INTERNATIONAL BUSINESS MACHINES CORP

Previous wording

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024

Current wording

FOR THE THREE MONTHS ENDED MARCH 31, 2025

Previous wording

In the first quarter of 2024, we made changes to our organizational structure and management system to better align our portfolio to the market, increase transparency and improve segment comparability to peers. These changes did not impact our Consolidated Financial Statements, but did impact our reportable segments. The segments are reported on a comparable basis for all periods. In addition, due to the removal of certain components of segment profitability we also updated the title of our segment performance metric from pre-tax income from continuing operations to segment profit. Refer to note 4, "Segments," for additional information on our reportable segments.

Current wording

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.

Previous wording

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 its 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.

Current wording

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.

Previous wording

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, 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 (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 primarily include true-ups, accounting elections and any changes to regulations, laws or audit adjustments that affect the recorded one-time charge. For acquisitions, operating (non-GAAP) earnings exclude the amortization of purchased 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. Given its unique and temporary nature, management has also characterized as non-operating expense, the mark-to-market impact on the foreign exchange derivative contracts entered into prior to the acquisition of StreamSets and webMethods from SoftwareAG to economically hedge the foreign currency exposure related to the purchase price of this acquisition. These derivative contracts expired by June 28, 2024. This impact was recorded in other (income) and expense in the Consolidated Income Statement and reflects the realized loss from the changes in fair value of these derivative contracts. All other spending for acquired companies is included in both earnings from continuing operations and in operating (non-GAAP) earnings. For retirement-related costs, management characterizes certain items as operating and others as non-operating, consistent with GAAP. We include defined benefit plan and nonpension postretirement benefit plan service costs, multi-employer plan costs and the cost of defined contribution plans in operating earnings. Non-operating retirement-related costs include defined benefit plan and nonpension postretirement benefit plan amortization of prior service costs, interest cost, expected return on plan assets, amortized actuarial gains/losses, the impacts of any plan curtailments/settlements including the impact of a one-time, non-cash, pre-tax settlement charge of $2.7 billion ($2.0 billion net of tax) resulting from the transfer to the Insurer of a portion of the Qualified PPP’s defined benefit pension obligations and related pl…

Excerpt shortened here; the source contains the full paragraph.

Current wording

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 (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 primarily include true-ups, accounting elections and any changes to regulations, laws or audit adjustments that affect the recorded one-time 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 mark-to-market 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. This impact was recorded in other (income) and expense in the Consolidated Income Statement and reflected the changes in fair value of these derivative contracts. All other spending for acquired companies is included in both earnings from continuing operations and in operating (non-GAAP) earnings. For retirement-related costs, management characterizes certain items as operating and others as non-operating, consistent with GAAP. We include defined benefit plan and nonpension postretirement benefit plan service costs, multi-employer plan costs and the cost of defined contribution plans in operating earnings. Non-operating retirement-related costs include defined benefit plan and nonpension postretirement benefit plan amortization of prior service costs, interest cost, expected return on plan assets, amortized actuarial gains/losses, the impacts of any plan curtailments/settlements and pension insolvency costs and other costs. Non-operating retirement-related costs are primarily related to changes in pension plan assets and liabilities which are tied to financial market performance, and we consider these costs to b…

Excerpt shortened here; the source contains the full paragraph.

Previous wording

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. Our reportable segment financial results reflect pre-tax operating earnings from continuing operations, consistent with our management and measurement system.

Current wording

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.

Previous wording

(1)Year-to-year revenue growth of 1.6 percent adjusted for currency.

Current wording

(1)Year-to-year revenue growth of 2.3 percent adjusted for currency.

Previous wording

The following table provides the company’s operating (non-GAAP) earnings for the third quarter of 2024 and 2023.

Current wording

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

Previous wording

(2)Refer to page 85 for a more detailed reconciliation of net income to operating earnings.

Current wording

(1)Refer to page 62 for a more detailed reconciliation of net income to operating earnings.

Previous wording

In the first nine months of 2024, 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.

Current wording

In the first three 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.

Previous wording

In the first nine months of 2024, we reported $45.2 billion in revenue, net income from continuing operations of $3.1 billion, including the impact of a one-time, non cash, pre-tax pension settlement charge of $2.7 billion ($2.0 billion net of tax), and operating (non-GAAP) earnings of $6.0 billion. Diluted earnings per share from continuing operations was $3.30 as reported, including an impact of $2.18 from the pension settlement charge, and diluted earnings per share was $6.41 on an operating (non-GAAP) basis. We generated $9.1 billion in cash from operations and $6.6 billion in free cash flow, and delivered shareholder returns of $4.6 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.

Current wording

In the first quarter of 2025, we reported $14.5 billion in revenue, income from continuing operations of $1.1 billion, and operating (non-GAAP) earnings of $1.5 billion. Diluted earnings per share from continuing operations was $1.12 as reported and $1.60 on an operating (non-GAAP) basis. We generated $4.4 billion in cash from operations and $2.0 billion in free cash flow. We invested $7.1 billion in acquisitions, driven primarily by the closing of the HashiCorp acquisition and delivered shareholder returns of $1.5 billion in dividends. Our first-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.

Previous wording

Total revenue grew 1.5 percent as reported and 2 percent adjusted for currency compared to the prior-year period, led by Software. Software delivered revenue growth of 9.7 percent as reported and 9.6 percent adjusted for currency, driven by both Hybrid Platform & Solutions and Transaction Processing, and reflecting the repositioning of our software portfolio around Hybrid Cloud, Automation, Data and Transaction Processing. Hybrid Platform & Solutions revenue was up 9.8 percent as reported and 9.7 percent adjusted for currency, led by growth in Red Hat, Automation and Data & AI. Transaction Processing grew 9.4 percent as reported and adjusted for currency, reflecting growing capacity, solid renewal rates, and continued customer interest in our AI solutions. Consulting revenue decreased 0.5 percent as reported but was flat adjusted for currency, as it continued to be impacted by a dynamic market environment as clients reprioritize spending given macroeconomic uncertainty. Infrastructure revenue decreased 7.0 percent year to year as reported and 6.7 percent adjusted for currency, reflecting product cycle dynamics.

Current wording

Total revenue grew 0.6 percent as reported and 2 percent adjusted for currency compared to the prior-year period, led by Software. Software delivered revenue growth of 7.4 percent as reported and 9.0 percent adjusted for currency, with growth across all lines of business, reflecting demand for our focused portfolio that provides end-to-end hybrid cloud and AI capabilities. Consulting revenue decreased 2.3 percent as reported but was flat adjusted for currency, driven primarily by revenue declines in Strategy and Technology. Infrastructure revenue decreased 6.2 percent year to year as reported and 4.3 percent adjusted for currency, reflecting product cycle dynamics.

Previous wording

From a geographic perspective, Americas revenue decreased 3.0 percent as reported (2.4 percent adjusted for currency). Europe/Middle East/Africa (EMEA) increased 8.5 percent as reported (6.8 percent adjusted for currency). Asia Pacific increased 3.1 percent as reported (4.5 percent adjusted for currency).

Current wording

From a geographic perspective, Americas revenue decreased 1.2 percent as reported but was flat adjusted for currency. Europe/Middle East/Africa (EMEA) increased 5.6 percent as reported (7.7 percent adjusted for currency). Asia Pacific decreased 2.4 percent as reported but was flat adjusted for currency.

Previous wording

Gross margin of 56.3 percent increased 1.9 points year to year with continued margin expansion driven by revenue growth, portfolio mix and ongoing productivity actions. Operating (non-GAAP) gross margin of 57.5 percent increased 2.1 points compared to the prior-year period due to the same dynamics.

Current wording

Gross margin of 55.2 percent increased 1.7 points year to year with margin expansion driven primarily by ongoing productivity initiatives and operating leverage. Operating (non-GAAP) gross margin of 56.6 percent increased 1.9 points compared to the prior-year period due to the same dynamics.

Previous wording

Total expense and other (income) increased increased 18.4 percent in the first nine months of 2024 versus the prior-year period primarily driven by the pension settlement charge of $2.7 billion described above, higher workforce rebalancing charges and higher spending reflecting our continued investment in portfolio innovation to drive our strategy. This was partially offset by a gain from the sale of certain QRadar SaaS assets, the gain on the divestiture of The Weather Company assets in the first quarter and the benefits from productivity and the actions taken to transform our operations. Total operating (non-GAAP) expense and other (income) increased 2.0 percent year to year, driven primarily by the factors described above, excluding the pension settlement charge.

Current wording

Total expense and other (income) increased 3.1 percent in the first quarter of 2025 compared to the first quarter of 2024 primarily driven by the prior-year gain on the divestiture of The Weather Company assets, higher current year spending, including expenses of acquired businesses, continued investments in portfolio innovation to drive our strategy, and higher acquisition-related charges and amortization of acquired intangible assets. These increases were partially offset by the benefits from productivity and the actions taken to transform our operations, the effects of currency, lower non-operating retirement-related cost and lower workforce rebalancing charges. Total operating (non-GAAP) expense and other (income) increased 3.8 percent year to year, driven primarily by the factors described above, excluding the impacts from non-operating retirement-related costs, acquisition-related charges and amortization of acquired intangible assets.

Previous wording

Operating (non-GAAP) pre-tax income from continuing operations of $2.5 billion increased 8.2 percent compared to the third quarter of 2023 and the operating (non-GAAP) pre-tax margin from continuing operations increased 1.0 point to 16.6 percent primarily driven by our revenue growth and gross margin performance and the benefits from productivity and the actions taken to transform our operations, partially offset by our continued investments to drive innovation. The operating (non-GAAP) provision for income taxes was $0.3 billion in both the third quarter of 2024 and the third quarter of 2023. Operating (non-GAAP) net income from continuing operations of $2.2 billion increased 6.1 percent and the operating (non-GAAP) net income margin from continuing operations of 14.4 percent was up 0.6 points year to year.

Current wording

Operating (non-GAAP) pre-tax income from continuing operations of $1.7 billion increased 4.9 percent compared to the first quarter of 2024 and the operating (non-GAAP) pre-tax margin from continuing operations increased 0.5 points to 12.0 percent primarily driven by our gross margin performance and the benefits from productivity; partially offset by continued investments in innovation. The operating (non-GAAP) provision for income taxes in the first quarter of 2025 was $0.2 billion, compared to $0.1 billion in the first quarter of 2024. Operating (non-GAAP) net income from continuing operations of $1.5 billion decreased 3.0 percent and the operating (non-GAAP) net income margin from continuing operations of 10.4 percent decreased 0.4 points year to year.

Previous wording

At September 30, 2024, 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, 2024 of $13.7 billion increased $0.3 billion from December 31, 2023 and debt of $56.6 billion at September 30, 2024 was flat from prior-year end.

Current wording

At March 31, 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 March 31, 2025 of $17.6 billion increased $2.8 billion from December 31, 2024 and debt of $63.3 billion at March 31, 2025 increased $8.3 billion, primarily driven by the first-quarter 2025 debt issuances.

Previous wording

Total assets decreased $0.9 billion ($0.7 billion adjusted for currency) from December 31, 2023 primarily driven by a decrease in receivables, partially offset by an increase in goodwill and intangible assets mainly related to the StreamSets and webMethods acquisition. Total liabilities decreased $2.8 billion ($2.9 billion adjusted for currency) from December 31, 2023 primarily driven by decreases in tax liabilities and accounts payable. Total equity of $24.5 billion increased $1.9 billion from December 31, 2023 primarily driven by the year-to-date net income, including the impact of the pension settlement charge, a decrease in accumulated other comprehensive loss mainly driven by retirement-related benefit plans due to the pension settlement charge of $2.0 billion net of tax, and common stock issuances; partially offset by dividends paid.

Current wording

Total assets increased $8.5 billion ($7.2 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 $8.9 billion ($7.3 billion adjusted for currency) from December 31, 2024 primarily driven by an increase in debt and deferred income; partially offset by decreases in tax liabilities and accounts payable. Total equity of $27.0 billion decreased $0.4 billion from December 31, 2024 primarily driven by dividends paid; partially offset by first-quarter 2025 net income.

Previous wording

Cash provided by operating activities was $9.1 billion in the first nine months of 2024, a decrease of $0.4 billion compared to the first nine months of 2023 and free cash flow was $6.6 billion, an increase of $1.5 billion versus the prior-year period. Refer to page 81 for additional information on free cash flow. Net cash used in investing activities of $3.6 billion decreased $6.3 billion compared to the prior-year period. Financing activities were a net use of cash of $5.4 billion in the first nine months of 2024 compared to $0.2 billion in the prior-year period.

Current wording

Cash provided by operating activities was $4.4 billion in the first quarter of 2025, an increase of $0.2 billion compared to the first quarter of 2024 and free cash flow was $2.0 billion, an increase of $0.1 billion versus the prior-year period. Refer to page 59 for additional information on free cash flow. Net cash used in investing activities of $13.0 billion increased $8.8 billion compared to the prior-year period primarily driven by cash used for the HashiCorp acquisition. Financing activities were a net source of cash of $5.4 billion in the first three months of 2025 and increased $3.6 billion compared to the prior-year period primarily driven by higher net debt issuances in the current-year period.

Previous wording

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 2024 versus the third quarter and first nine months of 2023 reportable segments results. Prior-year results have been recast to reflect the January 2024 segment changes as described in note 4, "Segments."

Current wording

The following tables present each reportable segment’s revenue and gross margin results, followed by an analysis of the first three months of 2025 versus the first three 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.

Previous wording

Across Hybrid Platform & Solutions, our annual recurring revenue (ARR) was $14.9 billion. ARR is a key performance metric management uses to assess the health and growth trajectory of our Hybrid Platform & Solutions business within the Software segment. The metric was updated in the first quarter of 2024 to reflect the organizational changes described in note 4, “Segments,” and to simplify the calculation. ARR 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 revenue as this performance metric and its inputs may not represent revenue that will be recognized in future periods.

Current wording

Across Software, our annual recurring revenue (ARR) was $21.7 billion, which increased 9.2 percent as reported (10.9 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. ARR includes annualized March 2025 HashiCorp recurring revenue. 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.

Previous wording

Software gross profit margin increased 0.9 points to 83.2 percent in the third quarter of 2024 compared to the prior-year period. Segment profit of $1,969 million increased 14.4 percent and segment profit margin of 30.2 percent increased 1.2 points compared to the prior-year period. The segment profit growth reflects our operating leverage driven by our revenue performance and portfolio mix and the benefits of our continued productivity actions, partially offset by key investments in software innovation.

Current wording

Software gross profit margin increased 1.2 points to 83.6 percent in the first quarter of 2025 compared to the prior-year period. Segment profit of $1,847 million increased 23.2 percent and segment profit margin of 29.1 percent increased 3.7 points compared to the prior-year period. Both segment gross profit and segment profit dollar growth and margin expansion reflect our operating leverage driven by our revenue performance and portfolio mix as well as the benefits from our continued productivity actions and innovations within the software portfolio.

Previous wording

In the third quarter of 2024, Consulting gross profit margin of 28.4 percent increased 0.9 points on a year-to-year basis. Segment profit of $559 million decreased 1.2 percent and segment profit margin of 10.9 percent decreased 0.1 points year to year. The gross profit margin expansion reflects the savings from productivity actions we have taken. Our segment profit margin improved 2.0 points compared to the second-quarter 2024 reflecting the benefits from our productivity actions, but was essentially flat year to year.

Current wording

In the first quarter of 2025, Consulting gross profit margin of 27.3 percent increased 1.9 points on a year-to-year basis. Segment profit of $558 million increased 31.6 percent and segment profit margin of 11.0 percent increased 2.8 points year to year. The gross profit margin expansion and increase in segment profit and margin reflect the benefits from the productivity actions we have taken.

Previous wording

In the third quarter of 2024, Consulting signings decreased 8.7 percent as reported and 9.3 percent adjusted for currency. Clients are reprioritizing their IT budgets to prepare for investments in generative AI, while the challenging macroeconomic environment is impacting client spending, particularly on more discretionary projects. We continued to have solid demand for large digital transformations that contributed to the $5.4 billion in signings in the quarter. Our book-to-bill ratio for the trailing twelve-months was 1.14. Book-to-bill represents the ratio of IBM Consulting signings to its revenue over the same period. The metric is a useful indicator of the demand of our business over time.

Current wording

In the first quarter of 2025, Consulting signings decreased 10.5 percent as reported and 9.5 percent adjusted for currency compared to the prior-year period. However, we had solid growth in backlog during the quarter. The uncertainty within the current macroeconomic environment is impacting client spending, particularly on more discretionary projects, and is elongating the decision-making process on large, higher value projects. Clients also continue to reprioritize their IT budgets to prepare for investments in generative AI. Our book-to-bill ratio for the trailing twelve-months was over 1.15. 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.

Previous wording

Infrastructure revenue of $3,042 million decreased 7.0 percent as reported and 6.7 percent adjusted for currency in the third quarter of 2024 compared to the prior-year period, reflecting the impact of product cycle dynamics in both Hybrid Infrastructure and Infrastructure Support.

Current wording

Infrastructure revenue of $2,886 million decreased 6.2 percent as reported and 4.3 percent adjusted for currency in the first quarter of 2025 compared to the prior-year period, reflecting the impact of product cycle dynamics in both Hybrid Infrastructure and Infrastructure Support. Hybrid Infrastructure revenue decreased primarily driven by IBM Z. This quarter represents the twelfth quarter of the z16 program, which continues to deliver strong performance in both total revenue and capacity over the life of the program. In April, we announced the launch of the IBM z17 which will be available in June, offering enhanced AI acceleration through multi-model AI capabilities, new security features to protect data, and tools that leverage AI for improving system usability. The z17 expands our value proposition to clients, including lower power requirements, larger capacity growth and increased performance over z16. Distributed Infrastructure revenue decreased reflecting product cycle dynamics that are impacting our Power business, while Storage had another quarter of double-digit growth as our latest innovations continue to address the increasing data demands of our clients. Infrastructure Support revenue decreased as reported, but grew adjusted for currency, as the business continues to stabilize.

Previous wording

Infrastructure gross profit margin of 55.0 percent increased 1.2 points in the third quarter of 2024 compared to the prior-year period, with margin expansion in Infrastructure Support and Hybrid Infrastructure. The increase in margin within Infrastructure Support was driven by product mix. The increase in margin within Hybrid Infrastructure was driven primarily by margin expansion in both IBM Z and Distributed Infrastructure, partially offset by portfolio mix. In the third quarter of 2024, Infrastructure segment profit of $422 million decreased 13.8 percent and segment profit margin of 13.9 percent decreased 1.1 points compared to the prior-year period. The year-to-year decrease in segment profit and margin reflects the revenue decline due to product cycle dynamics in IBM Z and Distributed Infrastructure and continued investments in innovation for our next generation of products. This performance was partially offset by higher IP and custom development income year to year and savings from productivity actions.

Current wording

Infrastructure gross profit margin of 52.8 percent decreased 1.4 points in the first quarter of 2025 compared to the prior-year period, driven primarily by gross margin declines within Hybrid Infrastructure mainly due to mix resulting from product cycle dynamics. Infrastructure segment profit of $248 million decreased 20.3 percent and segment profit margin of 8.6 percent decreased 1.5 points compared to the prior-year period. The year-to-year decrease in segment profit and margin reflects the revenue decline due to product cycle dynamics and continued investments in innovation for our next generation of products, partially offset by the benefits from productivity actions and higher IP and custom development income year to year.

Previous wording

Refer to pages 82 through 84 for a discussion of Financing’s segment results.

Current wording

Refer to pages 60 through 61 for a discussion of Financing’s segment results.

Previous wording

(2)2024 amount includes a pre-tax gain of $351 million from the sale of certain QRadar SaaS assets and a pre-tax gain of $241 million from the divestiture of The Weather Company assets. Refer to note 5, "Acquisitions & Divestitures," for additional information.

Current wording

(1)2024 includes a pre-tax gain of $241 million from the divestiture of The Weather Company assets.

Previous wording

Total selling, general and administrative (SG&A) expense increased 10.2 percent in the third quarter of 2024 versus the prior-year period driven primarily by the following factors:

Current wording

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

Previous wording

•The effects of currency (1 point).

Current wording

•The effects of currency (1 point); partially offset by

Previous wording

Operating (non-GAAP) SG&A expense increased 10.3 percent year to year primarily driven by the same factors above.

Current wording

Operating (non-GAAP) SG&A expense decreased 3.7 percent year to year primarily driven by the same factors above, excluding the higher acquisition-related charges and amortization of acquired intangible assets.

Previous wording

Expected credit loss expense was a benefit of $17 million in the first nine months of 2024 compared to a provision of $7 million in the prior-year period. The year-to-year change was primarily driven by lower reserve requirements in the current year. Refer to "Receivables and Allowances" section on page 75 for additional information.

Current wording

Expected credit loss expense was a provision of $14 million in the first quarter of 2025 compared to a benefit of $23 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 54 for additional information.

Previous wording

Research, development and engineering (RD&E) expense increased 11.3 percent and 9.7 percent year to year in the third quarter and first nine months of 2024, respectively. The year-to-year increase in RD&E expense was primarily driven by investments to drive innovation in AI, hybrid cloud and quantum, as well as in Infrastructure ahead of our next IBM Z cycle in 2025.

Current wording

Research and development (R&D) expense and operating (non-GAAP) R&D expense, increased 8.6 percent and 8.3 percent, respectively, in the first quarter of 2025. The year-to-year increase in R&D expense was primarily driven by investments to drive innovation in AI, hybrid cloud and quantum; partially offset by the effects of currency (1 point).

Previous wording

Total intellectual property and custom development income increased 25.3 percent year to year in the third quarter, and increased 12.6 percent in the first nine months of 2024 compared to the prior-year period. The increase in the third quarter and first nine months of 2024 was primarily driven by joint development and licensing agreements with a Japanese consortium to leverage our intellectual property and expertise on advanced semiconductors.

Current wording

Total intellectual property and custom development income increased 16.9 percent year to year. The increase was primarily driven by joint development and licensing agreements with a Japanese consortium to leverage our intellectual property and expertise on advanced semiconductors.

Previous wording

Operating (non-GAAP) other (income) and expense was income of $553 million in the third quarter of 2024 and increased $350 million compared to the prior-year period. The year-to-year change was primarily driven by the gain recognized from the sale of certain QRadar SaaS assets in the current year.

Current wording

Total other (income) and expense was income of $165 million in the first quarter of 2025 and decreased $152 million compared to the prior-year period. The year-to-year change was primarily driven by:

Previous wording

(1)2024 includes the realized loss of $68 million 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.

Current wording

•Lower net exchange losses (including derivative instruments) of $81 million. The prior-year (gains)/losses on derivative instruments included a loss of $50 million on foreign exchange derivative contracts entered into by the company prior to the acquisition of StreamSets and webMethods from Software AG (also included in “Acquisition-related charges” in the table above). Refer to note 16, “Derivative Financial Instruments,” for additional information; and

Previous wording

Operating (non-GAAP) other (income) and expense was income of $1,364 million in the first nine months of 2024 and increased $658 million compared to the prior-year period. The year-to-year change was primarily driven by the gain recognized from the sale of certain QRadar SaaS assets in the third-quarter 2024, higher gains on divestitures and sales of intangibles and higher interest income.

Current wording

Operating (non-GAAP) other (income) and expense was income of $187 million in the first quarter of 2025 and decreased $276 million compared to the prior-year period. The year-to-year change was primarily driven by the factors described above, excluding the lower non-operating retirement related costs and the acquisition-related charges.

Previous wording

Interest expense increased $17 million and $86 million year to year in the third quarter and first nine months of 2024, respectively. Interest expense is presented in cost of financing in the Consolidated Income Statement if the related external borrowings are to support the Financing external business. Overall interest expense (excluding capitalized interest) for the third quarter and first nine months of 2024 was $516 million and $1,542 million, respectively, an increase of $22 million and $85 million, respectively, compared to the prior-year periods. The year-to-year dynamics for both the third quarter and first nine months of 2024 were primarily driven by higher average interest rates and a higher average debt balance in thecurrent year.

Current wording

Interest expense of $455 million in the first quarter of 2025 increased $23 million compared to the prior-year period. Interest expense is presented in cost of financing in the Consolidated Income Statement if the related external borrowings are to support the Financing external business. Overall interest expense (excluding capitalized interest) for the first quarter of 2025 was $542 million, an increase of $25 million year to year primarily driven by higher average interest rates in the current year.

Previous wording

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, RD&E) relating to the job function of the plan participants. The non-operating cost amounts are included in other (income) and expense.

Current wording

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.

Previous wording

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 2024 were $257 million, a decrease of $38 million compared to the third quarter of 2023. The decrease was primarily driven by lower cost of defined contribution plans ($134 million), partially offset by higher service cost ($97 million) due to the U.S. retirement plan changes effective January 1, 2024. For the first nine months of 2024, operating retirement-related costs were $767 million, a decrease of $138 million compared to the prior-year period, primarily driven by lower cost of defined contribution plans ($426 million), partially offset by higher service cost ($289 million) due to U.S. retirement plan changes effective January 1, 2024. Including the related employee salary increase effective January 1, 2024, the net impact to our operating costs from the U.S. retirement plan changes was immaterial for the three and nine months ended September 30, 2024. Refer to note 18, "Retirement-Related Benefits," for additional information. Non-operating costs/(income) was $2,797 million of cost in the third quarter of 2024 compared to $12 million of income in the prior-year period and for the first nine months of 2024 non-operating costs/(income) was $2,991 million of cost compared to $16 million of income in the prior-year period. The year-to-year changes were primarily driven by an increase in curtailments/settlements including the impact of a one-time, non-cash pension settlement charge resulting from the transfer to the Insurer of a portion of the Qualified PPP in the current quarter and an increase in recognized actuarial losses due to the change in amortization period of the Qualified PPP effective January 1, 2024 as described in note 18, "Retirement-Related Benefits," partially offset by lower interest costs.

Current wording

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 first quarter of 2025 were $243 million, a decrease of $14 million compared to the first quarter of 2024. The decrease was primarily driven by lower service cost ($13 million). Non-operating costs/(income) was $23 million of cost in the first quarter of 2025 compared to $96 million in the prior-year period.

Previous wording

During the fourth quarter of 2020, the U.S. Internal Revenue Service (IRS) concluded its examination of the company’s U.S. income tax returns for 2013 and 2014 and issued a final Revenue Agent’s Report (RAR) proposing adjustments related to certain cross-border transactions that occurred in 2013. The company filed its IRS Appeals protest in the first quarter of 2021, and in October of 2023, the IRS issued a revised RAR. These adjustments, if sustained, would increase the company’s income subject to tax by approximately $4.2 billion, with tax calculated at the relevant federal income tax rate. The company continues to strongly disagree with the IRS position and will pursue resolution at IRS Appeals and then court, if necessary. In the first quarter of 2024, the IRS concluded its examination of the company's U.S. income tax returns for 2015 and 2016 and issued a final RAR proposing adjustments related to certain cross-border transactions that occurred in 2015. The proposed adjustments, if sustained, would increase the company’s income subject to tax by approximately $1.2 billion, with tax calculated at the relevant federal income tax rate. The company strongly disagrees with the IRS position and filed its IRS Appeals protest in the second quarter of 2024. In the fourth quarter of 2021, the IRS commenced its audit of the company’s U.S. tax returns for 2017 and 2018. The company anticipates that this audit will be completed in 2024. 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.

Current wording

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.