Announcement: Moody's says good demand for hybrid cloud offerings and pending asset sale better position IBM to meet guidance for 2022Global Credit Research - 31 Jan 2022New York, January 31, 2022 -- Moody's Investors Service ("Moody's") said operating results for International Business Machines Corporation (IBM) were solid in 4Q21 driven by 16% revenue growth for the Consulting segment and 10% growth for the Software segment, or 5% excluding sales from IBM's new relationship with Kyndryl. Moody's expects total revenues will increase in the high single digit percentage range in 2022, or roughly 5% excluding sales to Kyndryl. As the base of higher growth consulting and software revenues expands, IBM becomes better positioned to deliver consistent top line gains. Enterprises are still in the early innings of their digital transformations which provides IBM a multi-year runway for growing IT spend. In addition, IBM will benefit from its partnerships with blue chip firms including Accenture, AWS, Azure, and Salesforce.com, each of whom are expected to grow their toplines in the high single digit percentage range or better over the next year.Revenues for the Infrastructure segment increased 2% but were down (3%) excluding sales to Kyndryl. Moody's expects Infrastructure revenues will ramp up in the second half of 2022 given the anticipated launch of IBM's new mainframe. The current Z15 mainframe reported a record level of MIPS (millions of instructions per second) shipped, more than any other mainframe program, but equipment sales will wane over the next few months as enterprises anticipate the launch of the new model expected prior to mid-2022. In contrast to a number of IT equipment manufacturers, operating results for IBM have not been affected by supply chain shortages reflecting IBM's expertise with supply chain management and long term relationships with key suppliers.Within the Software segment, Transaction Processing revenues grew 14% in 4Q21, but were down (2%) excluding Kyndryl. Improved results in 4Q21 reflect certain large perpetual license transactions. In the prior year, Transaction Processing revenue declined (26%) in 4Q20 as clients chose shorter term duration contracts and IBM faced tough comparison to the 3-year cyclical peak in 4Q19. Over the long term, IBM indicates that Transaction Processing revenues will decline in the mid-single digit percentage range partially offsetting overall solid gains for remaining Software businesses.IBM's free cash flow guidance is consistent with Moody's expectations for adjusted free cash flow which will improve to $4.0 billion -- $4.5 billion in 2022 (after $6 billion of quarterly dividends), compared to roughly $2 billion in 2021, reflecting IBM's portion of costs related to structural actions. Free cash flow over the next year will benefit from higher margin revenues, working capital management, and lower cash taxes.Funded debt of $52 billion as of December 31, 2021 will see further declines in 2022 given proceeds from the sale of IBM's 19.9% equity interest in Kyndryl ($0.7 billion based on current share price) and the divestiture of the data and analytics assets of Watson Health. The sale of Watson Health assets further focuses IBM's efforts to grow high margin cloud and AI offerings. Moody's expects the separation of Watson Health assets will go smoothly given these operations were not fully integrated with IBM. We expect unfunded pension liabilities for December 31, 2021 will be reduced from the $14.6 billion deficit reported at the end of 2020 due to the transfer of roughly $1.1 billion of unfunded pension liabilities to Kyndryl, plan returns, and the increase in discount rates.This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history. Carl Salas VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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