Q1 2022 Kyndryl Holdings Inc Earnings Call
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Please standby your program is about to begin.
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Good morning, and welcome to the Kindred quarterly earnings Conference call. Currently all colors have been placed in a listen only mode and following management's prepared remarks, the call will be opened for your questions.
If you would like to ask a question at that time. Please press star one on your telephone keypad, if you need to remove yourself from the queue press the pound key.
At any time, if you should need operator assistance. Please press star zero. Please be advised that today's call is being recorded.
I will now turn the call over to Lori Chapman.
Global head of Investor Relations you may begin.
Morning, everyone and welcome to <unk> earnings call for the quarter ended March 31 2022.
Before we begin 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 in these statements speak only to our expectations as of today.
More details on some of these risks please see the risk factors section of our annual report on Form 10-K for the year ended December 31 2021.
<unk> does not update forward looking statements and expressly 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.
We are available on our website at investors Dot Kendall Dot com.
Excited to join the candle team as our new global head of Investor Relations and I look forward to interacting with all of you.
With me here today are tindell, Chairman and Chief Executive Officer, Martin shorter and Kendall Chief Financial Officer, David Weisner.
Following our prepared remarks, we will hold a Q&A session I'd like to now turn the call over to our chairman and CEO Martin Schroeter Martin.
Thank you Lori and welcome to general.
Very happy to have you here.
Thanks to each of you for joining us today to hear more about <unk> first full quarter results as an independent company.
I'm pleased to update you on the progress we've made in recent months and our strategy is the world's largest.
Infrastructure services provider.
Before we get into the financials, our thoughts remain with the people of Ukraine, and <unk> 74, Ukraine employees.
Stand with those calling for peace and to the war on Ukraine I has been moved by the generous spirit of many of our employees who have given their colleagues support during this difficult time.
From a business perspective, we have little exposure to Ukraine, and new facilities or subsidiaries in Russia.
Our focus remains on the human aspect in our people. We are committed to providing continued support for kindred employees in Ukraine their families and our customers.
Now turning to the business highlights on.
On our March 1st year end earnings call, we outlined our near term financial objectives and strategy put us on a path toward profitable revenue growth.
We've taken significant steps forward on that path with financial results and signings in the three months period between January and March in line with our expectations and with progress on our strategic goals as well.
We ended the quarter with over $2 billion in cash and are on solid financial footing to execute on our strategy.
And in just a few months, we've made meaningful advances on our three major initiatives, our three A's alliances advanced delivery and accounts.
On today's call I'll provide more detail on how we are leveraging our expanded alliances with key technology partners. The investments, we're making in our delivery capabilities and people through Upskilling and automation and how we're proactively addressing existing accounts with sub standard margins.
David will provide more detail on our quarterly financial results discuss our outlook for the fiscal year that began in April 2022, and reiterate our medium term goals.
As a reminder, many of you in his background for those who are new to the <unk> story.
Higher to our spinoff last November we operated largely as a captive services provider focused on supporting the products and technologies that IBM offered to its customers.
In the process, we became trusted experts at designing managing and modernizing complex mission critical systems at scale for large organizations.
As an independent company, we've rapidly taken action to expand our total addressable market dramatically from about 240 billion to about $415 billion to take advantage of the new opportunities and alliances available to us in cloud security data and automation and this'll.
Larger addressable market is expected to grow to about $510 billion by 2024.
We have the capabilities to gain share in this growing market with six global practice areas that give us an end to end perspective with world class intellectual property data and Knowhow with extensive alliances with other technology leaders with an optimized delivery model with an incredibly skilled global team of <unk>.
Nearly 90000 kindred is with in depth knowledge of our customers' industries and with an evolving culture that is restless empathetic and devoted to customers.
We're also well positioned to benefit from the macro trends that underpin many of our customer interactions such as their ongoing digital transformation journeys that include the migration of some but not likely all workloads to the cloud the explosive growth of data the integration of legacy and new technologies from multiple vendors.
<unk> and the urgent need for cyber security and resiliency.
Our capabilities in these areas differentiate us and give us substantial opportunities for growth.
Our starting point is both exciting and underappreciated.
It's far too early for us to declare victory yet our strategy is working.
I want to highlight that we're making progress in demonstrating that <unk> is a unique and different business now that we're independent.
Following three straight years of declining signings, we delivered 27% constant currency growth in the quarter compared to pro forma signings in the same period last year and.
And versus calendar 2021, we expect to generate double digit constant currency growth in signings in fiscal year 2023, which as you know began on April one of this year.
Within our signings growth activity related to advisory and implementation services was particularly strong.
50% year over year in constant currency, when compared to prior year pro forma signings and representing 16% of our total signings.
Growing our advisory and implementation services revenue, which tend to be higher margin and a feeder for future managed services revenue is an important objective for us.
Our growth in this area confirms that our strategy is working as customers are increasingly engaging us as their trusted technology services partner.
To capitalize on our expanded and growing addressable market while at the same time strengthening our overall business performance. We're focused on three major initiatives alliances advanced delivery and accounts.
These initiatives have the potential to transform our business and our team is working hard to execute on them.
As you know, we formed global strategic alliances with Amazon Microsoft.
Our alliances with the three major cloud Hyperscale are significant part of our growth strategy because they allow us to expand beyond the boundaries of IBM centric technologies to participate in the broader multi vendor ecosystem, where our customers want us to operate.
Further and in direct support of our practice areas, we've announced additional strategic alliances over the past few months.
Most recently, we've aligned with SAP.
Combining their business technology platform and our deep expertise in artificial intelligence data and cyber resiliency services in order to accelerate cost effective paths to the cloud for our customers.
In addition, our strategic partnership with Nokia will help us to reach customers, who are looking for LTE and <unk> solutions as part of their industry for data transformations.
With cloud era will help customers enable and drive hybrid cloud multi cloud and edge computing data initiatives.
Our expanded relationship with Lenovo will drive our development of scalable hybrid cloud solutions and edge computing implementations.
With pure storage will deliver mission critical and optimization services to enterprises, and our expanded alliance with Dell will allow us to embed protection and recovery capabilities in customer solutions.
We found great interest among technology providers and working with us to make their offerings part of the multi vendor solutions, we provide and we focus on aligning with firms that are world class in their segments.
These strategic alliances are already helping us expand existing customer relationships and win new accounts.
For example, we extended and expanded our relationship with Deutsche Bank to include cloud related content work that we wouldn't have won before our independence.
We are now optimizing and managing the anatomic pathology environment for the digital medical imaging system of Catalonia, demonstrating our ability to help customers manage large amounts of sensitive data.
And a five year $160 million of agreement, we expanded our relationship with Motiva enterprises to streamline its it services and accelerated cloud journey.
Manpower selected us to help transform its it infrastructure and applications to deliver a more flexible and scalable web platform.
And we've been at the center of digital transformation for customers around the world, including transitioning critical workloads to the cloud for a leading Irish bank and providing digital workplace solutions for a major Brazilian pharmacy chain.
Our enhanced ability to design and implement optimized solutions that combine multiple vendors' technologies is driving our progress.
In fact these are just a handful of examples that contributed to our double digit signings growth in the March quarter.
Signings can be lumpy, though and our focus now will be on delivering full year double digit growth in fiscal 2023 compared to calendar 2021.
At the same time, we are well aware that signings were both about quantity and quality and we're making progress on the quality front too.
Our projected margin on our signings in the quarter was up sequentially over our fourth quarter margin, which was up compared to our pre spin projected margin on signings.
Our focus on quality signings also reflects an aspect of our accounts initiative and that we're not going to renew certain contractual elements. If they are uneconomic for us, even though that discipline makes signings growth harder.
Last quarter, we laid out our targets for the benefits we expect in fiscal 2023 for Merrell licenses advanced delivery and accounts initiatives.
As a reminder, we share target of $1 billion in signings tied to Hyperscale alliance's $200 million in annualized cost savings from advanced delivery and another $200 million of annualized pre tax benefit from our accounts initiatives.
Our transition quarter between calendar 2021, and fiscal 2023 has given us a head start toward reaching our March 'twenty three targets.
For alliances we had our first several hyper scaler related signings and while it is only may we've already built a pipeline of more than $1 billion of opportunity.
We also increased our cloud related certifications by 10% in the quarter, bringing our total to roughly $17 5000 in giving us more capabilities to market and deliver cloud services.
For advanced delivery, we've expanded our rollout of proprietary delivery automation tooling from a handful of accounts to more than 100 at quarter end.
And we've already freed up more than 900 of our people to serve new revenue streams and backfill attrition.
The associated productivity is worth roughly $46 million a year to us.
At the same time this increased automation and strengthens the quality of services, we deliver and differentiates us in the marketplace.
And in our accounts initiatives, we've moved from identifying and quantifying the opportunity in front of us to developing our strategies for working with customers and engaging with accounts that need extra care and attention.
We know this initiative will take time, but we're pleased to report some green shoots already in.
In the form of accounts with actions already taken.
Some of these actions began to contribute immediately to our results producing pre tax benefits at a rate of roughly $26 million a year.
And some of the changes we and our customers have agreed to two will result in benefits that are realized in future quarters.
In short we're excited with the progress we've made on major initiatives and we're even more convinced of the significant positive contributions they will make to our business.
To close my remarks, there is no change in the medium term strategic objectives, we laid out including our focus on serving our customers and returning to revenue growth in calendar year 2025.
I want to reiterate what I said on our year end call regarding our commitment to <unk> future.
Our teams are tackling the opportunities in front of us with urgency and we are moving forcefully to strengthen the margin profile of our business.
Now with that I'll hand, it over to David to take you through our results and our outlook.
Thanks, Martin and good morning, good afternoon, and good evening, everyone today I'd like to discuss our quarterly results, our balance sheet and liquidity and our outlook.
For starters as Martin mentioned, our signings in the quarter were up 27% in constant currency versus prior year pro forma signings due to benefits from our new technology alliances as well as greater customer clarity about our business compared to last year.
Our signings increase follows our first major post spin milestones, which where the new technology training and go to market collaborations with each of the three major cloud hyper scaler.
Beyond our signings growth, we delivered quarterly results that were consistent with the guidance we shared in March.
In the quarter, we generated revenue of $4 4 billion, which represents a 2% decline in constant currency from our pro forma results a year ago.
Our results include two points of revenue growth, we picked up from pass through revenues related to IBM.
Because most of our revenue in any given quarter is the product of contracts signed over the prior several years.
Our revenue decline reflects the continuing effects, having been operated as a captive subsidiary of IBM prior to our spinoff.
Not the future growth potential of our business.
And with the strengthening of the U S dollar over the last year currency headwinds had a four point negative impact on our reported revenue growth.
Adjusted EBITDA was $536 million.
This represents an adjusted EBITDA margin of 12, 1%.
Slightly from our pro forma margin a year ago, primarily due to a currency headwind of 60 basis points.
Adjusted pre tax income was negative $51 million, which is $13 million stronger than the pro forma prior year quarter, despite $34 million in currency headwinds.
Among our geographic segments, we saw the strongest constant currency revenue growth in our Japan and strategic market segments.
And our strongest margins were in Japan, and the United States.
Changes in how various IBM related costs are hitting each of our segments under our new commercial agreement with IBM complicate year over year margin comparisons by segment.
We address our customers needs not only through our geographic operating segments, but also through our six global practices.
<unk> applications data and AI security and resiliency networking edge digital workplace and core enterprise.
We saw the strongest revenue growth in our cloud and apps data and AI practices.
Our signings growth in the quarter was driven by strength in our cloud apps data and AI and security practices and by that 50% growth in advisory and implementation services signings across our practices that Martin highlighted.
A few other items tied to our financials.
First as a reminder, our fiscal year end has changed to March 31 effective for the fiscal year, beginning April one 2022, and ending March 31 2023.
As a result, the quarter ended March 31, 2022 was a transition period for us that is not part of either our prior year period.
Our fiscal year, 2023, which began a month ago.
Second our reported results for the March quarter include $58 million of expense for transaction related costs associated with our spin off primarily related to systems migrations rebranding and a broad based employee retention plan that IBM put in place.
We expect about $300 million of P&L costs, and $400 million of transaction related cash outlays over the next 12 months.
<unk> spin related outlays are temporary and should be much less in fiscal 2024.
More generally our adjusted quarterly results were very much in line with our expectations.
Our gross capital expenditures in the quarter were $180 million and we received $9 million of proceeds from asset dispositions.
Our adjusted free cash flow was $136 million.
We've provided a bridge from our Q1 adjusted pre tax loss of $51 million.
Two our free cash flow.
A key reason that our free cash flow again exceeded our pre tax income is that our net capital expenditures were $75 million below our depreciation expense.
This difference is primarily due to our continuing transition towards being less asset intensive.
We also saw a cash flow benefit from working capital and other items in the quarter.
Our financial position remains strong.
Our cash balance at March 31 was over $2 $1 billion.
This cash combined with available debt capacity under committed borrowing facilities gave us more than $5 billion of liquidity at quarter end.
Our debt maturities are well ladder from late 2024 to <unk> 41, we had no borrowings outstanding under our revolving credit facility and our net debt at quarter end was just over $1 billion.
As a result, our net leverage sits well within our target range. We are rated investment grade by both Moody's and S&P.
As we think about capital allocation, our top priorities are to maintain strong liquidity remain investment grade and reinvest in our business.
As we've said before we view being investment grade is a commercial imperative given the importance of this to our customers.
And because of the spin related cash outlays, we have in front of US most of the free cash flow. We'll generate this year is in many ways are spoken for.
Importantly, and using a slide I shared on our last call I would like to reiterate that our <unk> initiatives driving certification signings and revenues through our new ecosystem partners train.
Transforming delivery for upscaling, and automation and addressing elements of our business with substandard margins carry significant potential for our business.
We anticipate that our alliances initiative will drive signings revenue and over time, roughly $200 million in annual pre tax income or.
Our advanced delivery initiative will drive cost savings equating over time to roughly $600 million in annual pre tax income.
And our accounts initiative will drive annual pre tax income of $800 million.
We're also pursuing growth in advisory and implementation services and among our global practices, which is incremental to the benefits coming from our <unk> initiatives and we're managing expenses carefully throughout our business we.
We expect that these efforts over time will contribute roughly $400 million in annual pre tax income.
In total then we've identified paths.
We expect to generate roughly $2 billion in contributions to our annual pre tax income over the medium term.
I hope that Martin to update on our progress on these initiatives gives us confidence in our eagerness and ability to seize this enormous opportunity.
Turning to our outlook. Our game plan is to continue to serve our customers seamlessly and to deliver solid results. Even as we go through the three year process of transforming our business preparing to return to topline growth and positioning <unk> for stronger margins and higher returns on.
<unk> capital.
Our outlook for the fiscal year ending next March our fiscal 2023 assumes that we will make significant progress on the initiatives that we've laid out.
For starters compared to calendar year 2021, we expect to drive double digit constant currency growth in signings in fiscal 2023.
The June quarter will be a tough signings comp for us due to two large renewals last year.
The December quarter is typically the largest signings quarter in our industry.
Our signings progress won't be linear.
What's important is that for the fiscal year as a whole are anticipated double digit signings growth will put us on track toward our first full year of revenue growth in calendar 2025.
As a reminder, we typically start each year with nearly 85% of our projected revenue already under contract given the multiyear term of our customer relationships.
Because of the nature of what we do and the long sales cycles and ramp up times inherent in our business. It will take time for our progress on signings to translate into revenue and profits.
Our financial outlook for fiscal 2023 reflects this element of our business model.
We're expecting revenue of $16 five to $16 7 billion. This fiscal year based on recent exchange rates as we're facing a roughly $1 billion year over year top line headwind from currency movements.
Our guidance implies a revenue decline of 4% to 6% in constant currency from calendar 2021 to fiscal 2023.
Comparing the 12 months ending March 2023 to the 12 months ending in March 2022, our guidance implies a year over year revenue decline of 3% to 4% in constant currency.
These year over year revenue comparisons both include a roughly one point benefit from pass through like revenues from customers to IBM that we largely didn't have in 2021.
Our outlook is for adjusted pre tax margin to be in the range of zero to 1%.
This is consistent with our 2020 and 2021 pro forma results, despite 60 basis points as expected currency headwinds this year.
In addition, there is an impact on margins from revenue declining at the same time that we're investing in sales training and growth K presenting these headwinds is a full year benefit from the workforce rebalancing <unk>.
The actions announced in late 2020 versus only a part year benefit in 2021 and.
And we will expect to get a partial year contribution this year from our new advanced delivery and accounts initiatives.
From a cash flow perspective, we're targeting about $750 million of gross capital expenditures and $700 million of net capital expenditures compared to about $1 billion of depreciation expense.
We continue to view, our normalized annual adjusted free cash flow to be roughly $500 million.
Subject to timing related swings in working capital.
As a reminder, in 2021, we generated $904 million in pro forma adjusted free cash flow and ended the year with $2 2 billion of cash on our balance sheet.
One anomaly, we are seeing in our outlook for fiscal 2023 is that although we expect our adjusted pre tax margin to be consistent with our 2020 and 2021 results. We're projecting our adjusted EBITDA margin to be slightly lower year over year at around 13% to 14%.
The lower adjusted EBITDA margin is primarily related to currency and spinoff related impacts on amortization, namely a 30 basis point headwind from currency.
And a 60 basis point headwind due to a portion of our software purchases from IBM being treated as a monthly subscription rather than as a prepaid and amortize software license.
In the current quarter, our new fiscal first quarter that runs from April to June we expect to generate just under 25% of our full year revenue.
There is some seasonality in our margins with the October to December quarter, typically being the strongest in the April to June quarter being softer.
More generally our projected growth in signings, including from our new alliances the benefits from our advanced delivery solutions and the contributions we expect from our accounts initiative all reflect how we're running our business differently and positioning it for a much stronger future.
We're committed to returning to revenue growth by calendar 2025 and to delivering margin expansion.
We have a solid game plan to drive our progress in this game plan starts with the rapid progress we've made in expanding technology partnerships and the meaningful initiatives. We're implementing this year.
In fact, I wanted to share some details about the composition of our revenues that underscore the underappreciated attractiveness of a large part of our business and the markets we serve.
These dynamics highlight the opportunity that's associated with our accounts initiative.
We're addressing elements of our customer relationships that generate sub standard margins.
Our aggregate results Nast, the fact that within <unk>, we have a strong $10 billion business, which I'll refer to as a blueprint for how we want to operate.
This blueprint consists of accounts that represent about 60% of our revenue generate average gross margins north of 20% and reflect our ability to get paid appropriately for the mission critical services we provide.
To me. This blueprint is most of what we do and a source of shareholder value hiding in plain sight.
And the reason that this value is underappreciated is our other roughly $8 billion of focus accounts revenue.
This revenue stream generates virtually no gross margin and after SG&A cost is losing money.
Look the best kind of problem to have is a fixable one.
Our accounts initiative is all about the opportunity to make our focus accounts more like the majority blueprint of our business over time.
Over the next three years, if we close even half of the gross margin gap between our focus accounts and our blueprint accounts will generate the $800 million in incremental earnings that we've targeted from these accounts.
In a nutshell, we're excited about the earnings upside associated with our accounts initiatives into our blueprint revenues represent the well established roadmap, we can follow to deliver this upside potential.
More generally we are enthusiastic about the fiscal 2023 outlook. We've shared today about the longer term opportunity in front of us and about how our near term actions will position us to achieve our longer term objectives.
We're committed to serving our customers transforming our business and delivering future growth and earnings with that let me turn things back to Martin.
Thanks, David.
Before we turn to Q&A, let me just quickly summarize why we're so enthusiastic about <unk> future.
We're in the early stages of operating independently.
<unk> towards growth opportunities, seizing our now larger market and bringing incremental and differentiated value to customers.
We are the trusted partner with tremendous expertise experience and scale.
As technology continues to evolve our customers will look to control to keep them operating efficiently and ahead of the technology curve.
Our <unk> initiatives will deliver substantial benefits.
We have the financial flexibility to execute our growth strategy.
Invest in our people and to create a winning culture, a culture that will create significant value for our employees, our customers and our shareholders.
And with that David and I are pleased to take your questions.
At this time, if you wish to ask a question. Please press star one on your telephone keypad, you may remove yourself from the queue by pressing the pound key.
Our first question today from Tien Tsin Huang with Jpmorgan. Your line is open.
Hey, guys. Thank you good morning, I like this slide 20, I think both of you talked about it this transforming.
Focus account into blueprint account, so I'm just curious just.
The plan, how do you get that focused account to move up into the higher gross margin categories that just a function of selling more.
I don't know if digital or modern content is that pricing discipline is there going to be some runoff in the book just trying to better understand the plan to get there yes.
Yes, sure. Thanks, Tien tsin, good morning, and thank you for joining.
A few things I'd say, one remember that we started.
We start these discussions in a really good place our customers like what we do for them They trust us to run their hearts and lungs.
And so these these discussions are they're very engaged they are very receptive to.
Working with us.
And keep in mind that our relationships and the proximity to our customers.
We brought with US right, we didn't we're not creating new relationships. We had the we had the.
That kind of a front and center relationships with these accounts widmer and IBM and so we brought those so we start in a good place the patterns, we're seeing in in how these discussions are evolving.
Our multifaceted so so primarily.
Primarily what we're seeing.
Is it an expansion of the relationship.
And Thats about.
Thats about using our new alliance partners, bringing some of our new capabilities to help them on the journeys there on whether that's cloud or data security. So so primary pattern. We're seeing is an expansion of the relationship driven by the ecosystem in which we now operate in the content.
We have to bring which is higher margin.
The other element that we're seeing.
Is how we how we re solution what we're delivering so as an example, we use.
We use some caves or content from other providers to help us deliver a certain elements and we have an ability to swap out some of those and bring others. In so we can we can go look through our vendor lists and see what alternatives, we have and I make that unique.
<unk>.
Yes.
Identify that as a unique pattern because it allows us obviously to keep the revenue, but improve the margin profile and then thirdly.
At.
At renewal.
We have a couple of options obviously.
We renegotiate the price and obviously, we work with our customers to make sure that that we get to a better spot.
We also have the opportunity to take some content out of these deals where.
Where for instance, it's uneconomic, what what you see in these deals.
And these relationships, it's not all one thing it's a myriad of services. It's a mirror is a pretty broad and complex relationship and we have an ability for instance to to ask the vendors maybe as a software vendor maybe it's a hardware vendor to go directly to the customer and sign a license for the software that we need to manage et cetera.
So we have an opportunity to pull some content out.
Obviously thats.
As I said in my prepared remarks that can represent a headwind to our signings growth, but we are as David has said as I've said in the past we're focused on the quality of building that backlog. So so yes. It would represent a slightly smaller relationship but at a much more profitable relationships. So so again, we start in.
A really good place here customers are very engaged in these discussions and receptive, which none of which has surprised us because we brought really good relationships over and they like what we do for them.
These patterns I think are the ones that over time, we'll just we'll see more and more either expanding our relationship with new content.
<unk> now at some of the vendors that.
Arent arent, helping our P&L and as I said, sometimes we'll renew without some of the some of the third party content here. So hopefully that's helpful.
As it is so just thinking about the signings and that being up 20% I'm assuming.
I think you did say the margins were up sequentially on the signings, which suggests the clients are.
Embracing and open to some of your new cost dropped or following this blueprint model.
Is it safe to say.
Yes.
If that is that is the correct interpretation in fact that.
Growth we printed.
What also reflects a few relationships, where we didn't renew some of the content because it wasn't economic in those cases those customers. They went directly to the vendor and they.
Either they bought the licenses are they they got some of the content, but we renewed the higher margin higher value content.
And we still were able to grow now every quarter is a little bit different and we're focused on growing the full year signings at double digit, which we're very confident we can do but it will reflect that higher value content and we will continue to carve out will carve out content that just doesn't make sense right. So it's not just the level of <unk>.
Both but also the quality of it within that that double digit I think I understand thank you. Thank you.
Thanks, Dan.
Operator next question please.
We will take our next question from David <unk> with Evercore ISI. Your line is open.
Hi, Good morning. This is Nelly elsewhere, David <unk>. Thank you for taking the question.
The question May have a follow up after that.
So my first question is on free cash flow can you give us more color.
Our fiscal 'twenty free cash flow expectation and maybe I'll pass it key drivers, including capital that they are working capital usage.
Sure.
Sure Neely Thanks for the question.
When we look at free cash flow and our normalized free cash flow of around $500 million a year.
See the way, we get there in fiscal 2023.
We have close to a $100 billion of adjusted pre tax income at the midpoint of the guidance range we provided.
Plus about a $300 million gap.
Be a little bit more between the amount of depreciation expense that we have and the amount of net capital expenditures that we're going to have so little over a $1 billion of depreciation and around $700 million of net capex produces about $300 million free.
Free cash flow there and then we're looking for in the range of $100 million.
From working capital.
And other items and thats going to be an area of focus for us this year as well, obviously with respect to free cash flow. There is always a possibility of timing differences those very much worked in our favor in 2021 and.
And probably a little bit in the March quarter as well, so we'll watch those but <unk>.
Three key components of our pre tax income the depreciation capex gap and a bit of contribution from working capital.
That's very clear thank you so much.
And my next question.
Yes.
Okay.
Last quarter you guided to.
<unk> decline.
Pro forma constant currency revenue growth.
And.
Yes.
Outperform that guidance this quarter with 2% comp.
Constant currency pro forma growth.
It may be helpful.
Factors that Charles.
Sure.
March quarter results include just over two points of revenue.
Two points of revenue growth, we picked up from pass through IBM revenues. As these are primarily situations, where we ended up being contractually contractually responsible for.
We're providing services to customers, but IBM is economically responsible and we hadn't really forecasted those continuing.
About two points out of the over performance and by the way fiscal 2020, our fiscal 2023 guide now assumes a one point year over year benefit from pass through IBM revenues.
The remaining upside was really driven by strength in our advisory and implementation services revenues.
<unk> of signings in this past quarter and in the fourth quarter of 2021.
Turned into project work and revenue sooner as I was helpful to us as well.
Operator next question please.
Okay.
And as a reminder, if you would like to ask a question today that is star and one we will take our next question from Jamie Friedman with Susquehanna. Your line is open.
Jamie Jamie we can't hear you.
Jamie Friedman your line is open please check your mute function on your phone.
Hi can you hear me okay.
Thank you good morning.
Great. Good morning, and congratulations a lot of hard work here I want I really like this slide 20, and the incremental disclosures you have you really appreciated.
I wanted to ask you a couple of related to that.
So this is the one we talk about focus accounts and the blueprint accounts.
I'll just ask two upfront about the same topic, but in general how do you see the contract renewal discussions going and then <unk>.
Also on contracts.
Thank you.
I apologize if I got this wrong on average contract duration runs about five years.
Do you see any meaningful trends and contract duration. So first on the renewals and second on the duration. Thank you.
Yes sure. Thank you. Thank you Jamie and thanks for joining the call. Good good question. So a few things.
And renewals I'll step back and say that from from all the work that IBM did last year as we were approaching the spin and then the digital team.
We have brought up we really have brought the customer base on this journey with us and that the backlog that we brought the substantial backlog that we bought.
Over with Us really does represent.
The customer base.
And their vote of confidence on.
On <unk> and what it can when it Ken.
Ultimately help them achieve which are a set of really complex journeys.
Related again to them transforming their business to be more competitive. So so between the work that IBM did as I said prior to spin and now our work is an independent firm customers are coming on this journey and I start there because it's also reflected in our in our renewal rates and we are.
We are really doubling down on the relationships, we have the customer base, we have investing quite heavily in making sure. They have access to the best skills, making sure that they have access to.
<unk> to our partners and what what we as a group as a as a consortium can bring to helping them on their journeys and these renewal relationships are going well.
As we as we start to put.
As we start to put.
Our alliances and our partners and we show up together now as we start to put the capabilities around that.
And are able to help them are able to help our customers go where they want to go.
I expect that our renewal rates will remain very high now on your on your average contract.
And I'll sort of a bifurcated a little bit in the in the run side of the business when we're managing infrastructure.
<unk> 456 years as can be can be typical.
I see we see a slight shortening of some of those some of that duration slight it's not now.
Not a meaningful change I think it's more of a trend in the marketplace.
And then the other part of our business, which we are growing and as you saw we were able to grow our advisory business by 50% and the signing space that has a much shorter duration.
Kind of business in that part of our focus is because we can convert that into revenue as David said part of our upside in the quarter was that we signed.
Signed a little bit higher mix and that business starts to convert it also by the way I think to link these two now.
When we grow advisory and the reason, we're delighted with that performance we grew advisory 50%.
And given what I, what I, what I said about our big bet on.
Investing in our customers, that's a big vote of confidence from our customer base because over time as they believe in our capabilities to help us advise them. Then they also believe very strongly in our capabilities to run their infrastructure for them. So we see that the vote of confidence on advisory and growth not only.
Our strategy to move into this ecosystem and be a more relevant partner for our customers to be working but it is a massive vote of confidence on where they want to go and our ability to help them over the long term hopefully that's helpful.
Yes, that's a great answer thank you for that I'll jump back in the queue.
Operator next question please.
We will go next to Bill <unk> with Deutsche Bank. Your line is open.
Good morning, just a couple of housekeeping items, David can you review the spin in terms of transactional costs for this year and then also provide any color as to what that's going to look like next year. Thank you.
Sure.
Looking for about $300 million of P&L cost this year fiscal 2023, and probably about $400 million of cash outlays.
The principal components associated.
With the spin related cost our systems migration work that needs to be done post spin to separate us from.
From IBM systems in which we're still running that.
That's the largest component we are rebranding costs that we're incurring.
We also have a broad based employee retention program that IBM put in place.
Under which we're continuing to accrue that pays out this December and that's actually the biggest source of the difference between the P&L cost and the cash outlays, because a portion of that it was already accrued prior.
Prior to year end. So those are the key components of it.
All three the retention program will be done at the end of this calendar year the systems migration work will.
Carry into fiscal 2024, but should be much smaller the rebranding work will be done this year and as a result, the amount of spin related costs that we expect to have in fiscal 2024, it should be significantly less than what we had much less than what we have here in fiscal 'twenty three.
So comfortable to say I mean at least 50% lower year over year.
I guess my question is I'm trying to understand what part of that is sort of structural versus onetime in nature, yes.
I would view all of it is onetime in nature some of it just there.
And yes, I do think it will be down 50% or more in fiscal 2024. It's all one time some of it just has a little bit of a tail that goes into fiscal 'twenty four.
Okay, great. Thank you and then remind me how do you guys define medium term when youre kind of in your slide deck.
I tend to think of medium term is three years to five years for us and in particular our initiatives.
In the accounts and alliances and advanced delivery initiatives.
Should very much play out over the next three to five year period.
With advanced delivery, having the potential to be.
Towards the shorter end of that period.
Okay, great. Thank you and then just one final question as you guys have been very consistent in your messaging around their commitment to the <unk> rating.
Can you talk about just to round that out the potential of pursuing a rating with Fitch.
Just to make sure that you not only from a customer facing perspective, you have to pick up another <unk> rating, but also.
In terms of your outstanding public debt just in terms of providing some assurance that it's going to remain in the index.
Sure as you mentioned, we are investment grade with both Moody's and S&P, we do consider that important to us not really from a financing cost perspective as much as it's commercially very important to us.
And we.
We are going to look to see whether our.
Whether the answer ratings ratings group we have is.
Having the heading to.
The right best answer for us or whether whether alternative other alternatives additional alternatives would make sense.
Great. Thank you for your time.
Operator.
And this does conclude the Q&A portion of today's call I would now like to turn the call back over to Martin Schroeter for any additional or closing remarks.
Thank you operator, and thanks again, everyone for joining US today look you can hopefully tell that we're very excited about the progress we've made in our in our first six months as an independent company and I Hope you also Ken.
The confidence we have that the steps, we're taking along with the long term journey that the our customers around that defines sort of the industry <unk> in which we operate really do position us to be.
Continue to be the leader to be a world class growing.
Higher profit business and our expanded market. So thanks again for joining and we will talk to you soon.
This concludes today's Kendra quarterly earnings call and webcast. You may disconnect. Your line at this time and have a wonderful day.