Hello everybody and warm welcome to the Kyndryl Fourth Quarter Earnings Conference Call. My name is Melissa and I will be your operator. [Operator Instructions] I now have the pleasure handing over to our host today Jenifer Hollander, Head of Investor Relations. Jenifer, over to you.

Good morning everyone and welcome to Kyndryl's fourth quarter 2021 earnings call. Before we begin, I would like to remind everyone that our remarks today will include forward-looking statements. These statements are subject to risk factors that may cause our actual results to differ materially from those expressed or implied and these statements speak only to our expectations as of today. For more details on some of these risks, please see the Risk Factor section of our Form 10 information statement filed with the Securities and Exchange Commission on October 12th, 2021. Kyndryl does not update forward-looking statements and expressly disclaims any obligation to do so. In today's remarks, we will also refer to certain non-GAAP financial measures. Corresponding GAAP measures and a reconciliation of non-GAAP measures to GAAP measures for historical periods are provided in the presentation materials for today's events, which are available on our website at investors.kyndryl.com. I am pleased to be here with Kyndryl's Chairman and Chief Of Executive Officer, Martin Schroeter and Kyndryl's Chief Financial Officer, David Wyshner. Following the prepared remarks, we will hold a Q&A session. I would now like to turn it over to our Chairman and CEO, Martin Schroeter.

Thank you, Jenny. And thanks to all of you for joining Kyndryl's first earnings call. I'm excited to update you on the significant progress we've made over the last four months as an independent firm and our outlook as a market leading IT services provider. But before we get started, like all of you, we are watching the events in Ukraine with deep concern. My thoughts are with the people there, including our 74 Kyndryl employees and their families and friends. Our focus right now is on the safety of our people and their families in Ukraine. And our thoughts are also with our employees originally from Ukraine who are now working in other parts of the world. At last check, all our employees are accounted for and safe. Our key office remains closed and we've been able to continue to support our customers operations in the region. Back in October, before we spun-off from IBM, we shared several expectations and goals with you. And we've entered 2022 with momentum. Our team is delivering on the strategy and objectives we've laid out. Our fourth quarter revenues and pretax income were in line with our guidance. And we've also quickly executed on our partnership agreements. We said that a key milestone would be our participation in the broader market ecosystem, which was not possible as a captive unit inside of IBM. We delivered new alliances with Microsoft and Google Cloud in the fourth quarter. And just last week, we announced a global alliance with Amazon Web Services, the largest cloud provider. Our ability to now bring the best technologies from the three largest hyperscalers to our customers is a huge asset, as they accelerate their digital transformations. And it's a huge part of our growth strategy too. It's one of the…

Thanks Martin, and good morning, everyone. I'm proud of how our global team delivered in our first quarter as an independent company and of our continued progress in the first few months of 2022. Today, I'd like to discuss our fourth quarter and full year 2021 results, our balance sheet and liquidity, and our outlook. Our fourth quarter and full year revenues and pretext income were in line with the guidance we shared back in November. Thankfully, this will be the last period when we report our current results on a pro forma basis. In the fourth quarter, regenerated pro forma revenue of $4.6 billion, which represents a 4% year-over-year decline in constant currency. The revenue decline reflects the continuing effects of having been operated as a captive subsidiary of our former parent prior to our spin-off, not the future potential of our business. Pro forma adjusted pretax income was $53 million, which is down compared to the prior year quarter, primarily due to higher IBM software cost, but is well ahead of our quarterly average for 2021. Pro forma adjusted EBITDA came in at $667 million, which was lower than our expectation, even though revenues and pretax income were in line. This was due to a switch in how our IBM software agreements and certain asset transfers were ultimately structured. We also had a negative impact from currency. These three items had an aggregate impact of $53 million, but other than currency, they didn't impact adjusted pretax income. For the full year, we generated pro forma revenue of $18.5 billion, pro forma adjusted EBITDA of $2.7 billion, and pro forma adjusted pretax income of $114 million. In the appendix of our presentation, we've provided a bridge from our reported pretax income to our pro forma adjusted EBITDA for Q4…

Thanks David. Before we turn to Q&A, let me quickly summarize why we're so enthusiastic about the opportunity ahead. We made significant progress in the fourth quarter, and we're now positioned to participate in a much bigger and faster growing total addressable market. We're already deeply embedded with our customers and they trust us to operate the hearts and lungs of their vital information systems. We're unmatched in terms of our expert and trusted people, our data and our intellectual property. And we've embraced our new freedom to act as you've seen with our recent partnership and customer announcements. The progress we're making and participating in a broader ecosystem and the initiatives we've shared today, put us on a path to return to growth by 2025 as we focus on serving our customers throughout their digital journeys. This will be a particularly exciting year for Kyndryl, as we bring our plans to life and start to see outcomes and results from everything we've been building. So with that, David and I will be delighted to take your questions.

Thank you. [Operator Instructions] Thank you. We'll be taking our first question today from Tien-Tsin Huang of JP Morgan. Tien-Tsin, please go ahead.

Operator, we can't hear Tien-Tsin.

You are on mute Tien-Tsin …

Can you hear me now?

Here we go. Thanks Tien-Tsin. Good morning.

Yeah. Sorry about that. I know what happened. Good morning. Thanks for the slides. It's great to see this and go through it here. I'll ask about signings, if you don't mind. So, just simplistically looking at book-to-bill, looks like 0.95, 0.96, here in the fourth quarter. I heard David, your comments around some of the framework to think about signings. It looks like double-digits for this year and a little bit of a slow burn into the revenue. But just maybe anything to consider or think about visibility on signings, anything interesting from a new logo versus existing client side? And then just the signings in relation to revenue retention, any thoughts there as we sort of get into a rhythm of thinking about signings in relation to revenue?

Sure, Tien-Tsin. With respect to signings, we are enthusiastic about the opportunity for double-digit signings growth this year on a year-over-year basis, and we expect to start making progress there right away. As I look at our signings, I see growing share of wallet and growth with existing customers as being a really important part of that. We are adding new logos as well, but I really view share of wallet growth and having that driving signings as being particularly important to us. And we feel very good about customer retention. Our retention rates have always tended to be very high and that's just a natural part of our business model, driven by the customer satisfaction that we have and the service level achievement that we have going on. So, I expect that will help with signings as well. And then the last piece that's going to be an important focus for us this year is the growth in advisory and implementation services revenues. And those signings are important for two reasons. Number one, that give rise to the signings growth. And number two, they tend to give rise to revenues on a faster or more accelerated basis as opposed to managed services signings, which typically play out over three, four, five, six years. So, we're focused, both on the significant signings growth we expect to achieve this year and on specific growth in advisory and implementation services signings.

Okay. Great. That’s clear. Thank you. I had a second question, but happy to jump in the queue.

Thank you, Tien-Tsin. We will take our next question from David Togut of Evercore. David, over to you. David, please ensure you’re unmuted.

Hi. This is Millie Wu on for David Togut. Good morning and thank you for taking the question. Hi. Can you hear me?

Yes. We can, Millie. Thank you. Millie, are you there?

Okay. I'll just have a question on capital allocation strategy. So, can you give us your latest update on how you're thinking about it? And could dividend be considered within the next 12 months?

Yeah. Well, I'll give you -- thanks, Millie.

And how you're thinking about M&A?

Okay. Thanks, Millie. I'll give you my perspective. It's an interesting question and obviously, an important one. So, a few things. On -- directly on dividend within the next 12 months, I think that's highly unlikely. As David noted, most of our cash this year gets absorbed by -- transition costs gets absorbed by some retention programs that IBM put in place before we were spun. So, I don't see in the year -- and not in the year an opportunity. And quite frankly, as you know, as I think everybody would expect, we need to get the firm on a stable footing, a stable margin profile with an assured -- as David noted earlier, an assured investment grade rating. So, it's just a bit premature, I think, for us to be focused on returning capital via a dividend to shareholders. On the acquisition front, look, I think there are some interesting opportunities out there. From my perspective, if I think at a high level, there are opportunities, I think, for us to accelerate this transition through skills. Obviously, there is a substantial demand for talent, for the kind of talent we have in which we're keeping and which we are using to shift our business. But there are some -- also some very important -- there are some very important firms that do this kind of work that we might be consider accelerating our progress towards some of these newer areas. And as we build out our security practice, our network and edge practice, those are opportunities where we might consider them. And relatedly, but not identical, the other side of the acquisition spectrum is more IP related. We didn't spend a lot of time, in the prepared remarks, talking about the service delivery platform that we're putting together from the IP and the data and the technology we have today. But keep in mind, we were spun out with more than 3,000 patents with quite a few in the process. So, we have a fair bit of IP that we're building a service delivery platform around. And we would -- and we are looking at some things that might fit into there. It depends a lot as does -- it depends a lot -- as does the discussion around investment grade credit, it all depends on what's important to our customers. So, our customers, obviously, need access to our skills. Our customers need a robust service delivery platform, and our customers need us to be investment grade. So, we will keep all of those things in context. So, hopefully, that's helpful. David, anything to add?

Good.

Okay. Thanks, Millie. Operator, next.

Thank you. We will now move to our next question from Jamie Friedman of Susquehanna. Jamie, over to you.

Good morning, Martin. Good morning, David. I wanted to ask about the partnerships. So, Kyndryl signed a flurry of these recent partnerships, Azure, AWS, Google, many others. I was wondering if you could describe at a high level some of the mechanics. How do these typically work? Are they go-to-market relationships? Is their training for KD employees? Is there a revenue share? Just some color around the partnerships, I would appreciate it.

Sure, Jamie. Thanks for the question. Thanks for calling in. And so, I would -- the way to think about these partnerships is there really are three elements to each of them. Each of the elements is a little bit different depending on the nature of the partnership, but they're all built around three things. One is, they are built around enhancing the Kyndryl skill set. So, a co-investment in skills, in the case of Microsoft, it's called Microsoft University for Kyndryl, in the case of Google, it's called Google Cloud Academy for Kyndryl. So, each of them has a very heavy co-investment component to it, so we can build the skills, build the credentials that our teams need as we move into this ecosystem. So, that's part one. Part two of these is a go-to-market -- joint go-to-market with the partners. So, we actually show up together in front of our customers. And that's -- it's worked really well for the longest ones, our co-marketing -- our co-go-to-market with Microsoft is pretty well developed. The teams are still -- they still got some familiarity that they need to build around the world, but they are -- all of these -- each of these is built around a joint go-to-market and that allows, obviously, then the skills we build, the credentials we have to get put to work in front of customers so that we also build the experience and obviously we closed some business. And then the third element of each of these is a joint innovation. So, we are building innovation labs with each of the partners, that allows us to build and invest in some joint solution building with the technologies that the partner has, plus our service delivery platform, which can enable all of that. And then as I said, we can go-to-market together. So, there really are three pieces to this. Co-investment in our skill base, joint go-to-market and co-innovation. Hopefully, that's helpful.

Got it. Thanks for the context.

Thanks Jamie. Operator, I know -- I don't know if Tien-Tsin still back on. He was nice enough to go back to the queue. Tien-Tsin, you still there?

Tien-Tsin, please go ahead.

Good. Thanks Tien-Tsin. Yeah. Please.

Yeah. No. Thanks for taking my follow-up. I just wanted to ask on advanced delivery. I thought that was really interesting on the upskilling and automation makes sense. I understand the $200 million initial cost savings. I'm just curious how -- and I'm not expecting you to preannounce a bigger number in the out years. But how much further can we take that in terms of potential from a cost perspective? And then, also from a revenue implications or revenue per employee implications, any consideration there that you upskill and automate?

Yeah. It's a good question. And look, I'd say a couple of things first, which is, this business like others in its prior -- in a incantation with the old owners has tried to change and create advanced delivery methods. This business has attempted automation and things. And this one, I would say, it's different. It's, obviously, different because we have now different management, different approach, different freedom of action and how we go about doing this. And so, there's a difference now relative to, I think, what may have been tried in the past. So, that's one. Two, it's really important -- and we talked -- I mentioned a little bit about on how these partnerships are around co-investment and skills. Look, there is a demand for skills out there that is unprecedented. And none of us -- we don't expect it to change. Our customers don't expect it to change. And everyone is out trying to find the people to fill the demand as the market continues to grow. This for us is a massive opportunity to fill our skill needs to move our really talented, trusted employees into the places where our customers are trying to go. And so, as we create that opportunity and we give those people the time to go reskill, this is a really powerful model for us. And there are early -- the early signs, because we're in the stage now, we've piloted this, think of piloting this in dozens and we're going to move that pilot into hundreds. And in the dozens, the learnings are very positive. It works. The people, who again, these customers trust, get reskilled. They move into some of these newer areas and they wind up back in these accounts where the accounts trust them and love them to do the work they do. So, as we scale that -- as David mentioned in his prepared remarks, as we scale that from dozens now to hundreds, we think -- and we'll see how it rolls out beyond that. But in the medium term, we think this is worth about $600 million to us. And we are very focused on it. Now where does it go from there? Too soon to tell, right? We're still again in pilot. But as we said, we'll also provide updates on what our learnings are, how this is working and we'll understand better, because we have -- what I'd call the wiring diagram now, and now we'll learn more about the physics of how this works as we scale it. But this is a sizable opportunity and important one for us. So, thanks for asking. Operator, I think …

That’s helpful. Thank you.

Thanks Tien-Tsin. I think either Millie or David might be back from Evercore. I don't know.

Yeah. Of course. Your line is now open. Just to confirm you're unmuted, please speak Millie or David.

Hi. Yeah. Thank you for taking our question. Sorry about the lag on the line earlier. But I just have kind of a follow-up in terms of margins. So, in 4Q 2021, you guys had 14% or about 15% of adjusted EBITDA margin, kind of what drove the decline in margin expectation in your first quarter 2022 guide?

Sure. The -- I would look at the first quarter guide is being very similar to the prior year first quarter and not really look at it sequentially. So, last year, when the first quarter was also in that 12% to 13% range, we delivered 15% margins for the year. So, I wouldn't read into -- I wouldn't read anything into the sequential decline that occurs there. There's some seasonality associated with that. And as a result, I would focus on the fact that Q1 margins are expected to be similar to where they were a year ago. And while our outlook for fiscal year 2023 is preliminary at this point, I would emphasize that we're looking for a continuation of the sort of margin trends that we had seen in fiscal 2021. So, from that perspective, consistency year-over-year is the right takeaway from our guidance and not to read anything into the sequential decline.

Thank you, Millie. Thank you, David.

Okay. Thank you for the clarification.

Thank you. Thanks. So, I think that's the end of the queue. We've tired them out. I guess, David, we don't have a question. So look, a few things. One, thanks to everybody who called in. We'll have another call in early May as we indicated to talk about the quarter. But obviously, between now and then we'll be spending lots of time with our investors at various conferences, et cetera, to make sure that everybody understands where we are. And quite frankly, make sure everybody understands why we're so excited about the opportunity ahead of us. There is growth to be had as we've now expanded the addressable market in which we operate. There is opportunity to work with the largest technology providers on the planet as we use our freedom of action to create new partnerships. And as we talked about, I think, in some detail here, these initiatives really help us shore up the margin profile of the company over the medium term. And as we said, we'll continue to share progress and signposts so that you know that we're on track. Thanks again, and we look forward to talking with you over the coming weeks and months. Thank you, operator.

This concludes today's call. Thank you all for joining. You may now disconnect your lines.