Q1 2024 Kyndryl Holdings Inc Earnings Call

August 8, 2023

Yes.

Yeah.

Good morning, ladies and gentlemen, welcome to Kindred first fiscal quarter of 'twenty 'twenty four earnings conference call. At this time, all participants are in a listen only mode.

Presentation there'll be a question and answer session. Just a question during the session you will need to press star one on your telephone you will then hear an automatic message advising Johann it's raised please note that today's conference is being recorded.

I'll hand, the conference over to speak.

The house.

Lori Freedman head of Investor Relations. Please go ahead.

Good morning, everyone and welcome to Kindred as earnings calls the first fiscal quarter ended June 30th 2023, before we begin I'd like to remind you that our remarks. Today will include forward looking statements. These statements are subject to risk factors that may cause our actual results.

To differ materially from those expressed or implied in these statements speak only to our expectations as of today.

For more details on these risks please see the risk factors section of our annual report on Form 10-K for the year ended March 31 2023.

Kindle 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 Karl.

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 events, which are available on our website at investors Dot Kindle Dot com.

With me here today are kindled, Chairman and Chief Executive Officer, Martin Schroeter, and Kindles, 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 on today's call I'll update you on the substantial progress, we're making as a company and the meaningful implications of that progress Dave.

David will then review our recent financial results, our updated and improved fiscal 2020 for outlook and how we're changing the margin profile of our focus accounts.

We are off to a very strong start in fiscal 2024 are.

Our first quarter results exceeded our expectations and position us well for the year as a whole.

Our three initiatives alliances advanced delivery and accounts, where at the core of our success.

Andrew will consult tendril bridge and our efficiency efforts also helped drive our results, we extended and expanded customer relationships in ways that would be mutually beneficial and we're raising our earnings outlook for fiscal 2024.

In short, we're moving even faster than before to deliver progress.

And we'll talk more about our achievements on the three days and our updated full year outlook.

But before we do that there are three declarative statements I want to make first.

Annual losses are now behind US, we expect to make money this year and each year going forward as measured by our adjusted pre tax income.

We remain committed to delivering revenue growth in calendar 2025, and in fiscal 2026 that means that our revenue will bottom out in calendar 2024 or fiscal 2025 and.

And we expect that bottom will be within a few percentage points of our revenues. This fiscal year as we retain the substantial majority of our focus accounts and their revenue.

And third as a result of our execution and accelerated pace of our transformation, we will deliver the profit goals. We've previously shared on the timelines we have previously shared.

And our medium term target is for adjusted pre tax margin to be in the high single digits.

This year, our fiscal 2024 will be a year of acceleration for control, we're already seeing that in our first quarter results and our operating trends were accelerating our transformation with new alliance signings and revenue with benefits from advanced delivery with a massive improvement and our focus accounts with rapid growth in <unk>.

So with our technology leadership through control bridge with our cost savings through our internal rationalization in transformation and of course, the culture change, we're driving through the chemical way.

These are powerful dynamics for our near term and medium term value creation.

Stepping back a bit as I think about general I believe our leadership in the markets, we serve and the way we're building towards future growth or creating a compelling value proposition that is not yet well appreciated across the investment community.

Previously highlighted a number of the key components of our value proposition and I want to clearly connect the dots as to how these elements of our business model are building value for us.

We're the world's largest provider of it infrastructure services doubled the size of the next largest players.

Our scale and our industry leadership Foster innovative solutions and service excellence because of our unique position on the industry learning curve and the mission critical nature of what we do.

We've been delivering double digit revenue growth in tinder will consult the higher margin higher value add advisory portion of our business. Despite the macro environment.

And over the medium term, we now expect tinder consulted to grow to 20% of our revenue one third more than our previous target of 15%.

And by delivering and accelerating customer business outcomes that are informed by our extensive operational experience central consult will support our future revenue growth and margin expansion.

We are aggressively fixing our focus accounts with these customers as we discussed last quarter, we're adding profitable scope removing unprofitable scope.

Driving efficiencies largely through automation, which enhances service quality and we're adjusting pricing when appropriate and only rarely are we exiting relationships.

We're approaching an inflection point in our business mix with fiscal 2025 being a year when roughly half of our revenue will come from post spin signings in fiscal 2026 being the first year when our revenues and earnings will be primarily determined by contracts that <unk> signed.

The three as the anticipated upswing in our revenue trajectory and the tipping point of controlling our own destiny through our revenues coming mostly from post spin signings are what will propel us from modestly positive adjusted pre tax earnings this year to high single digit margins in the medium term.

And our cash flow is expected to grow in conjunction with our adjusted pre tax income with strong conversion of adjusted net income to cash.

Together these elements of our business model form I believe a compelling value proposition.

I want to emphasize how enthusiastic we as a management team are about the margin trajectory that we've laid out and are already delivering on.

Our <unk> initiatives are major proof points in fact, they are driving momentum throughout our business and fostering additional progress each quarter. As a reminder, we provided fiscal 2024 targets of $300 million in revenue tied to hyperscale or alliances $450 million in Q accumulative annualized cost savings from <unk>.

Vance delivery by fiscal year end and $400 million of accumulative annualized pre tax benefit from our accounts initiative, we made excellent progress toward our goals in the first quarter, putting us well on track to deliver or exceed our 2000 fiscal 2024 milestones for each of these initiatives.

Through our alliances we are building the portion of our customer relationships that include cloud based content.

In the first quarter, we recognized more than $80 million of hyperscale or related revenue, putting our run rate ahead of our $300 million full year target.

We've also continued to increase our hyperscale or certifications to more than 37000, which is 70% higher than a year ago.

Our growth stems from joint enablement activities with our partners co marketing to enterprise customers and incremental training programs, all of which helped us deliver higher value solutions that address customers' most pressing needs.

Our advanced delivery initiative is transforming the way, we deliver our services with automation tools and resources to.

To date, we've been able to free up more than 6500 delivery professionals to address new revenue opportunities and to backfill attrition.

This is worth roughly $375 million a year to us representing a $75 million increase in our annual run rate this past quarter and.

And we continue to see significant automation opportunities across our delivery operations as we improve service levels reduce our costs and incorporate more technology, including central bridge into our offerings.

Our accounts initiative has been and will continue to be a global effort focused on fixing elements of contracts with substandard margins. We're a trusted partner for our customers and that trust is what brings our customers to the table.

In the first quarter, we are increasing annual profitability of our focus accounts to more than $300 million, which is a $90 million increase from our run rate just three months ago.

More generally we view successful execution of our three as is the clearest and fastest path toward achieving sustainable profitable growth.

And each quarter there are additional customer examples that demonstrate our team's successful execution of our three as the underlying theme among them is that the combination of airlines and our expanded capabilities, including tangible consult ridge and vital is resonating with our customers and providing tangible with new revenue streams and higher.

<unk> opportunities.

There are a few of my favorites from the first quarter.

With one banking customer, who we've been working with for over a decade. We recently expanded beyond our managed services to include <unk> consult and will help the bank build and deploy AI into its core banking services.

Second in conjunction with a contract renewal with one of our largest customers. We expanded our scope of work to include <unk>, consult and AWS cloud migration and management.

And with one of our largest larger focus accounts. It was undergoing a digital transformation and becoming increasingly unprofitable for us we're adding consult we're adding mainframe modernization and cloud based work and we're accelerating our customers' digital transformation, while removing third party purchase purchases that were uneconomic for us.

<unk> 16, the margins associated with the account.

Innovation innovation that is practical and useful is what's allowing kindred to show up differently for our customers.

<unk> bridge is.

It is an open integration services platform powered by AI and machine learning that we offer to our customers to accelerate automation drive efficiencies enhanced security and resiliency and create a more sustainable technology is state.

We have more than 500 enterprise customers operating on control bridge with more than 1000 expected by the end of the year.

And we recently announced that we're helping these customers both reduce risk and save more than $1 billion annually through their early adoption of general bridge.

Now we view artificial intelligence is a multifaceted opportunity for us as we both apply AI and our operations and enable our customers to use AI in their business.

AI is already driving enhanced operating performance and applications like <unk> bridge and is beginning to generate revenue growth opportunities as customers need additional help with data architecture and to implement AI at scale and it's going to allow us as an organization to operate more efficiently.

I'm not going to make AI, our fourth a but we clearly see it as an accelerator of our advanced delivery initiative, a component of our alliances growth and a source of future cost savings opportunities.

In fact this week, we will announce that we're working with Microsoft to help our customers accelerate their responsible adoption of generative AI solutions in their enterprises.

And in another area, where innovation is critical we've recently announced that we significantly expanded the end to end cyber security services, we offer enabling enterprise customers to detect respond to and recover from cyber attacks.

We're opening next generation security operations hubs in key geographies around the world, which will enable tingles already 2 billion security and resiliency practice to expand our presence into this nearly $50 billion market.

By offering security operations as a unified modular platform, we enable customers to retain existing security investments, while augmenting their infrastructure with new services.

To sum up we are highly enthusiastic about our recent results and the path in front of us.

And we're confident we have the right strategy in place to drive progress we have the right leadership talent knowhow and alliances to execute our business transformation and our fiscal 2023, and first quarter 2024 results, including our execution against the three days gives us strong positive momentum.

Looking ahead, we will use our intellectual property, our alliances and our scale to further expand our capabilities to differentiate ourselves in the markets, we serve and to strengthen our leadership position.

We're engaging with customers and it decisions further up the technology stack, including discussions about how to enable AI in their businesses.

Our unmatched expertise and mainframe modernization and hybrid it environment allows us to provide thought leadership with tinder consult deliver innovation with Kindred bridge and meet our customers' objectives for robust application of new technologies.

We're capitalizing on growth opportunities across our practices and particularly in cloud security networking apps and data and AI.

In short, we're engaging with customers, where they want us to be at the center of a collaborative relationship in which technology drives business outcomes and a reliable secure way.

This is allowing us to access incremental market opportunities to grow our share of wallet with existing customers to win new customers and to transform central.

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, how we're raising our outlook for fiscal year 2024, and the progress we're making on our focus accounts.

Our first quarter results reflect strong operational execution and remarkable progress on our key initiatives.

In the quarter revenue totaled $4 2 billion.

A 1% decline in constant currency.

Demand for our services has remained resilient and we continued to gain momentum in our higher margin advisory services.

And while our Q1 signings were down 5% year over year in constant currency through July 31, our year to date signings are up 9%.

Kimbro consult revenues grew 20% year over year in constant currency and represented 14% of total revenue in the quarter the highest percentage ever. This performance reflects how our post spin opportunities for growth in kimbro consult services.

Outweighing the macro issues pressuring some other firms.

Our adjusted EBITDA grew 25% year over year to $612 million.

Our adjusted EBITDA margin was 14, 6% a year over year increase of 310 basis points.

Adjusted pre tax income was $47 million and $97 million improvement in profit compared to the prior year quarter, our continued and substantial progress on our three A's is whats driving our results and more than offset the year over year software cost increases we faced.

We address our customers' needs through a geographic operating segments and 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.

More generally as we look back on the quarter. We're thrilled to have delivered results that position us to exceed the full year earnings targets, we laid out in may as I will discuss momentarily.

Turning to our cash flow and balance sheet, our adjusted free cash flow was negative $106 million in the quarter entirely due to timing effects are.

Our gross capital expenditures were $100 million.

And we received $6 million of proceeds from asset dispositions.

Negative adjusted free cash flow in Q1 does not change our expectation that full year adjusted free cash flow will be positive in fact, our cash flow seasonality in Q1 stems from annual incentive payments that were accrued throughout the prior fiscal year, but paid out in the June quarter as well as payments for software licenses that were made.

In Q1, but will be amortized in future periods.

As a result, the seasonal items that cause our Q1 adjusted free cash flow to be negative will reverse over the course of the year.

We provided a bridge from our adjusted pre tax income to our free cash flow and based on feedback from some investors. We've also provided a bridge from our adjusted EBITDA to our free cash flow in the appendix.

Our financial position remains strong our cash balance at March 31 was $1 5 billion.

Our cash balance combined with available debt capacity under committed borrowing facilities gave us nearly $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 8 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.

There is no change in our approach to capital allocation, our top priorities continue to be to maintain strong liquidity remain investment grade and reinvest in our business.

Our full year adjusted free cash flow will help fund spin related cash outlays, including required systems migrations and workforce rebalancing costs.

Over time, <unk> leadership position in it infrastructure services combined with benefits from our <unk> initiatives should allow us to significantly expand our margins and our free cash flow and ultimately be in a position to consider regularly returning capital to shareholders all while remaining investment.

Great.

In executing our accounts initiative, we're paying close attention to the margins on signings for both our focus accounts and our blueprint accounts.

Immediately following the spin we were signing business with an expected gross margin of roughly 20% and our pre tax margin in the mid single digits.

These signings themselves represented higher margins than the roughly breakeven pre spin deals that we're generating the bulk of our revenues and.

And over the last 12 months, we've combined pricing disciplined and collaborative engagement with customers to move our projected margins on all new signings up to the mid <unk> for gross profit in the high single digits for pre tax profit.

June quarter was a continuation of that favorable trend.

Importantly, what this means is that in the.

Six full quarters, we've been independent we've been signing agreements that fully support the medium term margins. We're aiming for in fact, if our P&L reflected only a recently signed deals we'd be operating at mid to high single digit adjusted pre tax margins.

But because of the prevalence in multiyear contracts in our business. Most of our revenue is still coming from lower margin pre spin legacy signings.

As a result, you can currently see in our overall results the full benefit of the higher margins at which we're now pricing contracts.

But that will change with time as our business mix increasingly shifts towards more postpaid contracts.

In fact next year, our fiscal 2025 about half of our revenue will be coming from contract signed post spin that.

We'll move up to two thirds in fiscal 2026 and in the fiscal year ending in March 2027, more than 85% of our revenue will be from post spin signings.

And where most of our revenue reflects our post spin efforts, we anticipate that our pre tax margins will move into the high single digits.

We are eager for the higher margin flywheel that we started to turn to gain momentum.

As Martin mentioned, we continue to progress on our <unk> initiatives.

Our momentum supports our continued expectation that our alliances initiative will drive signings revenue and over time roughly $200 million in annual pretax 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 or more.

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, including through the workforce actions. We've taken we expect that these efforts over time will contribute roughly 400.

In annual pre tax income.

In total then the magnitude of the earnings growth opportunity. We are tackling is tremendous relative to our current margins.

Progress on our three A's as a central source of value creation for kindred.

With a strong first fiscal quarter to build on we're raising our profit outlook for this fiscal year.

We expect to expand our margins largely due to the three initiatives and actions we've taken to drive efficiency.

We're raising our adjusted EBITDA margin outlook significantly to roughly 14%.

This represents an increase of 240 basis points versus fiscal 2023.

We now expect our adjusted pre tax income to be at least $100 million.

Which implies more than 190 basis point increase compared to last year.

The actions, we're taking and the progress we're making we would have an even larger impact but for the 125 basis points of margin headwinds that are associated with the $200 million IBM software cost increase we face.

We expect our focus accounts to contribute at least 200 million more profit this year than last and we expect our advanced delivery initiative to generate at least $200 million of incremental savings this year.

Real estate consolidation workforce rebalancing growth in kindred consult our pricing strategies and other actions are all contributing to our margin growth.

Our outlook for revenue continues to be a year over year decline of 6% to 8% in constant currency, which translates to 15, 8% to $16 2 billion.

Based on recent exchange rates.

To be clear the year over year revenue decline, we're projecting is primarily due to the soft backlog of fiscal 2020 for revenue we were born with.

<unk> intentional near term actions, we are taking to transform our business.

These changes typically involve removing selected low or negative margin scope from ongoing customer relationships.

For the September quarter on a year over year basis, we expect revenues to decline in the low to mid single digits in constant currency and for adjusted pre tax income to be slightly positive.

This will represent a year over year improvement in adjusted pre tax margin of at least 250 basis points.

As I mentioned, we expect adjusted free cash flow to be positive this fiscal year.

<unk> roughly $750 million of net capital expenditures and about $850 million of depreciation expense.

We also expect about $300 million of cash outlays for separation related work, primarily systems migrations and for workforce rebalancing actions.

This will be the last year in which we incur spin related charges. So we expect our adjusted earnings to move closer to our reported GAAP earnings over time.

Next year, our principal adjustments should be only noncash stock based comp and non cash intangibles amortization.

As Martin highlighted we remain committed to returning to revenue growth by calendar 2025, and over the medium term delivering significant margin expansion and free cash flow growth.

We have a solid game plan to drive our strategic progress and this game plan starts with the steps we've already taken to expand our technology alliances manage our costs and earn a return on all of our revenues.

As we've discussed previously our aggregate results obscure the fact that within kindred, we started with a strong nearly $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 was generating virtually no gross margin and after SG&A expenses was losing money.

Our accounts initiative is all about the opportunity to make our focus accounts look more like the majority blueprint of our business.

By addressing elements of our customer relationships that generate substandard margins.

Our $800 million target for the accounts initiative relies on us closing only about half the gross margin gap between our focus accounts and our blueprint accounts.

That's why our accounts initiative is a major priority and a major opportunity for us.

We're making tremendous progress towards this opportunity and that progress has accelerated over the last six months.

In fiscal 2024, we expect to have remedied the margins on roughly 40% of our focus accounts revenue.

And as we've said most of the progress we're making comes in the form of significantly increasing our margins as part of our ongoing customer relationships, including situations, where our margins were quite negative.

Only rarely are we exiting a customer relationship although that remains something we are willing to do if necessary.

When we look out over the next few years, we expect more than 80% of our focus accounts to have been addressed by March 2027% consistent with our expectation that our accounts initiative will ultimately contribute $800 million or more to our annual pre tax earnings.

In short as I look at focus accounts advanced delivery, our technology alliances and our actions to drive efficiency I'm incredibly enthusiastic about our progress and our prospects.

Martin back to you.

Thank you David.

Let me reiterate annual losses are behind us.

We remain committed to delivering revenue growth in calendar 2025, and as a result, we will deliver the profit goals. We've previously shared on the timelines we've previously shared.

As an independent company, we're solidifying our position as a cost effective gold standard provider of essential services that combine multiple technologies.

And we're executing fervently on the strategies and initiatives that will drive longer term progress future growth and stronger earnings in our business.

With that David and I would be pleased to take your questions.

Thanks Kelly.

To ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

Please standby, while we compile the Q&A roster.

First question coming from the line of Tien Tsin with JP Tien Tsin Huang with Jpmorgan. Your line is open.

Great. Thank you so much.

Obviously, great execution here on the margins I wanted to ask on.

<unk> consult if you don't mind it seems like <unk>.

Defying some of the macro pressures that some of your peers to seeing on.

Short cycle work, so im just curious whats driving differentiation in your view and I know this is.

Obviously in a different starting point with with consultant, but it does seem like it's a pretty consistent pressure point for the peer group. What are you seeing on the ground that's driving the difference yes, thanks, Tien tsin and good morning. Thanks for joining the call look Tinder will consult is as we've always said sits in sort of a unique position in the marketplace given the our knowledge of our <unk>.

<unk> environments, given the role we play in.

And quite frankly in any macro environment things that we do cyber security resiliency.

Helping customers use AI.

Data architecture required et cetera, et cetera. All of these things are are not as.

Subject, if you will to to macro because our customer base needs to continue to move forward.

In the macro environment, so kindred consult which again in our.

In our sort of unique spot in the marketplace. We expect we continue to expect to have a good long a good long run of double digit growth, including.

Including.

Another good quarter of another good year of signings growth and as we said in the prepared remarks, when we meet sort of <unk>.

We turned this into a focus for us at Kindred, we said it would be 15% of our business at the time it was only 10% of our business.

And we are now.

We're now, saying, it's going to be 20% pretty pretty quickly here. So so I think it's the answer to your question I think it's the the role we play in our customer environments the capabilities that we're building.

Around where our customers are still continuing to invest.

And the ecosystem in which were part of I'll say that this will see a good a good long term tailwind for revenue and signings growth for us.

Yes.

Glad to hear it.

Follow up question.

It's just a margins on signings in general Dave It sounds like the.

The margins you're getting on newer stuff is actually quite good or better.

So my question I know a lot of peers, including others that reported this morning talked about.

Pricing pressure bill rate pressure.

Clients in the procurement office or trying to be more mindful on costs. So just curious a same kind of question. What are you observing with some pricing are you turning away some deals.

Or is the workflow youre seeing.

Up to your standards in terms of pricing. Thank you.

Thanks, Tien Tsin I think we're in a similar position to what Martin was talking about with consult where we have opportunities that are unique to us.

To change the way, we're pricing certain contracts certain elements of what we do and we really feel a need to be in a different spot with respect to margins and that informs how we approach pricing and.

As a result, I think we've been able to repair focus accounts and move the pricing that we have there in many cases up to a market.

Market price and Thats, how we are enhancing margins and able to get significant price increases on renewals because its a movement up to mark up to market levels. The other thing that I think is really interesting is that when you look at our signings over the.

Over the last year and the margins on which we've been signing business in the mid <unk> for gross margins that actually means that our gross profit on signings has been in the range of $3 billion. During a period of time when our reported gross profit was about two.

262, 7 billion, so what our pricing and our signings are doing for us is actually driving a gross profit book to bill.

115 times, we're putting more gross profit.

Into the into the hopper than we're reporting and so I feel really good about the impact that our.

That our pricing initiatives and our pricing discipline are having on on the way we are building our business.

Thank you guys. Thanks.

Thanks, Tien Tsin operator next question please.

Thank you and our next question coming from the line of Jamie Friedman with Susquehanna. Your line is now open.

Hi, Good morning, let me Echo the congratulations letter hard work here.

Just wondering if you could double click on this slide 19, I think David you commented on it in your prepared remarks, it's the one that breaks out the services.

You had some comments on demand, but I was hoping you could elaborate.

On on those.

Be helpful perspective.

Sure. This is the services that we have the practices that we go to market with are really important.

Axis for the way, we operate and look to grow the business and I think one of the things that.

A few of the things that are worth mentioning first cloud and cloud related activity is a very significant part of what we do representing about a third of our revenue.

And with the hyper scaler alliances we have that's a.

<unk>.

Significant growth opportunity for us.

Curative resiliency is eight.

Is a really important area for us as well.

Recently put out.

Release about some of the additional and new things, we're doing in that space and I see that continuing to be a growth opportunity applications data and AI, particularly with with everything thats.

Going on.

With respect to generative AI is going to be a significant growth opportunity for us as well and as Martin mentioned on the call. We expect to have an announcement.

Further announcements on that topic.

This week as well.

My colleagues likes to point out that picture.

That youre AI is only as good as your data and for US data architecture data availability data protection are going to be a really important part of the discussions that we have with customers as we help them facilitate the use of more AI in there.

<unk> businesses, so we see that as an opportunity digital workplace continues to be a hot topic.

In a post pandemic environment and the hybrid work environments.

And then as we look at our core enterprise and Z cloud business. It's.

We're in a situation where hybrid environments are going to continue to be a really important dynamic for large enterprises and as a result, we see that.

Portion of our business and particularly mainframe modernization as being a.

An important source of revenues and signings for us going forward.

Well, yes and.

One thing to add Jamie I think David did a nice job of sort of the.

The pieces when you step back and think about how we how we created and built control.

Through discussions a lot of discussions with our customers just prior to spin is we're setting ourselves up.

The practices that we're building really reflect the venn diagram of of three questions that we ask them one is.

Where do we provide value to you today.

The second one was where are you investing and where are you where are you going to grow and then third where do you give us brand permission to play and so from our heritage. We obviously, we're adding a lot of value already in the in the core enterprise and cloud we were adding a lot of value in digital workplace et cetera, but but the other.

For that we've created in it that we're building our capabilities and we're really the where are you investing and where do you give us brand permission. So so there is a very strong customer demand element to the way, we built and are creating or have created our practices that is driving that is.

Driving demand for us.

And if I could just follow up Martin maybe to you.

How would you characterize the macro because I <unk>.

Most companies and service lethal enzyme responsible before they step back so far year to date when I look at your bookings you are actually up through July if I'm reading this right.

No.

How would you characterize the macro or is it more like Kindle is making its own whether it's.

<unk>.

It's not that relevant.

Look the macro.

We still operate within a macro environment is real to our customers and therefore, it's real it's real to us as well however, having said that we do sit in a rather unique position given the role we play in mission critical and.

And maybe what youre seeing or.

One of the ways I think about this is this is the difference between what <unk> does which is mission critical and what others may do which maybe is more discretionary. So so no matter what the macro is I will I will I would suggest there is not going to be any recession in cyber security for instance.

Would suggest that every company has figured out that resiliency is what matters. In addition to the cyber security.

As well so so every company is trying to figure out how to use AI and as David said wells that for US is a tailwind in our ability to help them with data architecture data management et cetera, et cetera, et cetera. So I do think that the macro matters. It is certainly it certainly may re prioritize what some of our.

<unk> do but the role we play in the World and our unique perspective in mission critical I think suggests that we are not only insulated from it but we can actually help them with some of their challenges as they try to get through whatever the macro is.

Got it thank you.

Jamie.

We have another question.

Our next question and our next question coming from the line of Jeff <unk> with Scotiabank. Your line is open.

Good morning, everyone great quarter.

I just wanted to get some more color on kindred.

So can you go consult as you mentioned, it's one of the higher margin stream that you are seeing here how do you.

Perfect to convert it.

Why is the services into execution and how can we assume it is the longevity of the revenue.

Thanks, Steve you.

With respect to consult.

<unk>.

Normal cadence for some of this work is that it gives rise to a discussion of.

What an enterprise needs to do to achieve that particular business objective.

Or to address a particular challenge that that it has and as a result, it's almost natural for this to give rise for consultant assignment to give rise to.

Our planning and analysis around an issue to implementation of change and then often in managed services tail associated with it. So one of the things we really like about they consult as well two other things are like one is it itself it tends to be a higher margin. The second it's a creator of.

The annuity type revenue streams that are the core part of our business. So it ends up being beneficial both for near term generating revenues generating margin, but also creating value from a longer term perspective, as well and that's really one of the key reasons why.

It's such an area of focus for us.

Third element that Martin mentioned earlier.

Instead, it also changes the position that we're in the role that we're playing with respect to our customers. It moves us up the technology stack. It. It has is interacting in some different ways with customers.

It allows us to add more value and be involved in more strategic conversations. So for all these are all reasons why in that kingdom consult sits at the.

At the heart of some of our strategic work because it has so many attributes that are so attractive.

One thing I'd add David I think David said, it well, but remember also that with Kindred will bridge.

What kindred bridges, providing in terms of insights to our customers given not only our own IP machine learning AI, but also the data pool, we have tangible bridges also acting as a bit of a demand generator for us because it's offering customers insights that they didn't have before and then obviously, where we're helping them.

Through how it might they address.

What bridges, helping them understand what bridges, giving them visibility too.

And what what bridges is sort of.

Helping them to optimize within their own systems. So Kendra bridge has proven not just to be.

Terrific way for us to deliver and as we said earlier in the month, we have it in 500 accounts already on its way to 1000.

It's not only helping us.

With how we deliver and how we automate its giving us great insights, giving our customers great insights in how to run better as well and that is also a good. That's also a really strong demand pull for our console business.

Thanks, Martin It took my follow up already maybe Eric.

And then a quick question here, David could you help us understand a little bit on the one time costs and what's the best way for us to sort of.

Model it on a go forward basis.

Sure.

Two most significant costs that we have call. It below the line. This year are spin related costs related to our systems migration and workforce rebalancing costs tied to the program that we implemented beginning in March and that's been playing out over the last seven.

Months.

To drive efficiency in our operations.

With respect to the spin related costs those are going to be done. This year. Our systems migrations will be done we won't have any spin related costs.

Going forward so that element.

Disappears.

Then with respect to workforce rebalancing, we're really viewing this as a as a one time.

Action that we have been implementing here and so as I mentioned in the prepared remarks, we really see our adjusted results converging more toward our GAAP results over time since we know spin related costs are going away.

And.

We're not.

We're not forecasting it.

Additional workforce rebalancing costs. After the program were currently executing.

Thanks, everyone.

Thanks Sylvia.

Operator, I believe that's our question correct.

Correct I see no further questions in the queue at this time I will now turn the call back over to Mr. Martin for any closing remarks. Thank you operator, and thanks, everyone for joining us today look as I hope you have a sense.

We have made significant progress.

And driving our earnings, which obviously as we as we talked a little bit about in our prepared remarks, those earnings will convert into free cash flow.

Over the medium term as we as we come out of as we come out of spin related costs et cetera, et cetera et cetera. So we feel really good about how we're positioned hopefully you get a sense of the energy here at kindred.

Around turning around the business.

We're excited about the opportunity ahead. So thanks again for joining us and we'll talk to you in 90 days.

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

[music].

Okay.

Yes.

Okay.

Yes.

[music].

Okay.

[music].

Okay.

Yes.

Okay.

Yes.

[music].

Okay.

[music].

Okay.

Yeah.

Yes.

Okay.

Yes.

Sure.

[music].

Okay.

Yes.

Okay.

[music].

Yes.

Okay.

Sure.

Yeah.

Yes.

Okay.

[music].

Yes.

Okay.

Sure.

Okay.

Yes.

[music].

Okay.

Yes.

Okay.

[music].

Okay.

Yes.

Perfect.

Okay.

Good morning, ladies and gentlemen, welcome to <unk> first fiscal quarter of 2024 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session. John a question. During this session you may ask your question.

Star one on your telephone you will do on an automatic message advising Yohanan sways. Please note that today's conference is being recorded I will now hand, the conference over to your Speaker House.

Lori Freedman head of Investor Relations. Please go ahead.

Good morning, everyone and welcome to <unk> earnings call for the first fiscal quarter ended June 32023, before we begin I would 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 these risks please see the risk factors section of our annual report on Form 10-K for the year and then March 31 2023.

<unk> 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.

With me here today are kendall's, Chairman and Chief Executive Officer, Martin shorter <unk>, 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 on today's call I'll update you on the substantial progress, we're making as a company and the meaningful implications of that progress.

David will then review our recent financial results, our updated and improved fiscal 2020 for outlook and how we're changing the margin profile of our focus accounts.

We are off to a very strong start in fiscal 2024.

Our first quarter results exceeded our expectations and position us well for the year as a whole.

Our three <unk> initiatives alliances advanced delivery and accounts with the core of our success.

Andrew will consult Tinder bridge and our efficiency efforts also helped drive our results, we extended and expanded customer relationships in ways that would be mutually beneficial and we're raising our earnings outlook for fiscal 2024.

In short, we're moving even faster than before to deliver progress and we'll talk more about our achievements on the three <unk> and our updated full year outlook.

But before we do that there are three declarative statements I want to make first.

Annual losses are now behind US, we expect to make money this year and each year going forward as measured by our adjusted pre tax income.

We remain committed to delivering revenue growth in calendar 2025, and in fiscal 2026 that means that our revenue will bottom out in calendar 2024 or fiscal 2025 and.

And we expect that bottom will be within a few percentage points of our revenues. This fiscal year as we retain the substantial majority of our focus accounts and their revenue.

And third as a result of our execution and accelerated pace of our transformation, we will deliver the profit goals. We've previously shared on the timelines we have previously shared.

And our medium term target is for adjusted pre tax margins to be in the high single digits.

These are powerful dynamics for our near term and medium term value creation.

We've previously highlighted a number of the key components of our value proposition and I want to clearly connect the dots as to how these elements of our business model are building value for us.

We're the world's largest provider of it infrastructure services doubled the size of the next largest players our scale in our industry leadership Foster innovative solutions and service excellence because of our unique position on the industry learning curve and the mission critical nature of what we do.

We've been delivering double digit revenue growth and Kendra consult the higher margin higher value add advisory portion of our business. Despite the macro environment.

And over the medium term, we now expect <unk> consulted to grow to 20% of our revenue one third more than our previous target of 15%.

And by delivering and accelerating customer business outcomes that are informed by our extensive operational experience central consult will support our future revenue growth and margin expansion.

We are aggressively fixing our focus accounts with these customers as we discussed last quarter, we're adding profitable scope, removing unprofitable scope driving efficiencies largely through automation, which enhances service quality and we're adjusting pricing when appropriate and only rarely are we exiting relationships.

We're approaching an inflection point in our business mix with fiscal 2025 being a year when roughly half of our revenue will come from post spin signings and fiscal 2026 being the first year when our revenues and earnings will be primarily determined by contracts that <unk> signed.

The three as the anticipated upswing in our revenue trajectory and the tipping point of controlling our own destiny through our revenues coming mostly from post spin signings are what will propel us for modestly positive adjusted pre tax earnings this year to high single digit margins in the medium term.

And our cash flow is expected to grow in conjunction with our adjusted pre tax income with strong conversion of adjusted net income to cash.

Together these elements of our business model form I believe a compelling value proposition.

And I want to emphasize how enthusiastic we as a management team are about the margin trajectory that we've laid out and are already delivering on.

Our <unk> initiatives are major proof points in fact, they are driving momentum throughout our business and fostering additional progress each quarter.

As a reminder, we provided fiscal 2024 targets of $300 million in revenue tied to hyperscale or alliances $450 million in Q accumulative annualized cost savings from advanced delivery by fiscal year end and $400 million of accumulative annualized pre tax benefit from our accounts initiative, we made excellent progress.

Progress toward our goals in the first quarter, putting us well on track to deliver or exceed our 2000 fiscal 2024 milestones for each of these initiatives.

Through our alliances we are building the portion of our customer relationships that include cloud based content in the first quarter, we recognized more than $80 million of hyperscale or related revenue, putting our run rate ahead of our $300 million full year target.

We've also continued to increase our hyperscale or certifications to more than 37000, which is 70% higher than a year ago.

Our advanced delivery initiative is transforming the way, we deliver our services with automation tools and resources to.

To date, we've been able to free up more than 6500 delivery professionals to address new revenue opportunities and to backfill attrition.

This is worth roughly $375 million a year to us representing a $75 million increase in our annual run rate this past quarter and.

In the first quarter, we are increasing annual profitability of our focus accounts to more than $300 million, which was a $90 million increase from our run rate just three months ago.

More generally we view successful execution of our three as is the clearest and fastest path toward achieving sustainable profitable growth.

And each quarter there are additional customer examples that demonstrate our team's successful execution of our three as the underlying theme among them is that the combination of <unk> and our expanded capabilities, including tangible consult ridge and vital is resonating with our customers and providing tangible with new revenue streams and higher <unk>.

<unk> opportunities.

Here are a few of my favorites from the first quarter.

Second in conjunction with a contract renewal with one of our largest customers. We expanded our scope of work to include central consult and AWS cloud migration and management.

And with one of our largest larger focus accounts that was undergoing a digital transformation and becoming increasingly unprofitable for us we're adding consult we're adding mainframe modernization and cloud based work and we're accelerating our customers' digital transformation, while removing third party purchase purchases that were uneconomic for us.

And fixing the margins associated with the account.

It's innovation innovation that is practical and useful is what's allowing kindred to show up differently for our customers.

<unk> bridge is.

We have more than 500 enterprise customers operating on control bridge with more than 1000 expected by the end of the year.

And we recently announced that we're helping these customers both reduce risk and save more than $1 billion annually through their early adoption of general bridge.

Now we view artificial intelligence is a multifaceted opportunity for us as we both apply AI and our operations and enable our customers to use AI in their business.

In fact this week, we'll announce that we're working with Microsoft to help our customers accelerate their responsible adoption of generative AI solutions in their enterprises.

By offering security operations as a unified modular platform, we enable customers to retain existing security investments, while augmenting their infrastructure with new services.

To sum up we are highly enthusiastic about our recent results and the path in front of us.

We're engaging with customers and it decisions further up the technology stack, including discussions about how to enable AI in their businesses.

Our unmatched expertise and mainframe modernization and hybrid it environment allows us to provide thought leadership with tinder will consult deliver innovation with kindred bridge and meet our customers' objectives for robust application of new technologies.

We're capitalizing on growth opportunities across our practices and particularly in cloud security networking apps and data and AI.

In short, we're engaging with customers, where they want us to be at the center of a collaborative relationship in which technology drives business outcomes and a reliable secure way.

This is allowing us to access incremental market opportunities to grow our share of wallet with existing customers to win new customers and to transform casual.

Now with that I'll hand over to David to take you through our results and our outlook.

Our first quarter results reflect strong operational execution and remarkable progress on our key initiatives.

In the quarter revenue totaled $4 2 billion.

A 1% decline in constant currency demand for our services has remained resilient and we continued to gain momentum in our higher margin advisory services.

And while our Q1 signings were down 5% year over year in constant currency through July 31, our year to date signings are up 9%.

Outweighing the macro issues pressuring some other firms.

Our adjusted EBITDA grew 25% year over year to $612 million.

Our adjusted EBITDA margin was 14, 6% a year over year increase of 310 basis points.

Our business mix continues to evolve to reflect demand with most of our signings, including kimbro consult signings coming from cloud apps data and AI security and other growth areas.

More generally as we look back on the quarter. We're thrilled to have delivered results that position us to exceed the full year earnings targets, we laid out in may as I will discuss momentarily.

Turning to our cash flow and balance sheet, our adjusted free cash flow was negative $106 million in the quarter entirely due to timing effects are.

Our gross capital expenditures were $100 million.

And we received $6 million of proceeds from asset dispositions.

In Q1, but will be amortized in future periods.

As a result, the seasonal items that cause our Q1 adjusted free cash flow to be negative will reverse over the course of the year.

Our financial position remains strong our cash balance at March 31 was $1 5 billion.

Our cash balance combined with available debt capacity under committed borrowing facilities gave us nearly $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 8 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.

There is no change in our approach to capital allocation, our top priorities continue to be to maintain strong liquidity remain investment grade and reinvest in our business.

Our full year adjusted free cash flow will help fund spin related cash outlays, including required systems migrations and workforce rebalancing costs.

Overtime Kindles leadership position in it infrastructure services combined with benefits from our <unk> initiatives should allow us to significantly expand our margins and our free cash flow and ultimately be in a position to consider regularly returning capital to shareholders all while remaining investment grade.

Right.

In executing our accounts initiative, we're paying close attention to the margins on signings for both our focus accounts and our blueprint accounts.

Immediately following the spin we were signing business with an expected gross margin of roughly 20% and our pre tax margin in the mid single digits.

These signings themselves represented higher margins than the roughly breakeven pre spin deals that we're generating the bulk of our revenues.

The June quarter was a continuation of that favorable trend.

Importantly, what this means is that in the six full quarters, we've been independent we've been signing agreements that fully support the medium term margins we're aiming for.

In fact, if our P&L reflected only a recently signed deals we'd be operating at mid to high single digit adjusted pre tax 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, you can currently see in our overall results the full benefit of the higher margins at which we're now pricing contracts.

But that will change with time as our business mix increasingly shifts towards more postpaid contracts.

In fact next year, our fiscal 2025 about half of our revenue will be coming from contract signed post spin.

We'll move up to two thirds in fiscal 2026 and in the fiscal year ending in March 2027, more than 85% of our revenue will be from post spin signings.

And when most of our revenue reflects our post spin efforts, we anticipate that our pre tax margins will move into the high single digits.

We are eager for the higher margins flywheel that we started to turn to gain momentum.

As Martin mentioned, we continue to progress on our <unk> initiatives.

Our momentum supports our continued expectation that our alliances initiative will drive signings revenue and over time roughly $200 million in annual pretax 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 or more.

In annual pre tax income.

In total then the magnitude of the earnings growth opportunity. We're tackling is tremendous relative to our current margins.

Progress on our three A's as a central source of value creation for kindred.

With a.

First fiscal quarter to build on we're raising our profit outlook for this fiscal year.

We expect to expand our margins largely due to the three initiatives and actions we've taken to drive efficiency.

We're raising our adjusted EBITDA margin outlook significantly to roughly 14%.

This represents an increase of 240 basis points versus fiscal 2023.

We now expect our adjusted pre tax income to be at least $100 million, which.

<unk> more than 190 basis point increase compared to last year.

Real estate consolidation workforce rebalancing growth in kindred consult our pricing strategies and other actions are all contributing to our margin growth.

Our outlook for revenue continues to be a year over year decline of 6% to 8% in constant currency, which translates to 15, 8% to $16 2 billion.

Based on recent exchange rates.

To be clear the year over year revenue decline, we're projecting is primarily due to the soft backlog of fiscal 2020 for revenue. We were born with plus intentional near term actions, we are taking to transform our business.

These changes typically involve removing selected low or negative margin scope from ongoing customer relationships.

For the September quarter on a year over year basis, we expect revenues to decline in the low to mid single digits in constant currency and for adjusted pre tax income to be slightly positive.

This will represent a year over year improvement in adjusted pre tax margin of at least 250 basis points.

As I mentioned, we expect adjusted free cash flow to be positive this fiscal year.

Project, roughly $750 million and net capital expenditures and about $850 million of depreciation expense.

We also expect about $300 million of cash outlays for separation related work, primarily systems migrations and for workforce rebalancing actions.

This will be the last year in which we incur spin related charges. So we expect our adjusted earnings to move closer to our reported GAAP earnings over time.

In fact next year, our principal adjustments should be only noncash stock based comp and non cash intangibles amortization.

As Martin highlighted we remain committed to returning to revenue growth by calendar 2025, and over the medium term delivering significant margin expansion and free cash flow growth.

As we've discussed previously our aggregate results obscure the fact that within Kindle, we started with a strong nearly $10 billion business, which we referred to as a blueprint for how we want to operate.

Our other roughly $8 billion of focus accounts revenue was generating virtually no gross margin and after SG&A expenses was losing money.

Our accounts initiative is all about the opportunity to make our focus accounts.

Look more like the majority blueprint of our business.

By addressing elements of our customer relationships that generate substandard margins.

Our $800 million target for the accounts initiative relies on us closing only about half the gross margin gap between our focus accounts and our blueprint accounts.

That's why our accounts initiative is a major priority and a major opportunity for us.

We're making tremendous progress towards this opportunity and that progress has accelerated over the last six months.

In fiscal 2024, we expect to have remedied the margins on roughly 40% of our focus accounts revenue.

Rarely are we exiting a customer relationship although that remains something we are willing to do if necessary.

In short as I look at focus accounts advanced delivery, our technology alliances and our actions to drive efficiency I'm incredibly enthusiastic about our progress and our prospects.

Martin back to you.

Thank you David.

Let me reiterate annual losses are behind us.

We remain committed to delivering revenue growth in calendar 2025, and as a result, we will deliver the profit goals. We've previously shared on the timelines we have previously shared.

As an independent company, we're solidifying our position as a cost effective gold standard provider of essential services that combine multiple technologies.

And we're executing fervently on the strategies and initiatives that will drive longer term progress future growth and stronger earnings in our business.

With that David and I would be pleased to take your questions.

Thanks Kelly.

To ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

Please standby, while we compile the Q&A roster.

First question coming from the line of Tien Tsin with JP Tien Tsin Huang with Jpmorgan. Your line is open.

Great. Thank you so much.

Obviously, great execution here on the margins I want to ask.

On <unk> consult if you don't mind it seems like.

Finding some of the macro pressures that some of your peers to seeing on.

Short cycle work, so im just curious whats driving differentiation in your view.

This is obviously in a different starting point with with consult but it does seem like it's a pretty consistent pressure point for the peer group. What are you seeing on the ground that's driving the difference yes, thanks, Tien tsin and good morning. Thanks for joining the call look Tinder consult is as we've always said sits in sort of a unique position in the marketplace given the hour.

<unk> knowledge of our customers' environments, given the role we play in.

And quite frankly in any macro environment things that we do cyber security resiliency.

Helping customers use AI.

Data architecture required et cetera, et cetera. All of these things are are not as.

Subject, if you will to to macro because our customer base needs to continue to move forward.

In the macro environment, so kindred consult which again in our in our sort of unique spot in the marketplace. We expect we continue to expect to have a good long a good long run of double digit growth, including.

Including.

Another good quarter of another good year of signings growth and as we said in the prepared remarks, when we meet sort of <unk> <unk>.

Turned this into a focus for us at Kindred, we said it would be 15% of our business at the time it was only 10% of our business and.

And we're now.

Around where our customers are still continuing to invest.

And the ecosystem in which were part of I'll say that this will see a good a good long term tailwind for revenue and signings growth for us.

Yes.

Glad to hear it.

Follow up question.

Is just on margins on signings in general I know, Dave It sounds like the.

The margins you're getting on your stuff is actually quite good or better.

So my question I know a lot of peers, including others that reported this morning talked about.

Pricing pressure bill rate pressure.

Clients of the procurement office or trying to be more mindful on costs. So just curious a same kind of question. What are you observing towards on pricing are you turning away some deals.

Or is the workflow youre seeing.

Up to your standards in terms of pricing. Thank you.

Thanks, Tien Tsin I think we're in a similar position to what Martin was talking about with consult where we have opportunities that are unique to us.

As a result, I think we've been able to repair focus accounts and move the pricing that we have there in many cases up to a market.

262, 7 billion, so what our pricing and our signings are doing for us is actually driving a gross profit book to bill.

115 times, we're putting more gross profit.

Into the into the hopper than we're reporting and so I feel really good about the impact that our.

That our pricing initiatives and our pricing discipline are having on on the way we are building our business.

Thank you guys. Thanks.

Thanks, Tien Tsin operator next question please.

Thank you and our next question coming from the line of Jamie Friedman with Susquehanna. Your line is now open.

Hi, Good morning, let me Echo the congratulations letter hard work here.

Wondering if you could double click on this slide 19, I think David you commented on it in your prepared remarks, it's the one that breaks out the services.

You had some comments on demand, but I was hoping you could elaborate.

On on those.

Might be helpful perspective.

Sure this is <unk>.

Service is that we have the practices that we go to market with are really important.

Axis for the way, we operate and look to grow the business and I think one of the things.

A few of the things that are worth mentioning first cloud and cloud related activity is a very significant part of what we do representing about a third of our revenue.

And with the hyper scaler alliances we have that's a.

Significant growth opportunity for us at security and resiliency is a.

It is a really important area for us as well, we recently put out.

Release about some of the additional and new things, we're doing in that space and I see that continuing to be a growth opportunity applications data and AI, particularly with with everything thats.

Going on.

With respect to generative AI is going to be a significant growth opportunity for us as well and as Martin mentioned on the call. We expect to have an announcement.

Further announcements on that topic this week as well.

My colleagues likes to point out that nature.

Is that your AI is only as good as your data and for US at data architecture data availability data protection are going to be a really important part of the discussions that we have with customers as we help them facilitate the use of more AI in there.

<unk> businesses, so we see that as an opportunity digital workplace continues to be a hot topic.

Post pandemic environment and the hybrid work environments.

And then as we look at our core enterprise in Z cloud business. It's.

We're in a situation where hybrid environments are going to continue to be a really important dynamic for large enterprises and as a result, we see that.

Portion of our business and particularly mainframe modernization as being a.

An important source of revenues and signings for us going forward.

Well, yes and.

One thing to add Jamie I think David did a nice job of sort of.

The pieces when you step back and think about how we how we created and built control.

Through discussions a lot of discussions with our customers just prior to spin is we're setting ourselves up.

The practices that we're building really reflect the venn diagram of of three questions that we ask them one is.

Where do we provide value to you today.

The second one was where are you investing and where are you where are you going to grow and then third where do you give us brand permission to play and so from our heritage. We obviously, we're adding a lot of value already in the in the core enterprise <unk> cloud, we were adding a lot of value in digital workplace et cetera, but but the other.

And are creating or have created our practices that is driving that is driving demand for us.

And if I could just follow up Martin maybe to you.

How would you characterize the macro because I.

Most companies in service lease hole enzyme responsible before they step back so far year to date when I look at your bookings year are actually up through July if I'm reading this right.

No.

How would you characterize the macro or is it more like Kindle is making its own weather.

It's.

It's not that relevant.

Look the macro there.

I guess one of the ways I think about this is this is the difference between what <unk> does which is mission critical and what others may do which maybe is more discretionary so.

No matter what the macro is I will I will I would suggest there is not going to be any recession in cyber security for instance, I would suggest that every company has figured out that resiliency is what matters. In addition to the cyber security.

As well so so every company is trying to figure out how to use AI and as David said wells that for US is a tailwind and in our ability to help them with data architecture data management et cetera, et cetera, et cetera. So I do think that the macro matters. It is certainly it certainly may re prioritize what some of our customer.

Got it thank you.

Gaming operator, David another question.

Our next question and our next question coming from the line of Jeff <unk> with Scotiabank. Your line is open.

Good morning, everyone great quarter.

I just wanted to get some more color on kindred subs. So kingdom consult as you mentioned, it's one of the higher margin stream that you are seeing here.

Do you expect.

Perfect to convert and wisely services into execution and how can we assume that there's been longevity of the revenue.

Thanks, Dave you.

With respect to consult.

<unk>.

Normal cadence for some of this work is that it gives rise to a discussion of.

What an enterprise needs to do to achieve that particular business objective.

Or to address a particular challenge that that it has and as a result, it's almost natural for this to give rise for consultant assignment to give rise to.

Our planning and analysis around an issue to implementation of change and then often in managed services tail associated with it. So one of the things we really like about a consult business about two other things are like one is it itself it tends to be a higher margin. The second it's a creator of.

It's such an area of focus for us.

Third element that Martin mentioned earlier.

That allows us to add more value and be involved in more strategic conversations. So for all these are all reasons why kingdom consult sits at <unk>.

At the heart of some of our strategic work because it has so many attributes that are so attractive.

One thing I'd add David I think David said, it well, but remember also that with Kindred bridge.

What kindred bridges, providing in terms of insights to our customers given not only our own IP machine learning AI, but also the data pool. We have tangible bridge is also acting as a bit of a demand generator for us because it's offering customers insights that they didn't have before and then obviously, where we're helping them.

Through how it might they address.

What bridges, helping them understand what bridges, giving them visibility too.

And what what bridges as sort of helping.

Helping them to optimize within their own system. So can draw bridge has proven not just to be.

Terrific way for us to deliver and as we said earlier in the month, we have it in 500 accounts already on its way to 1000 it's.

It's not only helping us.

It took my follow up already.

And then a quick question here, David could you help us understand a little bit on the one time cost in what's the best way for us to sort of.

Model it on a go forward basis.

Sure.

The two most significant costs that we have call. It below the line. This year are spin related costs related to our systems migration.

And workforce rebalancing costs tied to the program that we implemented beginning in March and that's been playing out over the last several months.

To drive efficiency in our operations.

With respect to the spin related costs those are going to be done. This year. Our systems migrations will be done we won't have any spin related costs.

Going forward so that element.

Disappears and then with respect to workforce rebalancing, we're really viewing this as a as a one time.

Action that we have been implementing at here and so as I mentioned in the prepared remarks, we really see our adjusted results converging more toward our GAAP results over time since we know spin related costs are going away and.

We're not.

We're not forecasting additional workforce rebalancing costs. After the program were currently executing.

Thanks, everyone.

Thanks Sylvia.

Operator, I believe that's our question correct.

I see no further questions in the queue at this time I will now turn the call back over to Mr. Bryan Jordan for any closing remarks. Thank you operator, and thanks, everyone for joining us today look as I hope you have a sense.

We have made significant progress.

In and driving our earnings, which obviously as we as we talked a little bit about in our prepared remarks, those earnings will convert into free cash flow.

Around turning around the business and we're excited about the opportunity ahead. So thanks again for joining us and we'll talk to you 90 days.

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

Q1 2024 Kyndryl Holdings Inc Earnings Call

Request a DemoDemo

Kyndryl Holdings

Earnings