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 NINE MONTHS ENDED SEPTEMBER 30, 2025

Snapshot

Organization of Information:

In September 2024, the IBM Qualified Personal Pension Plan ("Qualified PPP") irrevocably transferred to an insurer approximately $6 billion of the Qualified PPP’s Defined Benefit pension obligations and related plan assets. As a result of this transaction, the company recognized a pension settlement charge of $2.7 billion ($2.0 billion net of tax) in the third quarter of 2024, primarily related to the accelerated recognition of accumulated actuarial losses of the plans. As the charge was non-operating and non-cash, it did not impact our operating (non-GAAP) earnings or cash flow results. Refer to note U, “Retirement-Related Benefits,” in the company's 2024 Annual Report for additional 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 (e.g., H.R. 1 in July of 2025) 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

Management Discussion – (continued)

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 including the impact of a settlement charge of $2.7 billion ($2.0 billion net of tax) resulting from the transfer to an insurer of a portion of the IBM Qualified Personal Pension Plan's defined benefit pension obligations and related plan assets in the third quarter of 2024 and pension insolvency costs and other costs. Non-operating retirement-related costs are primarily related to changes in pension 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 September 30:


(Dollars and shares in millions except per share amounts)							Yr.-to-Yr. Percent/ Margin Change
For the three months ended September 30:	2025			2024 (1)
Revenue (2)	$	16,331		$	14,968		9.1	%
Gross profit margin	57.3		%	56.3		%	1.1	pts.
Total expense and other (income)	$	6,931		$	9,222		(24.8)	%
Income/(loss) from continuing operations before income taxes	$	2,430		$	(802)		nm
Provision for/(benefit from) income taxes from continuing operations (3)	$	686		$	(485)		nm
Income/(loss) from continuing operations	$	1,744		$	(317)		nm
Income/(loss) from continuing operations margin	10.7		%	(2.1)		%	12.8	pts.
Income/(loss) from discontinued operations, net of tax	$	0		$	(13)		98.4	%
Net income/(loss)	$	1,744		$	(330)		nm
Earnings/(loss) per share from continuing operations - assuming dilution	$	1.84		$	(0.34)		nm
Consolidated earnings/(loss) per share - assuming dilution	$	1.84		$	(0.36)		nm
Weighted-average shares outstanding - assuming dilution	948.9			923.6			2.7	%

(1)2024 includes the impact of a pension settlement charge of $2.7 billion ($2.0 billion net of tax) resulting in an impact of $2.18 to both diluted earnings/(loss) per share from continuing operations and consolidated diluted earnings/(loss) per share for that period. Refer to note U, "Retirement-Related Benefits," in the company's 2024 Annual Report for additional information.

(2)Year-to-year revenue growth of 7.3 percent adjusted for currency.

(3)2025 includes a one-time, non-cash income tax charge of $0.3 billion associated with the enactment of H.R. 1 in July of 2025. Refer to "Taxes" on page 71 for additional information.

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Management Discussion – (continued)

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


(Dollars in millions except per share amounts)					Yr.-to-Yr. Percent Change
For the three months ended September 30:	2025		2024
Net income/(loss) as reported (1) (2)	$	1,744	$	(330)	nm
Income/(loss) from discontinued operations, net of tax	0		(13)		(98.4)	%
Income from continuing operations (1) (2)	$	1,744	$	(317)	nm
Non-operating adjustments (net of tax):
Acquisition-related charges	$	454	$	373	21.7	%
Non-operating retirement-related costs/(income) (1)	10		2,097		(99.5)
U.S. tax reform impacts (2)	309		2		nm
Operating (non-GAAP) earnings (3)	$	2,517	$	2,155	16.8	%
Diluted operating (non-GAAP) earnings per share (3)	$	2.65	$	2.30	15.2	%

(1)2024 includes the impact of a pension settlement charge of $2.0 billion net of tax. Refer to note U, "Retirement-Related Benefits," in the company's 2024 Annual Report for additional information.

(2)2025 includes a one-time, non-cash income tax charge of $0.3 billion associated with the enactment of H.R 1 in July of 2025. Refer to "Taxes" on page 71 for additional information.

(3)Refer to the quarter-to-date "GAAP Reconciliation" on page 81 for additional information..

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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 continue to remain dynamic, we expect technology to keep supporting overall economic growth and serve as a key source of competitive advantage allowing businesses to scale, innovate and drive productivity. This was reflected in our performance in the third quarter. Our disciplined strategy and durable business model enable us to create long-term value for our partners and clients.

In the first nine 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 September 30:

In the third quarter of 2025, we reported $16.3 billion in revenue, income from continuing operations of $1.7 billion, and operating (non-GAAP) earnings of $2.5 billion. Diluted earnings per share from continuing operations was $1.84 as reported and $2.65 on an operating (non-GAAP) basis. We generated $3.1 billion in cash from operations and $2.4 billion in free cash flow, and delivered shareholder returns of $1.6 billion in dividends. Our third-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 9.1 percent as reported and 7.3 percent adjusted for currency compared to the prior-year period. Software delivered revenue growth of 10.5 percent as reported (8.8 percent adjusted for currency). Consulting revenue increased 3.3 percent as reported (1.5 percent adjusted for currency). Infrastructure revenue increased 17.0 percent as reported (15.1 percent adjusted for currency), reflecting early strength in our new IBM z17.

From a geographic perspective, Americas revenue increased 9.3 percent as reported and adjusted for currency. Europe/Middle East/Africa (EMEA) increased 14.6 percent as reported (8.7 percent adjusted for currency). Asia Pacific increased 0.1 percent as reported (0.2 percent adjusted for currency).

Management Discussion – (continued)

Gross margin of 57.3 percent increased 1.1 points year to year with margin expansion driven primarily by portfolio mix and productivity actions. Operating (non-GAAP) gross margin of 58.7 percent increased 1.2 points compared to the prior-year period due to the same dynamics.

Total expense and other (income) decreased 24.8 percent in the third quarter of 2025 compared to the third quarter of 2024 driven by the prior-year pension settlement charge of $2.7 billion and lower workforce rebalancing charges in the current year. This was partially offset by higher operating acquisition-related spending and a prior-year gain from the sale of certain QRadar SaaS assets. Total operating (non-GAAP) expense and other (income) increased 7.1 percent year to year, driven by higher operating acquisition-related spending and the prior-year gain from the sale of certain QRadar SaaS assets, partially offset by lower workforce rebalancing charges.

Pre-tax income from continuing operations was $2.4 billion in the third quarter of 2025 compared with a pre-tax loss of $0.8 billion in the prior-year period and pre-tax margin was up 20.2 points year to year to 14.9 percent. The continuing operations provision for income taxes was $0.7 billion in the third quarter of 2025, compared to a benefit from income taxes of $0.5 billion in the third quarter of 2024. Net income from continuing operations of $1.7 billion in the current period compared with a net loss of $0.3 billion in the prior-year period and the net income from continuing operations margin of 10.7 percent was up 12.8 points year to year. The year-to-year performance was primarily driven by the transfer to an insurer of a portion of the Qualified PPP's defined benefit pension obligations and related plan assets which resulted in a pension settlement charge of $2.7 billion ($2.0 billion net of tax) in the third quarter of 2024. Our performance in the third quarter also continues to benefit from both revenue growth and gross margin expansion, reflecting the strength of our business model and portfolio.

Operating (non-GAAP) pre-tax income from continuing operations of $3.0 billion increased 22.0 percent compared to the third quarter of 2024 and the operating (non-GAAP) pre-tax margin from continuing operations increased 2.0 points to 18.6 percent driven by revenue growth, portfolio mix, and increased productivity while providing investment flexibility. The operating (non-GAAP) provision for income taxes was $0.5 billion in the third quarter of 2025, compared to $0.3 billion in the third quarter of 2024. Operating (non-GAAP) net income from continuing operations of $2.5 billion increased 16.8 percent and the operating (non-GAAP) net income margin from continuing operations of 15.4 percent increased 1.0 points year to year.

Diluted earnings per share from continuing operations of $1.84 in the third quarter of 2025 compared to diluted loss per share of $0.34 in the prior-year period, which included an impact of $2.18 from the pension settlement charge. Operating (non-GAAP) diluted earnings per share of $2.65 increased 15.2 percent compared to the third quarter of 2024. In 2024, the operating (non-GAAP) earnings per share calculation used 938.4 million shares, which includes 14.9 million dilutive potential shares under our stock-based compensation plans and contingently issuable shares. Due to the GAAP net loss for the three months ended September 30, 2024, these dilutive potential shares were excluded from the GAAP loss per share calculation as the effect would have been antidilutive. Refer to note 7, "Earnings Per Share of Common Stock," for additional information.

Cash provided by operating activities was $3.1 billion in the third quarter of 2025, an increase of $0.2 billion compared to the third quarter of 2024. Free cash flow was $2.4 billion, an increase of $0.3 billion versus the prior-year period. Net cash used in investing activities of $0.4 billion decreased $1.1 billion and net cash used in financing activities of $3.0 billion increased $0.2 billion compared to the third quarter of 2024.

Management Discussion – (continued)

Financial Results Summary — Nine Months Ended September 30:


(Dollars and shares in millions except per share amounts)							Yr.-to-Yr. Percent/ Margin Change
For the nine months ended September 30:	2025			2024 (1)
Revenue (2)	$	47,849		$	45,199		5.9	%
Gross profit margin	57.2		%	55.6		%	1.6	pts.
Total expense and other (income)	$	21,184		$	22,621		(6.4)	%
Income from continuing operations before income taxes	$	6,185		$	2,491		148.3	%
Provision for/(benefit from) income taxes from continuing operations (3)	$	1,193		$	(597)		nm
Income from continuing operations	$	4,992		$	3,088		61.7	%
Income from continuing operations margin	10.4		%	6.8		%	3.6	pts.
Income from discontinued operations, net of tax	$	1		$	21		(95.0)	%
Net income	$	4,993		$	3,109		60.6	%
Earnings per share from continuing operations - assuming dilution	$	5.27		$	3.30		59.7	%
Consolidated earnings per share - assuming dilution	$	5.27		$	3.32		58.7	%
Weighted-average shares outstanding - assuming dilution	947.4			935.4			1.3	%

	At 9/30/2025			At 12/31/2024
Assets	$	146,312		$	137,175		6.7	%
Liabilities	$	118,322		$	109,783		7.8	%
Equity	$	27,990		$	27,393		2.2	%

(1)2024 includes a pension settlement charge of $2.7 billion ($2.0 billion net of tax) resulting in an impact of $2.18 to both diluted earnings/(loss) per share from continuing operations and consolidated diluted earnings/(loss) per share. Refer to note U, "Retirement-Related Benefits," in the company's 2024 Annual Report for additional information.

(2)Year-to-year revenue growth of 5.0 percent adjusted for currency.

(3)2025 includes a one-time, non-cash income tax charge of $0.3 billion associated with the enactment of H.R. 1 in July of 2025. 2024 benefit from income taxes was due to the resolution of certain tax audit matters. Refer to "Taxes" on page 71 for additional information.

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


(Dollars in millions except per share amounts)					Yr.-to-Yr. Percent Change
For the nine months ended September 30:	2025		2024
Net income as reported (1) (2)	$	4,993	$	3,109	60.6	%
Income from discontinued operations, net of tax	1		21		(95.0)
Income from continuing operations (1) (2)	$	4,992	$	3,088	61.7	%
Non-operating adjustments (net of tax):
Acquisition-related charges	$	1,326	$	1,081	22.7	%
Non-operating retirement-related costs/(income) (1)	61		2,259		(97.3)
U.S. tax reform impacts (2)	307		(434)		nm

Operating (non-GAAP) earnings (3)	$	6,686	$	5,994	11.5	%
Diluted operating (non-GAAP) earnings per share (3)	$	7.06	$	6.41	10.1	%

(1)2024 includes the impact of a pension settlement charge of $2.0 billion net of tax. Refer to note U, "Retirement-Related Benefits," in the company's 2024 Annual Report for additional information.

(2)2025 includes a one-time, non-cash income tax charge of $0.3 billion associated with the enactment of H.R 1 in July of 2025. Refer to "Taxes" on page 71 for additional information.

(3)Refer to the year-to-date "GAAP Reconciliation" on page 82 for additional information.

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Management Discussion – (continued)

Financial Performance Summary —Nine Months Ended September 30:

In the first nine months of 2025, we reported $47.8 billion in revenue, net income from continuing operations of $5.0 billion, and operating (non-GAAP) earnings of $6.7 billion. Diluted earnings per share from continuing operations was $5.27 as reported and $7.06 on an operating (non-GAAP) basis. We generated $9.2 billion in cash from operations and $7.2 billion in free cash flow, and delivered shareholder returns of $4.7 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 5.9 percent as reported and 5.0 percent adjusted for currency compared to the prior-year period. Software grew 9.2 percent as reported (8.4 percent adjusted for currency). Consulting revenue increased 1.2 percent as reported (0.2 percent adjusted for currency). Infrastructure revenue increased 8.4 percent as reported (7.7 percent adjusted for currency), reflecting early strength in our new IBM z17.

From a geographic perspective, Americas revenue increased 4.8 percent year to year as reported (5.3 percent adjusted for currency). EMEA increased 11.7 percent (8.3 percent adjusted for currency). Asia Pacific decreased 0.4 percent (0.9 percent adjusted for currency).

Gross margin of 57.2 percent increased 1.6 points year to year with gross profit margin expansion driven by our portfolio mix and productivity actions. Operating (non-GAAP) gross margin of 58.6 percent increased 1.8 points compared to the prior-year period due to the same dynamics.

Total expense and other (income) decreased 6.4 percent in the first nine months of 2025 versus the prior-year period primarily driven by the prior-year pension settlement charge of $2.7 billion partially offset by higher operating acquisition-related spend, a prior-year gain from the sale of certain QRadar SaaS assets and a prior-year gain on the divestiture of The Weather Company assets in the first quarter. Total operating (non-GAAP) expense and other (income) increased 7.2 percent year to year, due to higher operating acquisition-related spending, a prior-year gain from the sale of certain QRadar SaaS assets and a prior-year gain on the divestiture of The Weather Company assets in the first quarter.

Pre-tax income from continuing operations of $6.2 billion increased 148.3 percent and pre-tax margin was 12.9 percent, an increase of 7.4 points as compared to the first nine months of 2024. Performance in the first nine months of 2025 is driven by revenue growth, portfolio mix, and increased productivity while providing investment flexibility. In addition, our year-to-year performance includes a benefit from the 2024 pension settlement charge offset by the prior-year gains from the sale of certain QRadar SaaS assets and from the divestiture of The Weather Company assets. The continuing operations provision for income taxes for the first nine months of 2025 was $1.2 billion, compared to a benefit from income taxes of $0.6 billion for the first nine months of 2024. Net income from continuing operations of $5.0 billion decreased 61.7 percent and the net income from continuing operations margin was 10.4 percent, down 3.6 points year to year.

Operating (non-GAAP) pre-tax income from continuing operations of $8.0 billion increased 14.9 percent compared to the prior-year period and the operating (non-GAAP) pre-tax margin from continuing operations increased 1.3 points to 16.7 percent primarily driven by the same dynamics as described above, excluding the impact from the prior-year pension settlement charge. The operating (non-GAAP) provision for income taxes in the first nine months of 2025 was $1.3 billion, compared to $0.9 billion in the first nine months of 2024. Operating (non-GAAP) income from continuing operations of $6.7 billion increased 11.5 percent and the operating (non-GAAP) income margin from continuing operations of 14.0 percent increased 0.7 points year to year.

Diluted earnings per share from continuing operations of $5.27 in the first nine months of 2025 increased 59.7 percent and operating (non-GAAP) diluted earnings per share of $7.06 increased 10.1 percent compared to the first nine months of 2024.

At September 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 September 30, 2025 of $14.9 billion increased $0.1 billion from December 31, 2024 and debt of $63.1 billion at September 30, 2025 increased $8.1 billion. The

Management Discussion – (continued)

company continues to make investments in innovation both organically and through acquisitions, including the HashiCorp acquisition in first-quarter 2025.

Total assets increased $9.1 billion ($5.5 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 $8.5 billion ($3.9 billion adjusted for currency) from December 31, 2024 primarily driven by an increase in debt. Total equity of $28.0 billion increased $0.6 billion from December 31, 2024 primarily driven by year-to-date net income and an increase in common stock; partially offset by dividends paid and an increase in accumulated other comprehensive loss.

Cash provided by operating activities was $9.2 billion in the first nine months of 2025, essentially flat compared to the first nine months of 2024. Free cash flow was $7.2 billion, an increase of $0.6 billion versus the prior-year period. Refer to page 78 for additional information on free cash flow. Net cash used in investing activities of $11.7 billion increased $8.2 billion compared to the prior-year period primarily driven by cash used for the HashiCorp acquisition. Financing activities were a net use of cash of $0.4 billion and decreased $5.0 billion compared to the prior-year period. The year-to-year performance is primarily driven by debt.

Management Discussion – (continued)

Third 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 third quarter and first nine months of 2025 versus the third quarter and first nine 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 September 30:	2025			2024
Revenue:
Software	$	7,209		$	6,524		10.5	%	8.8	%
Gross margin	83.1		%	83.2		%	(0.2)	pts.
Consulting	5,324			5,152			3.3	%	1.5	%
Gross margin	29.3		%	28.4		%	0.8	pts.
Infrastructure	3,559			3,042			17.0	%	15.1	%
Gross margin	57.2		%	55.0		%	2.2	pts.
Financing	200			181			10.4	%	8.5	%
Gross margin	45.6		%	47.2		%	(1.5)	pts.
Other (1)	38			68			(44.0)	%	(49.8)	%
Gross margin	nm			(342.6)		%	nm
Total revenue	$	16,331		$	14,968		9.1	%	7.3	%
Total gross profit	$	9,360		$	8,420		11.2	%
Total gross margin	57.3		%	56.3		%	1.1	pts.
Non-operating adjustments:
Amortization of acquired intangible assets	231			192			20.2	%
Operating (non-GAAP) gross profit	$	9,591		$	8,612		11.4	%
Operating (non-GAAP) gross margin	58.7		%	57.5		%	1.2	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 nine months ended September 30:	2025			2024
Revenue:
Software	$	20,932		$	19,162		9.2	%	8.4	%
Gross margin	83.5		%	83.1		%	0.4	pts.
Consulting	15,706			15,517			1.2	%	0.2	%
Gross margin	28.0		%	26.7		%	1.3	pts.
Infrastructure	10,586			9,764			8.4	%	7.7	%
Gross margin	57.7		%	55.3		%	2.4	pts.
Financing	557			543			2.7	%	2.6	%
Gross margin	45.7		%	48.2		%	(2.5)	pts.
Other (1)	68			214			(68.3)	%	(70.8)	%
Gross margin	nm			(286.7)		%	nm
Total revenue	$	47,849		$	45,199		5.9	%	5.0	%
Total gross profit	$	27,369		$	25,112		9.0	%
Total gross margin	57.2		%	55.6		%	1.6	pts.
Non-operating adjustments:
Amortization of acquired intangible assets	656			533			23.2	%
Operating (non-GAAP) gross profit	$	28,025		$	25,645		9.3	%
Operating (non-GAAP) gross margin	58.6		%	56.7		%	1.8	pts.

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Software


(Dollars in millions)					Yr.-to-Yr. Percent Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the three months ended September 30:	2025		2024 (1)
Software revenue:	$	7,209	$	6,524	10.5	%	8.8	%
Hybrid Cloud	$	1,886	$	1,659	13.7	%	11.9	%
Automation	1,934		1,563		23.8		22.2
Data	1,459		1,352		7.9		6.7
Transaction Processing	1,930		1,951		(1.1)		(3.1)

(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 nine months ended September 30:	2025		2024 (1)
Software revenue:	$	20,932	$	19,162	9.2	%	8.4	%
Hybrid Cloud	$	5,369	$	4,716	13.9	%	13.2	%
Automation	5,401		4,574		18.1		17.3
Data	4,194		3,902		7.5		6.9
Transaction Processing	5,967		5,970		0.0		(1.1)

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

Software revenue of $7,209 million increased 10.5 percent as reported (8.8 percent adjusted for currency) in the third quarter of 2025 compared to the prior-year period, with solid growth in Automation, Hybrid Cloud and Data. This revenue performance reflects sequential acceleration of organic revenue growth and continued contribution from our high-value, annual recurring revenue.

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

Hybrid Cloud (Red Hat) revenue increased 13.7 percent as reported (11.9 percent adjusted for currency) in the third quarter, as demand for our hybrid cloud solutions remained strong. Our major subscription offerings continued to gain market share, with accelerating growth in both OpenShift and Ansible. Automation revenue grew 23.8 percent as reported (22.2 percent adjusted for currency), driven by strength in our organic portfolio and with HashiCorp contributing to growth, benefiting from IBM's go-to-market distribution. In Data, we had continued strength in our AI portfolio. The revenue performance in Transaction Processing reflects clients' prioritized hardware spending on our new IBM z17.

Across Software, our annual recurring revenue (ARR) was $23.2 billion, which increased 10.7 percent as reported (8.8 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 nine months of 2025 compared to the prior-year period was as follows:

Software revenue of $20,932 million increased 9.2 percent as reported (8.4 percent adjusted for currency) compared to the same period in 2024, driven by double-digit growth in both Hybrid Cloud and Automation and growth at a high single-digit rate in Data. The revenue performance in Transaction Processing reflects our product cycle dynamics. Overall Software revenue performance through the first nine months of 2025 reflects the combination of the strength of our portfolio, the investment we have made in innovating our organic software, and the contribution from acquisitions we have made during the past twelve months, including HashiCorp, StreamSets and webMethods.


(Dollars in millions)							Yr.-to-Yr. Percent/ Margin Change
For the three months ended September 30:	2025			2024
Software:
Gross profit	$	5,989		$	5,431		10.3	%
Gross profit margin	83.1		%	83.2		%	(0.2)	pts.
Segment profit	$	2,374		$	1,969		20.5	%
Segment profit margin	32.9		%	30.2		%	2.7	pts.

Management Discussion – (continued)


(Dollars in millions)							Yr.-to-Yr. Percent/ Margin Change
For the nine months ended September 30:	2025			2024
Software:
Gross profit	$	17,480		$	15,925		9.8	%
Gross profit margin	83.5		%	83.1		%	0.4	pts.
Segment profit	$	6,517		$	5,582		16.8	%
Segment profit margin	31.1		%	29.1		%	2.0	pts.

Software gross profit margin decreased 0.2 points to 83.1 percent in the third quarter of 2025 compared to the prior-year period. Segment profit of $2,374 million increased 20.5 percent and segment profit margin of 32.9 percent increased 2.7 points compared to the prior-year period.

For the first nine months of 2025, gross profit margin increased 0.4 points to 83.5 percent, compared to the prior-year period. Segment profit of $6,517 million increased 16.8 percent and segment profit margin of 31.1 percent increased 2.0 points compared to the prior-year period.

Software segment profit and profit margin performance in the third quarter and the first nine months of 2025 were driven by revenue growth and reflect the benefits from the productivity actions we have taken.

Consulting


(Dollars in millions)					Yr.-to-Yr. Percent Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the three months ended September 30:	2025		2024 (1)
Consulting revenue:	$	5,324	$	5,152	3.3	%	1.5	%
Strategy and Technology	$	2,905	$	2,856	1.7	%	(0.1)	%
Intelligent Operations	2,419		2,297		5.3		3.6


(Dollars in millions)					Yr.-to-Yr. Percent Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the nine months ended September 30:	2025		2024 (1)
Consulting revenue:	$	15,706	$	15,517	1.2	%	0.2	%
Strategy and Technology	$	8,607	$	8,613	(0.1)	%	(1.2)	%
Intelligent Operations	7,100		6,904		2.8		2.0

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

Consulting revenue of $5,324 million increased 3.3 percent as reported and 1.5 percent adjusted for currency on a year-to-year basis, as both lines of business had sequential quarter improvement in their year-to-year revenue growth rate. Strategy and Technology revenue increased 1.7 percent as reported (flat adjusted for currency) and Intelligent Operations revenue increased 5.3 percent as reported (3.6 percent adjusted for currency). The overall growth in Consulting reflects the solid demand for our strategic offerings, including business application transformation, application migration and modernization, and application operations as clients focus their investments on solutions that accelerate AI transformation and maximize their returns on those investments.

For the first nine months of 2025, Consulting revenue of $15,706 million increased 1.2 percent as reported (flat adjusted for currency), compared to the prior-year period, reflecting continued client focus on accelerating AI transformations and scaling technology platforms to drive operational efficiency and prioritize their spending on investments that provide a maximum return. In the first nine months of 2025, Intelligent Operations grew 2.8 percent as reported (2.0 percent adjusted for currency), partially offset by Strategy and Technology, which was flat as reported and declined 1.2 percent adjusted for currency. Within Consulting, revenue growth was primarily driven by our strategic

Management Discussion – (continued)

offerings, including application operations, business application transformation, and application migration and modernization.


(Dollars in millions)							Yr.-to-Yr. Percent/ Margin Change
For the three months ended September 30:	2025			2024
Consulting:
Gross profit	$	1,558		$	1,464		6.4	%
Gross profit margin	29.3		%	28.4		%	0.8	pts.
Segment profit	$	686		$	559		22.6	%
Segment profit margin	12.9		%	10.9		%	2.0	pts.


(Dollars in millions)							Yr.-to-Yr. Percent/ Margin Change
For the nine months ended September 30:	2025			2024
Consulting:
Gross profit	$	4,400		$	4,141		6.3	%
Gross profit margin	28.0		%	26.7		%	1.3	pts.
Segment profit	$	1,807		$	1,447		24.8	%
Segment profit margin	11.5		%	9.3		%	2.2	pts.

In the third quarter of 2025, Consulting gross profit margin of 29.3 percent increased 0.8 points on a year-to-year basis. Segment profit of $686 million increased 22.6 percent and segment profit margin of 12.9 percent increased 2.0 points year to year.

For the first nine months of 2025, Consulting gross profit margin of 28.0 percent increased 1.3 points compared to the prior-year period. Segment profit of $1,807 million increased 24.8 percent and segment profit margin of 11.5 percent increased 2.2 points in the first nine months of 2025 compared to the prior-year period.

Consulting gross profit, segment profit and the respective margin performance in the third quarter and the first nine months of 2025 reflect the benefits of the productivity actions we have taken, partially offset by strategic investments in acquisitions and innovation.

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 September 30:	2025		2024
Total Consulting signings	$	5,223	$	5,448	(4.1)	%	(5.1)	%


(Dollars in millions)					Yr.-to-Yr. Percent Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the nine months ended September 30:	2025		2024
Total Consulting signings	$	14,950	$	16,637	(10.1)	%	(11.0)	%

For the three and nine months ended September 30, 2025, Consulting signings decreased 4.1 percent as reported (5.1 percent adjusted for currency) and 10.1 percent as reported (11.0 percent adjusted for currency), respectively. However, the quality of our signings continued to strengthen, with more strategic signings with new clients and expanded engagements with existing clients. Our book-to-bill ratio for the trailing twelve-months was approximately 1.12. 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.

Management Discussion – (continued)

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 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 September 30:	2025		2024
Infrastructure revenue:	$	3,559	$	3,042	17.0	%	15.1	%
Hybrid Infrastructure	$	2,263	$	1,765	28.2	%	26.3	%
IBM Z					61.1		59.0
Distributed Infrastructure					9.8		8.0
Infrastructure Support	1,296		1,277		1.5		(0.3)


(Dollars in millions)					Yr.-to-Yr. Percent Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the nine months ended September 30:	2025		2024
Infrastructure revenue:	$	10,586	$	9,764	8.4	%	7.7	%
Hybrid Infrastructure	$	6,775	$	5,928	14.3	%	13.2	%
IBM Z					43.5		41.9
Distributed Infrastructure					(4.2)		(5.0)
Infrastructure Support	3,811		3,835		(0.6)		(0.8)

Infrastructure revenue of $3,559 million increased 17.0 percent as reported and 15.1 percent adjusted for currency in the third quarter of 2025 compared to the prior-year period. Within Hybrid Infrastructure, IBM Z revenue increased 61.1 percent as reported and 59.0 percent adjusted for currency in the third quarter, reflecting the early success of our z17 platform, which was purpose-built for AI and hybrid cloud with innovative capabilities in real-time inferencing, quantum-safe security, and seamless workload integration. Clients are investing in z17 for its reliability and scalability, as well as its enablement of secure, high-performance computing at the core of their digital transformation strategies. Distributed Infrastructure revenue increased 9.8 percent as reported (8.0 percent adjusted for currency), reflecting broad-based growth across our Storage portfolio as clients scale capacity to meet expanding data and AI demands. Infrastructure Support revenue increased 1.5 percent as reported and was flat adjusted for currency.

For the first nine months of 2025, Infrastructure revenue of $10,586 million increased 8.4 percent as reported (7.7 percent adjusted for currency) compared to the prior-year period, reflecting strong growth in Hybrid Infrastructure driven by z17, partially offset by declines in Distributed Infrastructure and Infrastructure Support, which reflected product cycle dynamics.

Management Discussion – (continued)


(Dollars in millions)							Yr.-to-Yr. Percent/ Margin Change
For the three months ended September 30:	2025			2024
Infrastructure:
Gross profit	$	2,034		$	1,672		21.6	%
Gross profit margin	57.2		%	55.0		%	2.2	pts.
Segment profit	$	644		$	422		52.6	%
Segment profit margin	18.1		%	13.9		%	4.2	pts.


(Dollars in millions)							Yr.-to-Yr. Percent/ Margin Change
For the nine months ended September 30:	2025			2024
Infrastructure:
Gross profit	$	6,105		$	5,398		13.1	%
Gross profit margin	57.7		%	55.3		%	2.4	pts.
Segment profit	$	1,857		$	1,387		33.9	%
Segment profit margin	17.5		%	14.2		%	3.3	pts.

Infrastructure gross profit margin of 57.2 percent increased 2.2 points in the third quarter of 2025 compared to the prior-year period. Infrastructure segment profit of $644 million increased 52.6 percent and segment profit margin of 18.1 percent increased 4.2 points compared to the prior-year period.

For the first nine months of 2025, gross profit margin of 57.7 percent increased 2.4 points compared to the prior-year period. Infrastructure segment profit of $1,857 million increased 33.9 percent and segment profit margin of 17.5 percent increased 3.3 points in the first nine months of 2025 compared to the prior-year period.

Infrastructure gross profit, segment profit and the respective margin expansion for the third quarter and first nine months of 2025 were primarily driven by the productivity actions we have taken and volume and mix of revenue, partially offset by our investments in product innovation.

Financing

Refer to pages 79 through 80 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 September 30:	2025		2024
Total Revenue	$	16,331	$	14,968	9.1	%	7.3	%
Americas	$	8,143	$	7,453	9.3	%	9.3	%
Europe/Middle East/Africa (EMEA)	5,251		4,584		14.6		8.7
Asia Pacific	2,936		2,932		0.1		0.2


(Dollars in millions)					Yr.-to-Yr. Percent Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the nine months ended September 30:	2025		2024
Total Revenue	$	47,849	$	45,199	5.9	%	5.0	%
Americas	$	23,811	$	22,727	4.8	%	5.3	%
Europe/Middle East/Africa (EMEA)	15,216		13,619		11.7		8.3
Asia Pacific	8,822		8,853		(0.4)		(0.9)

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

Americas revenue of $8,143 million increased 9.3 percent as reported and adjusted for currency in the third quarter of 2025 compared to the prior-year period. The U.S. increased 12.0 percent year to year. Canada was flat as reported, but grew 0.7 percent adjusted for currency. Latin America decreased 1.2 percent as reported and 1.8 percent adjusted for currency, with a decline in Brazil of 9.3 percent as reported and 10.3 percent adjusted for currency.

In EMEA, total revenue of $5,251 million increased 14.6 percent as reported and 8.7 percent adjusted for currency. The UK, France and Italy increased 32.2 percent, 28.4 percent and 15.9 percent, respectively, as reported, and 28.0 percent, 21.5 percent and 9.6 percent, respectively, adjusted for currency. Germany decreased 5.9 percent as reported and 11.0 percent adjusted for currency.

Asia Pacific revenue of $2,936 million was flat as reported and adjusted for currency. Japan decreased 2.6 percent as reported and 3.3 percent adjusted for currency. India and Australia increased 8.6 percent and 3.2 percent, respectively, as reported, and 13.4 percent and 5.7 percent, respectively, adjusted for currency. China decreased 11.8 percent as reported and adjusted for currency.

Geographic revenue performance for the nine months ended September 30, 2025:

Americas revenue of $23,811 million increased 4.8 percent as reported and 5.3 percent adjusted for currency. The U.S. increased 5.4 percent compared to the prior-year period. Canada increased 6.8 percent as reported and 9.2 percent adjusted for currency. Latin America decreased 0.4 percent as reported, but grew 3.0 percent adjusted for currency. Within Latin America, Brazil decreased 7.2 percent as reported and 2.5 percent adjusted for currency; however, there was growth in most other countries.

In EMEA, total revenue of $15,216 million increased 11.7 percent as reported and 8.3 percent adjusted for currency. The UK, France, Germany and Italy increased 22.3 percent, 15.5 percent, 10.4 percent and 7.0 percent, respectively, as reported, and 18.9 percent, 12.2 percent, 7.1 percent and 3.8 percent, respectively, adjusted for currency.

Asia Pacific revenue of $8,822 million decreased 0.4 percent as reported and 0.9 percent adjusted for currency. Japan increased 0.5 percent as reported, but declined 1.6 percent adjusted for currency. Australia and India increased 5.3 percent and 4.1 percent, respectively, as reported, and 8.6 percent and 8.0 percent, respectively, adjusted for currency. China

Management Discussion – (continued)

decreased 20.1 percent as reported and 20.0 percent adjusted for currency. China represents approximately 1 percent of IBM total revenue.

Expense

Total Expense and Other (Income)


(Dollars in millions)							Yr.-to-Yr. Percent Change
For the three months ended September 30:	2025			2024
Total expense and other (income) (1) (2)	$	6,931		$	9,222		(24.8)	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(330)		$	(290)		13.9	%
Acquisition-related charges	(29)			(10)			186.6
Non-operating retirement-related (costs)/income (2)	(13)			(2,797)			(99.5)
Operating (non-GAAP) expense and other (income) (1)	$	6,559		$	6,125		7.1	%
Total expense-to-revenue ratio	42.4		%	61.6		%	(19.2)	pts.
Operating (non-GAAP) expense-to-revenue ratio	40.2		%	40.9		%	(0.8)	pts.


(Dollars in millions)							Yr.-to-Yr. Percent Change
For the nine months ended September 30:	2025			2024
Total expense and other (income) (1) (2) (3)	$	21,184		$	22,621		(6.4)	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(948)		$	(815)		16.3	%
Acquisition-related charges	(118)			(106)			10.6
Non-operating retirement-related (costs)/income (2)	(61)			(2,991)			(98.0)
Operating (non-GAAP) expense and other (income) (1) (3)	$	20,058		$	18,709		7.2	%
Total expense-to-revenue ratio	44.3		%	50.0		%	(5.8)	pts.
Operating (non-GAAP) expense-to-revenue ratio	41.9		%	41.4		%	0.5	pts.

(1)2024 includes a pre-tax gain of $351 million from the sale of certain QRadar SaaS assets. Refer to note E, "Acquisitions & Divestitures," in the company's 2024 Annual Report for additional information.

(2)2024 includes the impact of a pension settlement charge of $2.7 billion. Refer to note U, "Retirement-Related Benefits," in the company's 2024 Annual Report for additional information.

(3)2024 includes a pre-tax gain of $241 million from the divestiture of The Weather Company assets. Refer to note E, "Acquisitions & Divestitures," in the company's 2024 Annual Report for additional information.

Management Discussion – (continued)

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 September 30:	2025		2024
Selling, general and administrative expense:
Selling, general and administrative — other	$	3,873	$	3,865	0.2	%
Advertising and promotional expense	270		279		(3.4)
Workforce rebalancing charges	43		306		(86.0)
Amortization of acquired intangible assets	330		290		13.9
Stock-based compensation (1)	233		167		39.0
Provision for/(benefit from) expected credit loss expense	(1)		4		nm
Total selling, general and administrative expense	$	4,748	$	4,911	(3.3)	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(330)	$	(290)	13.9	%
Acquisition-related charges (1)	(24)		(10)		133.0
Operating (non-GAAP) selling, general and administrative expense	$	4,394	$	4,611	(4.7)	%


(Dollars in millions)					Yr.-to-Yr. Percent Change
For the nine months ended September 30:	2025		2024
Selling, general and administrative expense:
Selling, general and administrative — other	$	11,757	$	11,901	(1.2)	%
Advertising and promotional expense	858		912		(5.9)
Workforce rebalancing charges	377		701		(46.2)
Amortization of acquired intangible assets	948		815		16.3
Stock-based compensation (1)	694		511		35.9
Provision for/(benefit from) expected credit loss expense	27		(17)		nm
Total selling, general and administrative expense	$	14,661	$	14,823	(1.1)	%
Non-operating adjustments:
Amortization of acquired intangible assets	$	(948)	$	(815)	16.3	%
Acquisition-related charges (1)	(107)		(39)		175.5
Operating (non-GAAP) selling, general and administrative expense	$	13,606	$	13,969	(2.6)	%

(1)2025 includes awards in connection with acquisitions of $29 million and $74 million for the three and nine months ended September 30, 2025, which includes a non-operating adjustment in acquisition-related charges of $14 million and $31 million, respectively.

nm - not meaningful

Total selling, general and administrative (SG&A) expense decreased 3.3 percent in the third quarter of 2025 versus the prior-year period driven primarily by the following factors:

Lower workforce rebalancing charges (5 points); and
Lower spending reflecting the benefits from productivity actions focused on transforming our enterprise operations (4 points); partially offset by
Higher operating expenses from acquired businesses, as a result of our continued investment to drive our hybrid cloud and AI strategy (4 points); and

Management Discussion – (continued)

Higher amortization of acquired intangible assets and acquisition-related charges (1 point); and
The effects of currency (1 point).

Operating (non-GAAP) SG&A expense decreased 4.7 percent year to year primarily driven by the same factors above, excluding the higher amortization of acquired intangible assets and acquisition-related charges.

Total SG&A expense decreased 1.1 percent in the first nine months of 2025 versus the prior-year period driven primarily by the following factors:

Benefits from productivity and the actions taken to transform our operations (4 points); and
Lower workforce rebalancing charges (2 points); partially offset by
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 (1 point).

Operating (non-GAAP) SG&A expense decreased 2.6 percent year to year primarily driven by the same factors above, excluding the higher acquisition-related charges and amortization of acquired intangible assets.

Expected credit loss expense was a provision of $27 million in the first nine months of 2025 compared to a benefit of $17 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 73 for additional information.

Research and Development


(Dollars in millions)					Yr.-to-Yr. Percent Change
For the three months ended September 30:	2025		2024
Research and development expense	$	2,082	$	1,876	11.0	%


(Dollars in millions)					Yr.-to-Yr. Percent Change
For the nine months ended September 30:	2025		2024
Research and development expense	$	6,129	$	5,512	11.2	%
Non-operating adjustments:
Acquisition-related charges	(4)		—		nm
Operating (non-GAAP) research and development expense	$	6,125	$	5,512	11.1	%

nm - not meaningful

Research and development (R&D) expense increased 11.0 percent year to year in the third 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 expenses from acquired businesses.

R&D expense and operating (non-GAAP) R&D expense increased 11.2 percent and 11.1 percent, respectively, in the first nine months of 2025 primarily driven by the same factors above.

Management Discussion – (continued)

Intellectual Property and Custom Development Income


(Dollars in millions)					Yr.-to-Yr. Percent Change
For the three months ended September 30:	2025		2024
Intellectual property and custom development income:
Intellectual property income (1)	$	39	$	62	(37.7)	%
Custom development income	180		176		2.6

Total	$	219	$	238	(7.9)	%


(Dollars in millions)					Yr.-to-Yr. Percent Change
For the nine months ended September 30:	2025		2024
Intellectual property and custom development income:
Intellectual property income (1)	$	145	$	211	(31.5)	%
Custom development income	542		484		12.0

Total	$	687	$	696	(1.2)	%

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

Total intellectual property and custom development income decreased 7.9 percent and 1.2 percent year to year in the third quarter and first nine months of 2025, respectively. 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.

Other (Income) and Expense


(Dollars in millions)					Yr.-to-Yr. Percent Change
For the three months ended September 30:	2025		2024
Other (income) and expense:
(Gains)/losses on foreign currency transactions	$	(84)	$	470	nm
(Gains)/losses on derivative instruments	162		(428)		nm
Interest income	(150)		(170)		(11.6)	%
Net (gains)/losses from securities and investment assets	(3)		(4)		(29.0)
Retirement-related costs/(income)	13		2,797		(99.5)
Other	(110)		(422)		(73.9)
Total other (income) and expense	$	(173)	$	2,244	nm
Non-operating adjustments:

Acquisition-related charges	$	(6)	$	—	nm
Non-operating retirement-related (costs)/income	(13)		(2,797)		(99.5)
Operating (non-GAAP) other (income) and expense	$	(191)	$	(553)	(65.4)	%

nm - not meaningful

Management Discussion – (continued)


(Dollars in millions)					Yr.-to-Yr. Percent Change
For the nine months ended September 30:	2025		2024
Other (income) and expense:
(Gains)/losses on foreign currency transactions	$	1,131	$	126	nm
(Gains)/losses on derivative instruments (1)	(881)		(1)		nm
Interest income	(513)		(597)		(14.0)	%
Net (gains)/losses from securities and investment assets	8		(14)		nm
Retirement-related costs/(income)	61		2,991		(98.0)
Other	(181)		(810)		(77.6)
Total other (income) and expense	$	(376)	$	1,694	nm
Non-operating adjustments:

Acquisition-related charges (1)	(7)		(68)		(90.2)	%
Non-operating retirement-related (costs)/income	(61)		(2,991)		(98.0)	%
Operating (non-GAAP) other (income) and expense	$	(444)	$	(1,364)	(67.5)	%

(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

Total other (income) and expense was income of $173 million in the third quarter of 2025 compared to expense of $2,244 million in the prior-year. The year-to-year change was primarily driven by:

Lower non-operating retirement-related costs of $2,784 million primarily driven by the prior-year impact of the pension settlement charge of $2.7 billion. Refer to note U, "Retirement-Related Benefits," in the company's 2024 Annual Report for additional information; partially offset by
Prior-year gain of $351 million from the sale of certain QRadar SaaS assets in the third-quarter 2024 (included in "Other" in the table above). Refer to note E, "Acquisitions & Divestitures," in the company's 2024 Annual Report for additional information.

Operating (non-GAAP) other (income) and expense was income of $191 million in the third quarter of 2025 and decreased $362 million compared to the prior-year period. The year-to-year change was primarily driven by the prior-year gain recognized from the sale of certain QRadar SaaS assets.

Total other (income) and expense was income of $376 million in the first nine months of 2025 compared to expense of $1,694 million in the prior-year period. The year-to-year change was primarily driven by:

Lower non-operating retirement-related costs of $2,930 million compared to the prior-year period primarily driven by the pension settlement charge as described in the third quarter above; partially offset by
Prior-year gain of $351 million from the sale of certain QRadar SaaS assets in the third-quarter 2024 and lower gains on divestitures of $254 million primarily driven by the divestiture of The Weather Company assets in first-quarter 2024 (both included in "Other" in the table above). Refer to note E, "Acquisitions & Divestitures," in the company's 2024 Annual Report for additional information.

Operating (non-GAAP) other (income) and expense was income of $444 million in the first nine months of 2025 and decreased $921 million compared to the prior-year period. The year-to-year change was primarily driven by the prior-year gain recognized from the sale of certain QRadar SaaS assets and from the divestiture of The Weather Company assets.

Management Discussion – (continued)

Interest Expense


(Dollars in millions)					Yr.-to-Yr. Percent Change
For the three months ended September 30:	2025		2024
Interest expense	$	492	$	429	14.8	%


(Dollars in millions)					Yr.-to-Yr. Percent Change
For the nine months ended September 30:	2025		2024
Interest expense	$	1,457	$	1,288	13.1	%

Interest expense increased $63 million in the third quarter and $169 million in the first nine months of 2025 compared to the prior-year periods, driven by higher average interest rates and debt balances. In addition, when external borrowings support the Financing business, interest expense is reported in cost of financing on the Consolidated Income Statement. For the third quarter and first nine months of 2025, interest reported in cost of financing was $95 million and $268 million with year-to-year increases of $8 million and $14 million, respectively.

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.


(Dollars in millions)					Yr.-to-Yr. Percent Change
For the three months ended September 30:	2025		2024
Retirement-related plans — cost:
Service cost	$	134	$	143	(6.3)	%
Multi-employer plans	3		3		(2.7)
Cost of defined contribution plans	116		111		4.5
Total operating costs	$	253	$	257	(1.6)	%
Interest cost	$	498	$	535	(6.8)	%
Expected return on plan assets	(645)		(708)		(8.9)
Recognized actuarial losses	158		244		(35.1)
Amortization of prior service costs/(credits)	(2)		(2)		(5.0)
Curtailments/settlements	2		2,727		nm
Other costs	0		0		75.3
Total non-operating costs/(income)	$	13	$	2,797	nm
Total retirement-related plans — cost	$	265	$	3,053	nm

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Management Discussion – (continued)


(Dollars in millions)					Yr.-to-Yr. Percent Change
For the nine months ended September 30:	2025		2024
Retirement-related plans — cost:
Service cost	$	397	$	426	(7.0)	%
Multi-employer plans	10		10		(1.1)
Cost of defined contribution plans	345		330		4.4
Total operating costs	$	751	$	767	(2.0)	%
Interest cost	$	1,468	$	1,648	(10.9)	%
Expected return on plan assets	(1,896)		(2,163)		(12.3)
Recognized actuarial losses	467		759		(38.4)
Amortization of prior service costs/(credits)	(5)		(5)		(1.5)
Curtailments/settlements	8		2,731		nm
Other costs	18		20		(9.7)
Total non-operating costs/(income)	$	61	$	2,991	nm
Total retirement-related plans — cost	$	812	$	3,757	nm

nm - not meaningful

Total pre-tax retirement-related plan cost in the third quarter of 2025 decreased by $2,788 million compared to the third quarter of 2024, primarily driven by a decrease in curtailments/settlements ($2,725 million) due to a pension settlement charge in the prior year, a decrease in recognized actuarial losses ($86 million) and lower interest cost ($36 million), partially offset by lower expected return on plan assets ($63 million). Total cost for the first nine months of 2025 decreased by $2,946 million compared to the first nine months of 2024, primarily driven by a decrease in curtailments/settlements ($2,723 million) due to a pension settlement charge in the prior year, a decrease in recognized actuarial losses ($291 million) and lower interest cost ($180 million), partially offset by lower expected return on plan assets ($267 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 third quarter of 2025 were $253 million, a decrease of $4 million compared to the third quarter of 2024. The decrease was primarily driven by lower service cost ($9 million), partially offset by increased cost of defined contribution plans ($5 million). For the first nine months of 2025, operating retirement-related costs were $751 million, a decrease of $16 million compared to the prior-year period, primarily driven by lower service cost ($30 million), partially offset by increased cost of defined contribution plans ($14 million). Non-operating costs were $13 million in the third quarter of 2025 compared to $2,797 million in the prior-year period, and $61 million for the first nine months of 2025 compared to $2,991 million in the prior-year period. For the periods presented, the year-to-year decreases in non-operating costs were primarily driven by the prior year pension settlement charge, resulting from the transfer to an insurer of a portion of the Qualified PPP, and a related decrease in recognized actuarial losses and interest cost, partially offset by a decrease in expected return on plan assets. Refer to note U, “Retirement-Related Benefits,” in our 2024 Annual Report for additional information.

Taxes

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 or H.R. 1). The Act incorporates various business tax provisions, including the permanent extension of key measures from the 2017 U.S. Tax Cuts and Jobs Act. As a result, the company recorded a one-time, non-cash charge to income tax expense of approximately $300 million in the Consolidated Income Statement in the third quarter of 2025, primarily for the remeasurement of deferred tax assets and liabilities. This one-time, non-cash charge did not impact operating (non-GAAP) net income or operating (non-GAAP) earnings per share.

The continuing operations provision for income taxes was $686 million in the third quarter of 2025, compared to a benefit from income taxes of $485 million in the third quarter of 2024. The current-year tax provision includes a charge resulting from the Act, as described above. The prior-year tax benefit was primarily driven by the pension settlement charge. The operating (non-GAAP) provision for income taxes was $516 million in the third quarter of 2025, compared to

Management Discussion – (continued)

$332 million in the third quarter of 2024.

The continuing operations provision for income taxes for the first nine months of 2025 was $1,193 million, compared to a benefit from income taxes of $597 million for the first nine months of 2024. The provision for income taxes in the first nine months of 2025 includes a charge resulting from the Act, as described above. The benefit from income taxes in the first nine months of 2024 was primarily driven by the pension settlement charge in the third quarter and the resolution of certain tax audit matters in the first quarter. The operating (non-GAAP) provision for income taxes in the first nine months of 2025 was $1,282 million, compared to $942 million in the first nine months of 2024. The operating (non-GAAP) income tax provision year-to-year change was primarily driven by the resolution of certain tax audit matters in the first quarter of 2024.

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.

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 September 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 September 30, 2025 is $9,325 million which can be reduced by $681 million associated with timing adjustments, potential transfer pricing adjustments, and state income taxes. The net amount of $8,644 million, if recognized, would favorably affect the company’s effective tax rate.

Management Discussion – (continued)

Financial Position

Dynamics

Our balance sheet at September 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 September 30, 2025 were $14,885 million, an increase of $81 million compared to December 31, 2024. Total debt of $63,115 million at September 30, 2025 increased $8,142 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. We continue to manage our debt levels while being acquisitive and without sacrificing investments in our business.

In the first nine months of 2025, we generated $9,153 million in cash from operating activities, an increase of $37 million compared to the first nine months of 2024. Within cash from operating activities, cash provided by financing receivables decreased $919 million compared to the prior year. Our free cash flow for the nine months ended September 30, 2025 was $7,181 million, an increase of $595 million versus the prior-year period. Refer to pages 77 through 78 for additional information on free cash flow. We invested $7,903 million in acquisitions primarily for the acquisition of HashiCorp, which was completed in the first quarter, and we returned $4,681 million to shareholders through dividends in the first nine 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 September 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 September 30, 2025		At December 31, 2024
Current assets	$	32,740	$	34,482
Current liabilities	35,142		33,142
Working capital	$	(2,402)	$	1,340
Current ratio	0.93:1		1.04:1

Working capital decreased $3,742 million from the year-end 2024 position. Current assets decreased $1,742 million ($2,958 million adjusted for currency) primarily due to decreases in receivables mainly from collections of seasonally higher year-end balances. Current liabilities increased $2,000 million ($762 million adjusted for currency) primarily due to increases in short-term debt driven by reclassifications from long-term debt net of maturities.

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	September 30, 2025
$273	$25	$(39)	$26	$285

(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 September 30, 2025, an increase of 10 basis points compared to December 31, 2024. The increase in coverage is primarily driven by a decrease in total receivables. The majority of the write-offs during the nine months ended September 30, 2025 were related to receivables which had been previously reserved. Refer to Financing's “Balance Sheet and Return on Equity Highlights” on page 79 for additional details regarding the Financing segment receivables and allowances.

Management Discussion – (continued)

Noncurrent Assets and Liabilities


(Dollars in millions)	At September 30, 2025		At December 31, 2024
Noncurrent assets	$	113,572	$	102,693
Long-term debt	$	55,174	$	49,884
Noncurrent liabilities (excluding debt)	$	28,006	$	26,756

Noncurrent assets increased $10,879 million ($8,430 million adjusted for currency) primarily due to an increase in goodwill and intangible assets from the HashiCorp acquisition.

Long-term debt increased $5,289 million ($3,382 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 $1,250 million (decreased $214 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 September 30, 2025		At December 31, 2024
Total debt	$	63,115	$	54,973
Financing segment debt (1)	$	11,300	$	12,116
Non-Financing debt	$	51,815	$	42,858

(1)Refer to Financing’s “Balance Sheet and Return on Equity Highlights” on page 79 for additional details.

Total debt of $63,115 million increased $8,142 million ($6,209 million adjusted for currency) from December 31, 2024, primarily driven by proceeds from issuances of $8,391 million to increase our financial liquidity and plan for our future debt maturities; partially offset by maturities of $3,679 million.

Non-Financing debt of $51,815 million increased $8,958 million ($7,269 million adjusted for currency) from December 31, 2024, primarily as a result of the issuances and maturities described above.

Financing segment debt of $11,300 million decreased $816 million ($1,059 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 September 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 $597 million from December 31, 2024, primarily driven by net income of $4,993 million and an increase in common stock of $1,439 million; partially offset by dividends paid of $4,681 million and an increase in accumulated other comprehensive loss of $715 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 nine months ended September 30:	2025		2024
Net cash provided by/(used in):
Operating activities	$	9,153	$	9,115
Investing activities	(11,719)		(3,558)
Financing activities	(423)		(5,403)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	429		(29)
Net change in cash, cash equivalents and restricted cash	$	(2,561)	$	125

Net cash provided by operating activities increased $37 million as compared to the first nine months of 2024. This was due to an increase in performance-related improvements within net income; partially offset by a decrease in cash provided by financing receivables and from balance sheet dynamics. Changes in operating assets and liabilities, net of acquisitions/divestitures in the Consolidated Statement of Cash Flows also includes a one-time, non-cash income tax charge associated with the enactment of H.R. 1 in July of 2025, and the tax benefit associated with the pension settlement charge in the third quarter of 2024, each of which represents a non-cash adjustment to reconcile net income/(loss) to cash from operating activities.

Net cash used in investing activities increased $8,161 million primarily driven by the HashiCorp acquisition, higher net purchases of marketable securities and other investments, a decrease in cash provided by divestitures driven by the first-quarter 2024 sale of The Weather Company assets, and higher net capital expenditures as the prior year was reduced by the cash proceeds from the sale of certain QRadar SaaS assets.

Net cash used in financing activities decreased $4,980 million mainly due to a decrease in cash used for debt maturities and higher cash proceeds from new debt issuances in the current period.

Looking Forward

Technology remains a key driver of growth and competitive advantage which allows businesses to scale, drive cost efficiencies, productivity 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.

AI adoption is accelerating, and hybrid cloud remains the foundation of enterprise IT. 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. Our watsonx platform and watsonx Orchestrate help enterprises deploy AI by connecting agents, models, and workflows with governance and security. 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.

Management Discussion – (continued)

AI is also a powerful productivity driver 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. Beginning in the second-quarter 2025, we further optimized our supply chain by shifting our Distributed Infrastructure manufacturing to an industry standard strategic partner. This is the next evolution of our supply transformation as we pivoted 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 nine 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 performance over the first nine months of 2025 reflects the continued success of our focused strategy around hybrid cloud and AI and underscores the strength and diversity of our business model and portfolio. We remain focused on consistent execution, delivering long-term growth aligned with our financial model.

While the operating environment continues to remain 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. Refer to note U, “Retirement-Related Benefits,” in our 2024 Annual Report for additional information.

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 third quarter of 2025, revenue from continuing operations increased 9.1 percent as reported and 7.3 percent at constant currency compared to the prior year. In the first nine months of 2025, revenue from continuing operations increased 5.9 percent as reported and 5.0 percent at constant currency, compared to the same period in 2024.

At September 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 third quarter of 2025 and first nine 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.

Management Discussion – (continued)

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.

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 nine months ended, or at, as applicable, September 30, 2025, those amounts are $9.2 billion of net cash from operating activities, $14.9 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.

The major rating agencies' ratings on our debt securities at September 30, 2025 appear in the following table and remain unchanged from June 30, 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 $8.1 billion ($6.2 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 September 30, 2025, the fair value of those instruments that were in a liability position was $608 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 75. 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, strategic investments, plan shareholder return levels 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 nine months of 2025 and 2024 prepared in a manner consistent with the description above.


(Dollars in millions)
For the nine months ended September 30:	2025		2024
Net cash from operating activities per GAAP	$	9,153	$	9,115
Less: change in Financing receivables	905		1,824
Net cash from operating activities, excluding Financing receivables	$	8,248	$	7,292
Capital expenditures, net	(1,067)		(705)
Free cash flow	$	7,181	$	6,586
Change in Financing receivables (1)	905		1,824
Acquisitions	(7,903)		(2,748)
Divestitures	(1)		705
Dividends	(4,681)		(4,601)
Change in total debt (1)	4,683		(777)
Other (1)	(531)		(704)
Effect of exchange rate changes on cash, cash equivalents and restricted cash (1)	429		(29)
Change in cash, cash equivalents, restricted cash and short-term marketable securities	$	81	$	257

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

In the first nine months of 2025, we generated $7.2 billion in free cash flow, an increase of $0.6 billion versus the prior-year period. The increase was primarily driven by performance-related improvements within net income; partially offset by higher net capital expenditures as the prior year was reduced by the cash proceeds from the sale of certain QRadar SaaS assets, and working capital dynamics. In the first nine months of 2025, we invested $7.9 billion in acquisitions, including the acquisition of HashiCorp, and we continued to return value to shareholders with $4.7 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 September 30:	2025			2024
Revenue	$	200		$	181		10.4	%	8.5	%
Segment profit	$	123		$	86		43.2	%
Segment profit margin	61.6		%	47.5		%	14.1	pts.


(Dollars in millions)							Yr.-to-Yr. Percent Change/Margin Change		Yr.-to-Yr. Percent Change Adjusted For Currency
For the nine months ended September 30:	2025			2024
Revenue	$	557		$	543		2.7	%	2.6	%
Segment profit	$	371		$	254		45.8	%
Segment profit margin	66.5		%	46.9		%	19.7	pts.

For the three months ended September 30, 2025, financing revenue increased 10.4 percent as reported (8.5 percent adjusted for currency) compared to the prior-year period. For the nine months ended September 30, 2025, financing revenue increased 2.7 percent as reported (2.6 percent adjusted for currency) compared to the prior-year period. Revenue growth for both periods was primarily driven by higher client financing revenue due to an increase in assets which reflects the new z17 product cycle.

Segment profit increased 43.2 percent to $123 million and segment profit margin increased 14.1 points to 61.6 percent, respectively, in the third quarter of 2025 compared to the prior-year period. For the nine months ended September 30, 2025, segment profit increased 45.8 percent to $371 million and segment profit margin increased 19.7 points to 66.5 percent, respectively, compared to the prior-year period. The increase in segment profit for both periods was primarily driven by the revenue growth as described above and 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 September 30, 2025		At December 31, 2024
Client financing receivables (1)	$	10,940	$	10,294
Commercial financing receivables (1) (2)	$	1,219	$	2,216
Financing Segment Debt (3)	$	11,300	$	12,116
Equity	$	1,256	$	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 32.0 percent compared to 23.5 percent for the three months ended September 30, 2025 and 2024, respectively. Return on equity was 32.7 percent compared to 23.0 percent for the nine months ended September 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 nine months ended September 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

Management Discussion – (continued)

quarters and four quarters, respectively. Annualized after-tax segment profit is a function of IBM's provision for income taxes determined on a consolidated basis.

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


(Dollars in millions)	At September 30, 2025			At December 31, 2024
Amortized cost	$	11,545		$	11,738
Specific allowance for credit losses	89			99
Unallocated allowance for credit losses	41			29
Total allowance for credit losses	130			128
Net financing receivables	$	11,415		$	11,611
Allowance for credit losses coverage	1.1		%	1.1		%

The percentage of Financing segment receivables reserved was 1.1 percent at both September 30, 2025 and December 31, 2024. The increase in unallocated allowance for credit losses for the nine months ended September 30, 2025 was primarily due to changes in worldwide 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 (1)			Operating (non-GAAP)
For the three months ended September 30, 2025:
Gross profit	$	9,360		$	231		$	—		$	—		$	9,591
Gross profit margin	57.3		%	1.4		pts.	—		pts.	—		pts.	58.7		%
SG&A	$	4,748		$	(354)		$	—		$	—		$	4,394

Other (income) and expense	$	(173)		$	(6)		$	(13)		$	—		$	(191)
Total expense and other (income)	$	6,931		$	(359)		$	(13)		$	—		$	6,559
Pre-tax income from continuing operations	$	2,430		$	590		$	13		$	—		$	3,033
Pre-tax margin from continuing operations	14.9		%	3.6		pts.	0.1		pts.	—		pts.	18.6		%
Provision for/(benefit from) income taxes (2)	$	686		$	136		$	3		$	(309)		$	516
Effective tax rate	28.2		%	(1.0)		pts.	0.0		pts.	(10.2)		pts.	17.0		%
Income from continuing operations	$	1,744		$	454		$	10		$	309		$	2,517
Income margin from continuing operations	10.7		%	2.8		pts.	0.1		pts.	1.9		pts.	15.4		%
Diluted earnings per share from continuing operations	$	1.84		$	0.48		$	0.01		$	0.33		$	2.65


(Dollars in millions except per share amounts)	GAAP			Acquisition- Related Adjustments			Retirement- Related Adjustments (3)			U.S. Tax Reform Impacts			Operating (non-GAAP)
For the three months ended September 30, 2024:
Gross profit	$	8,420		$	192		$	—		$	—		$	8,612
Gross profit margin	56.3		%	1.3		pts.	—		pts.	—		pts.	57.5		%
SG&A	$	4,911		$	(300)		$	—		$	—		$	4,611

Other (income) and expense	$	2,244		$	—		$	(2,797)		$	—		$	(553)
Total expense and other (income)	$	9,222		$	(300)		$	(2,797)		$	—		$	6,125
Pre-tax income/(loss) from continuing operations	$	(802)		$	492		$	2,797		$	—		$	2,487
Pre-tax margin from continuing operations	(5.4)		%	3.3		pts.	18.7		pts.	—		pts.	16.6		%
Provision for/(benefit from) income taxes (2)	$	(485)		$	119		$	700		$	(2)		$	332
Effective tax rate	60.4		%	(7.2)		pts.	(39.8)		pts.	(0.1)		pts.	13.4		%
Income/(loss) from continuing operations	$	(317)		$	373		$	2,097		$	2		$	2,155
Income/(loss) margin from continuing operations	(2.1)		%	2.5		pts.	14.0		pts.	0.0		pts.	14.4		%
Diluted earnings/(loss) per share from continuing operations (4)	$	(0.34)		$	0.40		$	2.27		$	0.00		$	2.30

(1)2025 includes a one-time, non-cash income tax charge associated with the enactment of H.R. 1 in July of 2025. Refer to "Taxes" on page 71 for additional information.

(2)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.

(3)2024 includes the impact of a pension settlement charge of $2.7 billion ($2.0 billion net of tax). Refer to note U, "Retirement-Related Benefits," in the company's 2024 Annual Report for additional information.

(4)Operating (non-GAAP) earnings per share was calculated using 938.4 million shares, which includes 14.9 million dilutive potential shares under our stock-based compensation plans and contingently issuable shares. Due to the GAAP net loss for the three months ended September 30, 2024, these dilutive potential shares were excluded from the GAAP loss per share calculation as the effect would have been antidilutive. The difference in share count resulted in an additional $(0.04) reconciling item.

Management Discussion – (continued)


(Dollars in millions except per share amounts)	GAAP			Acquisition- Related Adjustments			Retirement- Related Adjustments			U.S. Tax Reform Impacts (1)			Operating (non-GAAP)
For the nine months ended September 30, 2025:
Gross profit	$	27,369		$	657		$	—		$	—		$	28,025
Gross profit margin	57.2		%	1.4		pts.	—		pts.	—		pts.	58.6		%
SG&A	$	14,661		$	(1,055)		$	—		$	—		$	13,606
R&D	$	6,129		$	(4)		$	—		$	—		$	6,125
Other (income) and expense	$	(376)		$	(7)		$	(61)		$	—		$	(444)
Total expense and other (income)	$	21,184		$	(1,066)		$	(61)		$	—		$	20,058
Pre-tax income from continuing operations	$	6,185		$	1,723		$	61		$	—		$	7,968
Pre-tax margin from continuing operations	12.9		%	3.6		pts.	0.1		pts.	—		pts.	16.7		%
Provision for/(benefit from) income taxes (2)	$	1,193		$	396		$	0		$	(307)		$	1,282
Effective tax rate	19.3		%	0.8		pts.	(0.2)		pts.	(3.9)		pts.	16.1		%
Income from continuing operations	$	4,992		$	1,326		$	61		$	307		$	6,686
Income margin from continuing operations	10.4		%	2.8		pts.	0.1		pts.	0.6		pts.	14.0		%
Diluted earnings per share from continuing operations	$	5.27		$	1.40		$	0.06		$	0.32		$	7.06


(Dollars in millions except per share amounts)	GAAP			Acquisition- Related Adjustments			Retirement- Related Adjustments (3)			U.S. Tax Reform Impacts (1)			Operating (non-GAAP)
For the nine months ended September 30, 2024:
Gross profit	$	25,112		$	533		$	—		$	—		$	25,645
Gross profit margin	55.6		%	1.2		pts.	—		pts.	—		pts.	56.7		%
SG&A	$	14,823		$	(854)		$	—		$	—		$	13,969

Other (income) and expense (4)	$	1,694		$	(68)		$	(2,991)		$	—		$	(1,364)
Total expense and other (income)	$	22,621		$	(922)		$	(2,991)		$	—		$	18,709
Pre-tax income from continuing operations	$	2,491		$	1,454		$	2,991		$	—		$	6,936
Pre-tax margin from continuing operations	5.5		%	3.2		pts.	6.6		pts.	—		pts.	15.3		%
Provision for/(benefit from) income taxes (2)	$	(597)		$	374		$	731		$	434		$	942
Effective tax rate	(24.0)		%	10.4		pts.	20.9		pts.	6.3		pts.	13.6		%
Income from continuing operations	$	3,088		$	1,081		$	2,259		$	(434)		$	5,994
Income margin from continuing operations	6.8		%	2.4		pts.	5.0		pts.	(1.0)		pts.	13.3		%
Diluted earnings per share from continuing operations	$	3.30		$	1.16		$	2.42		$	(0.46)		$	6.41

(1)2025 includes a one-time, non-cash income tax charge associated with the enactment of H.R. 1 in July of 2025. 2024 includes a benefit from income taxes due to the resolution of certain tax audit matters in the first quarter. Refer to "Taxes" on page 71 for additional information.

(2)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.

(4)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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