00:05 Good morning and welcome to the Kyndryl Quarter Earnings Conference Call. Currently all callers have been placed in a listen-only mode, and following management's prepared remarks, the call will be opened for your questions. [Operator Instructions] Please be advised that today's call is being recorded. 00:36 I will now turn the call over to Lori Chaitman Global Head of Investor Relations at Kyndryl. Thank you, you may begin.

00:44 Good morning, everyone and welcome to Kyndryl's earnings call for the quarter ended March 31, 2022. 00:52 Before we begin, I'd 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 Factors section of our Annual Report on Form 10-K for the year ended December 31, 2021. Kyndryl does not update forward-looking statements and expressly disclaims any obligation to do so. 01:30 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 material for today’s event, which are available on our website at investors.kyndryl.com. 01:51 I'm excited to join the Kyndryl team as the new Global Head of Investor Relations. And I look forward to interacting with all of you. With me here today are Kyndryl’s Chairman and Chief Executive Officer, Martin Schroeter; and Kyndryl's Chief Financial Officer, David Wyshner. Following our prepared remarks, we will hold a Q&A session. 02:12 I'd like to now turn the call over to our Chairman and CEO, Martin Schroeter. Martin?

02:18 Thank you, Lori and welcome to Kyndryl. We're very happy to have you here. And thanks to each of you for joining us today to hear more about Kyndryl's first full quarter results as an independent company. 02:31 I'm pleased to update you on the progress we've made in recent months and our strategy as the world's largest IT infrastructure services provider. Before we get into the financials, our thoughts remain with the people of Ukraine and Kyndryl’s 74 Ukraine employees. I stand with those calling for peace and an end to the war in Ukraine. I've been moved by the generous spirit of many of our employees who have given their colleagues support during this difficult time. 03:00 From a business perspective we have little exposure to Ukraine and no facilities or subsidiaries in Russia. Our focus remains on the human aspect and our people. We're committed to providing continued support for Kyndryl employees in Ukraine, their families and our customers. 03:18 Now, turning to the business highlights. On our March 1 year-end earnings call we outlined our near-term financial objectives and strategy to put us on a path toward profitable revenue growth. We've taken significant steps forward on that path with financial results and signings in the three month period between January and March in line with our expectations and with progress on our strategic goals as well. We ended the quarter with over $2 billion in cash and on a solid financial footing to execute our strategy. And in just a few months we've made meaningful advances on our three major initiatives, our three A's, alliances, advanced delivery and accounts. 04:03 On today's call, I'll provide more detail on how we are leveraging our expanded alliances with key technology partners, the investments we're making in our…

14:46 Thanks, Martin. And good morning, good afternoon and good evening everyone. Today, I'd like to discuss our quarterly results, our balance sheet and liquidity and our outlook. 14:57 For starters, as Martin mentioned, our signings in the quarter were up 27% in constant currency versus prior year pro forma signings, due to benefits from our new technology alliances, as well as greater customer clarity about our business compared to last year. 15:17 Our signings increase follows our first major post-spin milestones, which were the new technology, training and go-to-market collaborations with each of the three major cloud hyperscalers. Beyond our signings growth, we delivered quarterly results that were consistent with the guidance we shared in March. In the quarter, we generated revenue of $4.4 billion, which represents a 2% decline in constant currency from our pro forma results a year ago. 15:49 Our results include two points of revenue growth we picked up from pass-through revenues related to IBM. Because most of our revenue in any given quarter is the product of contracts signed over the prior several years. Our revenue decline reflects the continuing effects having been operated as a captive subsidiary of IBM prior to our spin-off, not the future growth potential of our business. 16:15 And with the strengthening of the US dollar over the last year, currency headwinds had a 4 point negative impact on our reported revenue growth. Adjusted EBITDA was $536 million, this represents an adjusted EBITDA margin of 12.1%, up slightly from our pro forma margin a year ago, primarily due to a currency headwind of 60 basis points. Adjusted pretax income was negative $51 million, which is $13 million stronger than the pro forma prior-year quarter despite $34 million in currency headwinds. 16:57 Among our geographic segments, we saw the strongest…

30:58 Thanks, David. Before we turn to Q&A let me just quickly summarize why we're so enthusiastic about Kyndryl's future. We're in the early stages of operating independently, shifting to our growth opportunities, seizing our now larger market and bringing incremental and differentiated value to customers. We are the trusted partner with tremendous expertise, experience and scale. As technology continues to evolve our customers will look to Kyndryl to keep them operating efficiently and ahead of the technology curve. 31:34 Our three A initiatives will deliver substantial benefits as we have the financial flexibility to execute our growth strategy, to invest in our people and to create a winning culture, a culture that will create significant value for our employees, our customers and our shareholders. 31:52 And with that, David and I are pleased to take your questions.

31:58 [Operator Instructions] We'll take our first question today from Tien-Tsin Huang with JP Morgan. Your line is open.

32:15 Hey, guys. Thank you. Good morning. I like this slide 20. I think both of you talked about this transforming focused account into blueprint account. So I'm just curious, just the plan, how do you get that focused account to move up into the higher gross margin categories. Is it just a function of selling more on a digital or modern content, is it pricing discipline, is there going to be some run-off in the book? Just trying to better understand the plan to get there. Thanks.

32:43 Yes, sure. Thanks, Tien-Tsin. Good morning and thank you for joining. A few things I'd say: one, , remember that we start -- we start these discussions in a really good place. Our customers like what we do for them, they trust us to run their hearts and lungs. And so these discussions are -- they're very engaged, they're very receptive to working with us. And keep in mind that our relationships in the proximities to our customers we brought with us, right? We didn't -- we're not creating new relationships -- we had the kind of the front and center relationships with these accounts when we're in IBM, and so we brought those. 33:28 So we start in a good place. The patterns we are seeing in how these discussions are evolving are multifaceted. So primarily what we're seeing is an expansion of the relationship. And that's about using our new alliance partners bringing some of our new capabilities to help them on the journeys that they're on, whether that's cloud or data or security. So primary pattern we're seeing is an expansion of the relationship, driven by the ecosystem in which we now operate and the content we have to bring, which is higher margin. 34:15 The other element that we're seeing is, how we re-solution what we're delivering. So, as an example, we use sub-case or content from other providers to help us deliver certain elements. And we have an ability to swap out some of those and bring others in. So we can go look through our vendor lists and see what alternatives we have. And I make that unique -- identify that is a unique pattern, because it allows us, obviously, to keep the revenue, but improve the margin profile. 34:55 And then thirdly,…

36:42 It is. So just thinking about signings and that being up 20%, I'm assuming, I think you did say the margins were up sequentially on the signings, which suggest that clients are embracing and open to sort of your new construct or following this blueprint model. Is it safe to say that's the [Multiple Speakers]

37:03 Yeah. That is the correct interpretation. In fact, the growth we printed was also reflects a few relationships where we didn't renew some of the content, because it wasn’t economic. In those cases, say, those customers they went directly to the vendor and they -- either they bought the licenses or they got some of the content, but we renewed the higher margin, higher value content and we still were able to grow. Now, every quarter is a little bit different and we are focused on growing the full year signings at double-digit, which we're very confident we can do, but it will reflect that higher value content and we will continue to carve out -- we will carve out content that just doesn’t make sense.

37:48 Right. So it's not just a level of growth, but also the quality of it within that double-digit. I think I understand. Thank you, Martin.

37:55 Thanks, Tien.

37:56 Operator, next question please.

38:00 We will take our next question from David Togut with Evercore ISI. Your line is open.

38:08 Hi. Good morning this Millie on for David Togut. Thank you for taking the question. I have a question and may have a follow-up after. So my first question is on free cash flow. Can you give us more color on your fiscal ‘23 free cash flow expectations? And maybe unpack the key drivers, including capital spending and working capital usage among others?

38:37 Sure, Millie. Thanks for the question. When we look at free cash flow and our normalized free cash flow of around $500 million a year, I would say the way we get there in fiscal 2023 is, we have close to $100 million of adjusted pretax income at the midpoint of the guidance range we provided, plus about a $300 million gap, maybe a little bit more between the amount of depreciation expense that we have and the amount of net capital expenditures that we're going to have. So a little over $1 billion of depreciation and around $700 million of net CapEx produces about $300 million of free cash flow there. And then we're looking for in the range of $100 million from working capital and other items. And that's going to be an area of focus for us this year as well. 39:35 Obviously, with respect to free cash flow, there is always a possibility of timing differences that has very much worked in our favor in 2021, and probably a little bit in the March quarter as well. So we'll watch those, but the three key components are pretax income, the depreciation CapEx gap and a bit of contribution from working capital.

40:01 That's very clear. Thank you so much. And my next question is on your constant currency growth. So last quarter you guided to a 5% decline, a pro forma constant currency revenue growth and you, obviously, outperformed that guidance this quarter with 2% of constant currency pro forma growth. So can you maybe help us, what are the different factors that drove that?

40:36 Sure. Our March quarter results include just over 2 points of revenue -- 2 points of revenue growth we picked up from pass through IBM revenues. These are primarily situations where we ended up being contractually responsible for providing services to customers, but IBM is economically responsible. And we hadn't really forecasted those continuing. So it’s about 2 points of the over performance and by the way fiscal 2020 -- our fiscal 2023 guide now assumes a 1 point year-over-year benefit from pass through IBM revenues. 41:15 The remaining upside was really driven by strength in our advisory and implementation services revenues, the portion of signings in this past quarter and in the fourth quarter of 2021 they turned into project work and revenue sooner. So it was helpful to us as well.

41:37 Operator, next question please

41:41 [Operator Instructions] We'll take our next question from Jamie Friedman with Susquehanna. Your line is open.

41:58 Jamie ?

41:59 Jamie, we can't hear you.

42:05 Jamie Friedman, your line is open, please start to mute function on your phone.

42:08 Hi can hear me okay?

42:10 We can. Thank you. Good morning.

42:12 Okay. Great. Good morning and congratulations for all the hard work here. I really like this slide 20 in the incremental disclosures you have here. Really appreciate it. But I wanted to ask you a couple related to that. So this is the one where you talk about focus accounts and the blueprint accounts. I'll just add two upfront about the same topic, but in general how do you see the contract renewal discussions going? And then also on contracts, I think that -- I apologize if I got this wrong, on average your contract duration runs about five years, do you see any meaningful trends in contract duration. So first on the renewals and second on the duration. Thank you.

42:59 Yeah, sure. Thank you, Jamie. And thanks for joining the call. Good question. So few things, on renewals, I'll step back and say that, from all the work that IBM did last year as we were approaching the spin and then the Kyndryl team since, we have brought -- we really have brought the customer base on this journey with us and the backlog that we brought, the substantial backlog that we bought over with us really does represent like the customer base and their vote of confidence on Kyndryl's and what it can -- what it can ultimately help them achieve, which are a set of really complex journeys related again to them transforming their business to be more competitive. 44:00 So between the work that IBM did, as I said, prior to spin and now our work as an independent firm, customers are coming on this journey and I start there, because it's also reflected in our renewal rates. And we are really doubling down on the relationships we have, the customer base we have, investing quite heavily in making sure they have access to the best skills, making sure that they have access to our partners and what we as a group, as a consortium can bring to helping them on their journeys and these renewal relationships are going well. 44:43 As we start to put -- as we start to put our alliances and our partners and we show up together now as we start to put the capabilities around that and are able to help them -- are able to help our customers go where they want to go. I expect that our renewal rates will remain very high. 45:09 Now, on your average contract, I'll sort of bifurcate it a little bit, in…

46:56 Yep. That's a great answer. Thank you for that. I'll jump back in the queue.

47:00 Operator, next question please.

47:04 We'll go next to Bill Cadigan with Deutsche Bank. Your line is open.

47:08 Good morning. Just a couple of housekeeping items. David, can you review the spin in terms of transactional costs for this year? And then also provide any color as to what that's going to look like next year? Thank you.

47:21 Sure. We're looking for about $300 million of P&L costs this year, fiscal 2023, and probably about $400 million of cash outlays. The principal component is associated with these spin-related costs. Our systems migration work that needs to be done post spin to separate us from IBM systems and which we're still running, that's the largest component. We have rebranding costs that we're incurring and we also have a broad based employee retention program that IBM put in place, under which we're continuing to accrue and that pays out in this December. And that's actually the biggest source of the difference between the P&L cost and the cash outlays, because a portion of that was already accrued prior to year end. 48:17 So, those are the key components of it. All three, the retention program will be done at the end of this calendar year, the systems migration work will carry in to fiscal 2024, but it should be much smaller, the rebranding work will be done this year. And as a result, the amount of spin-related costs that we expect to have in fiscal 2024 should be significantly less than what we have, much less than what we have here in fiscal '23.

48:50 So comfortable to say, I mean, at least 50% lower year-over-year. I guess my question is, I'm trying to understand what part of that is sort of structural versus one-time in nature?

49:00 Yeah. I would view all of it as one-time in nature, some of it just -- and yes. I do think it will be down 50% or more in fiscal 2024. It's all one-time, some of it just has a little bit of a tail that goes into fiscal '24.

49:21 Okay, great. Thank you. And then, remind me, how do you guys define medium term in you're kind of -- in your slide deck?

49:27 Yeah. I tend to think of medium term is three to five years for us. And in particular, our initiatives, the accounts and alliances and advanced delivery initiatives should very much play out over the next three to five year period with advanced delivery having the potential to be in -- toward the shorter end of that period.

49:54 Okay, great. Thank you. And then just one final question. You guys have been very consistent in your messaging around your commitment to the IG rating. Can you talk about just to round that out, the potential of pursuing a rating with Fitch just to make sure that you -- not only from a customer facing perspective, you have to pick up another IG rating, but also in terms of your outstanding public debt, just in terms of providing some assurance that it's going to remain in the index. Thank you.

50:24 Sure. As you mentioned we are investment grade with both Moody's and S&P. We do consider that important to us. Not really from a financing cost perspective as much as it's commercially very important to us. And we are going to look to see whether our -- whether the sort of ratings group we have is having too is the right best answer for us or whether other alternative, additional alternatives would make sense.

51:04 Great. Thank you for your time.

51:06 Operator.

51:08 And this does conclude the Q&A portion of today's call. I would now like to turn the call back over to Martin Schroeter for any additional or closing remarks.

51:15 Great. Thank you, operator. And thanks again everyone for joining us today. Look, you can hopefully tell that we're very excited about the progress we've made in our first six months as an independent company. And I hope you also can sense the confidence we have, the steps we're taking along with the long-term journey that our customers are on that define sort of the industry tailwinds in which we operate really do position us to be -- continue to be the leader, to be a world-class growing and a higher profit business in our expanded market. So thanks again for joining and we will talk to you soon.

52:01 This concludes today's Kyndryl Quarterly Earnings Call and Webcast. You may disconnect your line at this time, and have a wonderful day.