Q3 2024 Kyndryl Holdings Inc Earnings Call

Good day, and thank you for standing by.

Operator: Good day, and thank you for standing by. Welcome to the Kyndryl Fiscal Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode.

Welcome to the Kindred fiscal third quarter 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.

Operator: After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising that your hand is raised.

To ask a question. During this session you will need to press star one one of your telephone you will then hear an automated message advising your hand is raised to withdraw your question. Please press star one again.

Operator: To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Lori Chaitman, Global Head of Investor Relations. Please go ahead.

Please be advised that today's conference is being recorded.

I now like to hand, the conference over to your speaker.

Lori Freedman global head of Investor Relations. Please go ahead.

Lori C. Chaitman: Good morning, everyone, and welcome to Kyndryl's earnings call for the third fiscal quarter ended December 31st, 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.

Good morning, everyone and welcome to Kindred earnings call for the third fiscal quarter ended December 31st 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.

Lori C. Chaitman: These forward-looking statements speak only to our expectations as of, and we are under no obligation to update them. For more details on some of these risks, please see the risk factor section of our annual report on Form 10-K for the year ended March 31st, 2020. In today's remarks, we'll also refer to certain non-GAAP financial metrics. Corresponding Gap Metrics and a Reconciliation of Non-Gap Metrics to Gap Metrics for Historical Periods are provided in the presentation materials for today's event, which are available on our website at investors.kyndryl.com. With me here today are Kyndryl's Chairman and Chief Executive Officer, Martin Schroeter, and Kyndryl's Chief Financial Officer, David Weiss. Following our prepared remarks, we'll hold a Q&A session. I'd now like to turn the call over to Martin. Martin?

These forward looking statements speak only to our expectations as of today.

And we are under no obligation to update them.

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 March 31 2023.

In today's remarks, we will also refer to certain non-GAAP financial metrics corresponding GAAP metrics and a reconciliation of non-GAAP metrics to GAAP metrics for historical periods are provided in the presentation materials for today's events, which are available on our website at investors Dotcom dotcom.

Yeah.

With me here today are kindles, 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 now like to turn the call over to Martin Martin.

Martin J. Schroeter: Thank you, Lori, and thanks to each of you for joining us. Kyndryl continues to make great progress in delivering value to customers and to shareholders. Today, we'll provide an update on our strong execution and our accelerated progress as the leader in mission-critical IT infrastructure services. Our strategy, centered around our alliances, advanced delivery, and accounts initiatives, Kyndryl Consult and Kyndryl Bridge, is paving the way for profitable growth. We're again raising our full-year earnings outlook, which reflects our progress and our prospects, fully appreciate how we reached this point so quickly, and understand Kyndryl's growth potential. It's important to recognize the critical role we play for our customers and the leadership position we hold in our industry. We're a vital and trusted partner for our customers' current and future technology. We have a strong heritage in running complex applications that are highly dependent upon mission-critical infrastructure, such as the mainframe. And as an independent company, our freedom of action has allowed us to quickly capitalize on opportunities that are unique to Kyndryl.

Thank you Laurie and thanks to each of you for joining us.

<unk> continues to make great progress in delivering value to customers and to shareholders. Today will provide an update on our strong execution and our accelerated progress as the leader in mission critical it infrastructure services.

Our strategy centered around our alliances advanced delivery and accounts initiatives central consult and Central bridge.

Giving away for profitable growth.

We're again, raising our full year earnings outlook, which reflects our progress and our prospects.

To fully appreciate how we reached this point so quickly and understand controls growth potential it's important to recognize the critical role we play for our customers and the leadership position, we hold in our industry.

We are a vital and trusted partner for our customers current and future technology needs. We have a strong heritage and running complex applications that are highly dependent upon mission critical infrastructure such as the mainframe.

And as an independent company our freedom of action has allowed us to quickly capitalize on opportunities that are unique to <unk>.

Martin J. Schroeter: As a result, we're building a strong track record of successful execution that is clearly visible in our results. Benefits from our three A's have driven and will continue to drive tangible financial progress. We formed alliances with key technology leaders, which has significantly increased our addressable market, and we continue to grow these relationships. In November, we expanded our relationship with AWS on two fronts. First, to jointly develop and deliver generative AI, and second, to collaborate on mainframe modernization.

As a result, we are building a strong track record of successful execution that is clearly visible in our results.

Benefits from our three aides have driven and will continue to drive tangible financial progress.

We formed alliances with key technology leaders, which has significantly increased our addressable market and we continue to grow these relationships.

In November we expanded our relationship with AWS on two fronts first to jointly develop and deliver generative AI and the second to collaborate on mainframe modernization.

Martin J. Schroeter: We've announced similar alliances with Microsoft and will soon be announcing an expanded collaboration with Google Cloud on Gen AI. We've expanded our service delivery capabilities through Kyndryl Bridge. We're now performing over one billion automations each year, addressing risks before they become incidents and building resilience.

We've announced similar alliances with Microsoft and will soon be announcing an expanded collaboration with Google cloud <unk> AI.

We've expanded our service delivery capabilities through clinical bridge, we're now performing over $1 billion automation each year addressing risks before they become incidents and building resiliency.

Our advanced delivery efforts are generating savings of $500 million a year for us.

Martin J. Schroeter: Our advanced delivery efforts are generating savings of $500 million a year for us. In our accounts initiative, we've engaged collaboratively with our customers and have already addressed roughly half of these accounts. And as a result, we've grown our aggregate margins on focus accounts by seven points. Our progress extends beyond the three As as we leverage Kyndryl Bridge, our deep insights, and the trust our customers have in us to drive growth in Kyndryl Consult. Consult revenues are up 16% year-to-date, and we already have roughly 750 customers using Kyndryl Bridge, our AI-powered open integration platform. These areas are foundational to growing our business and fueling our long-term growth. Importantly, our strategic progress is driving stronger financial results. We're now three quarters through our fiscal year, and it's clear that fiscal 2024 is a proof point for us.

And our accounts initiative, we've engaged collaboratively with our customers and have already addressed roughly half of these accounts and as a result, we've grown our aggregate margins on focus accounts by seven points.

Our progress extends beyond the three days as we leverage <unk> bridge, our deep insights and the trust our customers have enough to drive growth and change will consult.

Consult revenues were up 16% year to date, and we already have roughly 750 customers using jingle bridge, our AI powered open integration platform.

These areas are foundational to growing our business and fueling our long term growth.

Importantly, our strategic progress is driving stronger financial results.

We're now three quarters through our fiscal year and it is clear that fiscal 2024 as a proof point for us.

We grew signings in the first 10 months of the year with higher value services earnings are expected to be up meaningfully this year compared to last and we generated positive adjusted free cash flow in the first nine months of the year.

We are enthusiastic about how our strategies and our approach to the market are driving performance our customers value the technical expertise and services, we provide as they advance their own digital transformations.

Our powerful business dynamics are creating significant value and will continue to be bold and ambitious about how we come together with our partners to deliver value for our customers.

Martin J. Schroeter: We grew signings in the first 10 months of the year with higher-value services. Earnings are expected to be meaningfully higher this year compared to last. And we've generated positive adjusted free cash flow in the first nine months of the year. We are enthusiastic about how our strategies and our approach to the market are driving performance. Our customers value the technical expertise and services we provide as they advance their own digital transformation. Our powerful business dynamics are creating significant value, and we will continue to be bold and ambitious about how we come together with our partners to deliver value for our customers. They already see us behaving as a flatter, faster, and more focused organization, which is aligned to our new services culture, what we call the Kyndryl way.

They already see us behaving as a flatter faster and more focused organization, which is aligned to our new services culture, what we call the controlled way.

And we operate at the heart of large organizations technology of states. So it's natural for us to be at the center of the secular it trends.

Our customers look to us for capabilities and scale to address these trends from risks like cyber security and skill shortages to opportunities like cloud and AI.

Our success is fueled by providing customers with solutions that leverage both our own Knowhow and our alliance partners capabilities, our expanded hyperscale relationships combined with our extensive knowledge of complex hybrid. It states are right customers are partnering with <unk> to achieve their it and business objectives as they address the larger <unk>.

Is this shaping the evolution of <unk>, namely.

Namely <unk>.

The adoption of artificial intelligence, which we know is top of mind for enterprise Cio's.

Technology skill shortages, the modernization needs to address aging infrastructure challenges and cloud migration.

Martin J. Schroeter: We operate at the heart of large organizations' technology estates, so it's natural for us to be at the center of the secular IT trend. Our customers look to us for capabilities and scale to address these trends, from risks like cybersecurity and skill shortages to opportunities like cloud and AI. Our success is fueled by providing customers with solutions that leverage both our own know-how and our Alliance partners' capabilities. Our expanded hyperscaler relationships, combined with our extensive knowledge of complex hybrid IT estates, are why customers are partnering with Kyndryl to achieve their IT and business objectives as they address the larger forces shaping the evolution of IT, namely, the adoption of artificial intelligence, which we know is top of mind for enterprise CIOs. Technology skills shortages, the modernization needs to address aging infrastructure challenges, and cloud migration. Let me share a few examples.

Let me share a few examples.

In the healthcare industry, where digital applications are scaling at a remarkable pace and privacy regulations present unique challenges modernizing it environments and moving workloads to the cloud are particularly complicated.

We have been advising to large healthcare companies throughout the migration of their complex platform based systems onto the cloud, including their patient record systems.

This migration work is strengthening the user experience for patients and caregivers, while generating meaningful operating efficiencies for our customers.

For a global auto manufacturer, we're using AI enabled kinzel bridge to deliver real time insights and automate processes in order to enhance day to day performance.

This work is not just about it it's also producing efficiencies across our customers' manufacturing facilities.

And we're working with a large multinational communications provider to define and implement their strategy to modernize their it estate and migrate applications to the cloud with the goal of reducing energy consumption by about 70%.

There are two key themes. Among these examples other new scope, we're adding and other new customers were bringing on first.

Our capabilities and our technology alliances position us to do important work for important companies. Many of which are household names second the nature of the services we provide is evolving.

Martin J. Schroeter: In the healthcare industry, where digital applications are scaling at a remarkable pace and privacy regulations present unique challenges, modernizing IT environments and moving workloads to the cloud are particularly complicated. We've been advising two large healthcare companies throughout the migration of their complex platform-based IT systems onto the cloud, including their patient record system. This migration work is strengthening the user experience for patients and caregivers while generating meaningful operating efficiencies for our customers. For example, for a global auto manufacturer, we're using AI-enabled Kyndryl Bridge to deliver real-time insights and automate processes in order to enhance day-to-day IT performance.

Our independence is fueling mission critical work that is more consultative more multi vendor more hybrid and more value added as we help customers address the trends shaping it.

And if you want proof this quarter can you will consult delivered its largest signings quarter, yet with double digit constant currency growth in both signings and revenue.

And through our alliances we've generated more than $300 million of Hyperscale and related revenue. So far this year and increasing our current target for this activity to $400 million.

Let me also emphasize the controllers and AI beneficiary and AI enabler.

As the largest infrastructure services provider in the world, we generate large amounts of data about it systems.

We're using artificial intelligence with this data in our <unk> platform to identify application performance patterns produce actionable insights reduce required maintenance and prevent incidents from occurring.

Martin J. Schroeter: This work is not just about IT; it's also producing efficiencies across the customer's manufacturing facility. And we're working with a large multinational communications provider to define and implement their strategy to modernize their IT estate and migrate applications to the cloud with the goal of reducing energy consumption by about 70%. There are two key themes among these examples, other new scope we're adding, and other new customers we're bringing on. First, our capabilities and our technology alliances position us to do important work for important companies, many of which are household names. Second, the nature of the services we provide is evolving.

And beyond our own use of AI, our customers know that their AI is only going to be as good as their data. So they are looking for <unk> expertise in how to architect their data to set the foundation for the investments they are making an AI engine.

More generally because we serve as an operator and integrator and adviser to our customers in their digital business transformations, we naturally find ourselves at the nexus of broader market trends.

The unique combination of our advisory and engineering talent intellectual property and vast amounts of operational data positions <unk> as an essential business and technology services partner.

We're accessing incremental market opportunities growing our share of wallet with existing customers, winning new customers and transforming general.

As our business evolves and we move further away from our spin our revenue mix will continue to shift to higher margin post spin signings.

Martin J. Schroeter: Our independence is fueling mission-critical work that is more consultative, more multi-vendor, more hybrid, and more value-added as we help customers address the trends shaping IT. And if you want proof, this quarter, Kyndryl Consult delivered its largest signing quarter yet, with double-digit constant currency growth in both signings and revenue. And through our alliances, we've generated more than $300 million of hyperscaler-related revenue so far this year, and we are increasing our current target for this activity to $400 million. Let me also emphasize that Kyndryl is an AI beneficiary and AI enabler.

This fiscal year only one third of our revenue is coming from post spin signings next year, we'll move to half of our revenue from coming from post spin signings and in fiscal 2026, it will be roughly two thirds.

This inflection point when our P&L is largely determined by our higher margin post spin signings will dramatically change our earnings profile.

As I highlighted earlier, our forecast for fiscal 2024, now employs more than $360 million of adjusted pre tax income improvement this year compared to last.

And while our efforts to shed low to no margin revenue will continue to impact top line growth. This calendar year, we expect to deliver margin expansion and higher earnings each year with revenue growth returning in calendar 2025.

As David will explain in more detail the margins, which were signing contracts and the other actions, we're taking to increase our profitability have us on a path to deliver high single digit adjusted pre tax margins by fiscal 2027, and yes. The math associated with that is ultimately a $1 billion or more of adjusted pre tax income with a high conversion of our net.

Martin J. Schroeter: As the largest infrastructure services provider in the world, we generate large amounts of data about IT systems. We're using artificial intelligence with this data in our Kyndryl bridge platform to identify application performance patterns, produce actionable insights, reduce required maintenance, and prevent incidents from occurring. And beyond our own use of AI, our customers know that their AI is only going to be as good as their data, so they're looking for Kyndryl's expertise and how to architect their data to set the foundation for the investments they're making in AI and Gen AI. More generally, because we serve as an operator, integrator, and advisor to our customers and their digital business transformations, we naturally find ourselves at the nexus of broader market trends. The unique combination of our advisory and engineering talent, intellectual property, and vast amounts of operational data positions Kyndryl as an essential business and technology services partner.

Earnings into cash.

We're making substantial progress, earning the trust and respect of our customers and partners through exceptional and reliable delivery.

We're providing innovative solutions that drive real business outcomes and earnings stronger margins in our ROI from our work.

We're driving powerful business dynamics for value creation, and we will continue to be bold and ambitious about how we come together to deliver value with our partners for our customers.

And 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. The formidable progress, we're making on our three as the growth in gross profit that we've been building into our contracted book of business and our updated outlook for fiscal year 2024.

We again have a lot of positive developments to share.

Our third quarter results reflect strong operational execution and continued progress on our key initiatives.

In the quarter revenue totaled $3 9, billion% to 10% decline in constant currency.

Martin J. Schroeter: We're accessing incremental market opportunities, growing our share of wallet with existing customers, winning new customers, and transforming gender. As our business evolves and we move further away from our spin, our revenue mix will continue to shift to higher-margin post-spin signings. This fiscal year, only one-third of our revenue is coming from post-spend signings.

The year over year decline in revenue was anticipated and primarily driven by our intentional exit from negative no and low margin revenue streams within ongoing customer relationships not by macro factors.

We continued to gain momentum and higher margin advisory services.

Grow consult revenues grew 11% year over year in constant currency, which highlights how we're growing our share in this higher margin higher value add space.

Martin J. Schroeter: Next year, we'll move to half of our revenue coming from post-spend signings, and in fiscal 2026, it will be roughly two-thirds. This inflection point, when our P&L is largely determined by our higher-margin post-spend signings, will dramatically change our earnings profile. As I highlighted earlier, our forecast for fiscal 2024 now implies more than $360 million of adjusted pre-tax income improvement this year compared to last. And while our efforts to shed low to no margin revenue will continue to impact top line growth this calendar year, we expect to deliver margin expansion and higher earnings each year with revenue growth returning in calendar 2025. As David will explain in more detail, the margins at which we're signing contracts and the other actions we're taking to increase our profitability have us on a path to deliver high single-digit adjusted pre-tax margins by fiscal 2027. And yes, the math associated with that is ultimately a billion dollars or more of adjusted pre-tax income with a high conversion of our net earnings into cash.

As Martin mentioned consult signings grew even faster.

This performance reflects our unique opportunities for growth in advisory services due to our independence and our expanding alliances with third party technology providers.

Our total Q3 signings increased 13% year over year in constant currency in fiscal year to date signings through January are up 4%.

Among our practices the strongest growth this year has been in security and resiliency and apps data and AI.

Year to date signings support our plan to return to revenue growth in calendar 2025 in fiscal 2026.

Our third quarter adjusted EBITDA grew 6% to $615 million as we've said previously we had a tough comp in Q3 due to the exaggerated seasonality. We saw last year, which included earnings from minimum annual revenue commitments. Despite.

Despite the tough comp, though our adjusted EBITDA margin increased by 210 basis points year over year to 15, 6%.

Our continued margin expansion underscores our ability to drive meaningful profit growth in our business.

Adjusted pre tax income was $63 million at.

$67 million improvement in profit year over year, our continued progress on our three eighths is the key driver of our earnings growth.

We address our customers' needs through our 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.

Martin J. Schroeter: We're making substantial progress earning the trust and respect of our customers and partners through exceptional and reliable delivery. We're providing innovative solutions that drive real business outcomes and earning stronger margins in our ROI from our work. We're driving powerful business dynamics for value creation, and we'll continue to be bold and ambitious about how we come together to deliver value with our partners for our customers. And with that, I'll hand over to David to take you through our results and our outlook. Thanks, Martin, and hello everyone.

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 elated to have delivered results that position us to exceed the full year adjusted pre tax earnings target that we've already raised twice before.

Yeah.

Our strategy is working our three initiatives are driving continuous improvement throughout our operations and fostering additional progress each quarter.

As a reminder, at the start of the year, we provided fiscal 2024 targets of $300 million in revenue tied to a hyper scaler alliances.

$450 million in cumulative annualized savings from advanced delivery by fiscal year end.

And $400 million of cumulative.

David Mark Togut: Today, I'd like to discuss our quarterly results, the formidable progress we're making on our three A's, the growth in gross profit that we've been building into our contracted book of business, and our updated outlook for fiscal year 2024. We again have a lot of positive developments to share. Our third quarter results reflect strong operational execution and continued progress on our key initiatives. In the quarter, revenue totaled $3.9 billion, a 10% decline in constant currency.

Accumulative annualized pre tax benefit from our accounts initiatives.

Halfway through the year, we raised our targets for our advanced delivery and accounts initiatives by $100 million each.

And with the continued strong execution, we delivered in the third quarter, we're now raising our full year target for alliances revenue by $100 million.

And are well positioned to meet or exceed our targets for advanced delivery and accounts.

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

In the third quarter, we recognized more than $100 million in hyper scaler related revenue, bringing our year to date total to more than $300 million.

David Mark Togut: The year-over-year decline in revenue was anticipated and primarily driven by our intentional exit from negative, no, and low-margin revenue streams within ongoing customer relations, not by macro effects. We continue to gain momentum in higher-margin advisory services. Kyndryl Consult revenues grew 11% year-over-year in constant currency, which highlights how we're growing our share in this higher margin, higher value-add space. As Martin mentioned, consult signings grew even faster.

This surpasses our initial $300 million fiscal 2024 target and because of this progress we are raising our full year target for revenue tied to hyperscale or alliances to $400 million.

Our hyperscale edge certifications total more than 38000, which is more than double what they were two years ago and now include even more advanced certifications.

Our advanced delivery initiative is transforming the way, we deliver our services and Kindred bridge is driving our progress we continue to identify and realize significant automation opportunities across our delivery operations as we increased service levels reduce our costs and incorporate more technology into our op.

<unk> to.

To date, we've been able to free up more than 8500 delivery professionals to address new revenue opportunities and backfill attrition.

David Mark Togut: This performance reflects our unique opportunities for growth in advisory services due to our independence and our expanding alliances with third-party technology providers. Our total Q3 signings increased 13% year-over-year in constant currency, and fiscal year-to-date signings for January are up 4%. Among our practices, the strongest growth this year has been in security and resiliency in AppState and AI. Our year-to-date signings support our plan to return to revenue growth in calendar 2025 and fiscal 2026. Our third quarter adjusted EBITDA grew 6% to $615 million.

This is worth roughly $500 million, a year or two us representing a $75 million increase in our annual run rate this past quarter.

Our accounts initiative has been and will continue to be a global effort focused on fixing elements of contracts with sub standard margins.

In the third quarter, we increased the accumulative annualized profit savings from our focus accounts by $75 million to $475 million.

Our focus accounts program has been a galvanizing effort among kindred professionals around the world in order to repair hundreds of profit challenged relationships collaboratively with our customers and it has been a resounding win for us as a team.

Successful execution of our three AIDS remains our fastest path toward achieving sustainable profitable growth and the progress. Our teams have made on these initiatives has been and is an outstanding source of value creation for kindred and our customers and our shareholders.

David Mark Togut: As we've said previously, we had a tough comp in Q3 due to the exaggerated seasonality we saw last year, which included earnings from minimum annual revenue commitments. Despite the tough comp, though, our adjusted EBITDA margin increased by 210 basis points year-over-year to 15.6%. Our continued margin expansion underscores our ability to drive meaningful profit growth in our business. Adjusted pre-tax income was $63 million, a $67 million improvement in profit year-over-year.

Turning to our cash flow and balance sheet in the quarter, we generated positive adjusted free cash flow of $348 million.

Our gross capital expenditures in the quarter were $174 million and we received $15 million of proceeds from asset dispositions.

Working capital was unusually strong in the quarter and we expect some of these timing benefits to reverse in the March quarter. Our Capex is also back end weighted this year.

Our financial position remains strong and we continue to expect that our full year adjusted free cash flow will be positive.

David Mark Togut: Our continued progress on our 3As is the key driver of our earnings growth. We address our customers' needs through our geographic operating segments and also through our six global practices: Cloud, Applications, Data, and AI, Security and Resiliency, Network and Edge, Digital Workplace, and Core Enterprise. Our business mix continues to evolve to reflect demand, with most of our signings, including Kyndryl Consult signings, coming from cloud, AppState, and AI, security, and other growth areas. More generally, as we look back on the quarter, we're elated to have delivered results that position us to exceed the full year adjusted pre-tax earnings target that we've already raised twice before. Our strategy is working.

We've provided a bridge from our adjusted pretax income to our free cash flow as well as a bridge from our adjusted EBITDA to our free cash flow in the appendix.

Our cash balance at December 31 was $1 $7 billion.

Our cash combined with available debt capacity under committed borrowing facilities gave us $4 8 billion of liquidity at quarter end.

Our debt maturities are well ladder from late 2024 to 2041, we had no borrowings outstanding under our revolving credit facility and our net debt at quarter end was $1 6 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 our $500 million term loan matures in November so it now shows up on our balance sheet as a current liability we.

We intend to refinance this debt in the first half of calendar 2024 subject to market conditions.

On capital allocation, our top priorities continue to be to maintain strong liquidity remain investment grade and reinvest in our business.

David Mark Togut: Our three initiatives are driving continuous improvement throughout our operations and fostering additional progress each quarter. As a reminder, at the start of the year, we provided fiscal 2024 targets of $300 million in revenue tied to hyperscaler alliances. $450 million in cumulative annualized savings from advanced delivery by fiscal year end, and $400 million in cumulative annualized pre-tax benefit from our accounts initiative. Halfway through the year, we raised our targets for advanced delivery and accounts initiatives by $100 million each.

Our leadership position in it infrastructure services combined with benefits from our <unk> initiatives is significantly expanding our margins and will drive meaningful free cash flow growth.

As a result over time, we'll be in a position to consider regularly returning capital to shareholders all while remaining investment grade.

As encouraged as I am by the earnings growth, we delivered in Q3 and so far this year.

Even more enthusiastic about how we continue to position <unk> for future margin and profit growth the.

The December quarter was a continuation of us signing business with stronger margins and as our business mix increasingly shifts towards more post spin contracts you will see significant margin expansion in our reported results.

David Mark Togut: And with the continued strong execution we delivered in the third quarter, we're now raising our full-year target for alliances revenue by $100 million and are well positioned to meet or exceed our targets for advanced delivery and account. Through our alliances, we're building the portion of our customer relationships that include cloud-based content. In the third quarter, we recognized more than $100 million in hyperscaler-related revenue, bringing our year-to-date total to more than $300 million. This surpasses our initial $300 million fiscal 2024 target. And because of this progress, we're raising our full-year target for revenue tied to hyperscaler alliances to $400 million. Our hyperscaler certifications total more than 38,000, which is more than double what they were two years ago, and now include even more advanced certifications.

In the middle graph on slide 12 of our earnings presentation. We've included a gross profit book to Bill graph that accentuates, how we've been creating and capturing value in our business.

With an average projected gross margin of 26% on our $12 $5 billion of signings over the last 12 months, we've added over $3 billion of projected gross profit to our backlog.

Over the same period of time, we've reported gross profit of $2 8 billion.

This means that we have been adding more gross profit to our backlog and our contracted book of business has been producing in our P&L.

Having a gross profit book to Bill ratio above one at one one times is a measure of how we're growing what matters. Most the expected future profit from committed contracts.

And we've been doing this consistently over the last 18 months.

I wanted to remind people who are familiar with our story and highlight for those just beginning to follow us that two years ago, we laid out a bold ambitions that over the medium term or.

Our alliances initiative will drive signings revenue and roughly $200 million in annual pre tax income.

David Mark Togut: Our Advanced Delivery Initiative is transforming the way we deliver our services, and Kyndryl Bridge is driving our progress. We continue to identify and realize significant automation opportunities across our delivery operations as we increase service levels, reduce our costs, and incorporate more technology into our offering. To date, we've been able to free up more than 8,500 delivery professionals to address new revenue opportunities in backfill attrition.

Our advanced delivery initiative will drive cost savings equating to roughly $600 million in annual pre tax income.

Our accounts initiative will drive annual pre tax income of $800 million or more.

Two years into this journey, our momentum clearly has us on track to achieve these goals.

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're seizing opportunities to control expenses throughout our business we.

David Mark Togut: This is worth roughly $500 million a year to us, representing a $75 million increase in our annual run rate this past quarter. Our accounts initiative has been, and will continue to be, a global effort focused on fixing elements of contracts with substandard margins. In the third quarter, we increased the cumulative annualized profit savings from our FOCUS accounts by $75 million to $475 million. Our Focus Accounts program has been a galvanizing effort among Kyndryl professionals around the world in order to repair hundreds of profit-challenged relationships collaboratively with our customers. And It has been a resounding win for us as a team.

We expect that these efforts will contribute roughly $400 million in annual pretax income over the next few years.

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

Progress on our three <unk> has been and will be a central source of value creation for Kindle.

I mentioned earlier that transforming focus accounts into higher margin relationships has been a big effort and big win for us.

While pricing discipline is part of our approach it is only a portion of our strategy.

We're also expanding the scope of services, we provide to our customers in order to strengthen our margins and the growth in our hyper scaler related revenues and consult revenues demonstrates this.

We're removing low to no margin third party content from our deals which is you know impacts our reported revenue and.

David Mark Togut: The successful execution of our three A's remains our fastest path toward achieving sustainable, profitable growth, and the progress our teams have made on these initiatives has been and is an outstanding source of value creation for Kyndryl, our customers, and our shareholders. Turning to our cash flow and balance sheet, in the quarter, we generated a positive adjusted free cash flow of $348 million. Our gross capital expenditures in the quarter were $174 million, and we received $15 million of proceeds from asset disposition.

And we're driving efficiency in how we provide services with advanced delivery and Kindred bridge, helping us reduce costs.

In other words, turning our focus accounts into relationships that generate margins more like the blueprint portion of our revenues is a multifaceted multiyear exercise that is about more than just pricing.

I look at our progress to date is a good thing, but I also embraced the opportunity still available to us since the remaining focus accounts represent a significant opportunity to expand margins that is both specific to Kendall and something we've proven we can execute.

David Mark Togut: Working capital was unusually strong in the quarter, and we expect some of these timing benefits to reverse in the March quarter. Our CapEx is also back-end weighted this year. Our financial position remains strong, and we continue to expect that our full-year adjusted free cash flow will be positive. We've provided a bridge from our adjusted pre-tax income to our free cash flow as well as a bridge from our adjusted EBITDA to our free cash flow in the appendix. Our cash balance at December 31 was $1.7 billion.

Our updated outlook is for adjusted pre tax income to be at least $150 million versus our prior outlook of at least $140 million.

This increase in place at least 220 basis points of margin expansion compared to last year.

We now expect our fiscal 2024, adjusted EBITDA margin to be at least 14, 5%, which represents an increase of at least 290 basis points versus fiscal 2023.

Our outlook for revenue continues to be a decline of 6% to 7% in constant currency, which translates to $15 nine to $16 $1 billion based on recent exchange rates.

David Mark Togut: Our cash, combined with available debt capacity under committed borrowing facilities, gave us $4.8 billion of liquidity at quarter end. Our debt maturities are well laddered from late 2024 to 2041. We had no borrowings outstanding under a revolving credit facility.

As a reminder, 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're taking to transform our business.

David Mark Togut: And our net debt at quarter end was one point six billion dollars. As a result, our net leverage sits well within our target range. We are rated investment grade by Moody's, Fitch, and S&P.

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

We've accelerated these actions over the last nine months, which is why the year over year revenue decline in the second half of our fiscal year is greater than in the first half.

David Mark Togut: And our $500 million term loan matures in November, so it now shows up on our balance sheet as a current liability. We intend to refinance this debt in the first half of calendar 2024, subject to market conditions. As for capital allocation, our top priorities continue to be to maintain strong liquidity, remain investment grade, and reinvest in our business. Our leadership position in IT infrastructure services, combined with benefits from our 3A initiatives, is significantly expanding our margins and will drive meaningful free cash flow growth. As a result, over time, we'll be in a position to consider regularly returning capital to shareholders, all while remaining investment grade. As encouraged as I am by the earnings growth we've delivered in Q3 and so far this year, I'm even more enthusiastic about how we continue to position Kyndryl for future margin and profit growth. The December quarter was a continuation of us signing business with stronger margins.

For the March quarter, we expect year over year revenues declined 9% to 11% in constant currency and for the revenue decline to be most pronounced in our U S and strategic markets segments, where a reduction of lower margin elements is most impactful.

We expect adjusted pre tax income to be positive in the quarter.

The sequential quarterly comp from Q3 to Q4 is a tough one due to the contractual $50 million quarter over quarter increase in IBM software costs that we face.

Year over year, though we expect our adjusted pre tax margin to increase in the fourth quarter as it has in each of the first three quarters of fiscal 2024.

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

We now project roughly $650 million of net capital expenditures in fiscal 2024.

We estimate roughly $825 million of depreciation expense and $1 25 billion of amortization expense this year.

We still expect about $300 million.

Cash outlays for separation related work, primarily systems migrations and for our workforce rebalancing actions that are driving significant cost savings.

We remain committed to our target of returning to revenue growth by calendar 2025, and over the medium term delivering significant margin expansion and driving free cash flow growth.

To wrap up.

Our business model centers around providing mission critical services to large complex organizations that are dependent on technology and pursuing digital evolution.

David Mark Togut: And as our business mix increasingly shifts toward more post-spin contracts, you'll see significant margin expansion in our reported results. In the middle graph on slide 12 of our earnings presentation, we've included a gross profit book-to-bill graph that accentuates how we've been creating and capturing value in our business. With an average projected gross margin of 26% on our $12.5 billion of signings over the last 12 months, we've added over $3 billion of projected gross profit to our backlog. Meanwhile, over the same period of time, we've reported gross profit of $2.8 billion.

The mission critical nature of what we do distinguishes us from other providers of <unk> services.

Our scale, our Knowhow, our indispensability and our freedom of action as an independent company have given us opportunities to become a more profitable business, while continuing to serve our customers extremely well.

We've been successfully capitalizing on these opportunities in ways that position us for profitable growth in the future.

We still have much to do and a lot of additional value that we can generate.

And our accomplishments to date, including in the most recent quarter give us confidence in our ability to deliver continued substantial progress.

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

Operator.

Hello, operator.

David Mark Togut: This means that we've been adding more gross profit to our backlog than our contracted book of business has been producing in our P&L. Having a gross profit book-to-bill ratio above 1 at 1.1 times is a measure of how we're growing what matters most, the expected future profit from committed contracts. And we've been doing this consistently over the last 18 months.

Yes can you all hear me.

Now we can.

We will now open the line for questions as a reminder to ask a question. Please press star one one of your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

We ask that you please limit yourself to one question and one follow up please.

David Mark Togut: I want to remind people who are familiar with our story and remind those who are just beginning to follow us that two years ago, we laid out bold ambitions that, over the medium term, our alliances initiative would drive signings, revenue, and roughly $200 million in annual pre-tax income. Our Advanced Delivery Initiative will drive cost savings equating to roughly $600 million in annual pre-tax income, and our accounts initiative will drive annual pre-tax income of $800 million or more. Two years into this journey, our momentum clearly has us on track to achieve these goals.

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

Martin are you are ready for your first question, we already operator, thank you.

Our first question is from David <unk> with Evercore ISI. Your line is now open.

Thank you good morning, and good to see a 13% year over year bookings growth in the quarter could.

Could you talk about the underlying strength in bookings both at kindred consult at and alliances and to what extent.

That strength is sustainable going forward.

Thank you David I'll, obviously all of.

I'll ask.

David joined me if he had anything to supplement my answer with but a few things I think about what we saw in the quarter, obviously as you said well.

Good good growth got us back not only in the quarter, but got us back to.

David Mark Togut: We're also driving growth in Kyndryl Consult and among our global practices, which is incremental to the benefits coming from our 3A initiatives. And we're seizing opportunities to control expenses throughout our business. We expect that these efforts will contribute roughly $400 million in annual pre-tax income over the next few years.

Growth on a on a full year basis or a year to date basis, and I think what's important for a couple of things as you know we have a headwind in growing signings, which is because we are being selective about the content.

Having said that we do have these these growth factors that we've been talking about including tangible consult including our alliance activity, which is.

David Mark Togut: In total, then, the magnitude of the earnings growth opportunity we're tackling, and tackling successfully, is tremendous relative to our current margin. Progress on our 3As has been and will be a central source of value creation for Kyndryl. I mentioned earlier that transforming focus accounts into higher-margin relationships has been a big effort and a big win for us. However, while pricing discipline is part of our approach, it is only a portion of our strategy. We're also expanding the scope of services we provide to our customers in order to strengthen our margins, and the growth in our hyperscaler-related revenues and consulting revenues demonstrates this. We're removing low to no-margin third-party content from our deals, which, as you know, impacts our reported revenue.

I think.

Demonstrative of the role we play in our customers' environments and it shows how our customers Trust us with their most challenging work and the work we're doing and consult in the work we're doing with our partners as just evidenced that the important role we play for our customers future is now.

<unk> continues to play out notwithstanding the headwind we have is as we're more selective but also reflects the capabilities we have been.

Building over the last couple of years and moving into the bigger total addressable market that we've talked about since we were spun out.

As further signs.

Yes, I'll add one more data point, because while we have good growth in consults.

<unk> maintained good double digit growth in the quarter and on a year to date basis.

And good good growth in the alliance activity. We also did see more larger deals we saw 15 deals greater than $100 million.

David Mark Togut: And we're driving efficiency in how we provide services, with advanced delivery and Kyndryl Bridge helping us reduce costs. In other words, turning our focus accounts into relationships that generate margins, more like the blueprint portion of our revenues, is a multifaceted, multi-year exercise that is about more than just pricing. I look at our progress to date as a good thing, but I also embrace the opportunities still available to us, since the remaining FOCUS accounts represent a significant opportunity to expand margins that is both specific to Kyndryl and something we've proven we can execute. Our updated outlook is for adjusted pre-tax income to be at least $150 million versus our prior outlook of at least $140 million.

Through through the end of the year. So the first nine months of this year versus eight deals greater than $100 billion through the same time period. The prior year. So so again all evidence I think of the of the trust and the confidence that our customer base has in us even even as we've Ethernet even as we've kind of worked through.

Through the headwind of of being selective about content, David anything you'd just to add that.

Year to date consults earned 14% of our revenue in the quarter. It's in the range of 15% and that's really giving us confidence that we can ultimately move up move consult up to being 20%.

Or more of our aggregate revenue.

David Mark Togut: This increase implies at least 220 basis points of margin expansion compared to last year. We now expect our fiscal 2024 adjusted EBITDA margin to be at least 14 12%, which represents an increase of at least 290 basis points versus fiscal 2023. Our outlook for revenue continues to be a decline of 6 to 7% in constant currency, which translates to $15.9 to $16.1 billion based on recent exchange rates. As a reminder, the year-over-year revenue decline we're projecting is primarily due to the soft backlog of fiscal 2024 revenue we were born with, plus intentional near-term actions we're taking to transform our business. These changes typically involve removing selected low or negative margin scope from ongoing customer relationships. We've accelerated these actions over the last nine months, which is why the year-over-year revenue decline in the second half of our fiscal year is greater than in the first half. For the March quarter, we expect year-over-year revenues to decline 9% to 11% in constant currency and for the revenue decline to be most pronounced in our U.S. and strategic markets segments, where a reduction of lower margin elements is most impactful.

Thank you, Dave and thanks, Yeah, just as a quick follow up if I could ask about the $348 million in free cash flow in the quarter. David you called out some working capital benefits, which are mostly timing related and it sounds like Capex is more fourth quarter related would you still expect to be free cash flow positive in the fourth fiscal quarter of this year.

We expect to be free cash flow positive for the year as a whole.

Probably not in the in the fourth quarter itself and as you mentioned, we had some working capital benefits.

Helped us in the third quarter, which made our free cash flow in the quarter, particularly strong and our capital expenditures are backend loaded. This year, there is going to be more of that in the fourth quarter and then we have the usual march quarter seasonality, where we have certain certain payments.

Annual biannual payments for things like software.

They tend to go out in the first quarter of the year. So the March quarter is typically a.

Tougher tougher.

Tougher working capital and free cash flow quarter for us, but there is no change in our outlook our expectation that we'll be free cash flow positive for the year as a whole.

Thanks, so much.

Operator next question please.

Our next question.

Comes from the line of Thompson Wang with Jpmorgan. Your line is now open.

Hey, Thanks. Good morning, good results here, just I would like to gross profit book to Bill metric here greater than one I'm just curious the risk of it.

David Mark Togut: We expect adjusted pre-tax income to be positive in the quarter. The sequential quarterly comp from Q3 to Q4 is a tough one due to the contractual $50 million quarterly-over-quarter increase in IBM software costs that we face. Year over year, though, we expect our adjusted pre-tax margin to increase in the fourth quarter, as it has in each of the first three quarters of fiscal 2024. As I mentioned, we expect adjusted free cash flow to be positive this fiscal year. We now project roughly $650 million of net capital expenditures in fiscal 2024. We estimate roughly $825 million of depreciation expense and $1.25 billion of amortization expense this year.

Realization for that is what maybe can you go through that contract execution things like pricing.

Delivery capability things like that is I'm, just curious about the realization risk of that book to Bill.

Sure.

Our experience is is good in terms of realization associated with our with our book to Bill.

We do an analysis.

The contracts that we priced.

But we call it.

That measures the.

The actual realized profit compared to what we had estimated we call it our.

It did versus bid analysis and in the most recent version of.

Most of the contracts, we looked at average within a point of what we actually expected to generate I think it was around seven tenths of a point so there I.

David Mark Togut: We still expect about $300 million of cash outlays for separation-related work, primarily systems migrations, and for our workforce rebalancing actions that are driving significant cost savings. We remain committed to our target of returning to revenue growth by calendar 2025 and, over the medium term, delivering significant margin expansion and driving free cash flow growth. Our business model centers around providing mission-critical services to large, complex organizations that are dependent on technology for pursuing digital evolution. The mission-critical nature of what we do distinguishes us from other providers of IT services.

I think a realization of.

The signings and the gross profit associated with them.

It tends to be very good we have I'd say, good good visibility and good confidence with respect to it.

Thanks for that David just a quick follow up then just I.

I think Martin you mentioned, the 15 deals greater than $100 million I think.

Industry wide, we've been hearing a lot of mixed results on the short term projects are discretionary spend your consult advisory business seems to be between well just remind us maybe the difference here.

I know youre somewhat bringing that up too.

Good standard here, but are you seeing any impact from demand as we cross over into the calendar year here.

David Mark Togut: Our scale, our know-how, our indispensability, and our freedom of action as an independent company have given us opportunities to become a more profitable business while continuing to serve our customers extremely well. We've been successfully capitalizing on these opportunities in ways that position us for profitable growth in the future. We still have much to do and a lot of additional value that we can generate, and our accomplishments to date, including in the most recent quarter, give us confidence in our ability to deliver continued substantial progress. With that, Martin and I would be pleased to take your questions, Operator. Operator. Yes, can you all hear me?

Some projects stuff, Thanks, Tien tsin.

I think again and we've talked a bit about this in the past the nature of what we're consulting on is probably less.

Less.

Opportunistic or or or.

Variable because we are.

We are consulting on.

The things that we run where consulting on infrastructure, where consulting and helping our customers on securing their data and making their systems more resilient, making sure that the data is architected in a way that they can get to in a protected et cetera, et cetera et cetera. So so the Z.

The mission critical nature of our run business is also <unk>.

I'd say the mission critical nature of the consult business companies have challenges and it's not.

Operator: Now we can. We will now open the line for questions. As a reminder, to ask a question, please press star 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.

Helping with science experiments, we're not helping with with sort of the nice to haves, we're helping with how do you make sure your infrastructure secure resilient.

And you're able to meet the needs of the business. So I just think it's the nature of what we do that.

Operator: We ask that you please limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. Martin, are you all ready for your first question? We are ready, operator. Thank you.

That's that's different from a lot of others and I think thats, what drives consult to be at solid double digit performance.

Probably just unique to us.

David Mark Togut: Our first question is from David Togut with Evercore ISI. Your line is now open. Thank you. Good morning, and good to see the 13% year-over-year bookings growth in the quarter. Could you talk about the underlying strength in bookings, both at Kyndryl Consult and at Alliances, and to what extent that strength is sustainable going forward? Yeah, thank you, David. Obviously, I'll ask David to join me if he has anything to supplement my answer with.

Okay.

Good.

Thank you Scott Thanks, Tien tsin.

Operator next question please.

Our next question comes from the line of <unk> <unk> with Scotiabank. Your line is now open.

Good morning, everyone great quarter, So Martin.

The comment that you made that was actually very curious to understand.

Uh huh.

Hi, tailwind has been actually changing the way.

<unk> now interacting with the client per se.

In terms of PR focus accounts are they starting to.

Martin J. Schroeter: But a few things about what we saw in the quarter. Obviously, as you said, good growth got us back not only in the quarter but back to growth on a full-year basis or a year-to-date basis. And I think what's important are a couple things.

Your guys' Kimball and actually have you been seeing increased conversion there and for that matter. Your blueprint accounts are you seeing increased conversion and obviously conduct ourselves opting in is working alongside the glass.

Help us understand how hard.

Hi, Ben.

Driver of these revenues is about.

So so thank you <unk> a couple of things first AI is bolt something we use.

Martin J. Schroeter: As you know, we have a headwind in growing signings, which is because we're being selective about the content. Having said that, you know, we do have these growth factors that we've been talking about, including Kyndryl Consult and our Alliance activity, which is, I think, you know, demonstrative of the role we play in our customers' environments. And it shows how our customers trust us with their most challenging work. And the work we're doing in Consult and the work we're doing with our partners is just evidence that the important role we play for our customers' future is now, you know, continues to play out, notwithstanding the headwinds we have as we're more selective. It also reflects, you know, the capabilities we've been building over the last couple of years and moving into, you know, the bigger total addressable market that we've talked about since we were spun out.

And how we and how we deliver our services and digital bridge.

Has a massive machine learning model and then more data than anybody else that helps customers get insights as we said in our prepared remarks, we've got over 750 customers now getting insights from bridge on an on.

How to optimize those systems and what that work also allows us to do is then to help customers think through.

How do and which leaves by the way to consult opportunities for us, but it also helps customers as they think about now how they want to deploy AI and many are now starting to move into Gen. AI obviously.

The work that has to happen around Gen. AI to work I would ask to have around NII is all about how do you architect your data how do you get your data organized.

And even though.

In an experimental phase.

Martin J. Schroeter: As further signs, you know, I guess I'll add one more data point, because while we have good growth in Consult, we also maintained good double-digit growth in the quarter and on a year-to-date basis, and good growth in alliance activity. We also did see more larger deals. We saw 15 deals greater than 100 million through the end of the year, so the first nine months of this year, versus eight deals greater than 100 million through the same time period the prior year. So again, all evidence, I think, of the trust and the confidence that our customer base has in us, even as we've kind of worked through the headwind of being selective about content. David, anything you'd add?

The work we do tends to proceed the science experiments that have to happen. So we're at the front end of.

Of what customers are thinking about as they as they start to explore either for their systems, mostly for systems of engagement as they start to explore how to use their data to reach new customers to reach their customers to reach our customers better but this has a long long tail to it even though we're at the front end as AI becomes more used in systems.

Engagement and systems of record, which is where our mission critical work sits I.

I think we've got a very long tail to how our.

Our consultants and control consult help customers. So this is a long secular trend that I think is going to drive growth for quite a while for us.

That's very helpful and just to just to understand in a quick one here.

Kindred is a very mission critical infrastructure services company.

The global macro and you've talked about this in the bus, but how exactly does the global macro conditions impact you and to what extent could negatively impact Q given the nature of what you do versus the application services company that have been.

Martin J. Schroeter: Just to add that, year-to-date, consults are 14% of our revenue, and the quarter's in the range of 15%, and that's really giving us confidence that we can ultimately move consults up to being 20% or more of our aggregate revenue. Thank you, David.

Indicating slowdown in growth and.

A week a week.

David Mark Togut: Yeah, just as a quick follow-up, if I could ask about the $348 million in free cash flow in the quarter. David, you called out some working capital benefits, which were mostly timing-related, and it sounds like CapEx is more fourth-quarter-related. Would you still expect to be free cash flow positive in the fourth fiscal quarter of this year? We expect to be free cash flow positive for the year as a whole, probably not in the fourth quarter itself.

Outlook for fiscal 2024 broadly speaking.

Yes.

We are we are what I would say is insulated to the macro but we are with the.

Macro is the world we live in as the world our customers living as well so as as their worlds changes it will put different new pressures on on how how they run their infrastructure or what they might.

What they might.

What they might experience the direction. They may want to go so in the short term, we don't see much of an impact as we've said in the past, we're fairly well insulated but over the long term is as customers rethink.

David Mark Togut: And as you mentioned, we had some working capital benefits that helped us in the third quarter, which made our free cash flow in the quarter particularly strong. And our capital expenditures are back-end loaded this year, so there's going to be more of that in the fourth quarter.

Rethink the world, which leads maybe to industry consolidation other things, we will experience that so but that's over the longer term and again you and Andy.

Any macro environment.

Our customer basis, and all customers are going to always be thinking about how do I take advantage of the innovation I see how do I move into the world in order to serve my customers and we just have to be able to keep up with them with the capabilities that they're looking for at any given time, but that's again, that's what we've been doing is moving helping them move.

David Mark Togut: And then we have the usual March quarter seasonality, where we have certain payments, annual, biannual payments for things like software that tend to go out in the first quarter of the year. So the March quarter is typically a tougher working capital and free cash flow quarter for us, but there's no change in our outlook, our expectation, that we'll be free cash flow positive for the year as a whole. Thanks so much.

To the future in whatever macro environment, we happen to be in.

That's great. Thanks, a lot Paul.

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

Our last question comes from the line of Jamie Friedman with Susquehanna. Your line is now open.

Operator: Operator, next question, please. Our next question comes from the line of Tencent Wong with J.P. Morgan. Your line is now open. Hey, thanks. Good morning.

Hi, Good morning, and let me Echo the compliments. Good results here I was wondering David if you could help us bridge between slides 12 in slide seven in other words, how to think about.

Tencent Wong: Good results here. Just, I like the gross profit, book-to-bill metric here, greater than one. I'm just curious about the risk of... realization for that is, maybe, can you go through that contract execution process, things like pricing, you know, delivery capability, anything like that. I'm just curious about the realization and risk of that book-to-bill metric.

The timing related to the gross profit book to Bill as it waterfalls over to the pre tax margin.

Any any.

Comment on that would be helpful.

Absolutely.

Thanks.

Slide seven the one that shows how our.

Business mix is evolving really does operate as the bridge here and as a reminder, that's the slide that shows that this year only about a third of our revenue and therefore, a third of our P&L is really being driven by post spin signings that have these attractive high single digit margins associate.

Martin J. Schroeter: Sure. Our experience is good in terms of realization associated with our book to bill. We do an analysis of contracts that we've priced that we call our did versus bid analysis. And in the most recent version of that, most of the contracts we looked at averaged within a point of what we actually expected to generate. I think it was around seven tenths of a point.

And with them and we're still in the situation, where Q thirds of our revenue is coming from older pre spin signings that really arent generating.

Significant profit for us.

And the inflection point, that's really important for US is next year moving to that that mix of revenue is being kind of 50 50 between post spin and pre spin and the fiscal year after that.

Martin J. Schroeter: So I think our realization of the signings and the gross profit associated with them tends to be very good. We have, I'd say, good visibility and good confidence with respect to that. Perfect. No, thanks for that, David.

Our revenues in our P&L for the first time.

Really sort of being dominated by the post spin signings.

And what we expect that to translate into an I feel we have good visibility around.

Is the.

Martin J. Schroeter: Just my quick follow-up then. I think, Martin, you mentioned the 15 deals greater than $100 million, and I think, industry-wide, we've been hearing a lot of mixed results on the short-term projects, the discretionary spend. Your consultative advisory business seems to be doing well. Just remind us maybe of the difference here, and I know you're somewhat bringing that up to a good standard here, but are you seeing any impact from demand as we cross over into the calendar year here on the short-term project stuff? Thanks, Tingen.

The bars that you see on the right side of page seven.

As the more profitable signing.

Signing some more profitable book of business.

<unk> is a predominant part of our revenue.

It really creates the opportunity for the margin improvement that we're looking for and then by the time, we get to fiscal 2007, where 85% or so of our revenues are coming from the the business that we've signed post spin rather than what we inherited that's how we deliver a high single digit margin.

So this really.

Martin J. Schroeter: Look, I think, again, and we've talked a bit about this in the past, the nature of what we're consulting on is probably less opportunistic or less variable because we're consulting on the things that we run. We're consulting on infrastructure. We're consulting and helping our customers with securing their data, making their systems more resilient, making sure that the data is architected in a way that they can get to it and protect it, etc., etc., etc. So, the mission-critical nature of our run business is also, I would say, the mission-critical nature of the consulting business. Companies have challenges, and we're not helping with science experiments. We're not helping with sort of the nice-to-haves.

The margins at which we are signing business just become a larger and larger part.

Our overall business mix and by the time, we get to FID.

27, where it's 85% post spin that's how.

So we see ourselves at high single digit pre tax margins in aggregate, yes, I think I think that's well said I guess when I think about it as we get into next year I think we've got.

Still the headwind that we had this year, which we obviously have been able to overcome and thats.

The software cost increase that that IBM created in the spin so thats the headwind the tailwind we see David David said, it well, we get more of our post spin backlog that comes through we obviously get the full year benefit of everything we were able to execute this year and will continue to execute.

Next year, so we'll get the in period.

Execution benefits from that and then we also get a tailwind I think from lower depreciation as we get into next year. So so yes, we have headwinds as we go into as David described that Chartwell I think but.

Martin J. Schroeter: We're helping with how you make sure your infrastructure is secure, resilient, and able to meet the needs of the business. So, I just think it's the nature of what we do that's different from a lot of others, and I think that's what drives consulting to be a solid double-digit performance. It's probably just unique to us, understood.

But we've also got some tailwind as we get into the year.

And then for my follow up maybe for Martin.

In terms of the.

Projected revenue growth beginning in calendar 2025, how do you think about the factors.

That will help you stick that the.

Growing.

Operator: Thanks. Operator, next question, please. Our next question comes from the line of Divya Goyal with Scotiabank. Your line is now open.

At <unk> in other words, how much of that is impacted how much of that is under your own control is any of that at risk to discretionary or macro how do you think about that yes.

Divya Goyal: Good morning, everyone. Great quarter. So Martin, further to this comment that you made, I was actually very curious to understand how these AI tailwinds have been changing the way Kyndryl is now interacting with clients per se. For example, in terms of your focus accounts, are they starting to prioritize Kyndryl? And actually, have you been seeing increased conversion there?

We have as we've said a number of times we have engineered.

Client in our business and and I would say on the other side, where we focused on getting to growth like central consult and theyre alliances activity, we're growing quite well and as I sit here today, while we have.

Many many more quarters of signings to get under our belt.

Martin J. Schroeter: And for that matter, your Blueprint accounts, are you seeing increased conversion? And obviously, Kyndryl is working alongside the client. But help us understand how AI has been a driver of these revenues as well? Yeah. So, thank you, Divya. A couple of things.

As I sit here today I feel as good as ever that those two growth drivers along with all the other things we're building our capabilities around that they get us back to growth in the Timeframes that we've that we've said previously with.

David said well the margin profile is more of that comes through our P&L. So so as I sit here today I still believe that.

Our alliance activity in our control consult we've proven that we can grow where we want to grow and we've proven that the customers are willing to and want to expand.

Martin J. Schroeter: First, AI is something we use in how we deliver our services, and Kyndryl Bridge has a massive machine learning model and more data than anybody else that helps customers get insights. As we said in our prepared remarks, we've got over 750 customers now getting insights from Bridge on how to optimize those systems. And what that work also allows us to do is then to help customers think through how to, which leads, by the way, to consulting opportunities for us. But it also helps customers as they think about now how they want to deploy AI. And many are now starting to move into Gen AI, obviously. The work that has to happen around Gen AI, the work that has to happen around any AI, is all about how do you architect your data? How do you get your data organized?

Their work with us and their relationship with us even as we engineer this decline now.

The biggest chunk of that engineered decline is is this fiscal year as we move into next fiscal year. The engineered decline reduces the OEM content becomes.

Becomes sort of I won't call. It neutral right, we've taken a ton of it out it becomes a neutral going forward. We still have some more work to do to two two on focus accounts, which will have an impact but the bulk of it is in this fiscal year and as we move into next year. Then we will have a reduced a reduced impact from that engineered decline and more impact.

From more benefit from clinical consult in the alliances activity as it as it keeps going so I feel I feel really good about where we are in what we have described now for a bit over two years about getting back to growth in calendar year 'twenty five in driving the profitability.

Martin J. Schroeter: And even though it's in an experimental phase, the work we do tends to precede the scientific experiments that have to happen. So we're at the front end of what customers are thinking about as they start to explore either for their systems, mostly for systems of engagement, as they start to explore how to use their data to reach new customers, to reach their customers, to reach their customers better. But this has a long, long tail to it.

That we've been talking about in converting that in a very high at a very high rate to cash.

Got it. Thank you. Thank you so yes.

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Thanks, Larry So thanks, everybody for joining again today, we certainly appreciate the interest in Kindred look I got to tell you I'm very proud of the progress. This team has delivered and continues to execute on the strategy that we laid out three A's plus plus.

Building this business the right way, we have the right strategy that is and can be and is being executed and we have the right culture. So we as a business kindred continues to solidify its leadership position. We continue to strengthen the relationships, we have with our customers and our partners you can see that spread throughout.

Martin J. Schroeter: Even though we're at the front end, as AI becomes more used in systems of engagement and systems of record, which is where our mission-critical work sits, I think we've got a very long tail of how our consultants and Kindle Consult help customers. So this is a long secular trend that I think is going to drive growth for quite a while for us. That's very helpful. And just to just understand, and a quick one here.

The financials and now as we and our third year third calendar year as a firm I remain as excited as ever about the opportunity as we keep serving our customers' mission critical needs and keep developing new capabilities to bring them into the future. So thanks, everybody for joining.

Martin J. Schroeter: Kyndryl is a very mission-critical infrastructure services company. Do the global macro, and we've talked about this in the past, but how exactly do the global macro conditions impact you? And to what extent could they negatively impact you, given the nature of work you do versus the application services companies that have been indicating slowdown and growth and a weak outlook for fiscal 2024, broadly speaking? Yeah, look, we are what I would say is insulated from the macro, but we are, you know, the macro is the world we live in; it's the world our customers live in as well. So as their world changes, it will put different new pressures on how they run their infrastructure, what they might experience, or the direction they may want to go.

This concludes today's conference call. Thank you for your participation you may now disconnect.

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Martin J. Schroeter: So in the short term, you know, we don't see much of an impact, as we've said in the past, we're fairly well insulated, but over the long term, as customers rethink the world, which leads maybe to industry consolidation, other things, we will experience that. So, but that's over the longer term. And again, in any macro environment, our customer base, and all customers, are going to always be thinking about how do I take advantage of the innovation I see, how do I move into the world in order to serve my customers, and we just have to be able to keep up with them with the capabilities that they're looking for at any given time. And again, that's what we've been doing, moving, helping them move to the future in whatever macro environment That's great, Martin. Thanks a lot for all the info.

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Martin J. Schroeter: Thanks, Divya. Thanks. Brad, I believe we have one more question in the queue. Our last question comes from the line of Jamie Friedman with Susquehanna. Your line is now open.

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James Eric Friedman: Hi, good morning, and let me echo the compliments on the good results here. I was wondering, David, if you could help us bridge the gap between slides 12 and slide seven. In other words, how to think about the timing related to the gross profit book to bill as it waterfalls over to the pre-tax margin. Any comment on that would be helpful.

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David Mark Togut: Absolutely. Thanks. And I think slide seven, the one that shows how our business mix is evolving, really does operate as the bridge here. And as a reminder, that's the slide that shows that this year, only about a third of our revenue and, therefore, a third of our P&L is really being driven by post-spin signings that have these attractive high single-digit margins associated with them. And we're still in a situation where two-thirds of our revenue is coming from older pre-spin signings that really aren't generating significant profit for us.

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Martin J. Schroeter: And the inflection point that's really important for us is next year moving to that mix of revenues being kind of 50-50 between post spin and pre-spin. And the fiscal year after that, our revenues and our P&L, for the first time, were really sort of dominated by the post spin signings. And what we expect that to translate into, and I feel we have good visibility around, are the bars that you see on the right side of page seven, where as the more profitable signings and the more profitable book of business becomes a predominant part of our revenue, that really creates the opportunity for the margin improvement that we're looking for. And then by the time we get to fiscal 27, where 85% or so of our revenues are coming from the business that we've signed post spin rather than what we inherited, that's how we deliver high single-digit margins.

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Martin J. Schroeter: So this really, the margins at which we're signing business just become a larger and larger part of our overall business mix. And by the time we get to fiscal 27, where it's 85% post spin, that's how we see ourselves at high single-digit pre-tax margins in aggregate. Yeah, I think that's well said. I guess when I think about it as we get into next year, I think we've got the same headwind that we had this year, which we obviously have been able to overcome, and that's the software cost increase that IBM created in the spin. So that's the headwind.

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Martin J. Schroeter: But the tailwinds we see, David said it well, we get more of our post-spin backlog that comes through. We obviously get the full year benefit of everything we were able to execute this year, and we'll continue to execute next year. So we'll get the in-period execution benefits from that, and then we also get a tailwind, I think, from lower depreciation as we get into next year. So, yes, we have headwinds as we go into it.

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James Eric Friedman: David described that chart well, I think, but we've also got some tailwinds as we get into it. And then for my follow up, maybe for Martin, in terms of the projected revenue growth beginning in calendar 2025. How do you think about the factors that will help you stick with that growth?

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Martin J. Schroeter: In other words, how much of that is... impacted? How much of that is under your own control? Is any of that at risk from discretionary or macro? How do you think about that? Do you agree? We have, as we've said a number of times, we have engineered a decline in our business, and I would say on the other side, where we focused on getting to growth, like Kyndryl Consult and their alliances activity, we're growing quite well. And as I sit here today, while we have, you know, many, many more quarters of signings to get under our belt, as I sit here today, I feel as good as ever that those two growth drivers, along with all the other things we're building our capabilities around, will get us back to growth in the timeframes that we've said previously, with, as David said, well, the margin profile, as more of that comes through our P&

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Good day, and thank you for standing by.

Welcome to the Kindred fiscal third quarter 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.

Martin J. Schroeter: So as I sit here today, I still believe that our Alliance activity, our Kyndryl consult. We've proven that we can grow where we want to grow. And we've proven that customers are willing to and want to expand their work with us and their relationship with us, even as we engineer this decline. Now, the biggest chunk of that decline is this fiscal year. As we move into the next fiscal year, the engineer decline will reduce. The OEM content becomes sort of what I'll call a neutral, right?

To ask a question. During this session you will need to press star one one of your telephone.

Inherent automated message advising your hands raised to withdraw your question. Please press star one again please.

Please be advised that today's conference is being recorded I would now.

Martin J. Schroeter: We've taken a ton of it out. It becomes a neutral party going forward. We still have some more work to do on focus accounts, which will have an impact, but the bulk of it is in this fiscal year. And as we move into next year, then we'll have a reduced impact from that engineer decline and more impact from, and more benefit from Kyndryl Consulting and the Alliances activity as it keeps going. So I feel really good about where we are in what we've described now for, you know, a bit over two years about getting back to growth and calendar year 25 and driving the profitability that we've been talking about and converting that, you know, at I got it.

I'd like to hand, the conference over to your speaker.

Lori Freedman global head of Investor Relations. Please go ahead.

Good morning, everyone and welcome to <unk> earnings call for the third fiscal quarter ended December 31 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.

James Eric Friedman: Thank you. Thank you. Yeah.

Martin J. Schroeter: Thanks, Lori. So, thanks, everybody, for joining us again today. We certainly appreciate the interest in Kyndryl. Look, I got to tell you, I'm very proud of the progress this team has delivered and continues to execute on the strategy that we laid out, three A's, plus plus. We're building this business the right way. We have the right strategy that is, and can be, and is being executed, and we have the right culture. So, you know, as a business, Kyndryl continues to solidify its leadership position. We continue to strengthen the relationships we have with our customers and our partners. You can see that spread throughout the financials.

These forward looking statements speak only to our expectations as of today and we are under no.

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Operator: And now as we, you know, in our third year, third calendar year as a firm, I remain as excited as ever about the opportunity as we keep serving our customers' mission-critical needs and keep developing new capabilities to bring them into the future. So thanks, everybody, for joining. This concludes today's conference call. Thank you for your participation. You may now disconnect. ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? Good day, and thank you for standing by.

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Operator: Welcome to the Kyndryl Fiscal Third Quarter 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. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised.

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Lori C. Chaitman: To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Lori Chaitman, Global Head of Investor Relations. Please go ahead.

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Lori C. Chaitman: Good morning, everyone, and welcome to Kyndryl's earnings call for the third fiscal quarter ended December 31st, 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. These forward-looking statements speak only to our expectations as of, And we are under no ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ??

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