Kyndryl Holdings, Inc. (KD) Q4 2026 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the Kyndryl Fourth Fiscal Quarter 2026 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, Global Head of Investor Relations.

Good morning, everyone, and welcome to Kyndryl's earnings call for the fourth fiscal quarter and year-end March 31, 2026. Before we begin, I'd like to remind you that our remarks today include forward-looking statements. These statements do not guarantee future performance and speak only as of today, and the company assumes no obligation to update its forward-looking statements, except as required by law. Actual outcomes or results may differ materially from those suggested by forward-looking statements as a result of risks and uncertainties. For more information on some of these risks and uncertainties, please see the Risk Factors section of our annual report on Form 10-K for the year ended March 31, 2025, and our quarterly report on Form 10-Q for the quarter ended December 31, 2025, as such factors may be updated from time to time in the company's subsequent filings with the SEC. Also, in today's remarks, we refer to certain non-GAAP financial metrics. Definitions and additional information about our calculation of non-GAAP financial metrics as well as 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. Following our prepared remarks, we will hold a Q&A session. I'd now like to turn the call over to Kyndryl's Chairman and Chief Executive Officer, Martin Schroeter. Martin?

Thank you, Lori, and thanks to each of you for joining us. In our fiscal year 2026, we delivered adjusted pretax income growth and margin expansion and generated over $400 million in free cash flow. This performance comes against the backdrop of an environment that has continued to extend sales cycles and weighed on our revenue and signings performance. Customers are telling us that they are eager to embrace innovative solutions and modernization strategies, yet they are increasingly thoughtful and deliberate in their IT decision-making driven by the dynamic of sovereignty, AI and cyber preparedness, aiming to balance transformation with operational stability in today's complex environment. Considering these dynamics, we continue to invest in Kyndryl Consult, our alliance partnerships and our agentic AI capabilities, all while supporting and modernizing our customers' most complex mission-critical IT environments. Our strategic focus remains unchanged. We're focused on growing our revenues and earnings and generating cash to reinvest in our business. The successful execution and continuation of our advanced delivery initiative, the increasing use of AI across our own operations and the new workforce rebalancing actions gives us confidence that we're progressing toward our multiyear objectives. Both Harsh and I will discuss this in more detail. We will deliver sustainable profitable growth by increasing high-value consult engagements, deepening capabilities with our alliance partners and delivering innovative AI-led modernization services. As more post-spin signings convert into revenue in fiscal '27 and '28, these growth investments paired with our own use of innovation to drive productivity position us to achieve higher profitability going forward. On today's call, I'll highlight the underlying growth drivers that are strengthening our operations and the targeted actions we're taking in fiscal '27 to advance us towards our fiscal '28 goals. Let me start with Kyndryl Consult. In fiscal '26, Kyndryl Consult again delivered double-digit revenue growth, our third consecutive year of strong performance. We've invested heavily in Kyndryl Consult, including developing and hiring forward-deployed engineers and human systems architects and our AI innovation labs, where we co-create Agentic solutions at scale with customers. We exited the year with Kyndryl Consult signings exceeding revenue, positioning us well for another year of strong Consult revenue growth. This demonstrates how enterprises are turning to Kyndryl for our high-value services across agentic AI, IT modernization, public and private cloud and cybersecurity to help them modernize at scale, strength and resilience and unlock greater business value. Turning to our hyperscaler related revenue streams, we exceeded our initial target and realized nearly $2 billion in revenue in fiscal '26. Keep in mind, this revenue source was essentially 0 four years ago and has consistently grown year after year. This underscores the significant progress we've made in strengthening our core capabilities in establishing ourselves as a vital partner for our customers and alliances. We've been deepening our relationships with hyperscalers and most recently, developing new capabilities in areas such as data sovereignty and agentic modernization. Across the broader alliance ecosystem, Kyndryl continues to build strong momentum by translating innovation into secure, scalable and repeatable outcomes for customers. Additionally, we have continued to strengthen our collaborations with other important alliance partners beyond hyperscalers as private cloud becomes an important growth vector, including the likes of Broadcom, Dell, HP Enterprise and many others. For fiscal '27, we expect another year of strong growth from Kyndryl Consult and hyperscaler related revenue streams. Over the last few years, our success with Kyndryl Consult and hyperscalers has helped offset the headwinds we've been facing from our own accounts initiative and more recently from customers' decisions to procure hardware and software directly from IBM. You can also see from the chart on the right that 80% of our revenue in fiscal '27 is expected to be derived from post-spin higher margin signings supporting our multiyear objective of expanding projected pretax margins on post-spin signings into the high single digits. In fact, in fiscal '26 we signed 38 deals in excess of $50 million of which more than 30% consisted of new scope or were new logos. Given the multiyear nature of our customer relationships, I'm encouraged that we've signed more than 125 large deals over the last 3 years. Importantly, the investments we've made in consult, alliances and agentic AI capabilities have well positioned us in today's market where enterprises are turning to Kyndryl for their modernization needs. This reflects our ability to win large complex deals despite a more challenging environment, including longer sales cycles. With our heritage and mission-critical expertise and IP combined with AI-powered Kyndryl Bridge platform, and our differentiated solutions centered around the Kyndryl Agentic AI framework, Agentic Service Management and Digital Trust, we are seeing results in modernizing our own operations and in helping our customers continuously modernize their IT infrastructure and applications to scale AI to unlock business value and to enhance resiliency and address AI-enabled cyber threats every customer conversation right now is focused on agentic AI and what it means in the context of their business; returns on investment, implications for cybersecurity, their workforce and efficiency and in regulated environments, compliance. As customers embrace the agentic era, expectations of IT organizations to reinvent themselves have changed. And when you consider additional factors such as increasing tech and operational costs, modernization is no longer optional. It is a requirement. And at the same time, customers need a different approach to modernization as most traditional approaches are labor-intensive, slow, often encounter business disruptions and miss the expected ROI, which is why most customers lack confidence in their ability to execute modernization effectively. Our Kyndryl Readiness Report found that nearly half of organizations struggle to generate meaningful returns on AI because their IT environments, their infrastructure applications and business processes, simply were not built for it. It's like trying to run a shiny new 200-mile an hour bullet train on tracks built for 30 miles an hour. Our customers are challenged in moving from AI experiments to industrialized scale. In this rapidly evolving technological environment, Kyndryl becomes even more essential to our customers, helping them to prepare, navigate complexities and scale. Within our own delivery operations, we're using AI agents embedded in the Kyndryl Bridge platform to drive greater productivity and outcomes. For example, we're seeing incidents being resolved 70% to 90% faster, which means less disruption and more consistent service. We are seeing root cause analysis cycles approximately 75% faster, helping prevent the same issue from happening again. And we're seeing that the dependency on people's time reduced by 50% to 70% freeing up our people and their expertise for higher-value work that delivers transformation for customers and growth for Kyndryl. So let's now turn to how we're working with customers to deliver business outcomes across the modernization continuum using an agentic AI approach. Importantly, these aren't one-off engagements. They create clear paths for us to further develop and expand our long-term strategic partnerships with customers from infrastructure and applications into higher-value transformation work. We're working with a large European bank to build a joint competency center to establish a vendor-agnostic hybrid cloud design while complying with data sovereignty requirements and providing control over their AI adoption. They need flexibility and control across public and private cloud with a single simple view across their entire estate. We're leveraging our deep platform engineering expertise and agent modernization capabilities to rapidly deploy their shared cloud platform. By co-creating this future state together, we're also expanding our scope into the application layer. Next, with a global insurance company, the starting point was a decades-old mainframe environment running millions of lines of mission-critical code supported by a shrinking pool of in-house expertise. Such products have traditionally failed because of system complexity, limited documentation and skill shortages. We use AI agents to rapidly understand the current functionality and rewrite the system to a modern cloud-native architecture. The business outcomes we're delivering include an Agentic digital twin to retain institutional knowledge and a 50% faster data center exit. This has positioned us to replicate and apply our modernization approach to other mission-critical systems in other countries where they operate. And then with U.S. state government agencies, in this case, at D&B, we have a repeatable solution underpinned by Agentic AI to rapidly implement scalable and resilient digital platform services. The benefits of our approach include self-service for government employees and enhanced citizen experiences by reducing wait times and improving self-service. Importantly, we're deploying the solution across multiple states and countries as a standardized, repeatable offering. In all 3 examples, we were awarded new scope and now expect to expand into new areas. Customers are selecting Kyndryl for our decades of mission-critical engineering expertise and our unique approach to AI-led modernization services. We're a trusted adviser and long-term partner for our customers with differentiated solutions that center on achieving tangible business results. With that, I'd like to pass the call over to Harsh to discuss our fiscal year results and outlook, and then I'll close with a more detailed discussion on our multiyear objectives. Harsh?

Thanks, Martin, and hello, everyone. Today, I will focus my comments on our year-end results and our outlook for fiscal 2027. For fiscal year 2026, we generated $15.1 billion of revenue, flat from the prior year on a reported basis and down 3% in constant currency. We exited fiscal 2026 with total signings of $13.5 billion. As previously discussed, both revenue and signings were impacted by extended sales cycles, particularly in the U.K. and strategic markets and the evolution of our relationship with IBM. Our adjusted EBITDA in fiscal 2026 was $2.7 billion, and our adjusted pretax income was $581 million. Adjusted EBITDA margin increased 100 basis points, and our adjusted pretax margin increased 60 basis points year-over-year, reflective of a mix shift in the business as more post-spin signings flow to the P&L. Our 3 A's initiative continue to be an important source of margin expansion and value creation for us. Through our Alliances, we generated $1.9 billion in hyperscaler-related revenue in fiscal 2026, up 59% versus last year and exceeded the 50% growth in hyperscaler-related revenue that we were expecting at the beginning of the year. Through advanced delivery, we continue to drive efficiency by incorporating more AI-based technology into our services enabled through Kyndryl Bridge to further reduce our costs and increase our already strong service levels. To date, this is worth roughly cumulative $1 billion of savings a year to us. Our accounts initiative continues to address elements of contracts we inherited with substandard margins. We exited fiscal 2026 with $1 billion cumulative annualized profit savings from our focus accounts. A key takeaway point from this update on the 3 A's is that we have successfully implemented these initiatives, and they have become a core part of our operational discipline. I want to provide an update on what we shared last quarter on our evolving partnership with IBM, largely driven by how customers are consuming IBM innovation. This chart illustrates more than a 3-point adverse impact on revenue performance in constant currency since the spin-off, driven by our focus accounts initiative in our early years and more recently by this evolving relationship. As we have described before, at the time of spin-off, approximately 40% of our revenue from our inherited commercial agreements were in low to no margin position. Back then, our annualized run rate of spend with IBM was nearly $4 billion. Over the past 4 years, we have addressed most of the focus accounts, leading to improved profitability gains. In fact, by the end of this fiscal year, our annualized run rate of spend with IBM was less than $2 billion, half of where it was when we were spun off. Over the past year, especially in the second half of our fiscal 2026, customers started changing how they consume our high-value services and IBM innovation. While these changes do not affect the scope or margin of our services and our ability to grow our services content, they do have an impact on the size of our signings and consequentially, our revenue over time. And as we have said, this has a limited impact on our earnings, In fiscal 2027, we are expecting similar headwinds to continue. Turning to our cash flow. Our free cash flow was $406 million for the year, relatively in line with fiscal 2025 and approximately $50 million higher than the midpoint of our $325 million to $375 million guidance we provided on our February earnings call. This performance was driven by stronger cash collections and lower net CapEx in the fourth quarter. For the full year, working capital and other was a use of approximately $250 million of cash, largely related to broad-based incentive compensation payments that occurred in fiscal first quarter, coupled with lower compensation accruals in the current year based on our performance. Net CapEx of $543 million was up $20 million from last year, yet it was below what we anticipated, largely due to changing customers' consumption behaviors where they are buying direct from IBM. In the appendix, we include a bridge from our adjusted EBITDA to our free cash flow and more information on the free cash flow metric calculation. Today, we have a strong conversion of earnings to free cash flow at the rate we have been targeting. You can see on this slide that over the last 2 fiscal years, we delivered more than $1 billion in adjusted PTI and less cash taxes of $300 million over the same 2-year period, we generated over $800 million in free cash flow. We expect the same rate of earnings conversion to free cash flow going forward. While quarter-to-quarter dynamics can vary over time, this is our view on earnings to free cash flow conversion. Our financial position remains strong. Our cash balance at March 31 was $2.6 billion. Our cash is up $1.3 billion from the period ending December 31, which includes $300 million from operations and the $1 billion we drew under our revolving credit facility. Our debt maturities are well laddered from late 2026 to 2041. We plan to refinance or use cash on hand to fund our near-term debt maturity of $700 million later this calendar year and our pending acquisition of Solvinity, which is now expected to close in the first half of fiscal 2027 for EUR 100 million. Our net leverage ratio has been and continues to be well within our target range of 1x adjusted EBITDA. We exited this fiscal year at 0.5x, which is an improvement from 0.7x at the end of our fiscal 2024. We are rated investment grade by the rating agencies. Under the share repurchase authorization, we bought back 11.6 million shares of common stock at a cost of $304 million in fiscal 2026, of which 3.3 million was purchased in the fourth quarter at a cost of $49 million. Since the inception of the program, we have repurchased 6% of our outstanding shares. As of March 31, we have approximately $300 million capacity available under our current authorization. On capital allocation, our top priorities are to maintain a strong balance sheet and financial flexibility. We have remained focused on winning business with healthy margins, which takes significant discipline as enterprises prolong decision-making. Over the last 4 years, we have signed contracts with projected gross margins in the mid-20s and projected pretax margins in the high single digits. We have again included a gross profit book-to-bill chart that illustrates how we have been creating and capturing value in our business. With an average projected gross margin of 26% on signings over the last 3 years, we have added more gross profit dollars to our backlog than we have reported as gross profit over the same period. Having a gross profit book-to-bill ratio at or above 1 over the last 3 years demonstrates the quality of our post-spin signings and the expected future profit growth from committed contracts. And as Martin has highlighted, new scope and new logos continue to increase as a percent of our large deal signings. Turning to our outlook for fiscal 2027. Our outlook for adjusted pretax income is in the range of $600 million to $700 million. This pretax income outlook includes approximately $200 million of charges associated with the workforce rebalancing actions, which we expect to incur substantially in the first quarter of fiscal 2027. The savings from these actions will be primarily in the second half and will largely offset the charges. The impact on adjusted pretax income will largely be neutral on a full year basis. These actions are expected to yield annualized savings in the range of $400 million to $500 million in fiscal 2028. With the expectation that most of the charges will take place in the first quarter, we expect our first quarter adjusted pretax income to be a low point in earnings for the year with meaningful profit improvement expected for the remaining 9 months of the year. We expect our adjusted pretax income less cash taxes, which are estimated to be approximately $200 million to convert to free cash flow in the range of $400 million to $500 million. From a timing perspective and similar to last year, the first half of the year, particularly our first quarter will be a significant user of cash, largely due to annual software payments and incentive-based compensation payments and subsequent quarters will be more favorable. Our fiscal 2027 outlook assumes that revenue will be flat to down 2% in constant currency. Within that, we expect Kyndryl Consult and our alliances-related revenue streams will continue to grow. While at the same time, as I discussed earlier, we are assuming that our evolving relationship with IBM will be a similar headwind to what we have been experiencing. Taking into consideration the pace of signings in fiscal 2026 and what is expected to sign in the first half of 2027, we expect second half revenue to be stronger than first half. Let me now pass the call back to Martin to discuss our path toward our multiyear objectives.

Thank you, Harsh. As we think about where we exited fiscal '26 and our areas of focus in fiscal '27, I want to spend a few minutes outlining why I'm confident in our ability to achieve our fiscal '28 targets. We're entering fiscal '27 with a 5-point improvement in our beginning backlog for the year compared to fiscal '26. In addition, our pipeline includes scope expansions and new logos to support future signings growth and a better mix of higher-value services. In fact, Kyndryl Consult signings exceeded revenue this fiscal year, and we're driving both Kyndryl Consult capacity and productivity. We've delivered strong growth in hyperscaler-related revenue streams and with our customers' modernization needs accelerating and renewed demand in private cloud, we expect continued momentum across our alliance partners. We've been signing deals with projected pretax margins in the high single digits, and that pricing discipline will continue. We've transformed our business through the advanced delivery initiative, heavily embedding automation and AI into our operations and upskilling our teams for higher-value work. We're infusing Agentic AI and delivery of services through Kyndryl Bridge to address lower voluntary attrition rates and improve our SG&A efficiencies, we're taking workforce rebalancing actions to yield meaningful savings. We're confident in our strategic direction and our financial position remains strong. We believe our focus on higher-value services, coupled with the actions we're taking to streamline our own operations, positions us to navigate the evolving ways our customers consume IBM's innovation while keeping us on track toward our multiyear objectives. In fiscal '28, we continue to target more than $1.2 billion in adjusted pretax income and more than $1 billion in free cash flow, and these targets can be achieved on low single-digit constant currency revenue growth in fiscal '28. Before I open the call up to your questions, I want to briefly address the material weaknesses we disclosed last quarter. As a reminder, these issues did not impact our previously issued financial statements. We continue to make progress in addressing the identified weaknesses, and we expect to have the design, implementation and testing of controls completed when we file our fiscal '27 Form 10-K next year. We remain focused on strengthening our control environment and our processes, and further updates will be disclosed in our fiscal '26 Form 10-K filed at the end of the month. Importantly, I want to thank Kyndryl's around the world who are providing world-class services to our customers every day. Operator, let's move on to questions.

[Operator Instructions] Our first question comes from Kevin Krishnaratne at Scotiabank.

Can you hear me?

We can.

Thanks for all the detail on the drivers for '27 on the revenue. I'm wondering if you could talk about the macro and the buying decisions, maybe what you're seeing from a geographic perspective. You did mention there's still some issues in U.K. and strategic markets. And I'm just wondering if you could talk about what would get you closer to that sort of flat growth for the year versus a negative 2% decline.

Yes. Great. Let me start. I'll ask Harsh to comment as well. A couple of things, I think, are important as we think about the pace of signings, customer behaviors, et cetera, et cetera. First is what we do, right? So we are mission-critical, which means that there are lots of stakeholders, regulators in many decisions, boards of our customers are involved. And we typically sign deals that are 4, 5 or 6 years long. So our customers understand that the environment in which they operate is likely to change over those times. And so the nature of what we do causes -- provides an ability for them to be really thoughtful about how they want to commit. Secondly, they have choices, more choices than ever. They have the choice of the platforms they want to use. They want -- they have the choices around AI and how they want to deploy it and all the new capabilities that are coming out. They have -- for our customer base anyway, there's a substantial amount of tech debt and they need to make choices about that. And then finally, they each operate in an environment that is always concerned about security and resiliency. It's always concerned about the regulatory environment and then increasingly, the discussion around sovereignty, not here in the U.S., but sovereignty is a big deal, data sovereignty, cloud sovereignty, et cetera, et cetera, et cetera. So the environment and the complexity and the nature of what we do says that our customers have to be thoughtful given the longer-term commitments they make. With all of that in mind, we do see good demand trends. Our pipeline as we enter this year is bigger than it was last year. The momentum we have and the capacity we're building in consults, our ability to help them, our customers with their most complex challenges around public and private clouds, et cetera, et cetera, et cetera, is -- has a lot of momentum. The sovereignty discussion, though, is an important one, again, not in the U.S., but in Europe, I'll go to Europe for a second. And that just creates a need for more time. Customers have to be comfortable that they're going to know the sovereignty answer for more than 6 months. This is -- again, these are longer-term commitments. So the nature of what we do, the choices customers have and the environment in which they operate tend to elongate sales cycles. But deals do get closed. In fact, we had a great April because some of the deals that we had expected to close in March just took a little bit longer. And again, it was all of the stakeholders that are involved. And we had a press release as did our customer a few days earlier this week. Bank of Luxembourg is a great example where we obviously had to spend time with the regulators with the Board, et cetera, et cetera. We got the deal, thus we had a great April. So I don't expect as we go through this year that the environment is going to be any different. In fact, I think it's going to get more complex. I think sovereignty is going to become a bigger issue over time. I think the regulatory environment is always changing. I'll let Harsh talk a little bit about sort of the profile of what he sees and your question around what does it take to be at 0 versus minus 2%. I would just remind again that we still see the same size impact from IBM and the IBM content this year. And so our down 2% to flat is outside of the IBM content is up a bit more than 1% and or up 3% depending on where we land. And that's, again, a demonstration of our capabilities, our work with our alliance partners, our consult momentum, et cetera, et cetera. Harsh, you want to...

Yes. I think it's important to talk about a few things. Underneath if you open under the covers, like this is after 3 years for the first time we had in fourth quarter growth in U.S., and we do see continuation of that, right? So now you connect back with the same modernization discussion is happening with most of the customers, right? So you can clearly see the connection back with sovereignty, the delays that we see in those decision-making is more prominent in Europe versus in U.S. And that is kind of giving us a bit more confidence of how we get to where we need to get to kind of after 3 years and that I see as buildout of confidence. And then you say, how do you range between 0 and 2 is kind of what is the rate and pace of closure because we still have a starting backlog and there is still in-year revenue that we have to build, and that is going to be a function of the rate and pace of whether it's the large deal versus more consult-driven smaller deals kind of that has a different revenue yield. So you can be on 2 different sides of the pole depending on rate and pace and the type of transaction with a good mix we are starting. So that kind of gives us kind of from a signings to the rate and pace of that signing and how you yield from that signing kind of gets you into the range with the 2 sites, one U.S. kind of with the strength in Europe with the sovereignty kind of one moving faster, the other one kind of with the delays that we are seeing that creates the range of possibilities.

Operator, next question please?

Our next question comes from James Faucette at Morgan Stanley.

I wanted to just touch on how you're thinking or how -- where you're seeing customers prioritize spend and maybe how that's changed versus a year ago? And in particular, I've been intrigued by a lot of the technology evaluation that companies seem to be doing and where they want to push data and how they want to structure it for AI applications, whether that be in the cloud or maybe even running on-prem for longer, et cetera. So just love to get an update on where you're seeing customers prioritize their spend right now and how you're moving to address that.

So let me kind of talk about this security, governance, evolution of AI. Data sovereignty is kind of driving many of these discussions. And the emergence of private cloud, which was what I would call a couple of years ago was not as prevalent, has become very prevalent. And I think data and where you keep data and how you run AI and where you use what model is becoming important. And I think private cloud has some evolution from that perspective compared to hyperscaler as to kind of what type of models you can use and where and who's investing. So that certainly is putting most of our customers in kind of what I call a dichotomy as to where I keep because these are longer-term decisions. But many of our customers are also in regulated industries. So they have important mainframe estate. So they're also saying, how do I provide micro services from my mainframe because I don't want to lose the capability and capacity it has. So how do I modernize the platform? How do I modernize my core banking application if you are a bank? So it's kind of -- we are seeing most of the banks where you would have seen, especially in the regulated industries kind of 2 states of world kind of mainframe and hyperscaler. Now you have an added complexity of now because of data sovereignty, now they have to kind of think about that too because that's becoming more and more important. How do I keep more control of my estate, my data and AI? And do I bring AI models into my estate? Or do I take my data into hyperscalers. So that is kind of the evolution you're seeing. And then some of it is going to be driven by the business process transformation they have to think about, which is Agentic AI, how do they use Agentic AI, and that kind of brings all their processes in question. So it's a complex environment, right? It's a very complex environment, and it puts us in -- right in the middle of those conversations because we have been with these customers for decades and who knows the process and environment better than us, right? So that is an opportunity for us.

Yes. No, I think, Harsh, you're right. I think the keyword in everybody's -- in all of our customers' minds is modernization. It takes a slightly different form based on their starting point. Again, I'll go to Bank of Luxembourg, where we're going to help them improve their customers' experience with Agentic. So they want to be a leading European Agentic bank. I think that's driving a lot of investment dollars in our customer base. Whether that's, as Harsh said well, private cloud, public cloud, it will be a mix. And then obviously, because of the role they play in the world, and particularly in Luxembourg, they're always looking to improve operational resilience, not only at the regulatory standards, obviously, but even to make sure they have the great customer experience. So modernization is the word of the day, where they start depends on their tech debt, but Agentic AI, modernization, resilience, they're all big investment themes here.

Our next question comes from Jamie Friedman at Susquehanna.

I appreciate all the additional disclosures here. This is really good, especially Page 14 where it kind of sum it up the signposts. I want to ask, Martin, in terms of the evolving IBM relationship, the 3-point unfavorable impact. And I got your comments about how that's going to impact fiscal '27. But if you think about how that is performing relative to the original guide out to 2028, I just don't remember if it was or if you said, was that already embedded in the assumption? Or is this evolving different than what you might have thought?

Yes. Thanks, Jamie. So no, it is different from what we thought not only back in Investor Day 2.5 years ago, it's also different from what we thought when we started last year. That's why we started to spend more time explaining it and so the investment community can understand it. So we had assumed as we got through the focus account period that we would -- or that our customers would continue to consume IBM's technology in the way they had in the past. It was not an unreasonable assumption at the time. And for a number of reasons, now they have -- customers have obviously choices. They have an ability to create a relationship. Some customers just like to have a direct relationship. And so no, it has evolved differently from what we expected. But it's really only -- not really -- it is only on the revenue side. We have 0 ability to mark up IBM's content within our deals. So it really just comes down for us to customers' choice on how they want to consume that technology. And obviously, it would affect the size of our signings, it would affect the size of the backlog, affect the revenue performance. But without any ability to mark up their content, it doesn't have any impact on our profit. So it is different. It's the short answer to your question.

Operator, let's move to the next question, please.

Our next question comes from Tien-Tsin Huang at JPMorgan.

Just curious, with the sales cycle staying little bit elongated here, what do you think is the catalyst to get sales cycles to normalize and get to a better place or even improve? I know you're talking to clients all the time. Is it something related to the frontier models getting better and more clarity around agent deployment, things like that? I'm just trying to better understand what we should be watching for, for that to heal.

Yes. Yes. Look, I'm not sure that on any individual customer basis that the environment is going to return, let's say, or resume something that existed in the past. Again, given the nature of what we do, the choices our customers have in the environments in which they operate, I think everything -- every bit of technology evolution continues to add complexity. So at the individual customer level, I think it's -- we're not going from where we are today back to some faster sales cycle. For us, the key, and I can ask Harsh to comment as well. For us, the key, and Harsh said it in his remarks, for us, the key is to make sure we're moving into new customers to make sure we have new content in all of our deals so that, that bigger pipeline yields in the time frames that we need. So I don't think we're -- like I said, I don't think we're going back on an individual customer basis from making -- to making decisions faster. But I do think for us, our focus on expanding our footprint in our customer base as well as chasing and signing new customers is critical for our business model.

Yes. The other thing that I would add is kind of this is a year where we, for the first time, seeing a very high level of new scope in our pipeline. And I'll kind of use one example that Martin kind of mentioned in his prepared remarks, the European bank, one of the first things we had to do with them was to kind of help them think about a vendor-agnostic private cloud environment as they're thinking about how they're going to have more control on the data and they're kind of moving some of that away from hyperscalers, right, because they're thinking about their own destiny in a different way. And then we are working in a joint collaboration, creating a center where we're going to jointly kind of work on this. But now the second thing that happens is because of the regulation in that European market, they have to get their services, which kind of the transactional system, core banking sits on mainframe, it's on older application environment, which they have never been able to expose and they have to instantaneously provide those services to other banks, other ecosystem. Now we are helping them through Agentic AI, understand the COBOL environment, how you're going to convert. What documentation exists is not even known. So now we are kind of taking a step up. So it's important that we continue to maintain a strong hold with the customer, help them evolve not only from an infrastructure point of view, but now evolving into their application environment. Like this is kind of where what I call faster, smaller kind of land and expand model through the new scope. Like that's kind of -- that's going to be the next stage of our evolution than just big deals, renewals, which sometimes [indiscernible] came longer, like you just enter a customer but never leave, right, follow their wallet.

Operator, I believe we have one more question in the queue.

Yes. Our last question comes from Jonathan Lee at Guggenheim Partners.

I want to build off of Jamie's question from earlier. Your earnings materials points to your $1 billion free cash flow target for fiscal '28. And we heard you highlight the $1.2 billion target for adjusted pretax income. But if we heard you correctly, you called out low single-digit revenue growth for fiscal '28, which sounds like a downtick versus your mid-single-digit fiscal '28 target from the Analyst Day. Can you unpack what's happening with the downtick there? Is that an IBM dynamic? And given the longer decision cycles and complexity as well as sub 1x book-to-bill you saw this year, how should we think about the path to that fiscal '28 revenue growth?

So a couple of things. One, again, as I mentioned with Jamie's question, when we set out the triple double single, we did have a view about what the IBM content was going to be, and we assumed it was going to be kind of neutral, and that doesn't look like it's going to be neutral, right? We know last year it was more than 3 points. This year, similar size. Over time, that will diminish. It's not going to be 3 points or more than 3 points forever. In the time frames for '28, we'll see. We have to see how do we partner with them, what choices do customers make this year or throughout '27. And we'll then have a better view of whether our initial assumption about it being neutral will hold in the '28 itself. It has not held, as I said, for the first couple of years here. But again, the reason that the triple double single holds up is because it has no impact on our profit. Harsh, do you want to add?

Yes. I think if you look at the pipeline where we are starting and the scope of work we are doing. I mean if you look at 2 years back, the modernization, data sovereignty was not a big question, right? So you have to kind of think about what does it mean from sales cycle extension and kind of our penetration. So we have to think about business and how we use Agentic AI to be a bit more differently relevant. And if you look at the last 4 years, last 4 years of our gross profit book-to-bill has been kind of above 1x, right? So that's kind of one. I look at my consult, like my consult book-to-bill over the last 3 years have consistently been double digit kind of more than 1.1x. So that's kind of another one. And when I look at my consult pipeline, which is around the new scope, that also gives me the confidence that over the last 3 years, we have signed more than what I have hoped. So that kind of continues to give me the confidence with the pipeline, with the bookings I have and the relevancy of the type of discussion I'm having because these are higher-margin services, not just linked with an OEM, right? So that kind of gives me path kind of both from the revenue that we have to manage kind of with the IBM relationship, but the larger relevancy with the customer and the wallet that we have to follow.

Good.

Thank you, Harsh. I think based on the operator saying that was the last question, I do want to thank everybody for joining us today. As you've heard, our focus this year is to drive progress across all of our targeted growth areas; Kyndryl Consult, the hyperscaler work we do, our focus on modernization and our customers' focus on modernizing in AI. And obviously, we're going to execute the actions that Harsh went into detail around to streamline how we operate. We've got a very focused team. We are confident that we can deliver. We're confident in our ability to deliver on our multiyear objectives. And again, you see that in our prepared materials. And all at the same time, do what we do, continue to do what we do every day, which is deliver the world's best infrastructure services to our customers. Thanks for joining.

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