Good morning, and welcome to the Kyndryl First Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today's call is being recorded. I will now turn the call over to Lori Chaitman, Global Head of Investor Relations at Kyndryl. You may begin.

Good morning, everyone, and welcome to Kyndryl's Earnings Call for the Quarter Ended June 30, 2022, the first quarter of our new fiscal year. 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 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 event, which are available on our website at investor.kyndryl.com. 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. I'd now like to turn it over to our Chairman and CEO, Martin Schroeter. Martin?

Thank you, Lori, and thanks to each of you for joining us today. I am enthusiastic about our momentum and proud of what the team has accomplished over the last 3 months. On today's call, we'll share Kyndryl's quarterly results and update you on our progress. I'll discuss our strategy and how we're executing on our 3 As initiatives, alliances, advanced delivery and accounts, which are driving us toward profitable growth. Then David will provide more detail on our first quarter financial results, reaffirm our fiscal 2023 outlook and linked our recent progress to our financial goals. It's been nine months since Kyndryl became an independent publicly traded company, and I am just as excited today about the opportunity ahead as I was on day 1. As you can imagine, there's never a no moment post-spin. There's plenty of work to do to transition internal processes, build the new culture and seize market opportunities. For those of you who are new to the Kyndryl story, prior to our spin-off last November, we operated largely as a captive services provider, focused on supporting the products and technologies that IBM offered to its customers. Today, we are the world's largest IT infrastructure services company designing, managing and modernizing complex mission-critical systems at scale for some of the world's largest organizations. I'm proud of how quickly we're charting a new course to better serve our customers through our new alliances with a range of top-tier technology providers and enhancements of our services delivery driven by upskilling and automation fueled by data, IP and best practices. Our new freedom of action has given us the opportunity to be part of a much larger and growing ecosystem that really matters to our customers, expanding our addressable market from about $240 billion to $415 billion and…

Thanks, Martin, and hello, everyone. Today, I'd like to discuss our quarterly results, our balance sheet and liquidity and our outlook. Our financial results for the quarter ended June 30, our fiscal first quarter were in line with our expectations and position us to achieve the full year targets we laid out in May. In the quarter, we generated revenue of $4.3 billion, which represents only a 2% decline in constant currency from our pro forma results a year ago. This includes 2 points of revenue growth we picked up from pass-through revenues related to our former parent. 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 of having been operated as a captive subsidiary of IBM prior to our spin off, not the future potential of our business. Adjusted EBITDA in the quarter was $491 million. This represents an adjusted EBITDA margin of 11.4%. On a year-over-year basis, our adjusted EBITDA margin was down primarily due to the decline in revenue, a currency headwind of 60 basis points and a 50 basis point impact from some of our software licenses being treated as a subscription rather than a prepaid and amortized expense. Notably, our gross margin increased 60 basis points sequentially from our March quarter to our June quarter. This is a better reflection of the operational progress we're making. Adjusted pretax loss was $50 million, which is sequentially consistent with our March quarter results and down year-over-year, primarily due to lower revenue and $48 million in currency headwinds. Among our geographic segments, we delivered year-over-year constant currency revenue growth in our Japan and strategic market segments and our strongest margins were in Japan and the United States. Changes in how…

Thanks, David. Before we turn to Q&A, let me remind you why we're so enthusiastic about Kyndryl's future. As an independent company, we are seizing our now larger market opportunity, bringing incremental and differentiated value to customers and focusing on driving profitable growth. We're committed to investing in our business, and we'll continue extending relationships with our ecosystem partners and customers. We are a trusted partner with tremendous expertise, experience and scale. And as technology continues to evolve, our customers look to Kyndryl to keep them operating efficiently and ahead of the technology curve. Our 3 As initiatives will deliver substantial benefits. 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 stockholders. With that, David and I look forward to your questions.

[Operator Instructions] We will take our first question from Tien-Tsin Huang from JPMorgan.

Okay. Great. Appreciate the enthusiasm, definitely came through on the call. I wanted to ask, I suppose, on signings, if that's okay. I'm curious about sort of visibility there and timing of revenue conversion, et cetera. Have you observed any changes? And I know you talked about double-digit signings growth looking ahead. So hence, the visibility question?

Tien-Tsin, and thanks for joining the call. Look, a few things I'd say, first, obviously, our confidence in growing signings double digit this year stems from the pipeline that we're looking at. And we've got a terrific pipeline. We see it in the parts of our business where we're really focused, such as our A&IS business, which grew quite well this quarter as it did the prior quarter, such as the progress we're making with our hyperscale alliance partners. So we feel great about the pipeline but as you also know, we're really focused on the margin profile of these. And as David noted, we -- the gross profit dollars, for instance, in the signings from just this most recent quarter, the gross profit dollars in the next year also grow within that signings pool. So while the overall signings for that short period, the 90 days, we're down, the gross profit dollars still provide us growth for the next 12 months, which again is our focus. So we feel really good about the pipeline. We feel really good about the teams executing in the areas that of our biggest focus, and we feel really good about the profit profile of what we're signing. Now having said all that, look, when you're focused -- when one is focused on the quality of what you're signing and when one is really focused on making sure we get the right things into the backlog, that can elongate deal cycles that can elongate discussions with our customers. And look, we're okay because we want to get to the right signings -- the right signings profile, which we did in the most recent quarter, we did in the quarter prior to that. So we see a great pipeline of the kinds of quality deals and the kinds of quality revenue streams to go into the backlog as evidenced again by the gross profit over the next year or as evidenced again by the margin profile. And David commented, I did as well in the prepared remarks, we both commented on the pretax margin profile of what's going into the backlog. So we feel good about the growth we see and -- probably more importantly, we feel really good about the quality and the profit profile of what's going in.

And two things I just add related to the signings number. The June number -- the June quarter was a tough comp for us, we knew that going in because both of our two largest deals in calendar year 2021 fell in the June quarter, and those totaled more than $900 million. That created a tough comp for us. And obviously, we don't have that issue going forward. And then the second issue is that the December quarter is traditionally our biggest signings quarter. And as a result, how the second half of this calendar year plays out, particularly the December quarter ends up being a big driver of how we're going to get to double-digit signings growth for fiscal 2023.

I did have one, if you don't mind. I just want to ask on the gross margin since you mentioned it, we always like to look at gross margin as a proxy for contract execution pricing, labor costs, et cetera. So obviously, it sounds like that's doing well. There wasn't any unusual items there. But what about on the capital intensity side as well. Any change to consider there, especially as we think about cash flow conversion for the rest of the year?

Yes. I think we continue to see the business becoming less capital intensive. Our CapEx is underrunning depreciation, and we expect that to be the case probably even a bit more so than it was in the June quarter as we look out over the remainder of the year. In addition, I think the amount of cash we end up outlining for capitalized software and transition cost, startup cost is probably going to underrun our amortization as well this year, which should be helpful to free cash flow. So again, as we move to more advisory work and strengthen the margin profile of the business that we're signing, we see less capital intensity as part of that and that should be helpful to free cash flow, not only in fiscal 2023, but also over the longer term.

We'll go next to Jamie Friedman from Susquehanna Financial Group.

This is Spencer on for Jamie. Congratulations on the results. It seems that year is already tracking ahead of plan in some key metrics. Is the guidance just conservative or are there other considerations we should be looking at?

I think the -- I think we feel very good about the progress that we're making on a number of fronts, particularly the strategic fronts, the 3 As and the margin at which we're signing up business. And when you look at something like advanced delivery where we've already achieved half of our full year target for the benefits that we expect to generate, it's a time that we're making good progress. I'm hesitant to characterize the guidance in 1 direction or another. But I would point out that while we're making really good progress on the strategic front and with the 3 As and with the partnerships that we have, we have also been facing currency headwinds and the amount of currency impact on our EBITDA and our pretax margin, we currently estimate is a bit more than we would have estimated 3 months ago because of the way exchange rates have moved over this period of time. So when we're seeing progress on the strategic front in areas that we control some of the areas that are outside of our control, such as exchange rates are -- have been a little bit more of a challenge. So I really don't want to characterize the guidance one way or another.

Once again, thanks, everyone, for joining us today. We're delighted with the significant progress we made this quarter, obviously, in our 3 As and then getting our business back to profitable growth. We remain very excited about the opportunity ahead. We do serve our customers' mission-critical needs with more capabilities than ever before. And quite frankly, the idiosyncratic nature of a lot of the opportunities we have to turn this business around and the progress we're making in those keep us energized and motivated to deliver. So thanks again for joining, and we'll talk to you after the next quarter.

This concludes today's Kyndryl quarterly earnings call and webcast. You may disconnect your line at this time, and have a wonderful day.