared to the prior-year period, with solid growth in Hybrid Cloud, Automation and Data. This revenue performance reflects our continued growth in our high-value, annual recurring revenue base.

Revenue performance by line of business in the second quarter compared to the prior-year period was as follows:

Hybrid Cloud (Red Hat) year-to-year revenue growth accelerated in the second quarter compared to the first quarter, driven by another quarter of double-digit signings growth and demand for our hybrid cloud solutions. We gained market share across each of our key solutions, led by OpenShift which grew revenue more than 20 percent. Automation revenue grew 16.2 percent as reported (14.4 percent adjusted for currency), with HashiCorp contributing to growth with a strong first full quarter since the acquisition closed. In Data, revenue grew across the portfolio, with strength in our AI offerings. The revenue performance in Transaction Processing reflects where we are in the new z17 cycle as clients prioritized hardware spend at the beginning of a new program.

Across Software, our annual recurring revenue (ARR) was $22.7 billion, which increased 12.2 percent as reported (10.4 percent adjusted for currency). In the first quarter of 2025, the ARR calculation was updated to include all recurring revenue within the Software segment. ARR is a key performance metric management uses to assess the health and growth trajectory of our Software segment, and is calculated by using the current quarter’s recurring revenue and then multiplying that value by four. This value includes the following consumption models: (1) software subscription agreements, including committed term licenses, (2) as-a-service arrangements such as SaaS and PaaS, and (3) maintenance and support contracts. ARR should be viewed independently of software revenue as this performance metric and its inputs may not represent revenue that will be recognized in future periods.

Revenue performance in the first six months of 2025 compared to the prior-year period was as follows:

Software revenue of $13,722 million increased 8.6 percent as reported (8.3 percent adjusted for currency) compared to the same period in 2024. Software represents approximately 45 percent of IBM's business and the performance in the first half of 2025 reflects the combination of the strength of our portfolio, innovation we have brought to our organic software, and contribution from acquisitions we have made during the past twelve months, including HashiCorp, StreamSets and webMethods. Our ability to deploy our AI assistants and agents as well as AI middleware in hybrid environments leveraging multi-model capabilities continues to resonate with clients.


(Dollars in millions)							Yr.-to-Yr. Percent/ Margin Change
For the three months ended June 30:	2025			2024
Software:
Gross profit	$	6,197		$	5,634		10.0	%
Gross profit margin	83.9		%	83.6		%	0.3	pts.
Segment profit	$	2,296		$	2,113		8.7	%
Segment profit margin	31.1		%	31.3		%	(0.3)	pts.

Management Discussion – (continued)


(Dollars in millions)							Yr.-to-Yr. Percent/ Margin Change
For the six months ended June 30:	2025			2024
Software:
Gross profit	$	11,490		$	10,494		9.5	%
Gross profit margin	83.7		%	83.0		%	0.7	pts.
Segment profit	$	4,143		$	3,612		14.7	%
Segment profit margin	30.2		%	28.6		%	1.6	pts.

Software gross profit margin increased 0.3 points to 83.9 percent in the second quarter of 2025 compared to the prior-year period. Segment profit of $2,296 million increased 8.7 percent and segment profit margin of 31.1 percent decreased 0.3 points compared to the prior-year period.

For the first six months of 2025, gross profit margin increased 0.7 points to 83.7 percent, compared to the first six months of 2024. Segment profit of $4,143 million increased 14.7 percent and segment profit margin of 30.2 percent increased 1.6 points compared to the prior-year period.

Software gross profit, segment profit and respective margin performance in the second quarter and the first six months of 2025 reflect the benefits from our continued productivity actions and investments in acquisitions.

Consulting


(Dollars in millions)					Yr.-to-Yr. Percent Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the three months ended June 30:	2025		2024 (1)
Consulting revenue:	$	5,314	$	5,179	2.6	%	(0.3)	%
Strategy and Technology	$	2,920	$	2,895	0.9	%	(2.2)	%
Intelligent Operations	2,395		2,284		4.8		2.0


(Dollars in millions)					Yr.-to-Yr. Percent Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the six months ended June 30:	2025		2024 (1)
Consulting revenue:	$	10,382	$	10,365	0.2	%	(0.4)	%
Strategy and Technology	$	5,702	$	5,757	(1.0)	%	(1.7)	%
Intelligent Operations	4,680		4,608		1.6		1.2

(1)Recast to reflect January 2025 changes to the reported revenue categories.

Consulting revenue of $5,314 million increased 2.6 percent as reported and was flat adjusted for currency on a year-to-year basis, as the business continued to stabilize through the second quarter of 2025. Strategy and Technology increased 0.9 percent as reported (decreased 2.2 percent adjusted for currency) and Intelligent Operations revenue increased 4.8 percent as reported (2.0 percent adjusted for currency). The environment remains dynamic with clients prioritizing cost-efficient, high-impact technology investments, driving revenue growth in areas such as business application transformation, AI operations, and cloud platform engineering.

For the first six months of 2025, Consulting revenue of $10,382 million was flat as reported (declining 0.4 percent adjusted for currency), compared to the prior-year period, reflecting the current dynamic environment and client focus on discretionary spending. In the first half of 2025, we had strength in our Intelligent Operations offerings such as cloud platform engineering services and application management services, while we had declines in Strategy and Technology reflecting strong prior-year performance. Clients are recognizing the benefits of generative AI, which we have continued to see in our signings and backlog composition, and we are leveraging our AI offerings and growing our strategic partnerships to help clients drive operational efficiency and reduced costs.

Management Discussion – (continued)


(Dollars in millions)							Yr.-to-Yr. Percent/ Margin Change
For the three months ended June 30:	2025			2024
Consulting:
Gross profit	$	1,461		$	1,362		7.2	%
Gross profit margin	27.5		%	26.3		%	1.2	pts.
Segment profit	$	562		$	463		21.3	%
Segment profit margin	10.6		%	8.9		%	1.6	pts.


(Dollars in millions)							Yr.-to-Yr. Percent/ Margin Change
For the six months ended June 30:	2025			2024
Consulting:
Gross profit	$	2,842		$	2,676		6.2	%
Gross profit margin	27.4		%	25.8		%	1.6	pts.
Segment profit	$	1,121		$	888		26.2	%
Segment profit margin	10.8		%	8.6		%	2.2	pts.

In the second quarter of 2025, Consulting gross profit margin of 27.5 percent increased 1.2 points on a year-to-year basis. Segment profit of $562 million increased 21.3 percent and segment profit margin of 10.6 percent increased 1.6 points year to year.

For the first six months of 2025, Consulting gross profit margin of 27.4 percent increased 1.6 points compared to the prior-year period. Segment profit of $1,121 million increased 26.2 percent and segment profit margin of 10.8 percent increased 2.2 points in the first six months of 2025 compared to the prior-year period.

Consulting gross profit, segment profit and respective margin performance in the second quarter and the first six months of 2025 reflect the benefits of the productivity actions we have taken.

Consulting Signings and Book-to-Bill


(Dollars in millions)					Yr.-to-Yr. Percent Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the three months ended June 30:	2025		2024
Total Consulting signings	$	4,793	$	5,678	(15.6)	%	(18.2)	%


(Dollars in millions)					Yr.-to-Yr. Percent Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the six months ended June 30:	2025		2024
Total Consulting signings	$	9,727	$	11,189	(13.1)	%	(13.9)	%

For the three and six months ended June 30, 2025, Consulting signings decreased 15.6 percent as reported (18.2 percent adjusted for currency) and 13.1 percent as reported (13.9 percent adjusted for currency), respectively, as clients continued to delay decision-making, especially in discretionary projects. However, we had continued growth in backlog in the second quarter despite the challenging pricing environment. Our book-to-bill ratio for the trailing twelve-months was over 1.14. Book-to-bill represents the ratio of IBM Consulting signings to its revenue over the same period. The metric is a useful indicator of the demand of our business over time.

Signings are management’s initial estimate of the value of a client’s commitment under a services contract within IBM Consulting. There are no third-party standards or requirements governing the calculation of signings. The calculation used

Management Discussion – (continued)

by management involves estimates and judgments to gauge the extent of a client’s commitment, including the type and duration of the agreement, and the presence of termination charges or wind-down costs.

Contract extensions and increases in scope are treated as signings only to the extent of the incremental new value. Total signings can vary over time due to a variety of factors including, but not limited to, the timing of signing a small number of larger contracts. Signings associated with an acquisition will be recognized on a prospective basis.

Management believes the estimated values of signings disclosed provide an indication of our forward-looking revenue. Signings are used to monitor the performance of the business and viewed as useful information for management and shareholders. The conversion of signings into revenue may vary based on the types of services and solutions, contract duration, customer decisions, and other factors, which may include, but are not limited to, the macroeconomic environment.

Infrastructure


(Dollars in millions)					Yr.-to-Yr. Percent Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the three months ended June 30:	2025		2024
Infrastructure revenue:	$	4,142	$	3,645	13.6	%	11.5	%
Hybrid Infrastructure	$	2,866	$	2,360	21.5	%	19.1	%
IBM Z					70.2		67.1
Distributed Infrastructure					(15.1)		(16.9)
Infrastructure Support	1,275		1,285		(0.8)		(2.6)


(Dollars in millions)					Yr.-to-Yr. Percent Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the six months ended June 30:	2025		2024
Infrastructure revenue:	$	7,027	$	6,721	4.6	%	4.3	%
Hybrid Infrastructure	$	4,512	$	4,163	8.4	%	7.6	%
IBM Z					36.8		35.3
Distributed Infrastructure					(10.5)		(10.8)
Infrastructure Support	2,515		2,558		(1.7)		(1.1)

Infrastructure revenue of $4,142 million increased 13.6 percent as reported and 11.5 percent adjusted for currency in the second quarter of 2025 compared to the prior-year period, reflecting early strength in our new IBM Z program, z17, as AI use cases are resonating strongly with clients. IBM Z revenue increased 70.2 percent as reported and 67.1 percent adjusted for currency in the second quarter. The success of our z17 launch highlights the enduring nature of the IBM Z platform through the value of our continued innovation around AI workloads and hybrid cloud architecture. Distributed Infrastructure revenue decreased 15.1 percent as reported (16.9 percent adjusted for currency) with product cycle dynamics impacting Power. In July, we announced Power11, our next-generation platform featuring advancements across the processor, hardware architecture and virtualization software stack. While Storage was impacted by the new IBM Z cycle as clients prioritized hardware spend, our early strength in z17 and growth in installed capacity drives a long-term benefit.

For the first six months of 2025, Infrastructure revenue of $7,027 million increased 4.6 percent as reported (4.3 percent adjusted for currency) compared to the prior-year period, reflecting strong growth in Hybrid Infrastructure driven by z17, partially offset by the decline in Distributed Infrastructure, and a decrease in Infrastructure Support reflecting product cycle dynamics.

Management Discussion – (continued)


(Dollars in millions)							Yr.-to-Yr. Percent/ Margin Change
For the three months ended June 30:	2025			2024
Infrastructure:
Gross profit	$	2,548		$	2,060		23.7	%
Gross profit margin	61.5		%	56.5		%	5.0	pts.
Segment profit	$	965		$	654		47.6	%
Segment profit margin	23.3		%	17.9		%	5.4	pts.


(Dollars in millions)							Yr.-to-Yr. Percent/ Margin Change
For the six months ended June 30:	2025			2024
Infrastructure:
Gross profit	$	4,071		$	3,726		9.2	%
Gross profit margin	57.9		%	55.4		%	2.5	pts.
Segment profit	$	1,213		$	965		25.7	%
Segment profit margin	17.3		%	14.4		%	2.9	pts.

Infrastructure gross profit margin of 61.5 percent increased 5.0 points in the second quarter of 2025 compared to the prior-year period. Infrastructure segment profit of $965 million increased 47.6 percent and segment profit margin of 23.3 percent increased 5.4 points compared to the prior-year period.

For the first six months of 2025, gross profit margin of 57.9 percent increased 2.5 points compared to the prior-year period. Infrastructure segment profit of $1,213 million increased 25.7 percent and segment profit margin of 17.3 percent increased 2.9 points in the first six months of 2025 compared to the prior-year period.

Infrastructure gross profit margin expansion for the second quarter and first six months of 2025 were primarily driven by the launch of z17. Segment profit and profit margin performance for both periods were primarily driven by the gross profit margin expansion.

Financing

Refer to pages 76 through 77 for a discussion of Financing’s segment results.

Management Discussion – (continued)

Geographic Revenue

In addition to the revenue presentation by reportable segment, we also measure revenue performance on a geographic basis.


(Dollars in millions)					Yr.-to-Yr. Percent Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the three months ended June 30:	2025		2024
Total Revenue	$	16,977	$	15,770	7.7	%	5.3	%
Americas	$	8,462	$	7,979	6.1	%	6.5	%
Europe/Middle East/Africa (EMEA)	5,413		4,722		14.6		8.5
Asia Pacific	3,103		3,069		1.1		(2.7)


(Dollars in millions)					Yr.-to-Yr. Percent Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the six months ended June 30:	2025		2024
Total Revenue	$	31,519	$	30,231	4.3	%	3.9	%
Americas	$	15,668	$	15,275	2.6	%	3.4	%
Europe/Middle East/Africa (EMEA)	9,965		9,035		10.3		8.1
Asia Pacific	5,886		5,922		(0.6)		(1.4)

Geographic revenue performance for the three months ended June 30, 2025:

Americas revenue of $8,462 million increased 6.1 percent as reported and 6.5 percent adjusted for currency in the second quarter of 2025 compared to the prior-year period. The U.S. increased 4.5 percent year to year. Canada increased 27.8 percent as reported and 28.6 percent adjusted for currency. Latin America increased 1.4 percent as reported and 5.3 percent adjusted for currency, reflecting growth across most countries with a partial offsetting decline in Brazil of 6.1 percent as reported and 0.8 percent adjusted for currency.

In EMEA, total revenue of $5,413 million increased 14.6 percent as reported and 8.5 percent adjusted for currency. Germany, the UK, France, and Italy increased 30.9 percent, 23.7 percent, 15.4 percent and 9.1 percent, respectively, as reported, and 24.0 percent, 17.2 percent, 9.6 percent and 3.3 percent, respectively, adjusted for currency.

Asia Pacific revenue of $3,103 million increased 1.1 percent as reported, but decreased 2.7 percent adjusted for currency. Japan increased 4.3 percent as reported, but decreased 3.5 percent adjusted for currency. Australia and India increased 12.1 percent and 5.1 percent, respectively, as reported, and 15.0 percent and 7.9 percent, respectively, adjusted for currency. China decreased 21.5 percent as reported and 21.7 percent adjusted for currency.

Geographic revenue performance for the six months ended June 30, 2025:

Americas revenue of $15,668 million increased 2.6 percent as reported and 3.4 percent adjusted for currency. The U.S. increased 2.3 percent compared to the prior-year period. Canada increased 10.5 percent as reported and 13.6 percent adjusted for currency. Latin America was flat as reported, but grew 5.7 percent adjusted for currency. Within Latin America, Brazil decreased 5.9 percent as reported, but increased 2.3 percent adjusted for currency.

In EMEA, total revenue of $9,965 million increased 10.3 percent as reported and 8.1 percent adjusted for currency. The UK, Germany, France and Italy increased 17.2 percent, 14.5 percent, 9.4 percent and 8.0 percent, respectively, as reported, and 14.1 percent, 12.4 percent, 7.8 percent and 6.0 percent, respectively, adjusted for currency.

Asia Pacific revenue of $5,886 million decreased 0.6 percent as reported and 1.4 percent adjusted for currency. Japan increased 2.0 percent as reported, but declined 0.8 percent adjusted for currency. Australia and India increased 6.4 percent and 1.8 percent, respectively, as reported, and 10.0 percent and 5.3 percent, respectively, adjusted for currency. China decreased 24.1 percent as reported and 23.9 percent adjusted for currency.

Management Discussion – (continued)

Expense

Total Expense and Other (Income)


(Dollars in millions)							Yr.-to-Yr. Percent Change
For the three months ended June 30:	2025			2024
Total expense and other (income)	$	7,380		$	6,730		9.6	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(324)		$	(268)		20.8	%
Acquisition-related charges	(26)			(36)			(28.6)
Non-operating retirement-related (costs)/income	(25)			(98)			(74.1)
Operating (non-GAAP) expense and other (income)	$	7,005		$	6,328		10.7	%
Total expense-to-revenue ratio	43.5		%	42.7		%	0.8	pts.
Operating (non-GAAP) expense-to-revenue ratio	41.3		%	40.1		%	1.1	pts.


(Dollars in millions)							Yr.-to-Yr. Percent Change
For the six months ended June 30:	2025			2024
Total expense and other (income) (1)	$	14,253		$	13,399		6.4	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(618)		$	(526)		17.6	%
Acquisition-related charges	(88)			(96)			(8.3)
Non-operating retirement-related (costs)/income	(48)			(194)			(75.3)
Operating (non-GAAP) expense and other (income) (1)	$	13,499		$	12,584		7.3	%
Total expense-to-revenue ratio	45.2		%	44.3		%	0.9	pts.
Operating (non-GAAP) expense-to-revenue ratio	42.8		%	41.6		%	1.2	pts.

(1)2024 includes a pre-tax gain of $239 million from the divestiture of The Weather Company assets.

For additional information regarding total expense and other (income) for both expense presentations, refer to the following analyses by category.

Selling, General and Administrative Expense


(Dollars in millions)					Yr.-to-Yr. Percent Change
For the three months ended June 30:	2025		2024
Selling, general and administrative expense:
Selling, general and administrative — other	$	4,078	$	4,121	(1.0)	%
Advertising and promotional expense	349		354		(1.2)
Workforce rebalancing charges	18		20		(8.5)
Amortization of acquired intangible assets	324		268		20.8
Stock-based compensation (1)	244		172		41.8
Provision for/(benefit from) expected credit loss expense	14		2		nm
Total selling, general and administrative expense	$	5,027	$	4,938	1.8	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(324)	$	(268)	20.8	%
Acquisition-related charges (1)	(25)		(18)		35.6
Operating (non-GAAP) selling, general and administrative expense	$	4,679	$	4,651	0.6	%

(1)2025 includes awards in connection with acquisitions of $41 million for the three months ended June 30, 2025, which includes a non-operating adjustment in acquisition-related charges of $17 million.

nm - not meaningful

Management Discussion – (continued)


(Dollars in millions)					Yr.-to-Yr. Percent Change
For the six months ended June 30:	2025		2024
Selling, general and administrative expense:
Selling, general and administrative — other	$	7,884	$	8,036	(1.9)	%
Advertising and promotional expense	588		633		(7.1)
Workforce rebalancing charges	334		396		(15.5)
Amortization of acquired intangible assets	618		526		17.6
Stock-based compensation (1)	461		343		34.4
Provision for/(benefit from) expected credit loss expense	28		(21)		nm
Total selling, general and administrative expense	$	9,913	$	9,912	0.0	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(618)	$	(526)	17.6	%
Acquisition-related charges (1)	(83)		(28)		190.8
Operating (non-GAAP) selling, general and administrative expense	$	9,212	$	9,358	(1.6)	%

(1)2025 includes awards in connection with acquisitions of $45 million for the six months ended June 30, 2025, which includes a non-operating adjustment in acquisition-related charges of $17 million.

nm - not meaningful

Total selling, general and administrative (SG&A) expense increased 1.8 percent in the second quarter of 2025 versus the prior-year period driven primarily by the following factors:

Higher operating expenses from acquired businesses, as a result of our continued investment to drive our hybrid cloud and AI strategy (5 points);
The effects of currency (1 point); and
Higher amortization of acquired intangible assets and acquisition-related charges (1 point); partially offset by
Lower spending reflecting the benefits from productivity actions focused on transforming our enterprise operations (6 points).

Operating (non-GAAP) SG&A expense increased 0.6 percent year to year primarily driven by the same factors above, excluding the higher amortization of acquired intangible assets and acquisition-related charges.

Expected credit loss expense was a provision of $14 million in the second quarter of 2025 compared to $2 million in the prior-year period. The year-to-year change was primarily driven by higher specific reserve requirements in the current-year period. Refer to “Receivables and Allowances” section on page 70 for additional information.

Total SG&A expense was flat in the first six months of 2025 versus the prior-year period driven primarily by the following factors:

Higher operating expenses from acquired businesses, as a result of our continued investment to drive our hybrid cloud and AI strategy (4 points); and
Higher amortization of acquired intangible assets and acquisition-related charges and (2 points); partially offset by
Benefits from productivity and the actions taken to transform our operations (5 points); and
Lower workforce rebalancing charges (1 point).

Operating (non-GAAP) SG&A expense decreased (1.6) percent year to year primarily driven by the same factors above, excluding the higher acquisition-related charges and amortization of acquired intangible assets.

Management Discussion – (continued)

Expected credit loss expense was a provision of $28 million in the first six months of 2025 compared to a benefit of $21 million in the prior-year period. The year-to-year change was primarily driven by higher unallocated reserve requirements in the current year as a result of the current economic conditions. Refer to "Receivables and Allowances" section on page 70 for additional information.

Research and Development


(Dollars in millions)					Yr.-to-Yr. Percent Change
For the three months ended June 30:	2025		2024
Research and development expense	$	2,097	$	1,840	13.9	%


(Dollars in millions)					Yr.-to-Yr. Percent Change
For the six months ended June 30:	2025		2024
Research and development expense	$	4,047	$	3,637	11.3	%
Non-operating adjustments:
Acquisition-related charges	(4)		—		nm
Operating (non-GAAP) research and development expense	$	4,043	$	3,637	11.2	%

nm - not meaningful

Research and development (R&D) expense increased 13.9 percent year to year in the second quarter. The year-to-year increase in R&D expense was primarily driven by investments to drive innovation in AI, hybrid cloud and quantum and higher operating acquisition-related spending.

Research and development (R&D) expense and operating (non-GAAP) R&D expense increased 11.3 percent and 11.2 percent, respectively, in the first six months of 2025 primarily driven by the same factors above.

Intellectual Property and Custom Development Income


(Dollars in millions)					Yr.-to-Yr. Percent Change
For the three months ended June 30:	2025		2024
Intellectual property and custom development income:
Intellectual property income (1)	$	43	$	77	(44.1)	%
Custom development income	172		165		4.4

Total	$	215	$	241	(11.0)	%


(Dollars in millions)					Yr.-to-Yr. Percent Change
For the six months ended June 30:	2025		2024
Intellectual property and custom development income:
Intellectual property income (1)	$	106	$	149	(28.9)	%
Custom development income	362		309		17.3

Total	$	468	$	458	2.2	%

(1)Includes licensing, royalty-based fees and sales

Total intellectual property and custom development income decreased 11.0 percent year to year in the second quarter, and increased 2.2 percent in the first six months of 2025 compared to the prior-year period. The increase in the first six months of 2025 was primarily driven by joint development and licensing agreements with a Japanese consortium to leverage our intellectual property and expertise on advanced semiconductors.

The timing and amount of licensing and sales of IP may vary significantly from period to period depending upon the timing of licensing agreements, economic conditions, industry consolidation and the timing of new patents and know-how development.

Management Discussion – (continued)

Other (Income) and Expense


(Dollars in millions)					Yr.-to-Yr. Percent Change
For the three months ended June 30:	2025		2024
Other (income) and expense:
(Gains)/losses on foreign currency transactions	$	773	$	(140)	nm
(Gains)/losses on derivative instruments (1)	(601)		140		nm
Interest income	(172)		(217)		(20.4)	%
Net (gains)/losses from securities and investment assets	(19)		0		nm
Retirement-related costs/(income)	25		98		(74.1)
Other	(45)		(114)		(61.1)
Total other (income) and expense	$	(39)	$	(233)	(83.3)	%
Non-operating adjustments:

Acquisition-related charges (1)	$	(1)	$	(18)	(93.8)	%
Non-operating retirement-related (costs)/income	(25)		(98)		(74.1)
Operating (non-GAAP) other (income) and expense	$	(65)	$	(349)	(81.3)	%

(1)2024 includes the realized loss recognized on foreign exchange derivative contracts entered into by the company prior to the acquisition of StreamSets and webMethods from Software AG. Refer to note 16, “Derivative Financial Instruments,” for additional information.

nm - not meaningful


(Dollars in millions)					Yr.-to-Yr. Percent Change
For the six months ended June 30:	2025		2024
Other (income) and expense:
(Gains)/losses on foreign currency transactions	$	1,215	$	(345)	nm
(Gains)/losses on derivative instruments (1)	(1,043)		427		nm
Interest income	(363)		(427)		(14.9)	%
Net (gains)/losses from securities and investment assets	10		(10)		nm
Retirement-related costs/(income)	48		194		(75.3)
Other	(71)		(389)		(81.7)
Total other (income) and expense	$	(204)	$	(550)	(63.0)	%
Non-operating adjustments:

Acquisition-related charges (1)	(1)		(68)		(98.4)	%
Non-operating retirement-related (costs)/income	(48)		(194)		(75.3)	%
Operating (non-GAAP) other (income) and expense	$	(253)	$	(812)	(68.9)	%

nm - not meaningful

Total other (income) and expense was income of $39 million in the second quarter of 2025 and decreased $194 million compared to the prior-year period. The year-to-year change was primarily driven by:

Higher net exchange losses (including derivative instruments) of $171 million in the current-year period; and
Lower interest income ($44 million) primarily driven by a lower average cash balance in the current year and lower average interest rates; partially offset by
Lower non-operating retirement-related costs of $73 million. Refer to "Retirement-Related Plans" for additional information.

Management Discussion – (continued)

Operating (non-GAAP) other (income) and expense was income of $65 million in the second quarter of 2025 and decreased $283 million compared to the prior-year period. The year-to-year change was primarily driven by the factors described above excluding lower non-operating retirement-related costs.

Total other (income) and expense was income of $204 million in the first six months of 2025 compared to income of $550 million in the prior-year period. The year-to-year change was primarily driven by:

Lower gains on divestitures of $252 million primarily driven by the divestiture of The Weather Company assets in first-quarter 2024 (included in "Other" in the table above); and
Higher net exchange losses (including derivative instruments) of $91 million; and
Lower interest income of $64 million primarily driven by lower interest rates in the current year; partially offset by
Lower non-operating retirement-related costs of $146 million compared to the prior-year period. Refer to "Retirement-Related Plans" for additional information.

Operating (non-GAAP) other (income) and expense was income of $253 million in the first six months of 2025 and decreased $559 million compared to the prior-year period. The year-to-year change was primarily driven by the factors described above, excluding lower non-operating retirement-related costs.

Interest Expense


(Dollars in millions)					Yr.-to-Yr. Percent Change
For the three months ended June 30:	2025		2024
Interest expense	$	510	$	427	19.3	%


(Dollars in millions)					Yr.-to-Yr. Percent Change
For the six months ended June 30:	2025		2024
Interest expense	$	965	$	859	12.3	%

Interest expense increased $82 million and $106 million year to year in the second quarter and first six months of 2025, respectively. Interest expense is presented in cost of financing in the Consolidated Income Statement if the related external borrowings are to support the Financing external business. Overall interest expense (excluding capitalized interest) for the second quarter and first six months of 2025 was $595 million and $1,138 million, respectively, an increase of $87 million and $112 million, respectively, compared to the prior-year periods. The year-to-year dynamics for both the second quarter and first six months of 2025 were primarily driven by higher average interest rates and a higher average debt balance in the current year.

Retirement-Related Plans

The following tables provide the total pre-tax cost for all retirement-related plans. The operating cost amounts are included in the Consolidated Income Statement within the caption (e.g., Cost, SG&A, R&D) relating to the job function of the plan participants. The non-operating cost amounts are included in other (income) and expense.

Management Discussion – (continued)


(Dollars in millions)					Yr.-to-Yr. Percent Change
For the three months ended June 30:	2025		2024
Retirement-related plans — cost:
Service cost	$	133	$	141	(5.8)	%
Multi-employer plans	3		3		11.6
Cost of defined contribution plans	120		109		9.9
Total operating costs	$	255	$	252	1.2	%
Interest cost	$	493	$	555	(11.1)	%
Expected return on plan assets	(638)		(725)		(12.1)
Recognized actuarial losses	157		256		(38.5)
Amortization of prior service costs/(credits)	(2)		(2)		(9.9)
Curtailments/settlements	5		2		95.7
Other costs	10		12		(18.5)
Total non-operating costs/(income)	$	25	$	98	(74.1)	%
Total retirement-related plans — cost	$	281	$	350	(19.9)	%


(Dollars in millions)					Yr.-to-Yr. Percent Change
For the six months ended June 30:	2025		2024
Retirement-related plans — cost:
Service cost	$	263	$	284	(7.3)	%
Multi-employer plans	6		6		(0.3)
Cost of defined contribution plans	229		220		4.3
Total operating costs	$	499	$	510	(2.2)	%
Interest cost	$	969	$	1,113	(12.9)	%
Expected return on plan assets	(1,252)		(1,455)		(14.0)
Recognized actuarial losses	309		515		(39.9)
Amortization of prior service costs/(credits)	(4)		(4)		0.1
Curtailments/settlements	7		4		50.8
Other costs	18		20		(10.8)
Total non-operating costs/(income)	$	48	$	194	(75.3)	%
Total retirement-related plans — cost	$	546	$	704	(22.4)	%

Total pre-tax retirement-related plan cost in the second quarter of 2025 decreased by $70 million compared to the second quarter of 2024, primarily driven by a decrease in recognized actuarial losses ($99 million) and lower interest cost ($62 million), partially offset by lower expected return on plan assets ($88 million). Total cost for the first six months of 2025 decreased by $157 million compared to the first six months of 2024, primarily driven by a decrease in recognized actuarial losses ($206 million) and lower interest cost ($144 million), partially offset by lower expected return on plan assets ($203 million).

As described in the “Operating (non-GAAP) Earnings” section, management characterizes certain retirement-related costs as operating and others as non-operating. Utilizing this characterization, operating retirement-related costs in the second quarter of 2025 were $255 million, an increase of $3 million compared to the second quarter of 2024. The increase was primarily driven by increased cost of defined contribution plans ($11 million), partially offset by lower service cost ($8 million). For the first six months of 2025, operating retirement-related costs were $499 million, a decrease of $11 million compared to the prior-year period, primarily driven by lower service cost ($21 million) partially offset by increased cost of defined contribution plans ($10 million). Non-operating costs/(income) was $25 million of cost in the second quarter of 2025 compared to $98 million in the prior-year period, and $48 million for the first six months of 2025 compared to $194 million in the prior-year period. For the periods presented, the year-to-year decreases in recognized actuarial losses and interest cost, and lower expected return on plan assets were primarily driven by the prior year U.S. and

Management Discussion – (continued)

Canada pension transfers which occurred in the second half of 2024. Refer to note U, “Retirement-Related Benefits,” in our 2024 Annual Report for additional information.

Taxes

The continuing operations provision for income taxes in the second quarter of 2025 was $404 million, compared to $389 million in the second quarter of 2024. The operating (non-GAAP) provision for income taxes in the second quarter of 2025 was $545 million, compared to $516 million in the second quarter of 2024.

The continuing operations provision for income taxes for the first six months of 2025 was $507 million, compared to a benefit from income taxes of $112 million for the first six months of 2024. The benefit from income taxes in the first six months of 2024 was primarily driven by the resolution of certain tax audit matters in the first quarter. The operating (non-GAAP) provision for income taxes in the first six months of 2025 was $766 million, compared to $610 million in the first six months of 2024. The operating (non-GAAP) income tax provision year-to-year change was primarily driven by the same factor described above.

IBM’s tax provision and effective tax rate are impacted by recurring factors including the geographical mix of income before taxes, incentives, specific transactions, changes in unrecognized tax benefits and discrete tax events, such as the settlement of income tax audits and changes in or new interpretations of tax laws. The GAAP tax provision and effective tax rate could also be affected by adjustments to the previously recorded charges for U.S. tax reform attributable to any changes in law, new regulations and guidance, and audit adjustments, among others.

On July 4, 2025, H.R. 1, a bill to provide for reconciliation, was signed into law in the United States as Public Law 119-21 (the Act). The Act incorporates various business tax provisions, including the permanent extension of key measures from the 2017 Tax Cuts and Jobs Act. The effects of changes in tax legislation must be recognized in the period of enactment. The company is currently assessing the tax effects of the Act and expects to record a one-time, non-cash charge in the Consolidated Income Statement for the period ending September 30, 2025, primarily for the remeasurement of deferred tax assets and liabilities related to Global Intangible Low-Taxed Income (GILTI), now renamed to Net Controlled Foreign Corporation Tested Income (NCTI). This one-time, non-cash charge is not expected to impact operating (non-GAAP) net income or operating (non-GAAP) earnings per share.

The U.S. Internal Revenue Service (IRS) has proposed adjustments related to certain cross-border transactions with respect to the company’s 2013-2014 and 2015-2016 U.S. income tax returns, which if sustained, would increase the company’s income subject to tax by approximately $4.2 billion for the 2013-2014 audit cycle and approximately $1.2 billion for the 2015-2016 audit cycle, with tax calculated at the relevant federal income tax rate. The company strongly disagrees with the IRS’ positions, filed IRS Appeals protests, and will pursue resolution at court, if necessary. In 2021, the IRS commenced its audit of the company’s U.S. tax returns for 2017-2018, which the company anticipates will be completed in 2025. With respect to major U.S. state and foreign taxing jurisdictions, the company is generally no longer subject to tax examinations for years prior to 2016. The company is no longer subject to income tax examination of its U.S. federal tax return for years prior to 2013. The open years contain matters that could be subject to differing interpretations of applicable tax laws and regulations as it relates to the amount and/or timing of income, deductions, and tax credits. Although the outcome of tax audits is always uncertain, the company believes that adequate amounts of tax, interest and penalties have been provided for any adjustments that are expected to result for these years.

The company is involved in a number of income tax-related matters in India challenging tax assessments issued by the India Tax Authorities. As of June 30, 2025, the company had recorded approximately $430 million as prepaid income taxes in India. A significant portion of this balance represents cash tax deposits paid over time to protect the company’s right to appeal various income tax assessments made by the India Tax Authorities. Although the outcome of tax audits is always uncertain, the company believes that adequate amounts of tax, interest and penalties have been provided for any adjustments that are expected to result for these years.

The amount of unrecognized tax benefits at June 30, 2025 is $9,192 million which can be reduced by $664 million associated with timing adjustments, potential transfer pricing adjustments, and state income taxes. The net amount of $8,528 million, if recognized, would favorably affect the company’s effective tax rate.

Management Discussion – (continued)

Financial Position

Dynamics

Our balance sheet at June 30, 2025 continues to provide us with financial flexibility to support and invest in the business.

Cash and cash equivalents, restricted cash and marketable securities at June 30, 2025 were $15,530 million, an increase of $726 million compared to December 31, 2024. Total debt of $64,165 million at June 30, 2025 increased $9,192 million compared to December 31, 2024, primarily driven by the first-quarter 2025 debt issuances to increase our financial liquidity and plan for our future debt maturities, and due to currency fluctuation. We continue to manage our debt levels while being acquisitive and without sacrificing investments in our business.

In the first six months of 2025, we generated $6,071 million in cash from operating activities, a decrease of $162 million compared to the first six months of 2024. Within cash from operating activities, cash provided by financing receivables decreased $345 million compared to the prior year. Our free cash flow for the six months ended June 30, 2025 was $4,808 million, an increase of $285 million versus the prior-year period. Refer to pages 74 through 75 for additional information on free cash flow. We invested $7,845 million in acquisitions primarily for the acquisition of HashiCorp which was completed in the first quarter and we returned $3,112 million to shareholders through dividends in the first six months of 2025.

Our pension plans were well funded at the end of 2024, with worldwide qualified plans funded at 116 percent. Overall pension funded status as of the end of June 2025 was fairly consistent with year-end 2024. We expect contributions for all retirement-related plans to be approximately $1.3 billion in 2025, essentially flat compared to the prior year.

IBM Working Capital


(Dollars in millions)	At June 30, 2025		At December 31, 2024
Current assets	$	34,253	$	34,482
Current liabilities	37,726		33,142
Working capital	$	(3,473)	$	1,340
Current ratio	0.91:1		1.04:1

Working capital decreased $4,813 million from the year-end 2024 position. Current assets decreased $229 million ($1,575 million adjusted for currency) primarily due to decreases in receivables mainly from collections of seasonally higher year-end balances; partially offset by an increase in cash and cash equivalents, restricted cash and marketable securities. Current liabilities increased $4,584 million ($3,227 million adjusted for currency) primarily due to increases in short-term debt driven by reclassifications from long-term debt net of maturities, and in deferred income; partially offset by a decrease in taxes payable.

Receivables and Allowances

Roll Forward of Total IBM Receivables Allowance for Credit Losses


(Dollars in millions)
January 1, 2025	Additions / (Releases) (1)	Write-offs (2)	Foreign currency and other	June 30, 2025
$273	$24	$(28)	$23	$291

(1)Additions/(Releases) for allowance for credit losses are recorded in expense.

(2)Refer to note A, “Significant Accounting Policies,” in our 2024 Annual Report for additional information regarding allowance for credit loss write-offs.

Excluding receivables classified as held for sale, the total IBM receivables provision coverage was 1.5 percent at June 30, 2025, an increase of 10 basis points compared to December 31, 2024. The increase in coverage is primarily driven by an increase in the unallocated allowance for credit losses on financing receivables. The majority of the write-offs during the six months ended June 30, 2025 were related to receivables which had been previously reserved. Refer to Financing's

Management Discussion – (continued)

“Balance Sheet and Return on Equity Highlights” on page 76 for additional details regarding the Financing segment receivables and allowances.

Noncurrent Assets and Liabilities


(Dollars in millions)	At June 30, 2025		At December 31, 2024
Noncurrent assets	$	114,332	$	102,693
Long-term debt	$	55,219	$	49,884
Noncurrent liabilities (excluding debt)	$	28,052	$	26,756

Noncurrent assets increased $11,639 million ($8,976 million adjusted for currency) primarily due to an increase in goodwill and intangible assets from the HashiCorp acquisition.

Long-term debt increased $5,335 million ($3,411 million adjusted for currency) primarily driven by our first-quarter 2025 debt issuances; partially offset by reclassifications to short-term debt to reflect upcoming maturities.

Noncurrent liabilities (excluding debt) increased $1,296 million (decreased $243 million adjusted for currency) primarily driven by currency.

Debt

Our funding requirements are continually monitored as we execute our strategies to manage the overall asset and liability profile. Additionally, we maintain sufficient flexibility to access global funding sources as needed.


(Dollars in millions)	At June 30, 2025		At December 31, 2024
Total debt	$	64,165	$	54,973
Financing segment debt (1)	$	11,731	$	12,116
Non-Financing debt	$	52,434	$	42,858

(1)Refer to Financing’s “Balance Sheet and Return on Equity Highlights” on page 76 for additional details.

Total debt of $64,165 million increased $9,192 million ($7,244 million adjusted for currency) from December 31, 2024, primarily driven by proceeds from issuances of $8,385 million to increase our financial liquidity and plan for our future debt maturities; partially offset by maturities of $2,565 million.

Non-Financing debt of $52,434 million increased $9,577 million ($7,894 million adjusted for currency) from December 31, 2024, primarily as a result of the issuances and maturities described above.

Financing segment debt of $11,731 million decreased $385 million ($650 million adjusted for currency) from December 31, 2024, primarily due to lower funding requirements associated with financing receivables.

Financing provides financing solutions predominantly for IBM’s external client assets, and the debt used to fund Financing assets is primarily comprised of intercompany loans. Total debt changes generally correspond with the level of client and commercial financing receivables, the level of cash and cash equivalents, the change in intercompany and external payables, and the change in intercompany investment from IBM. The terms of the intercompany loans are set by the company to substantially match the term, currency and interest rate variability underlying the financing receivable. The Financing debt-to-equity ratio remained at 9.0 to 1 at June 30, 2025.

Interest expense relating to debt supporting Financing’s external client and internal business is included in the “Financing Results of Operations” and in note 4, “Segments.” In the Consolidated Income Statement, the external debt-related interest expense supporting Financing’s internal financing to the company is classified as interest expense.

Management Discussion – (continued)

Equity

Total equity increased $195 million from December 31, 2024, primarily driven by net income of $3,249 million and common stock of $1,012 million; partially offset by dividends paid of $3,112 million and an increase in accumulated other comprehensive loss of $772 million driven by net unrealized losses from cash flow hedges.

Cash Flow

Our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows on page 7, are summarized in the table below. These amounts also include the cash flows associated with the Financing business.


(Dollars in millions)
For the six months ended June 30:	2025		2024
Net cash provided by/(used in):
Operating activities	$	6,071	$	6,234
Investing activities	(11,281)		(1,971)
Financing activities	2,589		(2,638)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	487		(236)
Net change in cash, cash equivalents and restricted cash	$	(2,134)	$	1,389

Net cash provided by operating activities decreased $162 million as compared to the first six months of 2024. This was due to a decrease in cash provided by financing receivables and balance sheet dynamics; partially offset by performance-related improvements within net income.

Net cash used in investing activities increased $9,310 million primarily driven by the HashiCorp acquisition, higher net purchases of marketable securities and other investments, and a decrease in cash provided by divestitures as the first quarter 2024 included the sale of The Weather Company assets.

Net cash provided by financing activities increased $5,226 million primarily driven by a higher level of net debt issuances in the current-year period.

Looking Forward

Technology continues to serve as a key competitive advantage which allows businesses to scale, drive cost efficiencies, productivity, and to fuel growth and transformation. It is clear that technology is playing a significant role as the value of hybrid cloud, automation, data sovereignty, and on-prem solutions becomes even more critical in today’s environment.

Enterprise AI continues to gain traction. The portfolio of AI offerings we have built, including cost efficient, fit-for-purpose open-source models deployed in hybrid environments, is focused on helping businesses scale AI and generate return through productivity improvements and automation. In Software, IBM watsonx provides a robust portfolio of AI products for developing AI apps, managing data, and governing the entire lifecycle of AI models and AI agents. We continue to see Infrastructure play a larger role, enabling hybrid cloud environments for mission-critical transactions and AI workloads, as clients bring AI to their data. In June, we launched the IBM z17, which delivers enhanced AI acceleration through multi-model AI capabilities. In July, we introduced IBM Power11 which delivers the performance, resiliency, and scalability needed to run mission-critical data-intensive workloads. In Consulting, our experts are helping clients design and execute AI strategies by leveraging the IBM Consulting Advantage platform, an AI delivery platform designed to implement solutions at scale, transforming how our consultants work and harnessing AI across every stage of the project lifecycle.

AI is also a powerful driver of transformation for our clients and for IBM. We are transforming our enterprise operations, driving efficiency and cost savings, by leveraging technology and embedding AI in our own workflows, as well as optimizing our supply chain and service delivery. This quarter, we continued to optimize our supply chain by shifting

Management Discussion – (continued)

our Distributed Infrastructure manufacturing to an industry standard strategic partner. This is the next evolution of our supply transformation as we pivot to a simpler, more efficient process.

We remain focused on accelerating innovation speed and impact, and we continue to invest in emerging technologies, including Quantum, bringing new innovations to market. To complement our portfolio, we completed six acquisitions in the first six months of 2025, including the acquisition of HashiCorp in the first quarter, which brought leading automation and security tools that integrate with our hybrid cloud.

Our first-half performance reflects the continued success of our focused strategy around hybrid cloud and AI, highlighting the resiliency of our business model. We remain focused on consistent execution, delivering long-term growth aligned with our financial model.

While the operating environment remains dynamic, we believe our focused portfolio, disciplined investments in innovation, diverse set of businesses and clients, relentless focus on productivity, and strong liquidity position drive the durability of our performance.

Retirement-Related Plans

Our pension plans are well funded. Contributions for all retirement-related plans are expected to be approximately $1.3 billion in 2025, essentially flat compared to 2024, of which $0.1 billion generally relates to legally required contributions to non-U.S. defined benefit and multi-employer plans. We expect 2025 pre-tax retirement-related plan cost to be approximately $1.1 billion. This estimate reflects current pension plan assumptions at December 31, 2024. Within total retirement-related plan cost, operating retirement-related plan cost is expected to be approximately $1.0 billion in 2025, essentially flat compared to 2024. Non-operating retirement-related plan cost is expected to be approximately $0.1 billion, a decrease of approximately $3.3 billion compared to 2024, primarily driven by the $3.1 billion of pension settlement charges resulting from the U.S. and Canada pension transfers in the second half of 2024, and lower recognized actuarial losses.

Currency Rate Fluctuations

Changes in the relative values of non-U.S. currencies to the U.S. dollar affect our financial results and financial position. Movements in currency, and the fact that we do not hedge 100 percent of our currency exposures, will result in a currency impact to our revenues, profit and cash flows throughout 2025. We execute a hedging program which defers, versus eliminates, the volatility of currency impacts on our financial results. During periods of sustained movements in currency, the marketplace and competition adjust to the changing rates over time.

References to “adjusted for currency” or “constant currency” reflect adjustments based upon a simple mathematical formula. However, this constant currency methodology that we utilize to disclose this information does not incorporate any operational actions that management could take to mitigate fluctuating currency rates. Based on the currency rate movements in the second quarter of 2025, revenue from continuing operations increased 7.7 percent as reported and 5 percent at constant currency compared to the prior year. In the first six months of 2025, revenue from continuing operations increased 4.3 percent as reported and 4 percent at constant currency, compared to the same period in 2024.

At June 30, 2025, currency changes resulted in assets and liabilities denominated in most local currencies being translated into more dollars than at year-end 2024. We use financial hedging instruments to limit specific currency risks related to foreign currency-based transactions.

We translate revenue, cost and expense in our non-U.S. operations at current exchange rates in the reported period. In the second quarter of 2025 and first six months of 2025, the impact from currency translation and hedging to year-to-year pre-tax income, operating (non-GAAP) pre-tax income and segments profit margin growth was immaterial. Hedging and certain underlying foreign currency transaction gains and losses are allocated to our segment results. Considering the operational responses mentioned above, movements of exchange rates, and the nature and timing of hedging instruments, it is difficult to predict future currency impacts on any particular period.

For non-U.S. subsidiaries and branches that operate in U.S. dollars or whose economic environment is highly inflationary, translation adjustments are reflected in results of operations. Generally, we manage currency risk in these entities by linking prices and contracts to U.S. dollars.

Management Discussion – (continued)

Liquidity and Capital Resources

In our 2024 Annual Report, on pages 34 to 37, there is a discussion of our liquidity including two tables that present three years of data. The table presented on page 34 includes net cash from operating activities, cash and cash equivalents, restricted cash and short-term marketable securities, and the size of our global credit facilities for each of the past three years. For the six months ended, or at, as applicable, June 30, 2025, those amounts are $6.1 billion of net cash from operating activities, $15.5 billion of cash and cash equivalents, restricted cash and short-term marketable securities and $10.0 billion in global credit facilities, respectively. While we have no current plans to draw on these credit facilities, they are available as back-up liquidity. On June 20, 2025, we amended our $2.5 billion Three-Year Credit Agreement and $7.5 billion Five-Year Credit Agreement (the Credit Agreements) to extend the maturity dates. Refer to note 12, “Borrowings,” for additional details on these credit facilities.

The major rating agencies' ratings on our debt securities at June 30, 2025 appear in the following table and remain unchanged from March 31, 2025.


IBM Ratings:	Standard and Poor's	Moody’s Investors Service	Fitch Ratings
Senior long-term debt	A-	A3	A-
Commercial paper	A-2	Prime-2	F1

We have financial flexibility, supported by our strong liquidity position and cash flows, to operate at a single A credit rating. Debt levels have increased $9.2 billion ($7.2 billion adjusted for currency) from December 31, 2024 driven by debt issuances; partially offset by maturities. In the first quarter of 2025, we issued $8.4 billion of debt for general corporate purposes, including our future debt maturity obligations, as well as capital allocation priorities. Refer to note 12, “Borrowings,” for additional information.

We do not have “ratings trigger” provisions in our debt covenants or documentation, which would allow the holders to declare an event of default and seek to accelerate payments thereunder in the event of a change in credit rating. Our debt covenants are well within the required levels. Our contractual agreements governing derivative instruments contain standard market clauses which can trigger the termination of the agreement if our credit rating were to fall below investment grade. At June 30, 2025, the fair value of those instruments that were in a liability position was $820 million, before any applicable netting, and this position is subject to fluctuations in fair value period to period based on the level of our outstanding instruments and market conditions. We have no other contractual arrangements that, in the event of a change in credit rating, would result in a material adverse effect on our financial position or liquidity.

We prepare our Consolidated Statement of Cash Flows in accordance with applicable accounting standards for cash flow presentation on page 7 of this Form 10-Q and highlight causes and events underlying sources and uses of cash in that format on page 72. For the purpose of running its business, IBM manages, monitors and analyzes cash flows in a different manner.

Management uses free cash flow as a measure to evaluate its operating results, plan shareholder return levels, strategic investments and assess its ability and need to incur and service debt. The entire free cash flow amount is not necessarily available for discretionary expenditures. We define free cash flow as net cash from operating activities less the change in Financing receivables and net capital expenditures, including the investment in software and other asset sales. A key objective of the Financing business is to generate strong returns on equity, and our Financing receivables are the basis for that growth. Accordingly, management considers Financing receivables as a profit-generating investment, not as working capital that should be minimized for efficiency. Therefore, management includes presentations of both free cash flow and net cash from operating activities that exclude the effect of Financing receivables.

Management Discussion – (continued)

The following is management’s view of cash flows for the first six months of 2025 and 2024 prepared in a manner consistent with the description above.


(Dollars in millions)
For the six months ended June 30:	2025		2024
Net cash from operating activities per GAAP	$	6,071	$	6,234
Less: change in Financing receivables	606		951
Net cash from operating activities, excluding Financing receivables	$	5,465	$	5,283
Capital expenditures, net	(657)		(761)
Free cash flow	$	4,808	$	4,522
Change in Financing receivables (1)	606		951
Acquisitions	(7,845)		(235)
Divestitures	(1)		703
Dividends	(3,112)		(3,058)
Change in total debt (1)	5,791		481
Other (1) (2)	(9)		(631)
Effect of exchange rate changes on cash, cash equivalents and restricted cash (1)	487		(236)
Change in cash, cash equivalents, restricted cash and short-term marketable securities	$	726	$	2,497

(1)Prior-year amounts have been reclassified to conform to the change in 2025 presentation.

(2)Includes net change in short-term marketable securities.

In the first six months of 2025, we generated $4.8 billion in free cash flow, an increase of $0.3 billion versus the prior-year period. The increase was primarily driven by performance-related improvements within net income; partially offset by working capital. In the first six months of 2025, we invested $7.8 billion in acquisitions, including the acquisition of HashiCorp, and we continued to return value to shareholders with $3.1 billion in dividends.

Events that could temporarily change the historical cash flow dynamics discussed previously and in our 2024 Annual Report include significant changes in operating results, material changes in geographic sources of cash, unexpected adverse impacts from litigation, future pension funding requirements, periods of severe downturn in the capital markets or the timing of tax payments. Whether any litigation has such an adverse impact will depend on a number of variables, which are more completely described in note 14, “Contingencies,” in this Form 10-Q. With respect to pension funding, we expect to make legally mandated pension plan contributions to certain non-U.S. defined benefit plans of approximately $100 million in 2025. Contributions related to all retirement-related plans are expected to be approximately $1.3 billion in 2025. Refer to “Retirement-Related Plans” for additional information. Financial market performance could increase the legally mandated minimum contributions in certain non-U.S. countries that require more frequent remeasurement of the funded status. We are not quantifying any further impact from pension funding because it is not possible to predict future movements in the capital markets or changes in pension plan funding regulations. In 2025, we are not legally required to make any contributions to the U.S. defined benefit pension plans.

Our cash flows are sufficient to fund our current operations and obligations, including investing and financing activities such as dividends and debt service. When additional requirements arise, we have several liquidity options available. These options may include the ability to borrow additional funds at reasonable interest rates and utilizing our committed global credit facilities. Our overall shareholder payout remains at a comfortable level and we remain fully committed to our long-standing dividend policy.

Management Discussion – (continued)

Financing

Financing is a reportable segment that facilitates IBM clients’ acquisition of hardware, software and services by providing financing solutions, while generating solid returns on equity.

Results of Operations


(Dollars in millions)							Yr.-to-Yr. Percent Change/ Margin Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the three months ended June 30:	2025			2024
Revenue	$	166		$	169		(1.7)	%	(3.3)	%
Segment profit	$	179		$	77		134.2	%
Segment profit margin	107.9		%	45.3		%	62.6	pts.


(Dollars in millions)							Yr.-to-Yr. Percent Change/ Margin Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the six months ended June 30:	2025			2024
Revenue	$	357		$	362		(1.2)	%	(0.3)	%
Segment profit	$	248		$	168		47.1	%
Segment profit margin	69.3		%	46.5		%	22.8	pts.

For the three months ended June 30, 2025, financing revenue decreased 1.7 percent as reported (3.3 percent adjusted for currency) compared to the prior-year period. For the six months ended June 30, 2025, financing revenue decreased 1.2 percent as reported (0.3 percent adjusted for currency) compared to the prior-year period.

Segment profit increased 134.2 percent to $179 million and segment profit margin increased 62.6 points to 107.9 percent, respectively, in the second quarter of 2025 compared to the prior-year period. For the six months ended June 30, 2025, segment profit increased 47.1 percent to $248 million and segment profit margin increased 22.8 points to 69.3 percent, respectively, compared to the prior-year period. The increase in segment profit for both periods was primarily driven by higher intercompany financing net other income for sales of returned equipment to Infrastructure which reflects IBM Z product cycle dynamics.

Balance Sheet and Return on Equity Highlights


(Dollars in millions)	At June 30, 2025		At December 31, 2024
Client financing receivables (1)	$	11,221	$	10,294
Commercial financing receivables (1) (2)	$	1,282	$	2,216
Financing Segment Debt (3)	$	11,731	$	12,116
Equity	$	1,303	$	1,346

(1)Refer to note 9, “Financing Receivables,” for additional information.

(2)Includes both held for investment and held for sale receivables. The 2024 receivables amounts have been combined to conform to the 2025 presentation.

(3)Financing segment debt is primarily comprised of intercompany loans.

Return on equity was 49.2 percent compared to 21.4 percent for the three months ended June 30, 2025 and 2024, respectively. Return on equity was 32.8 percent compared to 22.5 percent for the six months ended June 30, 2025 and 2024, respectively. The increase in both periods was primarily driven by higher net income which reflects the increase in segment profit as described above. For the three and six months ended June 30, 2025, return on equity is calculated as annualized after-tax segment profit divided by the average of the ending equity for Financing for the last two quarters and three quarters, respectively. Annualized after-tax segment profit is a function of IBM's provision for income taxes determined on a consolidated basis.

Management Discussion – (continued)

The following table presents Client financing and Commercial financing receivables excluding receivables classified as held for sale.


(Dollars in millions)	At June 30, 2025			At December 31, 2024
Amortized cost	$	11,898		$	11,738
Specific allowance for credit losses	93			99
Unallocated allowance for credit losses	48			29
Total allowance for credit losses	141			128
Net financing receivables	$	11,757		$	11,611
Allowance for credit losses coverage	1.2		%	1.1		%

The percentage of Financing segment receivables reserved increased from 1.1 percent at December 31, 2024, to 1.2 percent at June 30, 2025, primarily driven by an increase in unallocated allowance for credit losses which reflects current economic conditions.

We continue to apply our rigorous credit policies. Approximately 78 percent of the total external portfolio was with investment grade clients, an increase of 4 points as compared to December 31, 2024. This investment grade percentage is based on the credit ratings of the companies in the portfolio and reflects certain mitigating actions taken to reduce the risk to IBM. For additional information relating to the company's credit quality and mitigation actions, including sales of receivables, refer to note 9, “Financing Receivables.”

Management Discussion – (continued)

GAAP Reconciliation

The tables below provide a reconciliation of our income statement results as reported under GAAP to our operating earnings presentation which is a non-GAAP measure. Management’s calculation of operating (non-GAAP) earnings, as presented, may differ from similarly titled measures reported by other companies. Refer to the “Operating (non-GAAP) Earnings” section for management’s rationale for presenting operating earnings information.


(Dollars in millions except per share amounts)	GAAP			Acquisition- Related Adjustments			Retirement- Related Adjustments			U.S. Tax Reform Impacts			Operating (non-GAAP)
For the three months ended June 30, 2025:
Gross profit	$	9,977		$	225		$	—		$	—		$	10,202
Gross profit margin	58.8		%	1.3		pts.	—		pts.	—		pts.	60.1		%
SG&A	$	5,027		$	(348)		$	—		$	—		$	4,679

Other (income) and expense	$	(39)		$	(1)		$	(25)		$	—		$	(65)
Total expense and other (income)	$	7,380		$	(350)		$	(25)		$	—		$	7,005
Pre-tax income from continuing operations	$	2,597		$	575		$	25		$	—		$	3,197
Pre-tax margin from continuing operations	15.3		%	3.4		pts.	0.1		pts.	—		pts.	18.8		%
Provision for/(benefit from) income taxes (1)	$	404		$	132		$	9		$	—		$	545
Effective tax rate	15.5		%	1.3		pts.	0.2		pts.	—		pts.	17.0		%
Income from continuing operations	$	2,193		$	443		$	17		$	—		$	2,652
Income margin from continuing operations	12.9		%	2.6		pts.	0.1		pts.	—		pts.	15.6		%
Diluted earnings per share from continuing operations	$	2.31		$	0.47		$	0.02		$	—		$	2.80


(Dollars in millions except per share amounts)	GAAP			Acquisition- Related Adjustments			Retirement- Related Adjustments			U.S. Tax Reform Impacts			Operating (non-GAAP)
For the three months ended June 30, 2024:
Gross profit	$	8,950		$	170		$	—		$	—		$	9,120
Gross profit margin	56.8		%	1.1		pts.	—		pts.	—		pts.	57.8		%
SG&A	$	4,938		$	(286)		$	—		$	—		$	4,651

Other (income) and expense (2)	$	(233)		$	(18)		$	(98)		$	—		$	(349)
Total expense and other (income)	$	6,730		$	(304)		$	(98)		$	—		$	6,328
Pre-tax income from continuing operations	$	2,219		$	474		$	98		$	—		$	2,792
Pre-tax margin from continuing operations	14.1		%	3.0		pts.	0.6		pts.	—		pts.	17.7		%
Provision for/(benefit from) income taxes (1)	$	389		$	113		$	26		$	(12)		$	516
Effective tax rate	17.5		%	1.1		pts.	0.3		pts.	(0.4)		pts.	18.5		%
Income from continuing operations	$	1,830		$	362		$	72		$	12		$	2,275
Income margin from continuing operations	11.6		%	2.3		pts.	0.5		pts.	0.1		pts.	14.4		%
Diluted earnings per share from continuing operations	$	1.96		$	0.39		$	0.08		$	0.01		$	2.43

(1)The tax impact on operating (non-GAAP) pre-tax income from continuing operations is calculated under the same accounting principles applied to the GAAP pre-tax income.

(2)Acquisition-Related Adjustments in 2024 includes a loss of $18 million on foreign exchange derivative contracts entered into by the company prior to the acquisition of StreamSets and webMethods from Software AG. Refer to note 16, “Derivative Financial Instruments,” for additional information.

Management Discussion – (continued)


(Dollars in millions except per share amounts)	GAAP			Acquisition- Related Adjustments			Retirement- Related Adjustments			U.S. Tax Reform Impacts			Operating (non-GAAP)
For the six months ended June 30, 2025:
Gross profit	$	18,008		$	426		$	—		$	—		$	18,434
Gross profit margin	57.1		%	1.4		pts.	—		pts.	—		pts.	58.5		%
SG&A	$	9,913		$	(701)		$	—		$	—		$	9,212
R&D	$	4,047		$	(4)		$	—		$	—		$	4,043
Other (income) and expense	$	(204)		$	(1)		$	(48)		$	—		$	(253)
Total expense and other (income)	$	14,253		$	(706)		$	(48)		$	—		$	13,499
Pre-tax income from continuing operations	$	3,755		$	1,132		$	48		$	—		$	4,935
Pre-tax margin from continuing operations	11.9		%	3.6		pts.	0.2		pts.	—		pts.	15.7		%
Provision for/(benefit from) income taxes (1)	$	507		$	260		$	(3)		$	2		$	766
Effective tax rate	13.5		%	2.2		pts.	(0.2)		pts.	0.0		pts.	15.5		%
Income from continuing operations	$	3,248		$	872		$	51		$	(2)		$	4,169
Income margin from continuing operations	10.3		%	2.8		pts.	0.2		pts.	0.0		pts.	13.2		%
Diluted earnings per share from continuing operations	$	3.43		$	0.92		$	0.05		$	0.00		$	4.40


(Dollars in millions except per share amounts)	GAAP			Acquisition- Related Adjustments			Retirement- Related Adjustments			U.S. Tax Reform Impacts (2)			Operating (non-GAAP)
For the six months ended June 30, 2024:
Gross profit	$	16,692		$	341		$	—		$	—		$	17,033
Gross profit margin	55.2		%	1.1		pts.	—		pts.	—		pts.	56.3		%
SG&A	$	9,912		$	(554)		$	—		$	—		$	9,358

Other (income) and expense (3)	$	(550)		$	(68)		$	(194)		$	—		$	(812)
Total expense and other (income)	$	13,399		$	(622)		$	(194)		$	—		$	12,584
Pre-tax income from continuing operations	$	3,293		$	963		$	194		$	—		$	4,449
Pre-tax margin from continuing operations	10.9		%	3.2		pts.	0.6		pts.	—		pts.	14.7		%
Provision for/(benefit from) income taxes (1)	$	(112)		$	255		$	31		$	436		$	610
Effective tax rate	(3.4)		%	6.5		pts.	0.9		pts.	9.8		pts.	13.7		%
Income from continuing operations	$	3,405		$	707		$	163		$	(436)		$	3,839
Income margin from continuing operations	11.3		%	2.3		pts.	0.5		pts.	(1.4)		pts.	12.7		%
Diluted earnings per share from continuing operations	$	3.65		$	0.76		$	0.17		$	(0.47)		$	4.11

(1)The tax impact on operating (non-GAAP) pre-tax income from continuing operations is calculated under the same accounting principles applied to the GAAP pre-tax income.

(2)2024 includes a benefit from income taxes due to the resolution of certain tax audit matters in the first quarter.

(3)Acquisition-Related Adjustments in 2024 includes a realized loss of $68 million on foreign exchange derivative contracts entered into by the company prior to the acquisition of StreamSets and webMethods from Software AG. Refer to note 16, “Derivative Financial Instruments,” for additional information.

Management Discussion – (continued)

Forward-Looking and Cautionary Statements

Except for the historical information and discussions contained herein, statements contained in this Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on the company’s current assumptions regarding future business and financial performance. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including, but not limited to, the following: a downturn in economic environment and client spending budgets; a failure of the company’s innovation initiatives; damage to the company’s reputation; risks from investing in growth opportunities; failure of the company’s intellectual property portfolio to prevent competitive offerings and the failure of the company to obtain necessary licenses; the company’s ability to successfully manage acquisitions, alliances and divestitures, including integration challenges, failure to achieve objectives, the assumption or retention of liabilities and higher debt levels; fluctuations in financial results; impact of local legal, economic, political, health and other conditions; the company’s failure to meet growth and productivity objectives; ineffective internal controls; the company’s use of accounting estimates; impairment of the company’s goodwill or amortizable intangible assets; the company’s ability to attract and retain key employees and its reliance on critical skills; impacts of relationships with critical suppliers; product and service quality issues; the development and use of AI and generative AI, including the company's increased offerings and use of AI-based technologies; impacts of business with government clients; reliance on third party distribution channels and ecosystems; cybersecurity, privacy and AI considerations; adverse effects related to climate change and other environmental matters; tax matters; legal proceedings and investigatory risks; the company’s pension plans; currency fluctuations and customer financing risks; impact of changes in market liquidity conditions and customer credit risk on receivables; risk factors related to IBM securities; and other risks, uncertainties and factors discussed in the company’s Form 10-Qs, Form 10-K and in the company’s other filings with the U.S. Securities and Exchange Commission or in materials incorporated therein by reference. Any forward-looking statement in this Form 10-Q speaks only as of the date on which it is made. Except as required by law, the company assumes no obligation to update or revise any forward-looking statements.

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