Good morning, ladies and gentlemen. Welcome to Kyndryl's First Fiscal Quarter 2024 Earnings Conference Call. [Operator Instructions]. Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Lori Chaitman, Head of Investor Relations. Please go ahead.

Good morning, everyone, and welcome to Kyndryl's earnings call for the first fiscal quarter ended June 30, 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 these risks, please see the Risk Factors section of our annual report on Form 10-K for the year ended March 31, 2023. Kyndryl does not update forward-looking statements and disclaims any obligation to do so. In today's remarks, we'll 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 like to now turn the call over to Martin. Martin?

Thank you, Lori, and thanks to each of you for joining us. On today's call, I'll update you on the substantial progress we're making as a company and the meaningful implications of that progress. David will then review our recent financial results, our updated and improved fiscal 2024 outlook and how we're changing the margin profile of our focus accounts. We are off to a very strong start in fiscal 2024. Our first quarter results exceeded our expectations and positioned us well for the year as a whole. Our 3A initiatives, Alliances, Advanced Delivery and Accounts were at the core of our success. Kyndryl Consult, Kyndryl Bridge and our efficiency efforts also helped drive our results. We extended and expanded customer relationships in ways that will be mutually beneficial, and we're raising our earnings outlook for fiscal 2024. In short, we're moving even faster than before to deliver progress, and we'll talk more about our achievements on the 3As and our updated full year outlook. But before we do that, there are 3 declarative statements I want to make. First, annual losses are now behind us. We expect to make money this year and each year going forward as measured by our adjusted pretax income. Second, we remain committed to delivering revenue growth in calendar 2025 and in fiscal 2026. That means that our revenue will bottom out in calendar 2024 or fiscal 2025. And we expect that bottom will be within a few percentage points of our revenues this fiscal year as we retain the substantial majority of our focus accounts and their revenue. And third, as a result of our execution and accelerated pace of our transformation, we'll deliver the profit goals we've previously shared on the timelines we've previously shared, and our medium-term target is for adjusted…

Thanks, Martin, and hello, everyone. Today, I'd like to discuss our quarterly results, our balance sheet and liquidity, how we're raising our outlook for fiscal year 2024 and the progress we're making on our focus accounts. Our first quarter results reflect strong operational execution and remarkable progress on our key initiatives. In the quarter, revenue totaled $4.2 billion, a 1% decline in constant currency. Demand for our services has remained resilient, and we continue to gain momentum in higher-margin advisory services. And while our Q1 signings were down 5% year-over-year in constant currency, through July 31, our year-to-date signings are up 9%. Kyndryl Consult revenues grew 20% year-over-year in constant currency and represented 14% of total revenue in the quarter, the highest percentage ever. This performance reflects how our post-spin opportunities for growth in Kyndryl Consult services are outweighing the macro issues pressuring some other firms. Our adjusted EBITDA grew 25% year-over-year to $612 million. Our adjusted EBITDA margin was 14.6%, a year-over-year increase of 310 basis points. Adjusted pretax income was $47 million, a $97 million improvement in profit compared to the prior year quarter. Our continued and substantial progress on our 3As is what's driving our results and more than offset the year-over-year software cost increases we faced. We address our customers' needs through our geographic operating segments and also through our 6 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 AI, security and other growth areas. More generally, as we look back on the quarter, we're thrilled to have delivered results that position us to exceed the full year earnings targets we laid…

Thank you, David. Let me reiterate. Annual losses are behind us. We remain committed to delivering revenue growth in calendar 2025. And as a result, we will deliver the profit goals we've previously shared on the timelines we've previously shared. As an independent company, we're solidifying our position as a cost-effective, gold standard provider of essential IT services that combine multiple technologies, and we're executing fervently on the strategies and initiatives that will drive longer-term progress, future growth and stronger earnings in our business. With that, David and I would be pleased to take your questions.

[Operator Instructions]. And our first question coming from the line of Tien-Tsin Huang with JPMorgan.

Great. Obviously, great execution here on the margins. I want to ask on Kyndryl Consult, if you don't mind. It seems like it's still battling some of the macro pressure that some of your peers have seen on short-cycle work. So I'm curious what's driving differentiation in your view? And I know there's obviously a different starting point with Consult, but it does seem like it's a pretty consistent pressure point for the peer group. What are you seeing on the ground that's driving the difference?

Yes. Thanks, Tien-Tsin. Look, Kyndryl Consult, as we've always said, sits in sort of a unique position in the marketplace given our knowledge of our customers' environments, given the role we play. And quite frankly, in any macro environment things that we do, cyber security, resiliency, helping customers use AI, data architecture required, et cetera, et cetera. All of these things are not as subject, if you will, to macro because our customer base needs to continue to move forward in the macro environment. So Kyndryl Consult, which again, in our sort of unique spot in the marketplace, we expect -- we continue to expect to have a good long run of double-digit growth, including another good quarter of -- another good year of signings growth. And as we said in the prepared remarks, when we sort of -- when we turn this into a focus for us at Kyndryl, we said it would be 15% of our business. At that time, it was only 10% of our business. And we're now saying it's going to be 20% pretty quickly here. So I think it's -- to answer your question, I think it's the role we play in our customer environments, the capabilities that we're building around where our customers are still continuing to invest and the ecosystem in which we're part of, I'll say that this will see a good long-term tailwind for revenue and for signings growth for us.

Glad to hear it. Glad to hear it. Just my follow-up question is just on margins, on signings in general. I know Dave, it sounds like the margins you're getting on newer stuff is actually quite good or better. So similar question, I know a lot of peers, including others that have reported this morning, talked about pricing pressure, bill rate pressure, clients in the procurement office are trying to be more mindful on costs. So I was curious, same kind of question, what are you observing in terms of on pricing? Are you turning away some deals? Or is the workflow you're seeing up to your standards in terms of pricing?

Yes. Thanks, Tien-Tsin. I think we're in a similar position to what Martin was talking about with Consult, where we have opportunities that are unique to us to change the way we're pricing certain contracts, certain elements of what we do. And we really feel a need to be in a different spot with respect to margins and that informs how we approach pricing. And as a result, I think we've been able to repair focus accounts and move the pricing that we have there, in many cases, up to a market price, and that's how we're enhancing margins and able to get significant price increases on renewals because it's a movement up to market levels. The other thing that I think is really interesting is that when you look at our signings over the last year and the margins on which we've been signing business in the mid-20s for gross margins. That actually means that our gross profit on signings has been in the range of $3 billion during a period of time when our reported gross profit was about $2.6 billion, $2.7 billion. So what our pricing and our signings are doing for us is actually driving a gross profit book-to-bill of 1.15x. We're putting more gross profit into the hopper than we're reporting. And so I feel really good about the impact that our pricing initiatives and our pricing discipline are having on the way we're building our business.

And our next question coming from the line of James Friedman with Susquehanna.

Let me echo the congratulations. A lot of hard work here. I was wondering if you could double click on the Slide 19. I think, David, you commented on it in your prepared remarks, it's the one that breaks out the services and you had some comments on demand. But I was hoping you could elaborate on those. It might be a helpful perspective.

Sure. This is -- the services that we have, the practices that we go to market with are really important access for the way we operate and look to grow the business. And I think one of the -- a few of the things that are worth mentioning, first, cloud and cloud-related activity is a very significant part of what we do, representing about 1/3 of our revenue. And with the hyperscaler alliances we have, that's a significant growth opportunity for us. Security and resiliency is a really important area for us as well. We recently put out a release about some of the additional and new things we're doing in that space, and I see that continuing to be a growth opportunity. Applications, data and AI, particularly with everything that's going on with respect to generative AI is going to be a significant growth opportunity for us as well. And as Martin mentioned on the call, we expect to have an announcement -- a further announcement on that topic this week as well. One of my colleagues likes to point out that, that your AI is only as good as your data. And for us, data architecture, data availability, data protection are going to be a really important part of the discussions that we have with customers as we help them facilitate the use of more AI in their own businesses. So we see that as an opportunity. Digital workplace continues to be a hot topic in the post-pandemic environment and the hybrid work environment of today. And then as we look at our core enterprise and zCloud business, it's a -- we're in a situation where hybrid environments are going to continue to be a really important dynamic for large enterprises. And as a result, we see that portion of our business and particularly mainframe modernization, as being an important source of revenues and signings for us going forward as well.

And one thing to add, Jamie, I think David did a nice job of sort of the pieces. When you step back and think about how we created and built Kyndryl, through discussions, a lot of discussions with our customers, just prior to spin as we were setting ourselves up, the practices that we're building really reflect the Venn diagram of 3 questions that we ask them. One is, where do we provide value to you today? The second one was where are you investing and where are you going to grow? And then third, where do you give us brand permission to play? And so from our heritage, we obviously we're adding a lot of value already in the core enterprise and zCloud, we were adding a lot of value in digital workplace, et cetera. But the other 4 that we've created and that we're building our capabilities in, we're really the -- where are you investing and where do you give us brand permission. So there is a very strong customer demand element to the way we built and are creating -- or have created our practices that is driving demand for us.

And if I could just follow up, Martin, maybe to you. How would you characterize the macro? Because I would -- I think that most companies in service, at least the ones I'm responsible for, they step back so far year-to-date. When I look at your bookings, you're actually up through July, if I'm reading this right. So how would you characterize the macro? Or is it more like Kyndryl is making its own weather and it's not that relevant.

Look, the macro -- we still operate within a macro environment is real to our customers, and therefore, it's real to us as well. However, having said that, we do sit in a rather unique position given the role we play in mission-critical. And maybe what you're seeing or I guess one of the ways I think about this is this is the difference between what Kyndryl does, which is mission-critical and what others may do, which maybe is more discretionary. So no matter what the macro is, I would suggest there's not going to be any recession in cyber security, for instance. I would suggest that every company has figured out that resiliency is what matters in addition to cyber security as well. So every company is trying to figure out how to use AI. And as David said, well, that for us is a tailwind in our ability to help them with data architecture, data management, et cetera, et cetera, et cetera. So I do think that the macro matters. It certainly may reprioritize what some of our customers do. But the role we play in the world and our unique perspective in mission-critical, I think, suggests that we are not only insulated from it, but we can actually help them with some of their challenges as they try to get through whatever the macro is.

Jamie. Operator, do we have another question?

[Operator Instructions]. And our next question coming from the line of Divya Goyal with Scotiabank.

I just wanted to get some more color on Kyndryl Consult. So Kyndryl Consult, as you mentioned, it's one of the higher-margin streams that you're seeing here. How do you expect to convert the advisory services into execution and how can we ascertain the longevity of these revenues there?

Thanks, Divya. With respect to Consult, the normal cadence for some of this work is that it gives rise to a discussion of what an enterprise needs to do to achieve a particular business objective or to address a particular challenge that it has. And as a result, it's almost natural for this to give rise -- for Consult assignment to give rise to sort of planning and analysis around an issue to implementation of change and then often a managed services tail associated with it. So one of the things we really like about the Consult business, well, 2 other things we like, one is that itself, it tends to be a higher margin. The second, it's a creator of the annuity-type revenue streams that are the core part of our business. So it ends up being beneficial both for near term, generating revenues, generating margin but also creating value from a longer-term perspective as well. And that's really one of the key reasons why it's such an area of focus for us. The third element that Martin mentioned earlier. He said it also changes the position that we're in, the role that we're playing with respect to our customers. It moves us up the technology stack. It has us interacting in some different ways with customers that allows us to add more value and be involved in more strategic conversations. So for all -- these are all reasons why Kyndryl Consult sits at the heart of some of our strategic work because it has so many attributes that are so attractive.

Yes. Just one thing I'd add, Divya, I think David said it well. But remember also that with Kyndryl Bridge, what Kyndryl Bridge is providing in terms of insights to our customers, given not only our own IP machine learning AI, but also the data pool we have. Kyndryl Bridge is also acting as a bit of a demand generator for us because it's offering customers insights that they didn't have before. And then obviously, we're helping them think through how might they address what Bridge is helping them understand, what Bridge is giving them visibility to and what Bridge is sort of helping them to optimize within their own system. So Kyndryl Bridge has proven not just to be a terrific way for us to deliver. And as we said earlier in the month, we have it in 500 accounts, already on its way to 1,000. And it's not only helping us with how we deliver and how we automate, it's giving us great insights, giving our customers great insights in how to run better as well. And that is also a good -- that's also a really strong demand pull for our Consult business.

You took my follow-up already. Maybe I'll just add in a quick question here. David, could you help us understand a little bit on the onetime cost and what's the best way for us to sort of model it on a go-forward basis?

Sure. The 2 most significant costs that we have, call it, below the line this year are spin-related costs related to our systems migration and workforce rebalancing costs tied to the program that we implemented beginning in March and that's been playing out over the last several months to drive efficiency in our operations. With respect to the spin-related costs, those are going to be done this year. Our systems migrations will be done. We won't have any spin-related costs going forward. So that element disappears. And then with respect to workforce rebalancing, we're really viewing this as a onetime action that we've been implementing here. And so as I mentioned in the prepared remarks, we really see our adjusted results converging more toward our GAAP results over time since we know spin-related costs are going away. And we're not forecasting additional workforce rebalancing costs after the program we're currently executing.

Operator, I believe that's our questions, correct?

Correct. I see no further questions in the queue at this time. I will now turn the call back over to Mr. Martin Schroeter for any closing remarks.

Thank you, operator, and thanks, everyone, for joining us today. Look, I hope you have a sense we have made significant progress in driving our earnings, which, obviously, as we talked a little bit about in our prepared remarks, those earnings will convert into free cash flow over the medium term as we come out of spin-related costs, et cetera, et cetera, et cetera. So we feel really good about how we're positioned. Hopefully, you get a sense of the energy here at Kyndryl around turning around the business, and we're excited about the opportunity ahead. So thanks again for joining us, and we'll talk to you in 90 days.

Ladies and gentlemen, that does conclude our conference call for today. Thank you for your participation. You may now disconnect.