Good day, and thank you for standing by. Welcome to the Kyndryl Fiscal First Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Lori Chaitman. Please go ahead.

Good morning, everyone, and welcome to Kyndryl's earnings call for the first fiscal quarter ended June 30, 2024. 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. These forward-looking 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 and for the year ended March 31, 2024. In today's remarks, we'll also refer to certain non-GAAP financial metrics. Corresponding GAAP metrics and a reconciliation of non-GAAP metrics to GAAP metrics 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 are Kyndryl's Chairman and Chief Executive Officer, Martin Schroeter; and Kyndryl's Chief Financial Officer, David Wyshner. Following our prepared remarks, we'll hold a Q&A session. I'd now like to 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 our continued progress and execution to drive our growth strategy. David will then review our recent financial results and our increased fiscal 2025 earnings outlook. We delivered another strong quarter and are off to a fast start to fiscal 2025. Signings were up 14% in the quarter in constant currency, and they're up 7% over the last 12 months and the projected pretax margin on these signings is in the high single digits. In the first quarter, pretax earnings were up significantly year-over-year, and we remain on track to deliver significant cash flow this year. Our performance was once again powered by strong growth in Kyndryl Consult and hyperscaler-related revenue as well as our ability to drive efficiency through automation and deliver innovation through Kyndryl Bridge, our AI-powered open integration platform. As we progress through the fiscal year, we'll continue to execute our growth strategy, drive substantial financial progress and focus on returning to the top line growth in the fourth quarter. There's a reason we're winning, why we're succeeding at such a rapid pace. Our expertise in both running and transforming IT estates is differentiating us in the markets we serve and uniquely positions us at the center of the secular trends that are shaping the evolution of IT. These trends, the adoption of artificial intelligence, cloud migration and management, increasingly hybrid environments, technology, skill shortages and cybersecurity are driving demand for our services, fueling our growth and further cementing our trusted relationships with our customers. For example, we're working with travel transportation and other customers to apply new AI and Generative AI technologies to drive business outcomes through our data architecture capabilities. With Kyndryl's Bridge, we're helping health care,…

Thanks, Martin, and hello, everyone. Today, I'd like to discuss our first quarter results, our continued progress on our 3A's initiatives, the solid margins at which we're signing customer contracts and our increased outlook for fiscal year 2025. The punch line is that we're off to a strong start. Our first quarter results reflect strong operational execution and continued progress on our key initiatives. In the quarter, revenue totaled $3.7 billion, an 8% decline in constant currency. The year-over-year decline was anticipated and primarily driven by our intentional exit from negative no and low margin revenue streams within ongoing customer relationships, not by macro factors. It's also sequentially 1 point stronger than the year-over-year decline we reported last quarter and about 1 point better than we had expected. Currency headwinds impacted our reported revenue by $100 million year-over-year. As Martin highlighted, we continued to gain momentum in higher-margin advisory services. Kyndryl Consult revenues grew 14% year-over-year in constant currency, which underscores how we're growing our share in this higher value-add space. Kyndryl Consult signings grew even faster, up 49% in constant currency. Total signings grew 14% year-over-year in constant currency in Q1, our third consecutive quarter of signings growth, which were strongest in our core enterprise apps data and AI in security and resiliency practices. Our first quarter adjusted EBITDA was $556 million and our adjusted EBITDA margin increased by 30 basis points year-over-year to 14.9%. Adjusted pretax income grew 96% to $92 million. Our financial progress continues to reflect our strategic achievements, leveraging technology alliances, stepping away from empty calorie revenues, fixing focus accounts, growing the consult portion of our business, driving efficiency throughout our operations and positioning Kyndryl to meet our customers' future IT needs. Our first quarter results also include a number of puts and takes, and…

Thank you Martin, are you ready for your first question?

You bet.

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

Thank you. Good morning. Good results here. Just on the signings side. I wanted to ask on the trend of -- or if there's any interesting observations on mix of renewal versus new work or even new logos. I know there's good progress in building quality gross profit, but just curious if the composition is changing at all? And are there any signs of delays in some of the backlog converting?

Thanks, Tien-Tsin and thanks for the nice comments. So a few things in terms of composition. As you saw now a very consistent solid growth rate in Kyndryl Consult. So the signings reflect us mixing more toward our advisory side, the run side of our business, the management run is still obviously substantial in the bulk of our business, but again, we're seeing really good demand from -- on the Consult side of our business. And this is now the third quarter in a row of total signings. So as we look at getting back to growth in fourth quarter -- revenue growth in fourth quarter, we feel increasingly confident about the trajectory of our overall signings profile as well. Now as you know, and as we've said before, as we work our way through our focus accounts, there are a number of elements that reduce, if you will, the overall signings and scope that we take out but at the same time, we are growing scope in the labor elements and the elements that are important to our business model. So -- so the scope expansion that we see doing more work within our clients, even though some of the resell and low-margin content comes out, is still giving us, it suggests that the value we're bringing and the value propositions we're bringing are quite powerful. And then finally, again, as I mentioned earlier, we've had 3 good quarters of overall growth even stronger in Consult. But as we sit here, we just had a great July. So I think it's likely we're going to have a fourth quarter coming up of good growth in total signings as well.

Okay. Great to hear July comment. Just my follow-up, just on the -- I heard David, you mentioned you don't need to do deals to hit your targets, you'll be focused on tuck-in acquisitions, but I have to ask your appetite here to do larger acquisitions, given where you are in the transformation of the 3A's, even if it's opportunistic, any thoughts there would be appreciated.

Well, David's here, but I'm going to jump in as well. And certainly, David made some comments in his prepared remarks around that we don't need to do. We don't need acquisitions. Look, the whole business, as we've talked about for a number of years is focused on delivering the financial performance that we laid out 2.5 years ago as I mentioned, when you do the math in fiscal '27, that's $1 billion of adjusted PTI. We put on the table this year another big step toward that profit. And that's what this whole business is working on. We are focused on delivering the return to revenue growth in the fourth quarter. We're focused on delivering nearly a $300 million improvement in adjusted PTI. This year, again, on our way to $1 billion in total. As we've said before, we are focused on our balance sheet in the form of making sure we maintain investment grade and make sure we have the right liquidity to support the business. And I think our words on the topic match kind of the actions. And what I mean by that is when you look at what we actually have done, we've now -- we bought Skytap. Skytap is a really good, I think, model for how we think about small tuck-in acquisitions that support what we see our customers needing. In the case of Skytap, we have a great partner with whom we go to market. It's an area where we have good brand permission. So -- and by the way, it's completely consistent with us achieving all of the financial objectives that we set out already, again, 2.5 years ago on our way to fiscal '27. So that's what Kyndryl is working on. I mean that's kind of how I think about it. Anything, David, because he did ask you, by the way. That was just my preface for you.

Yes. The comments I made, we made about not needing any acquisition or exactly what we meant.

Next question, please.

Our next question comes from the line of Ian Zaffino with Oppenheimer & Co.

Just kind of wanted to get your sense of growing confidence in the margins? What is basically giving you confidence in that? And maybe just kind of the components whether how much is from advanced delivery, all the other initiatives you can maybe help us understand.

Yes, sure. Thank you, and thanks for joining the call this more. I'll start, and then, obviously, I'll ask David to make some comments as well. Look, the confidence that we get in our margin profile is really probably just best displayed in the charts we shared during our prepared remarks, and we've shared this chart very consistently. And you can see since spin, that we have consistently delivered margins that will put us into that high single-digit pretax margin range as more and more of our P&L is determined by our post-spin signings versus the signings that we were spun out with. So between what we've put in the backlog every quarter since spin, which is consistent with high single digit, our ability to -- and we see those coming through the P&L, obviously, now. And as we work our way through this year, we're 50-50 between inherited backlog versus backlog we've created, which is a sort of a tipping point for our overall P&L. And next year, it will be 2/3 roughly that our P&L is determined by post-spin signing. So with the performance of what's going in the backlog and as David spent a little bit of time in his prepared remarks, the gross profit dollar book-to-bill, not only is the margin profile consistent, but it's in gross mode. The gross profit dollar book-to-bill is greater than 1. And -- and now we're getting back to, as I mentioned earlier, 3 quarters of signings growth with likely a fourth quarter, we feel pretty good about the next quarter as well. So we're seeing not only profit book-to-bill growth, we're seeing consistent value capture in what's going in the backlog and now we're getting back to revenue growth. So we -- the confidence, I think, comes from the data. David, do you want to...

I completely agree. And it's the data and the execution that we've had over the last few years since we became an independent company. You're seeing the growth in Consult signings and Consult revenues is part of it and the growth in hyperscaler related revenue is part of it as well. And as I mentioned on the call, those are great examples of how we're able to grow and really succeed in the areas that we focus on for growth. Martin mentioned the signings growth that we've had now for quarters, a strong July that we had. That's another example. -- the execution on our 3A's consistently over the last couple of years and the tremendous impact that 3A's are having are also examples of what gives us confidence going forward. And then the last one I'd mention on that is what we referred to as our did versus bid results, how our contracts perform relative to where we price them and that has tended to be strong and consistently strong for us. So the fact that we're signing business with high projected single-digit margins gives us a lot of confidence that we'll be able to deliver those sorts of margins from those contracts.

Okay. Great. And maybe just a little bit of a follow-up here on kind of in the same vein. I think you -- I think I heard a $1 billion pretax income number. Is that new? I know you've kind of hinted and we kind of want the numbers, but we're getting quite that to $1 billion. And so I'm trying to -- is this new? Is there more confidence in that? And how do we think about that?

Yes. So one, it's not new. When we talked about the 3A's already 2.5 years ago, we laid out path to get there. We were talking about exactly this data. And we've been consistently -- we've been consistently sort of reaffirming, if you will, that the data supports that trajectory and the time frames we originally laid out. So certainly not new -- and as -- again, as we trundle through quarter after quarter, and we keep delivering and the team keeps executing on the 3A's, and we see the momentum we're capturing and the value we're capturing in Kyndryl Consult. And then we add to that some of the newer things. So as you saw, we're in the early stages. We created what I think is going to be quite a meaningful partnership with NVIDIA. You just saw us do something with SAP and their RISE platform, which is going to represent another big opportunity for us. So -- so all of the data continues to support what we laid out 2.5 years ago and what we've continued to talk about, which was in that -- what we said at the time, medium term, which is now only a couple of years away, fiscal '27 in the medium term, this business, very stable business, but it will get back to good rates of growth, and then we'll deliver $1 billion of adjusted PTI.

Okay. Great. Yes, because the Street is just not there yet. So glad to hear that you're looking for something better than the Street. So I'll let me as jump on.

Our next question comes from David Togut with Evercore ISI.

Martin and David. Martin, could you speak to the kind of detailed underlying drivers of the 49% constant currency growth and Kyndryl Consult bookings in Q1, sort of underlying drivers and sustainability. And then I'll ask my follow-up upfront of David, which is the signaling of capital returns over time. Do you need to get to the $1 billion in pretax income in FY '27 to start returning capital? Or could that happen before then?

I'll go -- I think he asked me first, David. So I'm going to go first, if that's okay. Look, I think the Kyndryl Consult performance is -- look, we see what's going on and what others are announcing. So it is unique, I think, to us. But there's a reason that we're winning. And I think it's based in -- it's based in our expertise in what we would call run and transform, which is what customers want. Customers need, they know they need to transform their IT estates. But they also know because of the nature of what we do, it has to happen while they are running. And so we are uniquely positioned with the skills and capabilities, not only that we have in our deep insights, but we've made a lot of investments in capabilities and skills to move our customers -- to be able to move our customers into the future. And then you add to that the investments we've made in innovation like Kyndryl Bridge -- and by the way, since we're the largest, we have more data about how infrastructures work and how do you optimize them. So -- so all of that comes together in the form of Kyndryl Consult and Kyndryl Consult is benefiting from our customers deep insights that we're providing. Kyndryl Consult is benefiting from our deep insights into how their how their systems are working. And so when we look at the nature of the work we do, it's probably -- maybe it's best to talk about what it is and what it isn't. And maybe that's the best way to understand why this exceptionalism that we see will continue. First, everything we do within our value props has a strong business case tied to it. Those business…

Yes. And thanks, David, very much for the question on capital returns. It's a very important topic for us. And I think we've been really consistent in saying that over time, our leadership position in IT infrastructure services, with the benefits that we're generating from the 3A's really should allow us to expand our margins and then ultimately be in a position to consider regularly returning capital to shareholders, all while remaining investment grade, which is really important to us. We do not need to be at a -- in my opinion, we don't need to be at $1 billion of pretax income in order to be able to return capital to shareholders but nothing will come of nothing. And I think the key metric that will determine our ability to return capital to shareholders is really is our adjusted pretax income. And to me, it needs to be higher than 1% of revenue, which is where it was last year, where it is on an LTM basis. That's what really needs to move up in order for us to be generating the sustainable free cash flow and earnings levels and margin that's supportive of providing capital returns.

Operator, can we move to the next question, please?

Yes, we can. Our next question comes from Divya Goyal with Scotiabank.

Thank you, everyone. And good to see the ongoing progress on the company's growth here. I wanted to ask actually a big picture question on the broader macro. So as the interest rates potentially start to come down across North America, Martin, could you help us understand how would Kyndryl broadly benefit from that improvement from a revenue growth standpoint?

Sure. Thanks, Divya, and thanks for the nice comments. Two things come to mind, and I'll talk about the one that's obviously important to our financial picture. And then I'll talk about customers. I do think customers will react and we will benefit as they start to reposition themselves for a lower interest rate environment. First and foremost, with the yen, I'll go back to the yen so high, our second biggest country is Japan. We are along the yen forever basically because it's a very profitable area for us. So having the yen come off its lows and start to make its way back is obviously a big benefit to us in our financial model. Now on the customer side, look, when you think about the role we play in our customers' environments and banking is a big element, financial services in total is our biggest industry, but industrials, telecoms, airline travel, all of these customers are investing and considering their focus as they deal with the macro. And right now, obviously, we play a big role in helping them optimize and helping them save money. But at the same time, we're well positioned to help them to start ramp up their investments again when they're ready when they see a macro environment that is suitable -- and that means for us that they're going to want to start to work on the data architectures they need in order to be ready to use Generative AI as an example. That means they're going to ramp up their investments in order to improve the resiliency that may be a new regulatory regime requires. So it means for us additional opportunity because, again, in an environment like this, we can help them save money, but it also will allow us then to capture their reinvestment as they get ready for -- as they get their businesses ready for the future. And all of that has to happen on a transformed and modernized and contemporary infrastructure. So that's why we tend to lead all of these things. And I think that's part of what you see in our Kyndryl Consult performance to date is we sit at the heart of what they need to get done, what our customers need to invest in, in order to prepare their businesses for whatever future is there.

That's helpful, Martin. So just on the same theme, actually, broadly, right now, there is that discussion going on with respect to AI, GenAI implementations, not being at the same pace as anticipated by the market. That said, to your point, enterprises actually are working towards getting the infrastructure ready for AI implementation from a cybersecurity standpoint. So could you actually elaborate on this last point that you made and talk a little bit more about what is Kyndryl as an infrastructure services management company actually seeing from enterprises currently on the AI front?

Yes, absolutely. And again, this is a place we play a very strong role with our customers. So to oversimplify this, there is right now a pretty substantial chasm in a large enterprise between the line leader -- the business line leader who wants to use Generative AI to help her run her business and the IT organization that needs to ensure, particularly if it's a regulated entity that needs to ensure it understands the security implications, the data management implications and all the other things that have to happen. So we help our customers bridge that chasm. Through Consult, We help our customers bridge that chasm through education. And that's what we're seeing today in our customer base. And to the extent that the line leadership in a company and the IT shop in the company start to come together, you will see much more rapid progress in what customers talk about with regard to their use of GenAI. But again, all of that has to happen first. The CIO needs to be sure that whatever large language model they're using and wherever the data is coming from, as an example, those servers have all the patches they need. They need to make sure that they can answer the question for a regulator who can see your data right now. And so that chasm needs to get bridged. We see it getting bridge, and we're helping our customers work their way through that. Right now, it's heavily focused on bringing the CIO and the CIO organization into a readiness phase. And then it will get deployed more rapidly. But we sit in the middle of that now, and we're seeing the benefit in helping our customers through that. Sorry, David is going to pile on.

Yes. Certainly, a lot of the media attention over the last year has been on Generative AI, but old-fashioned AI is really important. And what we're seeing with Kyndryl Bridge is a tremendous amount of opportunity to create and add value through the use of AI and machine learning in particular. And the benefits that we're delivering, the automations associated with that, the insights that we're generating in Kyndryl Bridge again, using more, call it, regular AI rather in traditional AI rather than generative AI and large language models is really quite incredible. And so I think we're probably not the only ones doing that. We see customers getting value out of that in many ways as well. But I think we're a real leader in terms of the amount of value we're able to generate and deliver by applying Kyndryl Bridge and the AI-enabled elements of it to generate all these insights and to operate in a more optimized way.

Great. Thank you. Operator, I think we have 1 last question.

Our last question comes from the line of Jamie Friedman with Susquehanna International Group.

Martin, I was just wondering, I track the narrative since the separation 2.5 years ago. And it does seem like Consult is outperforming what you had set up at that time? I knew you knew there was a lot of white space. But the services space is not doing anything like what you're doing. I realize it's off a smaller base. So anyway, could you give us some and I know other people have asked you about this, but can you give us some use cases and why you think that your Consult position may be outperforming the wider industry?

Sure. Thanks, Jamie, and thanks for the nice -- again, thanks for the nice comments and for joining. So look, I think when you -- and David touched on this briefly with Kyndryl Bridge, but when you think about the knowledge, the depth of knowledge that we have just the raw engineering that we have and the skills and the talent that we have that understand our customer systems better than anybody that was what we started with, right? And to that -- and by the way, this is the trusted group of engineers that run the world's most important, most critical systems. To that, we've invested quite heavily to take those skills and supplement them with much more industry standard skills. And so now you have not only the group of engineers who understand your systems, but now they are contemporary and relevant in a much broader industry context and add to that, that we've invested heavily in Kyndryl Bridge, which gives insights we're generating as we said in our prepared remarks, we're generating over 3 million insights per month to help our customers, which is saving them money. So you take the engineering and the trust we started with, you invest heavily in the people so that they have the most contemporary skills. You invest in joining the ecosystem that really matters to our customer base. You invest heavily in innovation so that you show up with new ideas and with insights that customers cannot get anywhere else. And it's not, I guess it's not a surprise to me -- and yes, we did talk about it 2.5 years ago, but it's not a surprise to me that we, Kyndryl sit now at the heart, at the nexus of the secular trends that our customers are either excited…

Yes. And leveraging our capabilities and as Martin said, investing in our capabilities in Consult has been a big part of our strategy. Like Martin said when -- and this is part of our strategy, when you got a job to do, you've got to do it well. You have to give the other fellow help. And for us, that really means investing in Consult and being in a position where we can -- where we can lead and win and compete very effectively in this space, and that's showing up in the, call it, 49% signings growth you saw this last quarter in the consistent double-digit growth we're delivering in Consult.

Operator, we're going to have Martin say a couple of closing words, but I think that closes out our queue.

Perfect. I'm showing no further questions at this time. I would now like to turn it back to Martin for closing remarks.

Yes. Thanks, operator, and thanks, everybody, for joining us again today. Hopefully, you can get a sense, and you can hear how enthusiastic we are about the strong start to the fiscal year. And look, I also want to add the -- and share the gratitude with the whole Kyndryl team for their hard work and their contributions and their efforts, including, by the way, the tremendous job that the Kyndryl team did in recovering our customers from the CrowdStrike incident. It was just a phenomenal, phenomenal display of engineering prowess and urgency in support of important customers. Look, we're in a tremendous position in our third year as an independent company. Our unique run and transform approach is absolutely resonating with and adding a lot of value to our customers because it supports their continuous innovation while maintaining their operational excellence. We, as a firm, are capitalizing on the many opportunities we have to drive profitable growth. You see that not only in the data, but you see that in the things that are going to affect the data in the future. As I mentioned earlier, recent enhanced partnership with SAP. SAP RISE is going to be a big part of how we bring value in the future and NVIDIA would be another one, all now announced, but not yet part of the data, but the data looks great. It looks great in progress so far. David and I, we're looking forward to getting together with the investors, with our analyst community at our upcoming investor conference, as we said on first Investor Day on November 21, and in the meantime, thank you again for joining us, and we'll talk to you again in the quarter. Thanks, everybody.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.