Q3 2023 Kyndryl Holdings Inc Earnings Call
Good morning, and welcome to the Kid drove fiscal third quarter 2023 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 question.
If he would like to ask a question at that time. Please press star one on your telephone keypad, if any to remove yourself from the queue Press star two.
Any time, you shouldn't eat operator assistance press Star zero.
Please be advised that today's call is being recorded I would now like to turn the call over to Laura treatment Global head of Investor Relations at Kindred.
Thank you you may begin.
Good morning, everyone and welcome to Kindred <unk> earnings call for the quarter ended December 31, 2022.
Third quarter of our fiscal year 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 in these statements speak only to our expectations as of today for more details on some of these risks. Please see the risk factors section of our annual report on Form 10-K for the year ended December 31 2021.
Andrew does not update forward looking statements and disclaims any obligation to do so.
In today's remarks will also refer to certain non-GAAP financial measures.
Responding GAAP measures and a reconciliation of non-GAAP measures to GAAP measures for historical periods are provided in the presentation materials for today's events, which are available on our website at investors that Kindle dot com.
With me here today are kendall's, Chairman and Chief Executive Officer, Martin Schroeter, 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 Martin Martin.
Thank you Laurie and thanks to each of you for joining us today tendrils continuing to drive progress both as the world's leading provider of it infrastructure services and as an independent public company.
Today's call I'll update you on our strategy and the meaningful progress we've made on our <unk> initiatives alliances advanced delivery and accounts.
David will then provide you with a more detailed review of our financial results and discuss our full year 2023 outlook.
Our transformation is well underway and I am proud of what our teams have accomplished the.
The essential non discretionary nature of our business provides our revenue streams with some natural installation to macro factors.
As a result demand for our services remained stable across the markets we serve equally.
Equally important and independent of the broader economy. Our continued execution on our three days is delivering the benefits we need to strengthen our overall business performance and drivers to profitable growth.
Our continued progress combined with the nature of our business should ultimately allow us to regularly return capital to shareholders.
Circle back on this topic in a few minutes.
It's been about 15 months since we became an independent company and the world's largest pure play it infrastructure services provider.
We employ nearly 90000 people we operate in over 60 countries and we serve thousands of customers.
We address a large and growing market through our array of practices and services offerings.
With 30 years of mission critical experience, we have unmatched technical expertise in managing complex hybrid it environments for large organizations and in our business scale matters. It gives us the ability to invest in leading technology advanced delivery and automation, enabling us to expand our competitive advantage as well as.
Our comparative advantage over in sourced infrastructure management.
In this environment, we've been successfully executing our <unk> initiatives to drive business performance and we're on track to deliver on our fiscal 2023 milestones.
As a reminder, we provided targets of $1 billion in signings tied to hyperscale or alliances this fiscal year $200 million in annualized cost savings from advanced delivery by fiscal year end and $200 million of annualized pre tax benefit from our accounts initiative.
And our transformation work will not be done after this fiscal year over the next few years, we expect these initiatives to generate $1 $6 billion in annual benefits.
In the first nine months of this fiscal year, we generated $750 million of hyperscale or signings, putting us right on track to achieve our $1 billion year, one target for our alliances initiative the.
The number of customer contracts that now include a hyperscale or related component has tripled since the start of our fiscal year.
We've also continued to increase our hyperscale or certifications on top of our existing IBM cloud certifications to nearly 32898% increase from a year ago.
Our advanced delivery initiative has freed up over 4500 delivery professionals this year to backfill attrition or address new revenue opportunities.
At the same time, it's generating annualized savings of more than 225 million, surpassing already our $200 million fiscal 2023 year end objective.
And in our accounts initiative, we're addressing elements of our business with substandard margins in many cases, we're driving margin growth by expanding the scope of work and optimizing our cost base through automation and greater standardization.
Now realizing pre tax benefits of more than $130 million, a year and progressing toward our $200 million a year year end run rate goal.
Similar to last quarter I'm going to share some customer success stories that demonstrate our team's execution on our three A's.
The underlying theme among these examples is that the combination of our broader ecosystem and expanded capabilities is resonating with our customers and providing <unk> with new revenue streams and higher margin opportunities.
Through our alliances initiative, we want a new relationship valued at $170 million to provide tangible consult services and migrate workloads to a modern hybrid cloud infrastructure for a company in the services industry. Additionally, with an insurance company, who has been a long term customer of ours. We've expanded our scope of work to include cloud migration and <unk>.
Hyperscale or services in order to accelerate their digital transformation and drive efficiencies.
And for an industrial manufacturer, we're integrating our customers' operations into a hyperscale or ecosystem.
And advanced delivery, we've increased resiliency by more than 75% for a global consumer products company enhancing system stability and availability.
Or an industrial company, we've created an opportunity to generate approximately $15 million incremental annual revenue by expanding the scope of work to include network and edge automation.
For a global energy company, we reduced our staffing by 24% and increased system stability through automation and new ways of working.
And accounts for a large transportation company, we're increasing our gross margin by 50 percentage points by re scoping our contract to those areas that make economic sense for us.
This new contract will add $14 million and gross profit over the next five years.
With a leading manufacturer we extended our contract with a 25 percentage point increase in gross margin through delivery efficiencies automation and changes in scope.
And for a major technology company, we renegotiated specific elements of our contract prior to exploration to bring more flexibility to both our customer and control.
In the process, we're realizing an increase in gross profit of more than $25 million over the life of the previous contract.
Many of us at kindred regularly engage with Ceos and <unk> of large organizations, which gives us insight into the technology challenges they face and the opportunities they see.
This helps shape, our view of the market and how we can evolve to meet our customers' needs and objectives.
Here's what we're hearing from financial institutions to manufacturers to transportation providers virtually all firms operating at scale also need to be technology, driven companies relying on it infrastructure to operate and go to market.
Hybrid it environments will continue to be the norm for most large organizations and putting the right workload underwrite platform will provide ongoing opportunities for cloud migration and optimization.
While enterprises are continuing to modernize their it states many have already tackled the simplest transitions as it relates to cloud migration.
As a result their progress increasingly relies on complex optimization work in order to advance enterprise innovation.
Cyber threats are proliferating and cyber hygiene and resiliency are as important as ever to companies and their boards.
<unk> AI and data optimization are evolving in ways that will likely drive technological development and investment for the remainder of this decade.
This includes both the machine learning associated with managed infrastructure services and companies operational and go to market use of AI.
Organizations are looking to better tailor their employees tech experiences in order to drive productivity and engagement.
And lastly companies are optimizing automating and engaging with service providers to save money in todays more restrained economic environment.
Each of these trends play to our strengths.
Present control with opportunities in both managed services and advisory work and position us for sustainable profitable growth.
We are working with our customers around the world to address these macro trends through our practices through our scale and established presence in lower cost markets through innovation driven by <unk> Bridge Kintzel vital in kindred will consult and through our global alliances with leading technology companies.
We are very excited about how technology is evolving and the role <unk> plays in that evolution.
As I mentioned, our alliances and our important element of our business transformation with our freedom of action as an independent company. We've built an ecosystem that is more relevant to our customers and allows us to provide higher value services that we werent able to provide before.
Our long standing relationship with IBM continues to be important, but so are our significantly expanded top tier alliances with Microsoft AWS, Google Cisco Dell Oracle Red hat.
Vmware and many others.
We're building on these relationships and seizing new growth opportunities often with our existing customers.
Over the last year, we've co created and launched new capabilities with our alliance partners and doubled our hyperscale or related deal pipeline.
In November we hosted our first ever Alliance leadership summit, where our senior leaders and our alliance partners engaged in collaborative discussions to accelerate joint go to market strategies and joint business outcomes.
Our customer base and our credibility with our customers make us a highly sought after partner and we've chosen our technology alliances intentionally.
This past quarter, we expanded our relationship with AWS to support their new security solution tailored for industry and company specific needs.
To accelerate cloud transformation projects, we are helping our customers leverage our relationship with Microsoft and Dell to implement and manage integrated hybrid cloud solutions.
And we've been collaborating with Intel to design and implement private <unk> networks for joint customers.
In recent months, we've also given our customers and our alliance partners more clarity on how we will collaborate in surface innovation.
We branded these efforts to control bridge Kendra vital and casual consult <unk>.
Will bridge our open integration platform is at the core of our technology strategy and transforming the way we deliver our services.
It enables us to scale modern systems management capabilities integrating operational data, our intellectual property, our solution and partner offerings and insights through integrated AI operations.
As a result, <unk> bridge is how we help our customers manage modernization across their complex global it states.
Since our launch in late September we've already onboard and nearly 500 customer accounts to integrated AI ops that are at the core of <unk> Bridge.
Central vital redefines, how we engage with customers and co create innovative solutions through design led approach.
Our ability to beat objective expert across an array of technologies allows us to advise and collaborate with customers in ways, we could not when we were in IBM captive.
And our vital methodologies provides the foundation for a personalized result oriented environment to solve and create solutions and an easy to consume way.
And Carol consult ties it all together using bridge and vital to highlight our capabilities and our differentiation as we provide our customers with ways to handle their most vaccine technology challenges and make it easier for them to do business with us.
Year to date <unk> consult signings have increased 32% in constant currency compared to the prior year period, and they now account for approximately 12% of our revenue.
With bridge vital and consult customers are telling us the kindle is showing up differently for them.
This is creating opportunities for us to capture some of the larger addressable market now available to us and to grow our share of wallet with our customers.
When I look back on <unk> transformation to date 2022 was a period of transition and building as we began to rewire, our new firm with that strong Foundation. Our progress continues we.
We're building a purpose driven company and committed to being a strong corporate citizen in December we announced our long term target to reduce our overall carbon emissions to net zero by 2040 and committed to at least a 50% reduction by 2030 following science based frameworks.
Our de Carbonization plan aligns with their business strategies, because we see opportunities to consolidate our legacy real estate and data center footprint as well as our supply chain to more sustainable infrastructures.
2023 will be a year of acceleration, we will continue to execute our strategy to drive profitable growth we.
We expect to make significant progress on our three as initiatives. As this is our fastest path to growing our business and delivering more value to our customers employees and shareholders.
We will lean into the opportunities associated with a tougher macro climate and company's enhanced focus on managing costs, which aligns with what we do.
And we will continue to operate with our new mission, serving our customers in what we call the control way being restless empathetic and devoted in our pursuit of operational strategic and financial progress.
Looking beyond 2023, when most if not all of our separation related expenses and costs are behind us, we will be driving our business towards sustainable revenue growth significant margin expansion and meaningful cash flow growth.
We are committed to maintaining a strong investment grade balance sheet, and we will seek opportunities to further strengthen our credit profile.
Given the nature of our business and once we've made clear progress in strengthening our margins, we'd expect to be in a position to ask our board to evaluate returning capital to shareholders.
We have the right strategy in place to do this and I am confident we have the right leadership talent knowhow and partnerships to execute and transform our business now with that I'll hand over to David to take you through our results and our outlook.
Thanks, Martin and Hello, everyone today, I'd like to discuss our quarterly results, our balance sheet and liquidity the importance of our <unk> initiatives and our outlook.
Our financial results for the quarter ended December 31, our fiscal third quarter reflect progress on our top line growth efforts external factors, such as currency movements and sequential margin expansion.
In the quarter, we generated revenue of $4 3 billion, which represents a 2% increase in constant currency from our pro forma results a year ago led by 19% growth in kindred consult and increased seasonal factors this year, including amounts related to customer contracts with minimum annual <unk>.
Revenue commitments and seasonal variances in volumes.
Demand for our services has remained resilient amid increased global macro uncertainty.
Kindred consult signings and revenue were both at record levels with consult representing 20% of our total signings and 12% of our total revenue.
Signings translate into revenue at a faster pace given that theyre more in year project based work compared to our longer term managed services activities.
Adjusted EBITDA in the quarter with $580 million. This represents an adjusted EBITDA margin of 13, 5%.
The year over year decline in our adjusted EBITDA margin compared to pro forma 2021 results was primarily due to currency, partially offset by higher revenue and benefits from our three A's.
Adjusted pre tax loss was $4 million.
Currency movements had a negative year over year impact of $90 million and adjusted pre tax income as.
As we've mentioned before currency is having a significant impact on us because we have dollar denominated costs in our global operations. In addition to having international earnings.
Our currency hedges and various contractual protections havent fully offset the effects of the unprecedented dollar strengthening that occurred in 2022.
Higher revenue and progress on our three eighths helped to offset currency impacts and inflationary cost pressures.
Among our geographic segments, we delivered year over year constant currency pro forma revenue growth in three of our four segments.
And our strongest margins were again in Japan, and the United States.
Changes in exchange rates and how various IBM related costs are impacting each of our segments under our 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 cloud applications data and AI security and resiliency networking edge digital workplace and core enterprise.
Our business mix continues to evolve to reflect demand with most of our signings, including kindred consult signings coming from cloud apps data and AI security and other growth areas.
In short if it werent for currency movements this quarter, we'd be reporting year over year revenue growth and positive pre tax margins.
On a reported basis, however, currency is masking the operational progress we're making.
And as I mentioned, while there is still significant macro uncertainty we continue to see broad based demand for digital transformation and infrastructure services.
Turning to our cash flow and balance sheet, we generated adjusted free cash flow of $407 million in the nine months ended December 31, we.
We've provided a bridge from our adjusted pre tax loss to our free cash flow so far this year.
Our gross capital expenditures have been $711 million year to date, and we've received $20 million of proceeds from asset dispositions or.
Our capex has been somewhat frontloaded this fiscal year.
Working capital is contributing to cash flow as we've stepped up our management of both receivables and payables globally.
Our financial position remains strong our cash balance at December 31 was $2 billion.
This is above the September 30 level, despite our anticipated, but significant use of cash for transaction related payments in the quarter.
Our cash balance 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 lathered from late 2024 to 2041, we had no borrowings outstanding under our revolving credit facility and our net debt at quarter end was $1 2 billion.
As a result, our net leverage sits well within our target range.
We are rated investment grade by Moody's Fitch and S&P and we're happy to have the overhang associated with IBM sale of its retained stake and Kindle behind us.
On the topic of 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 many of whom operate in regulated industries.
We are using the free cash flow, we're generating this year to fund spin related cash outlays, including required systems migrations.
As Martin indicated kindles business characteristics combined with the contributions that we expect from our three initiatives over the medium term should allow us to expand our margins and that ultimately should allow us and our board to consider regularly returning capital to shareholders all while remaining investment grade.
<unk>.
For fiscal year 2023, we're raising our revenue outlook and reaffirming our margin outlook from what we provided last quarter.
We are increasing our constant currency revenue growth outlook by half a point to reflect the strength, we saw in the third quarter and growth in kindred consult.
And we're increasing our reported revenue outlook to also reflect currency movements.
On a reported basis currencies impacting our top line by more than seven points year over year, and we're now projecting fiscal 2023 revenue of 16, 8% to $17 billion, which compares to our previous guidance of 16, 3% to $16 5 billion.
Currency movements have impacted our projected adjusted pre tax margin by roughly 150 basis points year over year.
As we head into our fiscal fourth quarter, we're driving operational progress to mitigate external headwinds on.
On the positive side and importantly, we continue to grow the P&L benefits that our <unk> initiatives are providing and we're managing cost carefully on.
On the flip side currency and energy cost pressures remain the seasonal uplift in revenue we had in Q3 won't repeat in Q4, and our IBM software costs increase with this start of the new calendar year.
In aggregate these items pointed towards the midpoint of our full year guidance.
Our focus is on delivering the benefits we anticipated from our <unk> initiatives, while we invest to drive innovation and future growth.
From a cash flow perspective, we're now projecting roughly $800 million of gross capital expenditures in fiscal 2023 compared to about $900 million of depreciation expense.
For us the March quarter is a seasonally soft period for cash flow driven by the combination of earning seasonality and required annual software licenses and other prepayments.
Looking ahead, we plan to provide full year fiscal 2024 earnings guidance when we announce our full year fiscal 2023 results in may.
Over the medium term, we remain committed to returning to sustained revenue growth by calendar 2025, delivering significant margin expansion and driving free cash flow growth.
We also expect to mitigate the effects of recent currency movements over time, even if exchange rates don't revert back towards historical norms.
We have a solid game plan to drive our strategic progress and this gameplay and starts with the steps we've already taken to expand our technology partnerships and with the meaningful initiatives. We're implementing this year.
As Martin mentioned, we continue to progress on our <unk> initiatives.
Our momentum supports our expectation that our alliances initiative will drive signings revenue and over time, roughly $200 million in annual pre tax income.
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 driving growth in kindred consult and among our global practices, which is incremental to the benefits coming from our <unk> initiatives and we see opportunities to control expenses throughout our business.
We expect that these efforts over time will contribute roughly $400 million in annual pre tax income.
As part of these efforts and with the restrictions in the employee matters agreement related to our spin having expired, we can and we'll look at potential actions to reduce our expense base and foster increased productivity.
In total the magnitude of the earnings growth opportunity. We're tackling is tremendous relative to our current margins progress on our three AIDS will therefore be a central source of value creation for kindred.
And for any investors, who have been following the <unk> story I have included an updated version of a slide we first published in May.
Slide that provides a breakdown between our margin challenged focus accounts and the rest of our business.
As Youll recall, our aggregate results obscure the fact that within Kindle, we started with a strong $10 billion business, which we referred 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.
Our other roughly $8 billion of focus accounts revenue generates virtually no gross margin and after SG&A expenses is losing money.
Our accounts initiative is all about the opportunity to make our focus accounts look more like the majority blueprint of our business over time by addressing elements of our customer relationships that generate substandard margins.
Over time, if we close even half 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.
That's why our accounts initiative is a major priority.
And a major opportunity for us.
To realize this opportunity we are paying close attention to the margins on signings for both our focus accounts and our blueprint accounts.
Since the beginning of our fiscal year. The overall expected gross margin on our signings has been in the low to mid Twenty's, which means that the pre tax margin has been in the mid to high single digits.
The December quarter with the continuation of that favorable trend.
We're achieving this exactly as we've intended and as you'd probably expect.
In our blueprint accounts, we're delivering increases in expected margins of a point or two.
In our focus account signings were dramatically changing our margin profile with the average gross margin moving to the low to mid Twenty's, which is within a few points of where blueprint accounts operate.
In short our strategy is driving the results we've targeted.
What that also means is that if our P&L for the next few quarters reflected only a recently signed deals we'd be operating at mid to high single digit adjusted pretax margins.
But because of the prevalence of multiyear contracts in our business. Most of our revenue is still coming from lower margin pre spin legacy signings.
As a result in our aggregate numbers you can immediately see the benefits of the higher margins at which we're now pricing contracts.
But that will change with time as our business mix increasingly tilt toward more post spin contracts.
In closing as an independent company, we are solidifying our position as a cost effective gold standard provider of essential services.
We're signing new contracts at higher projected margins and we're executing on the strategies and initiatives that will drive longer term progress future growth and stronger earnings in our business.
With that Martin and I would be pleased to take your questions.
At this time, if you would like to ask a question. Please press star one on your telephone keypad, you may remove yourself from the queue by pressing star Kim we'll take our first question from Tien Tsin Huang with Jpmorgan. Your line is now open.
Hey, thanks, so much good morning.
I wanted to ask on the on the signings front. David you were just commenting on that the sidings were ahead of our <unk>.
Expectations here.
So can you maybe just elaborate on the better margin profile of the deals.
Side and I know David you just went through some of that but I was just asking because we get questions from investors all the time about clients focusing on cost cutting so what does that mean for pricing et cetera, but it sounds like youre getting better pricing in.
Embedded delivery. So can you just square that for us.
Sure Tien tsin.
Exactly right on the signings that we have the over $3 billion of signings in the quarter.
We are.
We're seeing a mix is similar to our overall business. So far this year roughly 60% of our our signings have been in blueprint accounts about 40% in focus accounts.
And what we're we're as I mentioned, what we're doing is keeping the blueprint accounts similar to where they've been maybe up a point or two and really driving major progress on the the focus accounts and the way we're getting there is by running.
The plays as we call them.
That we want to have to make our focus accounts better it can involve expanding the scope of relationship.
Having more consult business associated with them some time, taking elements of scope out that arent economic or that won't be economic for us as well as adjusting pricing to get there and the combination of those actions is producing exactly this.
<unk> impacts we wanted to have on the margins associated with these accounts in fact, one of the things we're looking at and tracking internally is how much year, one gross margin and how much.
How much aggregate gross profit we're signing off.
On our on the new.
<unk> that we bring into the fold and add to our backlog and we're really excited about the gross margin. The gross profit that we're adding with our sales and renewal activities.
Alright, great thanks for going.
We go through that maybe my follow up I'll ask on the outlook.
You did raise your revenue outlook by $500 million the margins are.
Are the same how much of the raise in the revenue was from upside to the third quarter versus a raised outlook I heard <unk>.
<unk> was doing quite well and maybe just any comments on gross margin, which was quite strong.
In the third quarter Im curious if youre thinking on gross margin in the fourth or ahead is changed I know it takes time to feather in to.
The gross margin changes from signings, but figured I'd ask it upfront here.
Yes, when you look at the revenue raised the constant currency revenue increase is about a half a point.
So and the high end and the mid point.
So the majority of the increase.
In the absolute dollar forecast of revenue is due to currency, but were seeing about.
Half a point increase due to operational activity I would say a fair amount of that was in the third quarter, but the consult piece, we expect to play out in favorably influence the fourth quarter as well.
They consult signings have been really strong this year and that should benefit us in the fourth quarter and even as we turn the page.
Two into fiscal 'twenty or I think the margin elements associated with the.
With the signings that we've had.
<unk> will come in over time, some of the consult business.
Tends to turn into revenues faster and those margins will come through.
On the flip side, when we extend a managed services contract sometimes that that actually has six or 12 months to run on the preexisting contract and that's often the piece, where it's hurt us for us to increase the pricing we ended up focusing on their pricing over the duration.
<unk> of the contract extension. So if we have to sort of continue or near continue.
Pricing that's already in place.
I ended up getting some more of the aggregate margin in the later years of the non first year.
<unk>.
Of that contract extension and Thats really why the margin improvement associated with signings layers in over time.
Yes, the other thing Tien tsin and thanks for joining this morning, I'd add to David's from a at a high level I think.
To me is particularly encouraging and I've been very impressed with how much. This team has gotten done in a short period of time, we have.
Brought high value.
Offerings to market that really reflect.
Where our customers want to take us where they want us to help them and so what youre seeing here is a lot of momentum on the signings line because of the role we play in these environments combined with the combined with the work. This team has done in creating high value offerings.
In the practices that we're taking to market. So so this.
As David said well. These these show up in the in the P&L over time, but this momentum is continuing to build as we as we get ready to get back to consistent revenue growth and as David pointed out if we just had in.
In the P&L, what we signed now we'd already be at what we have recently signed we'd already be it.
At a really good profit margin relative to today. So so a lot of what Youre seeing is a result of a team working very quickly given the role we play in our customers' environments very quickly to retool bring to market higher value offerings that make us a.
<unk> part of our customers' future.
And that momentum I expect will continue.
Okay.
No that's great to hear thank you.
Thanks, Tien Tsin, operator, do we have another question in the queue. Please.
And we'll take our next question from Jamie Friedman with Susquehanna. Your line is now open.
Hi.
Good morning, Nice results here.
In your prepared remarks at the beginning you had said something in the effect of <unk>.
The business being naturally insulated to macro factors.
Being the macro so topical Martin I was hoping you could elaborate on that comment.
Sure sure Jamie So look.
The role we play in our customers' environments running mission critical systems.
Yes.
Does naturally insulate us from sort of the.
The highs and lows if you will of of a lot of economic activity at the end of the day, our business and remember we serve the most important companies on their most important mission critical processes. These businesses have.
I have to stay and run their infrastructure seven days, a week 24 hours a day, that's the nature of what we do and so while.
While customers may have a different view of their economic situation going forward. They still have to run their infrastructure and in fact as the as the economies volatility.
As our customers start to plan for that volatility we sit right at the sort of the heart and the center of how they can be helped most because they look to us to help them become more efficient they look to us to help them optimize all of which helps them deal with the economic realities of their customers. Their end users are the markets.
In which they operate so we have a natural installation because of what we do and and then really I think a really positive way for us we tend to thrive in environments, where they get really focused on optimizing they get really focused on productivity because thats, what we do for <unk>.
Living so this is a good environment a good demand environment for us.
Stable because of what we do today, but.
Set of capabilities and offerings that can help them navigate.
It could be a more volatile economic environment.
Got it and then for my follow up.
David This slide 18 is really quite innovative and.
It's really a good.
Practice. So this is when we are talking about the.
Blueprints versus to focus accounts.
And I apologize I don't know this if you disclosed it but what percentage now is to focus accounts have you.
Remediated tried to reprice.
Ed.
If you have not disclosed is it possible through the disclosures you have to back into.
In some way thank you.
Sure.
Thanks for the comments on slide 18, I think it's a really important one and what we really wanted to highlight one of the things we really wanted to highlight on this call with the real progress were making in <unk>.
Mining or extending focus accounts amending those relationships in a way that is substantially changing the profitability of focus accounts and will substantially change it going forward I think it's a really important proof point of execution by our team on the strategy.
We laid out.
The way I would think about focus accounts is it a lot of these are multi year managed services relationships.
And working through the portfolio of most of the focus accounts is going to be.
Our year exercise I think with maybe a little bit of a tale of a few longer term accounts that are on there and we're nine months into that.
That that four year four year exercise.
Would the math associated with that would be would be 20 ish percent I think there are two additional things going on first.
The first few months of that.
It's a ramp up period associated with it and as a result.
We may not have had a full nine months of progress there on the flip side, we are finding opportunities to make progress on focus accounts, even before they come up for renewal by adding scope by adding consult.
<unk> in there and that's going to be helpful to us and I think that puts us in a position where over the over the next 12 months.
Or the opportunity in front of us is to make a ideally an outsized amount of progress.
Relative to the overall four year.
Four year play that we're going to have.
Got it thank you I'll jump back in the queue.
Thanks, Jami operator, do we have another question in the queue. Please.
Well, we do have one final question from Vivien <unk> with Scotiabank. Your line is open.
Good morning, guys great quarter.
Talking about the focus that comes in the blueprint accounts.
I actually was wondering if you could give some color on.
The specific markets.
Is that is one of the areas you could talk about the focus accounts are.
Somewhat.
Whether they are kind of growing because when I look at your EBITDA margins.
<unk> is in a good shape.
It's the principal markets that need a little bit of margin expansion. So would you focus accounts in those market.
Or would that be a theme for lasers.
Yes.
Thanks for calling look the focus accounts are kind of spread around the world Theres not one location, where I'd say, we have the most or the fewest. It is it is pretty well spread so we have opportunity in each of the markets to improve.
To improve our margin profile now, having said that with them with them spread we do have a slightly disproportionate share in Europe , which is what you.
Which was a big part of what sits in those primary markets. So slightly more but nothing nothing that says we don't have opportunity everywhere as for sort of the other view of of markets. There is obviously, a geographic view right the country view.
Other side of this and David David has talked about this I thought.
Well.
The offerings were bringing in are reflective now of the value, we're creating in spaces like cloud management in spaces like security and resiliency in spaces like data applications in AI. So so that the country's pretty spread slightly disproportionately heavier in Europe .
Other places, but what we're bringing into these relationships in this in a in a.
Hybrid cloud world is around.
The places our customers are going and now we're getting paid quite well for the value we're creating in.
Again data and AI security, and resiliency et cetera, et cetera, et cetera. So hopefully that helps hopefully that adds a little color for you.
That's helpful. We look forward to the progress if I can shift gears here and ask a question on your overall debt profile and expected leverage levels that would be helpful.
Sure our net debt right now is around $1 $2 billion combination of $3 $2 billion of debt minus $2 billion of cash on the balance sheet and as we think about it we really what we'd like to keep our net leverage in there.
Range of zero to one times EBITDA.
Well within that range right now and we think that's appropriate for the for the business, particularly now where our during a period of time.
While our margins are still a bit challenged in and where we need to make progress. So we've been targeting zero to one times leverage and remaining investment grade and continuing to improve our credit profile over time is it is very important to us.
That's great color, David and Martin Thanks, a lot.
Thanks, David.
Alright, let me let me.
Sorry, operator, let me just thank everybody for joining us today as you can tell I hope from from our prepared remarks as well as from the Q&A. We've made an enormous amount of progress in a relatively short period of time.
Both with the <unk>.
The <unk> initiative as well as what we've talked about as well and for the last year, plus plus which is getting our consulting business.
To grow much much faster, which has been successful and focusing obviously on expense management.
As we as we retool, how we do our work and put contemporary systems and contemporary tools in place so.
I feel as confident as I ever have given all the progress. We've made we are all excited about the opportunity. We see ahead and the role we play in the world and serving our customers' mission critical systems is one that.
Regardless of the economic environment is one that's going to.
Is going to need controls. So we're excited about the future again, thanks for calling and operator ill turn it back to you.
This concludes today's control third quarter 2023 earnings call and webcast. You may disconnect. Your lines at this time and have a wonderful day.
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Okay.
Okay.
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