Good day and thank you for standing by. Welcome to the Kyndryl Fiscal Fourth Quarter 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker’s presentation there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your host today, Lori Chaitman, Global Head of Investor Relations at Kyndryl. Please go ahead.

Good morning, everyone and welcome to Kyndryl’s earnings call for the fourth quarter and fiscal year ended March 31, 2023. Before we begin I'd like to remind you 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. 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 investors.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 now turn the call over to Martin. Martin?

Thank you Lori and thanks to each of you for joining us today. I am enthusiastic about all that we at Kyndryl have accomplished in our first full fiscal year as an independent company and I could not be more proud of our teams around the world. We delivered solid fourth quarter results exceeding our recent guidance. We exceeded our year one targets for all three of our Alliances, advance delivery and accounts. We're solidifying our leadership position in mission critical IT services and we are signing new contracts that will drive margin expansion going forward. In short, we are taking full advantage of the new freedom associated with our independence and autonomy. We've proven we can deliver on ambitious plans to transform and strengthen our business. This gives us tremendous confidence as we look ahead to fiscal 2024 and beyond. On today's call, I'll update you on our strategy, on the remarkable progress we've made to date on our three A's initiatives, and on the opportunities we see ahead. David will then review our recent financial results and discuss our fiscal year 2024 outlook. Just over a year ago, we introduced our three A's and since then, we've successfully executed each of these initiatives and exceeded the year one milestones that we laid out. We've reshaped our business through our global practices and Alliances and we've created new avenues for delivering higher value services to customers through Kyndryl Consult, Kyndryl Bridge, and Kyndryl Vital. We're building resiliency and productivity through Advanced Delivery and we're fixing focus accounts. We're expanding our capabilities across our six global practices from cloud, core and security to network, data and workplace services. And along the way we've also made great strides in creating a services oriented culture, one that is flat and fast and…

Thanks, Martin and hello everyone. Today, I'd like to discuss our quarterly results, our balance sheet and liquidity, the substantial value being created by our three A's, and our outlook for fiscal year 2024. Our fourth quarter results reflect solid operational execution and progress on our key initiatives. In the quarter, we grew revenue 1% in constant currency to $4.3 billion. Demand for our services has remained resilient amid increased global macro uncertainty and we continued to gain momentum in higher margin advisory services. Kyndryl Consult signings grew 30% in constant currency year-over-year and generated 13% of our revenue in the quarter, the highest percentage ever. Our adjusted EBITDA in the quarter was $476 million and represented a margin of 11.2%. Adjusted pretax loss was $61 million, only a $10 million decline in profit compared to the prior year quarter despite currency headwinds and higher software costs. Currency movements had a negative year-over-year impact of $22 million since we have dollar denominated costs in our global operations, in addition to having international earnings. IBM software costs increased by $50 million year-over-year pursuant to the contract that our former parent put in place prior to our spin. And importantly, progress on our three A's helped offset currency impacts in the software cost increase. Among our geographic segments, we delivered year-over-year constant currency revenue growth in three out of four segments and our strongest margins were again in Japan and the United States. We address our customer’s needs not only through our geographic operating segments but also through our six global practices; cloud, applications, data and AI, security and resiliency, network and Edge, digital workplace, and core enterprise. Our business mix continues to evolve to reflect demand with most of our signings, including Kyndryl Consult signings coming from cloud, apps data and…

[Operator Instructions]. Our first question comes from the line of Tien-Tsin Huang with J.P. Morgan.

Great, thank you. Good morning and thanks for the new slides there. It's easier and helpful. Just on the outlook, if you don't mind me asking that first, just some visibility on the five to six points drag that you called out to reduce the focus accounts. Will we see that as early as Q1, how do you expect that to phase in as the year plays out? And I'm curious if we see delays in the runoff like we did in fiscal 2023, would that put pressure on the margin outlook here or are there other offsets? Can you hear me?

Please stand by.

Well, is Tien-Tsin still…

I'm here. Can you hear me?

Yes, there you go, Tien-Tsin. We can hear you now. Can you hear us? Thank you.

Yes. Yes. I wasn't sure if you heard my question or…

I did. Yes. Thank you. We had a little -- we had a little audio issue. So let me start, and I'll ask David to comment as well. And again, apologies for the audio issue here. So look, we're 12 months into the focus account work which means we've got a pretty good idea of where we stand customer by customer. And so the decision to -- the decision to reduce the revenue in some of these accounts is pretty well developed. It takes time to execute and it will build over time. So -- and as you know, it's cumulative. So what we get done in the first and the second, for instance, will persist in the third. And on top of that, we'll get more done in the second half. So it will build, the impact will build over time. But I feel -- look, I feel pretty good about our ability to execute on the focus account initiative again like we did in the first year. And I'd say that -- I'd say that two other comments. One, as David mentioned when he talked a bit about the patterns we're seeing, the primary pattern is an expansion of scope. So even if the revenue doesn't come down as much as what we're predicting, we will get the lower margin revenue out over time, and it may get replaced by higher margin revenue. You saw that in everything we've signed since. So -- and that's really what's driving the outperformance last year. It wasn't that we didn't get as much of the lower margin revenue out, it is actually that we're doing better, replacing it with new work, and obviously Kyndryl Consult is growing pretty well within that. So I feel -- and therefore, by the way, your second part of your question is I don't feel like we've got an exposure in margins even if the revenue doesn't come down at that rate because, again, our customers are demonstrating over and over that they're interested in us expanding the scope that we have with them. So again, I'll ask David to make a comment about how he sees it. But this will build over the year. I feel like with the work now 12 months -- having 12 months of maturity, I think we understand pretty well how this will play out. And again, even if the revenue doesn't come down at this rate, it's probably because we're generating better margins on expanded scope and therefore, it's not a risk to the margin profile for the year. David, would you add to that?

Exactly right. The only thing I'd add is that some of the visibility we have is because some of the actions have already been taken. Some of the -- some of the contracts where this will have an impact, have already been revised or adjusted to do this. So we will see it in the first quarter in part because of actions we took in fiscal 2023 that play out in fiscal 2024.

I see. Okay. No, that's great. That's all very thoughtful. So my follow-up, if you don't mind, just I'll ask a macro question, just thinking about client priorities and if you're seeing any change in client demand at all, given all the talk of macro uncertainties. Is there any impact on short-term project work, it sounds like Consult is doing well, but I figured that I will ask that as well and then just any implementation sort of changes and delays, that kind of thing?

Yes. Look, we're very fortunate Tien-Tsin. Before I start my answer I must make sure you can still hear me?

Yes. Yes.

Okay, good. So look, we're very fortunate that the nature of the work we do is not discretionary. And so we don't see the kind of demand slowdown, the signing slowdown that others may be experiencing. On top of that, where we are moving into new areas like all the work with our partners and our Alliance partners, we've got some catching up to do, right. We're fairly new to the public cloud space with our three big hyperscale partners, as an example. And we were able to sign $1.2 billion in the first year, and we expect that to keep growing but again, we're catching up to where others have been in the past. So the nature of what we do is mission-critical and not discretionary. The new areas we're going into is an area of tremendous untapped demand for us because of what we do and the demand profile we see is really latent demand, pent-up demand because our customers have been asking us to play a heavier role in how they manage across their hybrid infrastructures and helping them move more workloads -- the important workloads on to cloud environments. And I think all of that is a proof point, as you said, Kyndryl Consult doing really, really well, and there is this latent demand for what we do now that we've entered the ecosystem that's really important to our customers, the one that really represents their future. So we don't -- we haven't experienced it, we don't see it. And again, it's the nature of the work that we do that's nondiscretionary and it's the pent-up demand for us to help customers on these -- the most challenging infrastructure programs given that we now are part of an ecosystem that is where they're moving to. Hopefully, that's helpful.

It is, thank you for the answers.

Thanks Tien-Tsin. Operator, next question please.

Our next question comes from Divya Goyal with Scotiabank.

Good morning everyone. So for the Tien-Tsin's question, I just wanted to get some clarity on, do you see improvement in revenue retention as the clients are considering slowing down their cloud transformation, given there was a little bit excessive done during the pandemic? And in addition to that, given the clients are now looking at more of a distributed structure -- infrastructure rather than focusing all in on cloud?

Yes, thanks Divya. I will also ask David to share his point of view, but let me say a few things. But again, before we start, hopefully, Divya, you can hear me?

You're coming through.

Yes, good. Thank you. So look, first and foremost, I think it's important to understand given the role we play in the world and in managing the banking systems, the telecom systems, the supply chains, the airline reservation systems, as those worlds, as those infrastructures, as our customers' environments become more complex it's a massive opportunity for us to help them because these are the systems that have to work all the time. And so whether a customer is accelerating or decelerating a move to public cloud, whether a customer is thinking about -- whether a customer is thinking about or rethinking is it all public versus hybrid, that really represents for us a substantial amount of demand. And we see the world getting more complex. We see the world, we see our customer base trying to take advantage of innovation wherever it may exist. Right now, there's tremendous interest obviously in AI and tools, which means for us that we help them architect their data in a way that they can get it where they need it. We help them secure it and manage it across that diverse infrastructure. So for us, given again the nature of what we do, the specific opportunity to Kyndryl is driven more by the complexity of what our customers want to create given where they see innovation, given where they see their infrastructure evolving as opposed to a more general macro trend, let's say that a shift to public cloud slows by a few points or accelerates by a few points, our demand is driven and again, I think it's somewhat unique to us. Our demand is driven more by the complexity with which they're dealing and with so few of on an absolute basis, with so few of the really important mission-critical things having been moved as a percentage of the total, we see a long-term demand for us, managing across these diverse infrastructures. But again, I'll ask David to comment as well.

I agree, right. Hybrid environments are helpful to us in terms of the demand they generate. Complexity is helpful to us in terms of the customer demand it generates. More access to data where AI is helpful to us and really more focus by companies, by enterprises on efficiency, and productivity is a helpful backdrop for us as well. So as Martin said, I think all of those things are working in our favor in this environment.

Thanks, David. Divya, do you have another follow-up?

Yes, that's very helpful. Thank you so much. Just a quick question on the focus account on -- and the progress on the three-A’s. So did you see one geography getting more impacted or being more profitable or more effective than others as you are rolling out these initiatives now?

So Divya, let me again give you my two cents and obviously, I'll ask David to comment as well. When you deconstruct or look at the three-A’s as individuals, our ability to expand into the hyperscaler space across the world is pretty evenly distributed because we started from -- really from a standing start over a year ago. And so that $1.2 billion is mixed a lot like our general signings are, U.S. is quite large and etcetera, etcetera. So the Alliance is part of the three-A’s, it is going to be distributed roughly by -- similarly to our existing business. Now having said that, and that some of our countries get a little bit of a faster start and some a little yes, they did. But by and large, that opportunity over time over the medium term is going to look like our business. Our Advanced Delivery efforts are global in nature. We run a global platform, and therefore those benefits show up -- quite a bit of them show up in our delivery. It's obviously in our delivery centers. We do some local delivery. That mix is always slightly different country by country. But again, it won't look different from the way we're mixed today. The focus accounts to finish up the three-A’s, the focus accounts are not distributed exactly the way our business is. Yes, we have them everywhere. But the focus accounts and the pace at which they will resolve themselves will show up very heavily in the U.S. They'll show up very heavily in Western Europe. We have focused accounts in Japan, even though it's already quite a profitable business but we will get those fixed. So the focused account impact, the benefit to the focus accounts is over time, is going to show up where our profitability is pressured the most, and that's outside of Japan, that's Western Europe. It's a bit in the U.S. as well. So you'll see from a segment perspective, you'll see the benefits of two of the three-A’s distributed the way our business is today, and you'll see the focus account impact -- the focus account benefits impact Europe and you'll see it impact the U.S. more than Japan. David, anything you would like to add?

Yes. The corollary to that is that our three-A’s are really global initiatives. It's not two-A’s in one part of the world and plus something else. The three-A’s are what we're working on everywhere across our organization. And with respect to focused accounts, really with respect to all three of the A’s, they have been what we've been emphasizing. And I think the progress has been remarkably solid and consistent around the world.

Thanks David.

Thanks Divya. Operator, could we move to the next question please.

Our next question comes from David Togut with Evercore ISI.

Thank you, good morning. Could you comment on the profit margins on the $1.2 billion in hyperscaler bookings you recorded for FY 2023?

Yes, sure. We view the profitability of those as being very consistent with where we've been signing business. So it's obviously higher than our existing profitability and is a part -- a significant part of the profitability on -- the expected profitability on these signings that we reported on, and you can see on Slide 16. We see the new Alliances having that same sort of profitability. And in many cases, the hyperscaler component is part of a larger signing as well. And as a result, it is -- it's very much playing into the results that you're seeing with our projected margins on signings moving up considerably from where they had been and really positioning us for better margins in the future, which we think is a key part, an important part of our story.

Appreciate that. And then just as a follow-up, I heard you give some of the elements of the free cash flow guide for FY 2024. And I apologize if I missed anything, but working capital was a big source of cash in FY 2023. Could you walk through what your FY 2024 operating cash flow guidance, including assumption on use or source of cash from working capital management? And then just bring us down to free cash flow for FY 2024, if you could?

Sure. As you pointed out, in fiscal 2023, we were able to generate significant positive adjusted free cash flow despite having an adjusted pretax loss. And we did that in part by having a favorable gap on CAPEX and depreciation and then making a lot of progress on working capital. And as we go into fiscal 2024, we're not going out with a free cash flow guide or outlook but the key pieces in there will be our pretax income or loss. We'll have a little bit of cash taxes and interest expense. And then the biggest opportunities for us are the gap between CAPEX and depreciation that I mentioned earlier, and we estimate that to be in the $100 million favorable range. And we're going to continue to work on working capital as we've seen that being a significant opportunity for us, and we see further opportunities on the payable side, on the receivable side, a little bit in terms of accrued liabilities as well. And we'll look to optimize those -- to continue to optimize those in order to have our free cash flow, be strong as it can be in fiscal 2024.

And just a quick follow-up. Net-net, would you expect working capital to be a source of cash or a use of cash in FY 2024?

We're going to -- we expect it to be a source of cash in fiscal 2024, probably not to the same extent that it was in fiscal 2023.

Thank you very much.

Thanks David. Operator, can we go to the next question please.

[Operator Instructions]. Our next question comes from Jamie Friedman with Susquehanna.

Hi, thank you. And congratulations on the milestone in your first year. I just wanted to ask about the Slide 16 and observations about the three-A’s, I'm particularly interested in this progression of the pretax margin going from 4% to 9% on post-spin signings. I was just wondering, is there -- is there any particular reason why it has expanded kind of in this progression in this time, is it because like the low hanging -- you're starting to pick the low-hanging fruit now or is the pricing kicking in, like why -- I mean 9 is a lot higher than 4 so why is it moving up this way now?

Yes, a great question. I think what's important about the 4%, which is in our first six months, is it -- that included a number of deals, particularly larger deals that we had started negotiating even before the spin. And as a result, some of the signings in there were essentially think of them as being pre-spin price quotes that dragged down the margin. And I think the -- as we moved into fiscal 2023, we were -- we're signing deals that were our business, and that's why they were in the 7% to 9% pretax range. And then the movement up from 7% to 9%, I think, represents the benefit increased focus on this issue. And probably the learning from experience that we can indeed command the sort of margins that we're seeing now up in the 9% approaching 10% range. And that's going to be a key area for us going forward, making sure we've got the discipline to get appropriate margins on the business that we're signing.

Thanks for that David. And then I want to ask about the 2024 outlook, Slide 14. This is really an impeccable slide. But what -- in terms of the revenue, what is different, if anything, than when you spun, so in other words, the three points in the initial backlog, was that any different then versus now the five to six in the reduced focus account headwind, is this the same or different because this is the question investors are asking us this morning.

Sure. I would say the three points due to the backlog is no different. It's exactly what it was. It's the backlog playing out. It's the impact of the low to mid-single-digit revenue decline associated with our initial backlog that we've been talking about consistently over the last 18 months. The second piece, the five to six-point impact associated with reducing focused account revenue and low-margin third-party content, that is a -- that is consistent with what we wanted to do, but we're stepping it up a little bit. And I think the mix of the impact between fiscal 2023 and fiscal 2024 has ended up being more in fiscal 2024 and less in fiscal 2023 than we would have initially expected. So our revenues were a bit stronger this past year than we thought at the beginning of the year, which actually creates a tougher comp for us. And so as we step away from the business that we have always wanted to step away from and then maybe even a little bit more, the impact in fiscal 2024 on a percentage basis just ends up being a bit larger. And then lastly, I would say we're really excited about Kyndryl Consult and the growth that we're seeing there. The 30% growth in signings that we have, the fact that's already up to 12% of revenue on a full year basis, 13% in the most recent quarter, the impact that's having a little bit on the revenue side and reflecting us, showing up differently for our customers and playing a bigger up technology stack role with those customers is really exciting. And so I think that's a positive development in there as well.

Okay, thank you David. I will drop back in the queue.

Thanks Jamie. Operator, it looks like that's our last question. I'm going to pass the call to Martin.

So thanks, everybody for joining today. Look, hopefully, you can hear and get a sense of not only how much progress we've made in our first full year on the three-A’s, but also that the three-A’s are what's going to turn this business around in the time frame or maybe even a little bit faster than what we've said in the past. I feel as though we're on or ahead of schedule in executing on each of the three-A’s. So we feel really good about what we've gotten done. We now as we've said, both David and I have said on the call, this is a year of acceleration. We're growing where we want to and we will continue to target and to focus on improving the profitability of this business, and that's what you see in our guidance. Very strong pretax margin expansion, notwithstanding the headwinds that have been imposed in some parts of our business, but very strong pretax margin expansion and really focusing this business on the high-value that we know we create with our customers. So thanks again for joining us. A lot of work left to do, but we're excited about where we are. Thank you, operator.

This concludes today's conference call. Thank you for participating. You may now disconnect.