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    2018 Annual Report

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    Dear IBM Investor: 2018 was a defining year for IBM and our clients. Your company returned to growth, just as businesses readied to enter Chapter 2 of their digital reinventions. For years, we have focused on building the tools businesses 2018: Return to Growth need in the 21st century. Our investments have reshaped IBM In 2018, IBM achieved $79.6 billion in revenue and operating to lead in the emerging, high-value segments of the IT market, earnings per share of $13.81. For the full year, we returned to including analytics, artificial intelligence (AI), cloud, security, revenue growth, grew earnings per share and stabilized margins. blockchain and quantum computing. At the same time, we have Our strategic and continued investment in innovative deepened our longstanding commitment to the responsible technology drove our improved competitive position and profit stewardship of technology. dynamics. Offerings that address data, AI, cloud, analytics and IBM is now ready to help our clients advance their cybersecurity now represent more than half of our revenue—up business transformations. from a quarter just four years ago—accounting for approximately In my letter to you this year, I will describe IBM’s $40 billion in revenue in 2018. performance in 2018. I will outline how clients are poised Our investment of more than $5 billion in research and to enter Chapter 2 of their digital reinventions, with help from development produced thousands of breakthrough innovations, IBM, and how this translates to growth for IBM, for businesses which led to IBM’s 26th consecutive year of U.S. patent leadership. and for the world. Of the 9,100 patents granted to IBM in 2018, more than 1,600 were related to AI and 1,400 to cybersecurity—more than any other company in either area.

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    2 This focus on breakthrough innovation has created New IBM investments are further energizing our portfolio. IBM’s strongest portfolio ever and has driven results: In late 2018, we announced plans to acquire Red Hat, the world’s leading open source technology provider for the enterprise. – Total cloud revenues were more than $19 billion in 2018, up With this acquisition, which is expected to close in the second 12 percent. In the fourth quarter alone, IBM signed 16 client half of 2019, IBM will enhance our position as the world’s number services agreements worth more than $100 million to help one hybrid cloud provider, helping clients unlock the full business optimize business performance on the IBM Cloud. Today, value of the cloud. 47 of the Fortune 50 depend on the IBM Cloud. We also continued to divest stand-alone software and services assets that are no longer strategic for IBM. – IBM is the world’s enterprise AI leader. Solutions enabled At the same time, we remained committed to returning by IBM Watson are helping produce better decision-making capital to our shareholders. In 2018, we returned more than and business outcomes through more than 20,000 client $10 billion to you, our shareholders, including dividends engagements, across 20 industries to date. IDC ranked of $5.7 billion and gross share repurchases of $4.4 billion. IBM number one in AI market share. We continue to pioneer We raised our dividend for the 23rd consecutive year—IBM’s innovations in natural language processing, speech processing, 103rd straight year of providing one. computer vision and machine learning. Moving Clients to the Next Chapter of Digital Reinvention – IBM Blockchain is the global leader in improving trust and For the past several years, businesses around the world have been transparency across business networks by creating a new driving their digital reinventions as they look to take advantage way for clients to share and secure data. IBM Blockchain of data, their most powerful source of competitive advantage. now powers more than 500 client projects, with more than This first chapter has been defined largely by experimenting 85 active networks transforming supply chains, global with narrow and disparate AI applications and moving simple shipping, and cross-border finance. workloads—typically consumer and customer-facing applications— to the cloud. – IBM Security, the world’s largest cybersecurity enterprise, Now, we are beginning to see the contours of Chapter 2 has 8,000 subject matter experts serving more than 17,000 among pioneering enterprise businesses: moving from clients in more than 130 countries. The industry’s leading experimentation to true business transformation at scale AI and cloud-based security solutions include IBM Security with AI and hybrid cloud. Connect, launched in 2018, which allows clients to gather, This next chapter of digital reinvention will be enterprise- integrate and analyze security data across multiple applications driven. It will be characterized first by scaling AI and embedding and tools, in a vendor-agnostic way. it everywhere in business. Second, in cloud, it will be characterized by moving mission-critical applications to hybrid cloud— – IBM Systems produces innovative infrastructure for AI using a combination of multiple public clouds, private clouds, and hybrid cloud. The z14 is one of IBM’s most successful and on-premise IT capabilities, so businesses can create mainframe programs in history, with broad global adoption the environment most suitable for their enterprise workloads. across 27 different industry segments. In addition, the Underpinning it all is the growing importance of trust, both U.S. Department of Energy’s POWER9-based supercomputers, in technologies and their impact on the world. Summit and Sierra, were ranked the most powerful supercomputers in the world in 2018. Scaling AI throughout the Enterprise In Chapter 2 of their digital reinventions, businesses will begin – IBM Services was a key driver of IBM’s performance in 2018. to scale AI across the enterprise, as some first movers are already Forty-seven engagements worth more than $100 million demonstrating. each helped major clients—like Bank of The Philippine Islands, Take the world’s leading banks, for example. While many Juniper Networks, Nordea, Westpac and Aditya Birla Retail— have been applying AI to specific challenges, some first movers move to the next stage of their digital transformations. are scaling AI across the enterprise. For example, Orange Bank,

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    one of the fastest growing mobile banks in France, now manages all customer service through IBM Watson. Similarly, Banco Bradesco is now using IBM Watson to assist every member of its services team—resolving customer inquiries in seconds with nearly 95 percent accuracy. IBM brought AI for business into the mainstream with the introduction of our Watson platform in 2014. Today, IBM Watson is the most open and trusted AI for business, available to run on any environment—on premise, and in private and public clouds. Businesses can apply Watson to data wherever it is hosted and infuse AI into their applications, regardless of where they reside. With Watson Studio, Watson Machine Learning, and Watson OpenScale, IBM delivers a suite of tools that allow enterprises to build, deploy and manage their AI models in a hybrid cloud environment. IBM Watson OpenScale, a first-of-a-kind platform introduced in 2018, also enables businesses to manage their AI— no matter where it was built or where it runs—with transparency, explainability and bias mitigation. Addressing these factors, which traditionally have held businesses back, is critical for scaling AI throughout an enterprise. Through IBM Services, we are helping our clients around the world apply AI to core business processes and workflows, infusing their businesses with automation, intelligence and continuous learning to transform everything from supply chains and HR to finance and operations. In 2018, we also launched a new service called IBM Talent and Transformation that addresses the often overlooked cultural Virginia M. Rometty aspects of AI. This service helps our clients ensure their teams Chairman, President and have the right skills and talent—and the supporting culture and Chief Executive Officer work environment—to support a new way of working that is critical to scaling AI for business. Moving Mission-Critical Work to Hybrid Cloud In the first chapter of digital reinvention, cloud deployments largely focused on easily portable workloads for productivity and commodity computing. This primarily was driven by user-facing applications inspired by advances in consumer technology. As a result, only 20 percent of enterprise workloads today have moved to the cloud. The remaining 80 percent of enterprise workloads provides the real value opportunity for business—transforming mission- critical workloads and applications for the cloud. The challenge is that most businesses have unique regulatory or data requirements and anywhere from five to 15 clouds across multiple providers.

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    IBM Leadership That is why businesses moving to Chapter 2 will need to embrace a new, hybrid cloud approach. It is one that will allow them to more easily move data and scale AI and other applications across public, private and on-premise IT in their enterprises, with consistent #1 AI for business management and security protocols, using open source technology. 20,000+ IBM Watson client For example, BNP Paribas, a leading European bank, engagements across 20 industries. is working with IBM to speed and scale the launch of new digital and AI customer services across the cloud, while protecting the security and confidentiality of customer data. Similarly, global telecom leader Vodafone Business is partnering with IBM to #1 in hybrid cloud innovate the way it delivers 47 of the Fortune 50 rely on multicloud and digital “We are ready for this IBM Cloud. Revenue for IBM Cloud capabilities—including AI, moment of moving topped $19 billion in 2018. Edge computing, 5G and clients to Chapter 2 software-defined networking of their digital solutions—to its customers. reinvention with our IBM Services provides unique integration of #1 in enterprise services end-to-end cloud integration innovative technology, IBM Services, with end-to-end capabilities and is helping industry expertise cloud and AI capabilities, closed thousands of businesses and a reputation for 47 client agreements worth more migrate, integrate and trust and security than $100 million each in 2018. manage applications and earned over decades.” workloads seamlessly and #1 in enterprise security securely across any cloud environment. Industry experts from IBM Security manages 70 billion IBM Services are co-creating cloud-enabled solutions with clients cybersecurity events per day for in our IBM Garages. Using design thinking and agile methods, clients in more than 130 countries. we are helping clients implement new ways of working, such as rapid prototyping and iteration to more quickly move technology projects from pilot to production at scale. We are ready for this moment of moving clients to Chapter 2 #1 in enterprise systems of their digital reinvention with our unique integration of innovative IBM Z is at the heart of world technology, industry expertise and a reputation for trust and commerce with 30 billion transactions security earned over decades. IBM is now moving the world’s per day, including 87 percent of all major enterprises to the next era, an effort that will be enhanced credit card transactions. by our planned acquisition of Red Hat. #1 in blockchain Chapter 2 of Trust and Responsible Stewardship IBM Blockchain Platform was We recognize that our clients and the consumers they serve ranked number one by analyst firms expect more than groundbreaking innovation and industry Juniper Research and Everest Group. expertise. They want to work with technology partners they can trust to protect their data and handle it responsibly. They want to work with partners that know how to bring new technologies into the world safely and help society benefit from #1 in U.S. patents for the them. And they want their partners to create inclusive workplaces 26th consecutive year and communities where diversity thrives. IBM inventors received a record 9,100 patents, including more than 3,000 in AI, cloud and quantum computing. #1 and #2 fastest supercomputers in the world Built by IBM for the U.S. Department of Energy, based on IBM POWER9 CPUs tuned for AI workloads.

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    5 These expectations are linked by a common theme: As IBM sees it, the promise of technology is to empower responsibility. Responsibility has been a hallmark of IBM’s culture people to do good, access new opportunities and make the world for 107 years—from our labs to our boardroom. IBMers’ unwavering better, safer and smarter—for the many, not just the few. global commitment to the responsible stewardship of data and powerful new technologies has earned us the trust of clients IBM Poised to Lead and society as a whole. In summary, we have returned your company to growth. We have In 2018, as trust in technology came under heightened positioned IBM’s products, services and people to enable clients global scrutiny, we published our IBM Principles for Trust and to write the next chapter of their digital reinventions. And we have Transparency, which have long guided our company. They stress done it all while reaffirming IBM’s longstanding reputation for our belief that the purpose of new technologies is to augment— trust, integrity and responsibility. not replace—human intelligence, and that the data and insights Our work ahead is to build on this progress and bring these derived from technology belong to the businesses who own capabilities to life for our clients. I want to thank all of our clients them. The principles also emphasize that new technologies for partnering with us while we reinvented IBM, and for choosing brought into the world must be open, transparent, explainable us for their own journeys of transformation. and free of bias. I also would like to thank our investors for their confidence We know that AI, like other transformative technologies in IBM. Finally, I would like to thank the hundreds of thousands before it, will have a profound impact on peoples’ jobs and the of IBMers whose expertise has prepared us to lead in this new workplace. That is why, in 2018, IBM further expanded access to chapter of digital reinvention. the pathways through which students and professionals can build I am honored to steward this great company, and I am filled skills for today’s technology era. That includes “new collar” jobs, with optimism about what we can achieve in partnership with our where having the right skills matters more than having a specific clients and society. Together, we are changing work and business— degree. Through our work in 11 U.S. states and 13 countries, we and ultimately the world. will have 200 Pathways in Technology Early College High Schools— or P-TECHs—serving a pipeline of 125,000 students in the 2019 school year. 2018 also saw the rapid growth of our IBM Apprenticeship Program, which trains people in 21st-century skills ranging from blockchain and digital design to cybersecurity—and which Virginia M. Rometty expanded nearly twice as fast as we had projected in its first year. Chairman, President and Chief Executive Officer Yet skills are only part of today’s workforce opportunity. In 2018, fueled by record diverse hiring, promotion and retention, we achieved our greatest progress in a decade on diversity representation among global executive women and underrepresented minorities. We also continued advocating with governments around the world for policies that help ensure workplaces are as inclusive and diverse as the world we live in. Recognizing that responsible stewardship should not be confined within IBM’s walls, we also are working aggressively to empower others to do lasting good. We are, for example, a founding partner in Call for Code, a global initiative that works with software developers to create solutions that can help save lives. Last year, 100,000 open source developers from 156 countries responded to the call, creating more than 2,500 applications to help communities recover from natural disasters. In an effort to provide additional and useful information regarding the company’s financial results and other financial information, as determined by generally accepted accounting principles (GAAP), these materials contain non-GAAP financial measures on a continuing operations basis, including operating earnings per share and operating pre-tax income. The rationale for management’s use of this non-GAAP information is included on pages 18 and 19 of the company’s 2018 Annual Report, which is Exhibit 13 to the Form 10-K submitted with the SEC on February 26, 2019. For reconciliation of these non-GAAP financial measures to GAAP and other information, please refer to page 41 of the company’s 2018 Annual Report.

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    Leading businesses are reinventing themselves with IBM Services and Solutions across AI, cloud, blockchain, quantum and more.

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    7 IBM Services United Airlines: Reinvention takes flight To ignite a major business transformation, United Airlines Flight attendant Deb Winchell knows better than most how stressful turned to IBM iX—the business design arm of IBM Services—and a delay can be—for customers and a set of business applications from a global partnership between staff alike. IBM and Apple called IBM MobileFirst for iOS. These applications combine the power of enterprise data and analytics with an elegant user experience, allowing United to broadly rethink how its crews work and how its work flows. United and IBM used the IBM Garage method to design apps for the airline’s growing deployment of iOS devices. The IBM Garage method, used by IBM Services with clients around More than 60% savings in app development the world, emphasizes co-creation and frequent iteration. It has costs, compared to a traditional approach allowed United to build complete, integrated mobile platforms that start with a user’s experience and extend to all the airline’s core business processes. United is now able to foster better and faster collaboration across diverse teams and time zones, enabling it to focus on its core mission of transporting customers to their proactive with apps co-designed by United and IBM iX. Deb can destinations on time. The apps are also giving flight attendants even report an issue while a plane is still in the air, so the ground like Deb Winchell new ways to help customers enjoy their flights, crew can get to work as soon as the plane lands. Customers on which makes everyday travel just a little less stressful for the next flight are far less likely to be affected because the app everyone involved. streamlines communication. “It’s been a game changer for us,” Front-line crews know that many factors can contribute Deb says. “It lets us care for our customers right in the moment— to delays. “Most challenges stem from things I can’t control,” and nothing’s better than that.” Deb says. “But when I can make a difference in a customer’s travel The agile IBM Garage method helps organizations think experience, it can be huge.” That’s why it’s important to resolve beyond their existing systems and focus on what customers issues before they affect customers. Deb can now be more actually need. When combined with IBM Cloud and IBM Watson, it’s nothing less than a way for organizations to reinvent themselves—an approach that’s being adopted by enterprises around the world as they move to the next stage of digital With new mobile tools, United staff can reinvention. For example, it has helped create a startup culture in quickly report and resolve issues that Bradesco, one of Brazil’s largest banks. Bradesco can now quickly previously required multiple steps. respond to the rising demand from its 75 million mobile banking customers. It has also showed East Carolina University new value in discarded data that enabled the school to predict possible outcomes, report strengths, weaknesses and deficits, and enable advisors to better assist students and improve educational programs. Digital reinvention isn’t just a product or a platform. And it’s certainly more than just a buzzword. It’s a promise: a new way to innovate and rethink a company from the ground up and help customers and businesses alike.

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    8 IBM Blockchain Walmart: Linked by safer food It starts with a single report of severe food-borne illness. With the IBM Food Trust, Walmart’s Food Safety professionals can Then more reports pour in from around the country and from trace produce back to its source them, a culprit emerges: a common type of lettuce. But where, in just seconds. specifically, did the tainted lettuce come from? The work of Walmart and IBM, powered by IBM Blockchain, is giving us time was reduced from seven days to just 2.2 seconds. a better way to answer this question. “With blockchain, all the trace media’s already there,” explains Until recently, tracing food hasn’t been easy or fast. Tejas Bhatt, senior director, Food Safety, for Walmart. And the risk that represents is significant. The World Health Blockchain technology is also changing the way companies Organization has estimated that there are 600 million cases like Walmart collaborate with their supply chains—even with of foodborne illness each year, leading to 420,000 deaths. potential competitors. The IBM Food Trust ecosystem connects And it can be daunting to trace how food goes through the supply supply chains like Walmart’s and also those of other major retailers chain. For example, four days of a farm’s production of red- and global companies such as Carrefour, Dole, Golden State Foods, and green-leaf lettuce and cauliflower can generate more than Driscoll’s and Nestlé—all without sharing any information they 200 separate tracking numbers that are printed onto cartons don’t want to share. Beyond safety, consumers increasingly value and pallets for shipping to buyers. Finding individual boxes of the kind of information that a system built on IBM Blockchain can particular at-risk produce in this environment means searching provide. With blockchain, growers, distributors and retailers can through a haystack of paper records. IBM Food Trust—using provide consumers digitized certifications of existing organic or fair blockchain technology—connects growers, processors, distributors trade products along with detailed documentation from different and retailers through a permissioned, permanent and shared points in the process, from farm to table. Ed Treacy, vice president, record of food-system data that drastically cuts the time needed Supply Chain and Sustainability at the Produce Marketing to trace produce from farm to store. In a pilot program, tracing Association, says blockchain “can speed up investigations into contaminated food, authenticating the origin of food and providing insights about the conditions and pathway through which the food traveled.” As more companies adopt a digital, end-to-end traceability protocol, the IBM Food Trust’s goal is to make the world’s food From Down to supply safer—something that is sorely needed. In its 2017 fiscal 7 days 2.2 seconds year, the U.S. Food and Drug Administration recorded 794 food recalls that involved more than 3,000 products. In addition to the Worldwide lettuce exports totaled societal and business impact, these recalls waste huge stocks of $2.7 billion in 2017. food and erode consumer trust. And if outbreaks multiply and answers are slow in coming, customers can become desensitized and begin to ignore overly broad warnings such as “throw away all lettuce in your refrigerator.” Work by companies like Walmart and other participants in the IBM Food Trust are laying the foundation for better management of our global food supply: rapid insight into what’s happened when something goes wrong, reducing waste, and a safer journey from the family farm to our local markets and, ultimately, to our dinner table.

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    9 Experts from Crédit Mutuel and IBM Services are working together in a “Cognitive Factory.” Watson eliminates distractions that come between branch director François-Xavier Maille and his clients. IBM Cloud · IBM Watson But that’s just the start. Crédit Mutuel is making important decisions—about data, compliance and regulation, cybersecurity, and managing applications across the enterprise. To achieve Crédit Mutuel: digital banking at scale, IBM and Crédit Mutuel are crafting a hybrid cloud strategy that encompasses multiple clouds and on-premise systems, including the mainframe. At the same time, experts A bank thinks from Crédit Mutuel and IBM Services are working together in a “Cognitive Factory” that provides a fertile environment for identifying, building and deploying new AI solutions. With many bigger internal IT teams involved, IBM and Crédit Mutuel are also creating industrial tools and training assets to efficiently expand cognitive solutions to 100% of the business lines of the company. Crédit Mutuel’s reinvention represents a synthesis of human and machine that gives banking new power. Employees can find the optimal blend of talent and data, use their talents to the fullest, When Crédit Mutuel embarked on its “together#newworld” delve more deeply into clients’ financial challenges and develop initiative—a five-year project to become a leading digital bank— smarter, more creative solutions. Extrapolate IBM’s immediate it brought in IBM to help it reinvent itself. impact on Crédit Mutuel to the entire world of financial services, Crédit Mutuel’s goal: to engage with customers more deeply, both online and offline, while providing new products and the fastest service—all in an environment of trust and security. To do that, the bank is infusing IBM Watson into the applications its advisors use and is embracing IBM Cloud as a platform for innovation, trust and security. 60% 175,000 François-Xavier Maille, director of one of the premier faster responses to daily emails routed business inquiries and prioritized branches of Crédit Mutuel bank in Paris, was the first to deploy the initial AI solution: a Watson virtual assistant that helps employees answer customers’ questions. “The application has and you can see the implications for how banking consumers liberated our people from a few recurring tasks so they can devote experience and engage with their financial institutions: More their time and talents to understanding our clients’ aspirations, relevant innovation for customers. Lower client turnover for banks. challenges, and circumstances,” says François-Xavier. Today, Greater confidence in asset management for consumers. Higher 23,000 Crédit Mutuel advisers across France rely on the Watson employee engagement and contributions. Growing customer tool, which helps employees answer business-related questions satisfaction. And more predictable performance for institutions. 60% faster. The bank intends to use Watson across all of its AI accelerates access to relevant information and liberates people business lines. to provide a human touch.

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    DeKalb is shifting to a systems-based approach to care. The IBM Watson Health solution helped Ellen Hargett and her Quality Institute team change the way they measure system-wide performance by organizing data and analysis into a usable dashboard. For each key performance metric on the dashboard, Ellen established tactical teams to fully understand the metrics, determine the “why” behind them and recommend tactics for improvement. Across healthcare, a systems-based approach can also produce a significant positive impact on resources. For example, sepsis is not only a medical challenge for hospitals. It’s also the most costly reason for hospitalization, consuming $24 billion each year in the U.S. alone. DeKalb’s efforts to quantify, Christina English is helping to lead analyze and shift the diagnosis and treatment of sepsis have not DeKalb Medical’s fight against sepsis. only led to a lower mortality rate but also significantly reduced the length of stay for patients. Individual treatments are now based on data informed IBM Watson Health by large-scale findings across large populations. Historically, doctors diagnosed through trained intuition. In recent decades, however, this approach has been replaced by “empirical medicine” DeKalb Medical: that’s based on data. The result is more standardized treatments and improved outcomes. At DeKalb, data is shared with healthcare professionals, providing them with information to spot large Stronger medicine patterns or gaps. Watson Health’s data-driven tools allow healthcare institutions to organize and visualize data and take fast action to address weaknesses or roll out improvements. A data-driven approach to challenges like sepsis also helps doctors expand their understanding of the syndrome, improving diagnosis and treatment. This trajectory will eventually create DeKalb Medical takes a systems-based, data-intensive a new era of healthcare. As medical professionals tap data at both approach to fighting dangerous infections with the help the systemic and individual levels, an age of “precision medicine” of IBM Watson Health. One of the lesser-known challenges will arise. It will be a time when understanding derived from the it faces is sepsis, which is caused by an infection that triggers many can be tailored and applied to the needs of the individual. an inflammatory immune response. Sepsis is notoriously difficult to diagnose and treat, making it the third-leading cause of death in the U.S. This trajectory will Nurses see it all, and sepsis requires them to race against the clock. But with the intelligent use of data, delivered eventually create a by IBM Watson Health and deployed by a team led by Christina new era of healthcare. English, a quality management specialist and former bedside nurse, clinicians at DeKalb are getting a step ahead to help patients get better, faster. Previously, Christina and her team had to fight sepsis with siloed and sometimes subjective information. “We knew what to look for, but we didn’t understand the importance of the symptoms, how they worked together and how 30% a clearly defined set of treatment measures is critical to success,” fewer lives lost to sepsis she says. Using IBM CareDiscovery, part of Watson Health’s set of performance-improvement solutions for healthcare providers, Christina and her team were able to gather and analyze industry benchmarks as well as their own performance metrics in order to identify sepsis “flags” and pinpoint where DeKalb could take proactive measures.

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    11 IBM Watson Hydro One: Outsmarting the storm Another late spring storm was rolling toward the Canadian With Watson, Hydro One’s Derek Roles can restore power utility Hydro One. But in its ongoing battle with ice, snow, wind more quickly after a storm. and thunderstorms, this time the utility found calm in the predictive power of The Weather Company and IBM Watson. Derek Roles is Hydro One’s first line of defense for a service area that covers most of Ontario. 20 years of experience and an encyclopedic knowledge of winter storms have helped him manage through many major disruptions, so Derek can usually Predictive intelligence is plan for the worst. Now, though, he can predict it. And that starting to create new options changes everything. In the past, recovery teams were deployed only after the weather had passed. Now, however, Derek doesn’t that can make extreme just keep up with the weather—he stays ahead of it. This shift weather more manageable was made possible because Derek and his team put data and AI to work: they trained Watson to predict outages using five years and less disruptive. of Hydro One historical outage data and a massive amount of Ontario’s historical weather information. Derek’s new predictive tools help him paint a clearer picture of how a storm will affect the utility’s electrical distribution network. Hydro One has committed itself to a more proactive 33% Emergency faster electricity Recovery Award approach, and the utility has not only gained a new way to restoration than from the Edison similar storms Electric Institute fight storms, but has also changed its basic business operations to strengthen its customers’ experience and service quality. The predictive power of AI enables Hydro One to activate its emergency organization structure in advance and create detailed Weather exerts a tremendous influence on the economy. team deployment plans, positioning some crews in the storm’s It affects productivity, sales and energy consumption, and predicted path while making sure other crews are well rested. it can disrupt supply chains and transportation systems. The utility is also able to staff call centers more effectively and Severe weather can upend lives and businesses for hours, weeks, notify customers of a storm’s potential impact on their service. years or even forever. So there’s a logic behind the expression So when a storm hits, restoration plans are already in motion and “ride out the storm”—that’s often been the only option. work crews can spring into action faster than ever before, quickly But predictive intelligence is starting to create new options that and safely scaling repairs from the main transmission grid to can make extreme weather more manageable and less disruptive. smaller circuits to individual customer locations in remote areas. This is especially critical at a time when severe weather is the leading cause of power disruptions in many countries. Global economic losses resulting from weather disasters totaled $215 billion last year. By putting the power of data and Watson to work, Hydro One is modeling new solutions for previously intractable weather problems everywhere—problems that can now be better understood and managed, along with human risks that can now be met head-on with artificial intelligence.

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    12 IBM Quantum ExxonMobil: Quantum ExxonMobil’s vice president understanding for Research and Development, Vijay Swarup, is leading the company’s exploration of quantum computing. quantum, as do Samsung and Daimler. Working as part of the Every energy company’s dual challenge: IBM Q Network alongside global universities and national research labs, these corporations see the potential of a massive shift in how computers can help solve some of the most enduring challenges— issues that, once solved, could transform entire industries. Provide access Address “IBM Q System One is the world’s first integrated universal quantum to scalable, climate affordable change computing system designed for scientific and commercial use,” energy says Dario Gil, director, IBM Research. “We are at the beginning of an exciting journey. Our research, systems, and business teams— along with our IBM Q Network partners—have a bold vision. Vijay Swarup, ExxonMobil vice president for Research and They are thinking big. These are the true pioneers.” Development, says energy research requires curiosity, Nature is no longer estimated but predicted and optimism, patience and dissatisfaction. Dissatisfaction because understood. That’s the goal. So when IBM unveiled its quantum he believes things can be better. But what, exactly, can be better? machines, companies like ExxonMobil saw great promise. But when Nothing less than our understanding of the world. you talk to Vijay about promise, his thoughts turn to the great needs Researchers now have a new tool to explore new ways that are facing the world. “Our global population is increasing to solve problems: quantum computing. And Vijay’s quite precise from 7 billion to 9 billion and, all across the world, a growing middle about the trouble with our current understanding. “There are some class requires more resources and, especially, more energy.” problems so big, all we can do is approximate,” he says. Whether Quantum might be well suited to solve super-complex problems, he’s in a business suit or the lab coat he wears at ExxonMobil’s such as advanced models which could lead to better approaches expansive New Jersey research facility, Vijay clearly enjoys trying to carbon capture and lower emissions sources of energy. But what to solve what he calls today’s pressing dual challenge: ensuring excites Vijay most is that the collaboration with IBM researchers that people have access to scalable, affordable energy, and doing could lead to a fresh ability to predict and anticipate how nature so in the context of climate change and the need for sustainable operates—which could lead to an understanding of what’s actually solutions. This is where IBM Q comes into the picture. Quantum happening, as opposed to an approximation of what might be computers have long been considered theoretical. But today, happening. “With a little curiosity, patience and not settling for they’re becoming a reality, with huge potential for energy the status quo, I know we can get there,” he says. companies like ExxonMobil. That said, using a quantum computer also calls for significant change in how researchers think about approaching their work. “Computation has always been an integral IBM Q System One is the world’s part of the research we’ve done here, but quantum’s radically first integrated quantum computing system for commercial use. different,” Vijay explains. “Now, we must first figure out which problems are most suited to a quantum approach and only then can we answer a more interesting question: How can you program a quantum computer to solve energy problems?” ExxonMobil joins a group of global corporations partnering with IBM to work side-by-side on IBM’s fully functional quantum computers. As Vijay says, quantum’s a priority that requires pairing the “best minds with the best minds.” So ExxonMobil has a team that will meet regularly with IBM’s quantum researchers. Barclays has its own team working on

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    13 KPMG is using IBM Watson to power a contract analysis solution for its clients. The solution examines More clients contracts, breaks them into their component parts and interprets each are partnering part with a high degree of accuracy. It’s faster and less expensive than manual methods, while freeing up with IBM to write skilled resources to perform more productive tasks. Maersk, the container logistics giant, Whirlpool Corporation is using the next chapters is using IBM Blockchain to create IBM Cloud to help manage all TradeLens, a global blockchain the data from its manufacturing of their digital solution for the shipping ecosystem. of connected home appliances. This global transformation will lead Whirlpool will be using the cloud reinventions. to faster delivery times, lower costs and a noticeable difference in the way to manage critical enterprise applications, which will give it more we get the things we use every day. flexibility to scale and innovate. KMD, Denmark’s largest technology company, is dedicated to connecting its clients to the latest technologies. Krungsri Bank, one of Thailand’s The company is using IBM Services largest financial institutions, to provide a critical foundation is working with IBM Services to of servers, networks and other lay the foundation for its future. technologies that help it handle An IBM Blockchain pilot is in large volumes of data with high progress, and the bank is planning levels of security. to develop new services for its customers. Belron applied IBM Watson Visual Telefónica turned to IBM Blockchain Recognition to its Autoglass Body to capture call data in real time Repair business to speed up insurance and save it in a format that’s trusted, processing, move repairs along traceable and accessible to network quickly, and help its customers get providers and carriers worldwide, back on the road fast. making international phone calls feel seamless despite all the technological Thought Machine, a London-based leaps they require. fintech startup, has built Vault, a new, cloud-native core banking infrastructure launching on Bausch + Lomb simplified the IBM Cloud. It has also partnered with service and maintenance process Profility, a post-surgery rehabilitation IBM Services to provide advisory for its high-tech Stellaris Elite Vision solutions provider, needed to integrate and delivery capabilities to its clients. Enhancement System for cataract and large volumes of data as well as retina surgery. Using IBM Cloud, the meet stringent HIPAA regulations. company can now pinpoint or respond They chose the IBM Cloud because to technical and service requests of its flexible software and secure, and limit or minimize downtime. dedicated hardware. Their system is widely used and has resulted Smart Dubai, working with in shorter rehab stays and fewer IBM Blockchain and IBM Cloud, hospital readmissions. has launched the region’s first government-endorsed blockchain service: Dubai Blockchain Platform. It is designed to make the technology Travelport, a travel commerce more accessible to the Dubai platform, is working with IBM Watson government, the UAE national to integrate disparate information government and private companies. sources and make stronger corporate travel recommendations. As a result, Fluor Corporation builds mega finding the lowest travel costs for projects across the globe. Data a company will be quicker and easier. generated by these projects has been harnessed by working with The Australian Federal Government IBM Research and IBM Services. has set its sights on being one of the Fluor recently introduced two new world’s top three digital governments AI-powered systems to uncover by 2025. In July 2018, it announced and predict how unmitigated trends a five-year agreement that covers could affect key project indicators. solutions from IBM Cloud, IBM Watson, IBM Security, IBM Research and the BNP Paribas is accelerating its digital Suunto, creator of the Movesense IBM Q quantum computing initiative. transformation and improving its microsensor, launched a Movesense operational efficiency. The bank will development community enabled now integrate IBM Cloud-hosted data in the IBM Cloud. This let Suunto Japan Airlines is using an IBM Watson- dramatically scale its offerings. centers dedicated to the bank, and powered chatbot, Makana-chan, Today, more than 800 developers will strengthen its hybrid cloud “as a to answer customers’ questions about are working with Movesense, helping service” capabilities while ensuring its popular Tokyo-to-Honolulu flights. Suunto bring the device to new the security and confidentiality of their Makana-chan eases the burden customers’ data—including not using customers all over the world. View these stories on live agents and is very popular public clouds for hosting any customer with passengers. and more at or other production environments with sensitive information. ibm.com/annualreport

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    14 Responsible Data Responsibility At IBM, we’ve always followed straightforward principles to act responsibly and earn trust. Today, our principles include: stewardship and – The purpose of new technologies is to augment—not replace— human intelligence. – Data and insights belong to their owner. trust have been – New technology, including AI, must be transparent and explainable. Recent actions demonstrate our principles at work, including: hallmarks of • Advocating for public policies to protect the privacy and IBM’s culture— security of data, working with governments worldwide on strategies that will ensure privacy and responsible handling of data, without undermining innovation. from our labs to • Partnering with STOP THE TRAFFIK, law enforcement and financial services institutions to stop human trafficking by using the boardroom— IBM software analytics to identify suspicious trends, hotspots and financial transactions. for more than a century. Modern slavery, a $150 billion business, has a new foe: an AI data hub on the IBM Cloud. • Launching AI Fairness 360, an open source software toolkit to help developers actively detect and reduce bias in datasets and AI. • Releasing Diversity in Faces, a first-of-its-kind dataset, to help reduce bias in facial recognition systems, making them fairer and more accurate. 1 million annotated human facial images IBM is recognized as one of the World’s Most Ethical Companies by Ethisphere, highlighting our influence in driving positive change in business and society around the world.

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    15 Jobs and Skills Diversity and Inclusion In the 1940s, IBM partnered with Columbia University to create In 2018, fueled by record diverse hiring, promotion and a new discipline: computer science. In 2018, we continued this retention, IBM achieved our greatest progress in a decade tradition by expanding training and education for the growing on diversity representation among global executive women number of “new collar” jobs for today’s era of data and AI. Recent and underrepresented minorities. We also continued advocating examples include: with governments around the world for policies that help ensure workplaces are as inclusive and diverse as the world • Developing new talent with our 12-month IBM Apprenticeship we live in. We received widespread recognition in 2018 for Program in areas including cybersecurity, digital design, this leadership, including: mainframe administration and software development. Hundreds of apprentices—ranging in age from 18 to 59—have joined the • Being honored with a 2018 program, which includes training and on-the-job experience Catalyst Award for leadership guided by an IBM mentor. in advancing women in business, becoming the first company to win the award four times and the only tech company so honored in the last 20 years. • Being named a 2018 Diversity Best Practices Leading Inclusion Index Company by Working Mother. • Scoring a perfect 100 percent for the 15th consecutive year Brandon Whittington, IBM Blockchain Solutions support in the Human Rights Campaign (HRC) Corporate Equality Index. engineer and graduate of IBM’s apprenticeship program • Launching Skills Build, an IBM volunteer initiative that helps more than three million primary and secondary school students learn about new technologies. • Continuing to transform education via P-TECH—Pathways to Technology Early College High School. In the 2019 school year, there will be: 200 P-TECH schools serving a pipeline of 125,000 students across 13 countries and 11 U.S. states IBMers at the Pride March in New York P-TECH students at a graduation ceremony

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