Kyndryl Holdings Q3 2026 Kyndryl Holdings Inc Earnings Call | AllMind AI Earnings | AllMind AI
Q3 2026 Kyndryl Holdings Inc Earnings Call
Speaker #1: Good day, and thank you for standing by. Welcome to the Kyndryl Fiscal Third Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode.
Operator: Good day, and thank you for standing by. Welcome to the Kyndryl Fiscal Q3 2026 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, please press star 11 on your telephone. You will then hear an automated message advising that your hand is raised. 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 first speaker today, Lori Chaitman, Global Head of Investor Relations. Please go ahead.
Operator: Good day, and thank you for standing by. Welcome to the Kyndryl Fiscal Q3 2026 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, please press star 11 on your telephone. You will then hear an automated message advising that your hand is raised. 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 first speaker today, Lori Chaitman, Global Head of Investor Relations. Please go ahead.
Speaker #1: After the speaker's presentation, there will be a question-and-answer session. To ask a question, please press star 11 on your telephone. You will question, please press star 11 hand is raised.
Speaker #1: again, please be advised that today's conference is being recorded. I would now then hear an automated message advising that your like to hand the conference over to your first To withdraw your First speaker today .
Speaker #1: Lori Chaitman, Global Head of Investor Relations. Please go ahead.
Speaker #2: Good morning welcome to , everyone , Earnings and Call for the third fiscal quarter
Lori Chaitman: Good morning, everyone, and welcome to Kyndryl's Q3 2025 Earnings Call. Before we begin, I'd like to remind you that our remarks today include forward-looking statements. These statements do not guarantee future performance and speak only as of today, and the company assumes no obligation to update its forward-looking statements except as required by law. Actual outcomes or results may differ materially from those suggested by forward-looking statements as a result of risks and uncertainties. For more information on some of these risks and uncertainties, please see the risk factors section of our annual report on Form 10-K for the year ended March 31, 2025, as such factors may be updated from time to time in the company's subsequent filings with the SEC. Also, in today's remarks, we refer to certain non-GAAP financial metrics.
Lori Chaitman: Good morning, everyone, and welcome to Kyndryl's Q3 2025 Earnings Call. Before we begin, I'd like to remind you that our remarks today include forward-looking statements. These statements do not guarantee future performance and speak only as of today, and the company assumes no obligation to update its forward-looking statements except as required by law. Actual outcomes or results may differ materially from those suggested by forward-looking statements as a result of risks and uncertainties. For more information on some of these risks and uncertainties, please see the risk factors section of our annual report on Form 10-K for the year ended March 31, 2025, as such factors may be updated from time to time in the company's subsequent filings with the SEC. Also, in today's remarks, we refer to certain non-GAAP financial metrics.
Speaker #2: December 30th . Good morning , everyone , and welcome to Earnings call for the third fiscal quarter 2025 . we Before begin , I'd like to remind you that our ended remarks today forward looking . statements .
Speaker #2: December 30th . Good morning , everyone , and welcome to Earnings call for the third fiscal quarter 2025 . we Before begin , I'd like to remind you that our ended remarks today forward looking .
Speaker #2: These statements do not guarantee future performance and speak only as of today. The company assumes no obligation to update its forward-looking statements, except as required by law.
Speaker #2: outcomes or results may differ by from law December 31st , those suggested forward looking statements . by As a result of risks and uncertainties .
Speaker #2: For more information on some of these risks and uncertainties, please see the Risk Factors of our annual report on Form 10-K for the year ended March 31, 2025.
Speaker #2: Updated in the form may, time to be factors subsequent, include company's with the filings time. SEC company. Also refer remarks, non-GAAP metrics, financial. We certain today's.
Lori Chaitman: Definitions and additional information about our calculation of non-GAAP financial metrics, as well as a reconciliation of non-GAAP metrics to GAAP metrics for historical periods, are provided in the presentation materials for today's event, which are available on our website at investors.kyndryl.com. Following our prepared remarks, we will hold a Q&A session. I'd now like to turn the call over to Kyndryl's chairman and chief executive officer, Martin Schroeter. Martin?
Lori Chaitman: Definitions and additional information about our calculation of non-GAAP financial metrics, as well as a reconciliation of non-GAAP metrics to GAAP metrics for historical periods, are provided in the presentation materials for today's event, which are available on our website at investors.kyndryl.com. Following our prepared remarks, we will hold a Q&A session. I'd now like to turn the call over to Kyndryl's chairman and chief executive officer, Martin Schroeter. Martin?
Speaker #2: in additional Definitions information our calculation of non-GAAP about financial metrics , as well as a reconciliation of non-GAAP metrics to GAAP metrics . For periods historical are provided in the presentation materials which today's are event , available materially website at on our investors .
Speaker #2: and our Following prepared remarks , hold Q&A session . I'd to turn the call over to a Chairman and Chief now like Executive Officer Martin Schroeter Martin .
Martin Schroeter: Thank you, Lori. Thanks to each of you for joining us. Today, we announced a few leadership changes, and important for this call, Harsh Chugh has been appointed Interim Chief Financial Officer. He's joining us on today's call, and we'll walk through the quarter in more detail. Harsh is a seasoned leader with extensive experience in our business, finance, and the technology industry. We are fortunate to have his leadership to guide our finance organization as we continue to execute our priorities. With that, let's turn to Q3. We delivered margin expansion, higher earnings, and positive Free Cash Flow. Our 3% top-line growth was unchanged in constant currency. We've been investing to support future growth opportunities, and the base we're building is strengthening our profitability as our mix of post-spin signings convert over time.
Martin Schroeter: Thank you, Lori. Thanks to each of you for joining us. Today, we announced a few leadership changes, and important for this call, Harsh Chugh has been appointed Interim Chief Financial Officer. He's joining us on today's call, and we'll walk through the quarter in more detail. Harsh is a seasoned leader with extensive experience in our business, finance, and the technology industry. We are fortunate to have his leadership to guide our finance organization as we continue to execute our priorities.
Speaker #3: Thank you . Lori , and thanks to each of you for
Speaker #3: joining us . Today we leadership announced a new and important for this call has been chug appointed Interim Financial we will officer . , harsh us on He's joining today's call and will walk through the quarter in more detail .
Speaker #3: joining us . Today we leadership announced a new and important for this call has been chug appointed Interim Financial we will officer . , harsh us on He's joining today's call and will walk through the quarter in more
Speaker #3: Extensive experience in our business, finance, and the technology industry. To have his fortunate leadership to guide our organization as we continue to execute our priorities.
Martin Schroeter: With that, let's turn to Q3. We delivered margin expansion, higher earnings, and positive Free Cash Flow. Our 3% top-line growth was unchanged in constant currency. We've been investing to support future growth opportunities, and the base we're building is strengthening our profitability as our mix of post-spin signings convert over time. With $3.9 billion of signings in the quarter, including 11 signed contracts exceeding $50 million each and $15.4 billion over the last year, our trailing 12-month revenue Book-to-Bill Ratio remains above 1.0, and we're pleased that disciplined execution has ensured that signed contracts come with solid projected margins.
Speaker #3: With that , let's the third quarter . finance delivered margin expansion , higher for
Speaker #3: Our earnings and cash have been positive. We've been investing to strengthen our profitability. Free cash flow was unchanged in constant currency. The mix of post-spin signings will convert over time.
Martin Schroeter: With $3.9 billion of signings in the quarter, including 11 signed contracts exceeding $50 million each and $15.4 billion over the last year, our trailing 12-month revenue Book-to-Bill Ratio remains above 1.0, and we're pleased that disciplined execution has ensured that signed contracts come with solid projected margins. While we made progress in Q3, I want to share some thoughts on what is different from the start of our fiscal year that drove our second-half outlook to be below what we were targeting. For some context, we're in a services business operating mission-critical systems that require multi-year customer commitments. With the accelerating pace of new AI capabilities being introduced and regulatory uncertainty specifically on Data Sovereignty, long-term agreements have become more complex and, therefore, sales cycles are taking longer.
Speaker #3: With $3.9 billion of signings, including 11 signed section contracts exceeding $50 million each, we are at $15.4 billion over the last.
Speaker #3: year trailing and 12 month revenue book to bill pleased above 1.0 , and we're that execution has signed come with contracts disciplined solid projected I want to quarter , made margins progress in the third share some thoughts on what is different from the start of our year that fiscal drove our second half outlook below what we were targeting for some context , we're in a services business operating mission critical systems that require multiyear customer commitments with the accelerating pace of new AI capabilities being introduced and regulatory uncertainty specifically on data sovereignty , long term agreements have become more complex and therefore sale cycles are taking longer .
Martin Schroeter: While we made progress in Q3, I want to share some thoughts on what is different from the start of our fiscal year that drove our second-half outlook to be below what we were targeting. For some context, we're in a services business operating mission-critical systems that require multi-year customer commitments. With the accelerating pace of new AI capabilities being introduced and regulatory uncertainty specifically on Data Sovereignty, long-term agreements have become more complex and, therefore, sales cycles are taking longer.
Speaker #3: ensured that shows our an impact revenue constant currency . clearly see the revenue limited declines through chart our focus Accounts . these And the evolving content IBM had a three and a half point in adverse effect on revenue receive over growth .
Martin Schroeter: Additionally, the timelines for large enterprise ERP transitions to cloud solutions have extended, which has also contributed to longer sales cycles. These dynamics were particularly noticeable in Kyndryl Consult's Q3 performance, which remained strong and delivered double-digit revenue growth but came in below our expectations. Second, the way we collaborate with IBM, one of our key alliance partners, is continuing to evolve. I'll speak more about that in a minute. Before I do, I want to discuss our earnings variance in the quarter. We've made investments to support our growth in Consult. These investments have taken longer than expected to contribute to the top line due to the lengthening of the sales cycles that I just described.
Martin Schroeter: Additionally, the timelines for large enterprise ERP transitions to cloud solutions have extended, which has also contributed to longer sales cycles. These dynamics were particularly noticeable in Kyndryl Consult's Q3 performance, which remained strong and delivered double-digit revenue growth but came in below our expectations. Second, the way we collaborate with IBM, one of our key alliance partners, is continuing to evolve. I'll speak more about that in a minute. Before I do, I want to discuss our earnings variance in the quarter. We've made investments to support our growth in Consult. These investments have taken longer than expected to contribute to the top line due to the lengthening of the sales cycles that I just described.
Speaker #3: Additionally , the timelines for . large While we enterprise ERP transitions to cloud solutions have extended , which is also contributed to longer sales cycles .
Speaker #3: These dynamics were particularly noticeable in Kyndryl Consults. Third quarter performance, which remained delivered double-digit revenue growth, but came in below our expectations.
Speaker #3: Second, the way we collaborate with IBM, expectations for alliance partners, is continuing to evolve. I'll speak more about that in a minute.
Speaker #3: Before I do, I want to discuss our earnings variance in the quarter. We've made investments to support our growth in Chief Consult. Investments have these longer than expected to contribute to the top line due to the sales, coupled with ...
Martin Schroeter: Coupled with an unanticipated decline in overall employee attrition, our labor costs are higher in the near term given the levels of turnover we've assumed, as we've demonstrated over the last four years, and we'll address our labor efficiencies. Importantly, we've had positive momentum in key aspects of our business, including consult and alliances, and we have a strong foothold in the areas where market disruption is occurring, which gives us a running start as more customers are ready to scale AI and implement sovereign solutions. Therefore, we're driving towards our key fiscal '28 targets, and we remain confident in our growth strategy. As I mentioned a moment ago, it's important to put a bit more context to the evolution of our partnership with IBM.
Martin Schroeter: Coupled with an unanticipated decline in overall employee attrition, our labor costs are higher in the near term given the levels of turnover we've assumed, as we've demonstrated over the last four years, and we'll address our labor efficiencies. Importantly, we've had positive momentum in key aspects of our business, including consult and alliances, and we have a strong foothold in the areas where market disruption is occurring, which gives us a running start as more customers are ready to scale AI and implement sovereign solutions. Therefore, we're driving towards our key fiscal '28 targets, and we remain confident in our growth strategy. As I mentioned a moment ago, it's important to put a bit more context to the evolution of our partnership with IBM.
Speaker #3: an lengthening of decline described overall employee attrition , strong and our labor costs are higher in the near term levels of turnover support we've assumed , as we've demonstrated over the last four years , and we'll address our labor efficiencies .
Speaker #3: Importantly , we've had positive momentum in key aspects of our including business , consult and alliances , and we have a strong one of our key foothold in the areas where market disruption is occurring , which gives us a running start as more customers are ready to scale , AI and implement sovereign solutions .
Speaker #3: Therefore, we're driving towards our key fiscal '28 targets, and we remain confident in our growth strategy. As I mentioned a moment ago, to put a bit more context on the evolution of our partnership with IBM, it's important to...
Martin Schroeter: At the time of the spinoff, as we've covered many times, the commercial agreement that we inherited essentially put 40% of our revenue in a low-to-no-margin position. We called this our Focus Accounts initiative. Over the last four years, we've addressed most of these Focus Accounts, and you can see that reflected in our revenue performance and our significant profitability improvements. As we entered this fiscal year, we believe that, by and large, our customers who consumed IBM's innovation through our services contracts would continue to do so in a similar manner. What we are seeing is that our customers' consumption models for IBM's innovation are changing. While it doesn't change the scope of our services or our ability to grow our services content, it does have an impact on the size of our signings and, therefore, the revenue we receive over time.
Martin Schroeter: At the time of the spinoff, as we've covered many times, the commercial agreement that we inherited essentially put 40% of our revenue in a low-to-no-margin position. We called this our Focus Accounts initiative. Over the last four years, we've addressed most of these Focus Accounts, and you can see that reflected in our revenue performance and our significant profitability improvements. As we entered this fiscal year, we believe that, by and large, our customers who consumed IBM's innovation through our services contracts would continue to do so in a similar manner. What we are seeing is that our customers' consumption models for IBM's innovation are changing. While it doesn't change the scope of our services or our ability to grow our services content, it does have an impact on the size of our signings and, therefore, the revenue we receive over time.
Speaker #3: At the time of the spin, as we've covered many times, the commercial inherited essentially agreement that we 40% of our revenue in a low margin to no position.
Speaker #3: We called this focus initiative Accounts Years. Over the last four years, we've addressed these focus accounts, and that is reflected in our revenue performance and our significant profitability improvements as we entered this fiscal year.
Speaker #3: believe We that , . by and large , our As who consumed IBM's innovation through our services quarter , would contracts continue continue to do so to in a customers manner .
Speaker #3: What we are seeing similar is that our customers' consumption models for IBM's innovation are changing. While it doesn't change our services or our ability to grow our—
Martin Schroeter: And as we said, this has a limited impact on our earnings. So this chart shows our revenue performance in constant currency, and you can clearly see the revenue declines through our Focus Accounts initiative. And these declines have continued as the evolving IBM content had a 3.5-point adverse effect on revenue growth. To give you a sense of the magnitude of this, when we were spun off, the annualized run rate of our spend with IBM was nearly $4 billion, and now it is approximately $2 billion, so it's essentially cut in half. This matters because our customers will decide how to best consume our high-value services and IBM's own innovation. We continue to evolve the joint Kyndryl and IBM value proposition as the pace of modernization in mission-critical environments accelerates.
Martin Schroeter: And as we said, this has a limited impact on our earnings. So this chart shows our revenue performance in constant currency, and you can clearly see the revenue declines through our Focus Accounts initiative. And these declines have continued as the evolving IBM content had a 3.5-point adverse effect on revenue growth. To give you a sense of the magnitude of this, when we were spun off, the annualized run rate of our spend with IBM was nearly $4 billion, and now it is approximately $2 billion, so it's essentially cut in half. This matters because our customers will decide how to best consume our high-value services and IBM's own innovation.
Speaker #3: content , it does have size of signings and therefore the revenue we time . And as we said , this has a impact on scope of earnings on the our .
Speaker #3: declines have To give you a sense of the magnitude of this , when we off were spun given the initiative the continued as run rate of our spend IBM was with nearly $4 billion , and now it is So this approximately $2 billion .
Speaker #3: So annualized, it's—and you can essentially cut in half. This matters because our customers decide how to best consume our high-value services.
Martin Schroeter: We continue to evolve the joint Kyndryl and IBM value proposition as the pace of modernization in mission-critical environments accelerates. The goal of the work we do together is to create greater value for our customers, and we believe it is important to understand both views of revenue growth. Now let's shift to our primary growth factors and the actions underway to execute against a clear set of priorities. Let me start with our hyperscaler alliances. At the start of the fiscal year, we expected we would deliver $1.8 billion in hyperscaler-related revenue, and after strong execution in the first half, we expected to exceed our initial target, and we are now on track to realize nearly $2 billion in revenue by the end of fiscal 2026.
Speaker #3: And will IBM's own . evolve the joint and IBM Value We proposition as the pace of modernization and mission innovation environments accelerates . The IBM .
Martin Schroeter: The goal of the work we do together is to create greater value for our customers, and we believe it is important to understand both views of revenue growth. Now let's shift to our primary growth factors and the actions underway to execute against a clear set of priorities. Let me start with our hyperscaler alliances. At the start of the fiscal year, we expected we would deliver $1.8 billion in hyperscaler-related revenue, and after strong execution in the first half, we expected to exceed our initial target, and we are now on track to realize nearly $2 billion in revenue by the end of fiscal 2026.
Speaker #3: The goal of the work we do together is to create greater value for critical customers, and we continue to believe it is important to understand both views of revenue growth.
Speaker #3: shift to our performance Kyndryl primary factors and the actions underway to execute against a clear priorities . Let me start with set of hyperscaler alliances .
Speaker #3: At the start of the fiscal year, we were expected to deliver $1.8 billion in hyperscaler-related revenue, and after strong execution in the first half, we expected to exceed our initial target.
Martin Schroeter: To step back for a second, the transformation that this business has undergone, starting with nearly $4 billion in IBM spend, which is now approximately $2 billion, while at the same time going from essentially 0 in hyperscaler-related revenue to nearly $2 billion and growing, is profound, and it demonstrates how we've transformed Kyndryl's underlying capabilities and positioned us to grow profitably and be part of our customers' future with all of our partners. We've also invested heavily in Kyndryl Consult and will continue to do so as it is a key growth driver for us. As I've said before, while consult has performed extremely well, consult's performance in Q3 was below our expectations.
Martin Schroeter: To step back for a second, the transformation that this business has undergone, starting with nearly $4 billion in IBM spend, which is now approximately $2 billion, while at the same time going from essentially 0 in hyperscaler-related revenue to nearly $2 billion and growing, is profound, and it demonstrates how we've transformed Kyndryl's underlying capabilities and positioned us to grow profitably and be part of our customers' future with all of our partners. We've also invested heavily in Kyndryl Consult and will continue to do so as it is a key growth driver for us. As I've said before, while consult has performed extremely well, consult's performance in Q3 was below our expectations.
Speaker #3: And we on Now let's track to realize growth nearly 2 billion in end of fiscal 26 . back for a second , our are now would the starting this undergone , transformation that business has with revenue by the $4 billion in IBM spend , now approximately 2 billion , while which is To step at the same time going from essentially Hyperscaler related revenue to nearly 2 billion in growing , is , and it demonstrates how we've transformed Kindred's underlying capabilities and positioned grow and be part of our customers future .
Speaker #3: With all of our... We've also invested heavily in Kyndryl Consult and will continue to do so, as it is a key growth driver for us.
Martin Schroeter: Additionally, to address the factors that have impacted our revenue and our earnings, we're leveraging our Kyndryl Bridge operating platform and building even more Agentic AI into how we deliver services to our customers to drive quality enhancements and enterprise efficiency. We're consistently expanding our capabilities with a focus on AI, and our Agentic AI framework is resonating powerfully with our customers. We'll continue investing in AI innovation labs and in related capabilities and skills to deliver emerging technologies to customers at increasing scale. We're further expanding our presence in Private Cloud, where we're seeing renewed demand driven by AI, data sovereignty, and security requirements, and we'll work with our alliance partners to align with those opportunities. And at the same time, we will get our cost base back in line.
Martin Schroeter: Additionally, to address the factors that have impacted our revenue and our earnings, we're leveraging our Kyndryl Bridge operating platform and building even more Agentic AI into how we deliver services to our customers to drive quality enhancements and enterprise efficiency. We're consistently expanding our capabilities with a focus on AI, and our Agentic AI framework is resonating powerfully with our customers. We'll continue investing in AI innovation labs and in related capabilities and skills to deliver emerging technologies to customers at increasing scale. We're further expanding our presence in Private Cloud, where we're seeing renewed demand driven by AI, data sovereignty, and security requirements, and we'll work with our alliance partners to align with those opportunities. And at the same time, we will get our cost base back in line.
Speaker #3: As I've said while consults is before , performed extremely well , consult performance in the third quarter was below our expectations . Additionally , to the have impacted our revenue and earnings , we're our bridge operating leveraging our address platform and even more agentic factors that building how we deliver services to our customers to drive quality enterprise enhancements and efficiency .
Speaker #3: We're consistently expanding our capabilities with a focus on AI and our Agentic framework is AI resonating customers . We'll continue investing in labs and in related powerfully AI with our capabilities , and skills to deliver partners customers at increasing technologies to We're emerging expanding our innovation presence in scale we're seeing renewed cloud , where by driven AI , data private sovereignty and security requirements , and will work with our alliance partners to those further opportunities the same time , our cost base demand back in line clear strategic align with .
Martin Schroeter: We're operating with a clear strategic mindset, providing innovative and world-class services that are fully aligned with our longer-term goals. We are confident in our strategic direction. We're in a business with trusted customer relationships and long-term contracts that evolve all the time to meet changing market dynamics. The operational adjustments we're making position as well as we move ahead. As we head into a new fiscal year and drive our business toward our multi-year objectives with the strategy and actions we've just outlined, it's important to recognize the progress we're aiming to deliver and focus on delivering our fiscal 2028 targets. In fiscal 2025 and with our outlook for fiscal 2026 over this two-year period, we estimate that we will deliver approximately $1.1 billion in adjusted PTI.
Martin Schroeter: We're operating with a clear strategic mindset, providing innovative and world-class services that are fully aligned with our longer-term goals. We are confident in our strategic direction. We're in a business with trusted customer relationships and long-term contracts that evolve all the time to meet changing market dynamics. The operational adjustments we're making position as well as we move ahead. As we head into a new fiscal year and drive our business toward our multi-year objectives with the strategy and actions we've just outlined, it's important to recognize the progress we're aiming to deliver and focus on delivering our fiscal 2028 targets. In fiscal 2025 and with our outlook for fiscal 2026 over this two-year period, we estimate that we will deliver approximately $1.1 billion in adjusted PTI.
Speaker #3: innovative and world class services that are fully our longer term goals . We are confident in our . We're direction . We're in a strategic trusted we will get customer with a business with and long contracts that relationships all the time to meet changing dynamics market .
Speaker #3: operational adjustments we're making , . position us The well as we move ahead and as we head into a And at new fiscal year our business toward our multi-year and drive objectives with the strategy actions we've just term outlined , it's important to progress recognize the we're aiming to deliver and focus on delivering our 2028 targets in fiscal 2025 .
Speaker #3: With our operating outlook for fiscal 2026 over the period, this two-year period, we will deliver approximately $1.1 billion in adjusted PTI and less expected cash taxes of $300 million over the same period.
Martin Schroeter: And less expected cash taxes of $300 million over the same period, our target is to generate $800 million in fiscal 2025 and 2026 combined free cash flow. So today, we have a strong conversion of earnings to free cash flow at the rate we've been targeting. As we continue to recognize more and more revenue from our higher-margin post-spin signings, we're confident in our ability to drive toward more than $1.2 billion in adjusted pre-tax income in fiscal 2028. And we believe we're well-positioned to convert that level of earnings into more than $1 billion in adjusted free cash flow, and we still see mid-single-digit growth as we exit fiscal 2028. With that, I'd like to pass the call over to Harsh. Harsh?
Martin Schroeter: And less expected cash taxes of $300 million over the same period, our target is to generate $800 million in fiscal 2025 and 2026 combined free cash flow. So today, we have a strong conversion of earnings to free cash flow at the rate we've been targeting. As we continue to recognize more and more revenue from our higher-margin post-spin signings, we're confident in our ability to drive toward more than $1.2 billion in adjusted pre-tax income in fiscal 2028. And we believe we're well-positioned to convert that level of earnings into more than $1 billion in adjusted free cash flow, and we still see mid-single-digit growth as we exit fiscal 2028. With that, I'd like to pass the call over to Harsh. Harsh?
Speaker #3: Our target is to and generate 800 million in fiscal 2025 and 2026 . Combined free cash flow today we have a strong earnings to free cash fiscal flow at the rate we've been as we continue to recognize more and more revenue from our higher post spin signings , we're confident in our ability to , so drive toward more than 1.2 billion in adjusted pre-tax income in conversion of fiscal 2028 , believe we're well positioned to level of earnings into more than free flow cash .
Speaker #3: margin And
Speaker #3: we still see targeting And mid-single digit as we exit fiscal 2028 . With that , growth convert that I'd like to call over a billion in adjusted harsh harsh , .
Harsh Chugh: Thanks, Martin, and hello, everyone. Today, I would like to discuss our Q3 results and our outlook for fiscal 2026. In the quarter, revenue totaled $3.9 billion, up 3% from the prior-year quarter on a reported basis and unchanged in constant currency. This represented three points of revenue growth sequentially but behind what we were expecting. The variances versus our expectations were concentrated in our strategic markets and UK operations, which we are taking actions to address. Despite our efforts to get deals over the finish line, we have continued to experience longer sales cycles. With that said, we continue to deliver strong growth in Kyndryl Consult, which grew 20% year-over-year in constant currency. Kyndryl Consult now represents 25% of our total revenue in the quarter. This underscores how we are expanding our role with higher-value services.
Harsh Chugh: Thanks, Martin, and hello, everyone. Today, I would like to discuss our Q3 results and our outlook for fiscal 2026. In the quarter, revenue totaled $3.9 billion, up 3% from the prior-year quarter on a reported basis and unchanged in constant currency. This represented three points of revenue growth sequentially but behind what we were expecting. The variances versus our expectations were concentrated in our strategic markets and UK operations, which we are taking actions to address. Despite our efforts to get deals over the finish line, we have continued to experience longer sales cycles. With that said, we continue to deliver strong growth in Kyndryl Consult, which grew 20% year-over-year in constant currency.
Speaker #3: Thanks , Martin .
Speaker #4: hello , everyone . Today I would like to discuss our third quarter results and outlook for fiscal 2026 . In the quarter , revenue
Speaker #4: totaled 3.9 billion , up
Speaker #4: 3% from the prior year quarter . On a reported pass the basis . to And in constant currency . This represented three points of revenue growth sequentially , but behind what we were expecting .
Speaker #4: The variances versus our expectations were concentrated in our strategic markets and UK operations, which we are taking actions to address. And despite our efforts to get deals over the line, we have continued to experience a longer sales cycle.
Speaker #4: With that said , we continue to strong deliver Kindle Consult , grew over year in constant . Consult now 20% year represents 25% of our total revenue in This underscores the are expanding quarter .
Harsh Chugh: Kyndryl Consult now represents 25% of our total revenue in the quarter. This underscores how we are expanding our role with higher-value services. While our Q3 signings decreased 3% year-over-year, our last 12 months signing totaled $15.4 billion. As a result, our book-to-bill ratio was above 1 over the last 12 months. We continue to see strong demand for our modernization services. In fact, we recently announced a five-year contract extension with Hertz to modernize its IT infrastructure.
Harsh Chugh: While our Q3 signings decreased 3% year-over-year, our last 12 months signing totaled $15.4 billion. As a result, our book-to-bill ratio was above 1 over the last 12 months. We continue to see strong demand for our modernization services. In fact, we recently announced a five-year contract extension with Hertz to modernize its IT infrastructure. Our adjusted EBITDA decreased 1% year-over-year to $696 million, as depreciation and amortization were a larger percent of our cost in last year's third quarter. Adjusted pre-tax income grew 5% year-over-year to $168 million, which reflects incremental benefits from our 3As initiative, partially offset by the incremental investments we are making, primarily in Kyndryl Consult, to drive further growth. Our 3As initiatives continue to be an important source of margin expansion and value creation for us.
Speaker #4: role how we with higher value services efforts to . While our Q3 signings decreased 3% year over year . Our last signing As a 12 months result , book to bill ratio above one was over the currency 12 months .
Speaker #4: We continue to see our demand for our strong modernization services . In we recently announced a five year contract extension with Hertz to modernize last its IT infrastructure 15.4 billion .
Harsh Chugh: Our adjusted EBITDA decreased 1% year-over-year to $696 million, as depreciation and amortization were a larger percent of our cost in last year's third quarter. Adjusted pre-tax income grew 5% year-over-year to $168 million, which reflects incremental benefits from our 3As initiative, partially offset by the incremental investments we are making, primarily in Kyndryl Consult, to drive further growth. Our 3As initiatives continue to be an important source of margin expansion and value creation for us.
Speaker #4: Our adjusted EBITDA totaled decreased 1% year over year to fact, depreciation and amortization year were a larger percent of our cost in last year's third quarter.
Speaker #4: pre-tax income 5% year over to year 168 million , which reflects incremental benefits from three initiatives , partially incremental offset investments we are making by the primarily in Kyndryl consult to drive further growth .
Speaker #4: Our three EHS continue to be an important source of initiatives expansion and for creation. Through our alliances, we generated $500 million in Hyperscaler-related revenue in the third quarter.
Harsh Chugh: Through our alliances, we generated $500 million in hyperscaler-related revenue in Q3, a 58% increase year-over-year. This puts us on track to exceed the 50% growth in hyperscaler-related revenue that we were expecting at the beginning of the year. Through advanced delivery powered by Kyndryl Bridge, we continue to drive automation throughout our delivery operations. Kyndryl Bridge incorporates more technology into our offerings, reducing our costs and increasing our already strong service levels. This is worth roughly a cumulative $950 million of savings a year to us. Our accounts initiative continues to remediate elements of contracts we inherited with substandard margins. In Q3, the cumulative annualized profit savings from our focus accounts was $975 million. A key takeaway point from this update on the 3As is that we have successfully implemented these initiatives, and they have become a core part of our operational discipline.
Harsh Chugh: Through our alliances, we generated $500 million in hyperscaler-related revenue in Q3, a 58% increase year-over-year. This puts us on track to exceed the 50% growth in hyperscaler-related revenue that we were expecting at the beginning of the year. Through advanced delivery powered by Kyndryl Bridge, we continue to drive automation throughout our delivery operations. Kyndryl Bridge incorporates more technology into our offerings, reducing our costs and increasing our already strong service levels. This is worth roughly a cumulative $950 million of savings a year to us. Our accounts initiative continues to remediate elements of contracts we inherited with substandard margins.
Speaker #4: A 58% increase over year. This year puts us on track to exceed the 50% growth in Hyperscaler-related revenue that we were expecting at the beginning of the year, driven through delivery advances powered by Kyndryl Bridge.
Speaker #4: We continue to margin drive automation throughout delivery, our operations value. Kyndryl incorporates more technology into our offerings, reducing our increasing already strong service levels.
Speaker #4: This is worth roughly a cumulative savings a year to us . Our accounts initiative continues to remediate contracts elements of inherited with substandard 950 million of in the third quarter , cumulative annualized profit savings from focus accounts our was 975 million , a key takeaway point from this on the three A's is that we have successfully implemented these initiatives , and they become a core part update of our operational discipline Turning to cash .
Harsh Chugh: In Q3, the cumulative annualized profit savings from our focus accounts was $975 million. A key takeaway point from this update on the 3As is that we have successfully implemented these initiatives, and they have become a core part of our operational discipline. Turning to our cash flow, balance sheet, and share repurchases, we generated Free Cash Flow of $217 million in Q3. Our net CapEx was $210 million, which is above our typical quarterly run rate but is consistent with our expectation for the quarter. Working capital was a source of cash in the quarter. We have provided a bridge from our Adjusted Pre-Tax Incomes to our Free Cash Flow.
Harsh Chugh: Turning to our cash flow, balance sheet, and share repurchases, we generated Free Cash Flow of $217 million in Q3. Our net CapEx was $210 million, which is above our typical quarterly run rate but is consistent with our expectation for the quarter. Working capital was a source of cash in the quarter. We have provided a bridge from our Adjusted Pre-Tax Incomes to our Free Cash Flow. In the appendix, we include a bridge from our Adjusted EBITDA to our Free Cash Flow and more information on the Free Cash Flow metric calculation. Under the share repurchase authorization we announced in late 2024, we bought back 3.7 million shares of our common stock in the quarter, which represents 1.6% of our outstanding shares at a cost of $100 million. Since the inception of the program, we have repurchased 5% of our outstanding shares.
Speaker #4: sheet balance repurchases , we generated free cash flow of the third quarter . A net and share CapEx was 210 million , which is above our typical quarterly run rate , but is consistent with our expectation for the .
Speaker #4: Working capital quarter a source was of in the cash quarter . We have we a bridge from our adjusted pre-tax income to our free cash flow in the provided appendix .
Harsh Chugh: In the appendix, we include a bridge from our Adjusted EBITDA to our Free Cash Flow and more information on the Free Cash Flow metric calculation. Under the share repurchase authorization we announced in late 2024, we bought back 3.7 million shares of our common stock in the quarter, which represents 1.6% of our outstanding shares at a cost of $100 million. Since the inception of the program, we have repurchased 5% of our outstanding shares. We have approximately $350 million capacity available under our authorized program. Our financial position remains strong. Our cash balance at 31 December was $1.35 billion, and we are rated investment grade by Moody's, Fitch, and S&P. Our debt maturities are well laddered from late 2026 to 2041. We plan to refinance or use cash on hand to fund a near-term debt maturity of $700 million later this calendar year.
Speaker #4: We bridge our adjusted to our free margins EBITDA from flow more 217 million in information on the free and cash cash flow metric calculation the under the include a share repurchase authorization , we announced in late 2024 , we bought back 3.7 million shares of common stock in the quarter , which represents 1.6% of our outstanding shares at a cost of 100 million .
Harsh Chugh: We have approximately $350 million capacity available under our authorized program. Our financial position remains strong. Our cash balance at 31 December was $1.35 billion, and we are rated investment grade by Moody's, Fitch, and S&P. Our debt maturities are well laddered from late 2026 to 2041. We plan to refinance or use cash on hand to fund a near-term debt maturity of $700 million later this calendar year. We recently drew $1 billion under a revolving credit facility. We have increased flexibility ahead of our seasonally higher cash outflow in our fiscal Q1 as well as for other general corporate purposes, including tuck-in acquisitions. Our target has been to keep net leverage below 1x Adjusted EBITDA, and we ended the quarter well within our target range at 0.7x.
Speaker #4: Since inception of the program, we have repurchased 5% of our outstanding shares. We have approximately $350 million of capacity available under our authorized program.
Speaker #4: Our financial position remains strong. Cash at December 31st was $1.35 billion, and we are rated investment grade by Moody's, Fitch, and S&P.
Speaker #4: Our debt balance is strong. Our maturities are well laddered from late 2026 to 2041. We plan to refinance or use cash on hand to fund a near-term debt maturity of $700 million.
Harsh Chugh: We recently drew $1 billion under a revolving credit facility. We have increased flexibility ahead of our seasonally higher cash outflow in our fiscal Q1 as well as for other general corporate purposes, including tuck-in acquisitions. Our target has been to keep net leverage below 1x Adjusted EBITDA, and we ended the quarter well within our target range at 0.7x. On capital allocation, our top priorities to maintain strong liquidity, remain investment grade, and reinvest in our business, including tuck-in acquisitions and share buybacks. We have remained focused on winning business with healthy margins, and the December quarter was a continuation of this trend. Throughout fiscal 2023, 2024, and 2025, and now into the first nine months of fiscal 2026, we have signed contracts with projected gross margins in the mid-20s and projected pre-tax margins in the high single digits.
Speaker #4: Later this year, calendar. And we recently drew $1 billion under a credit revolving facility ahead of our seasonally higher cash outflow in Q4.
Speaker #4: We have flexibility fiscally, as in the first quarter, for general purposes, including tuck-in acquisitions. Our leverage has been well kept to other one times adjusted, and we were within our net target range at 0.7 times this quarter on capital allocation.
Harsh Chugh: On capital allocation, our top priorities to maintain strong liquidity, remain investment grade, and reinvest in our business, including tuck-in acquisitions and share buybacks. We have remained focused on winning business with healthy margins, and the December quarter was a continuation of this trend. Throughout fiscal 2023, 2024, and 2025, and now into the first nine months of fiscal 2026, we have signed contracts with projected gross margins in the mid-20s and projected pre-tax margins in the high single digits. As our business mix increasingly shifts towards more post-spin contracts, you'll continue to see significant margin expansion in our reported results. We have again included a gross profit book-to-bill chart that illustrates how we have been creating and capturing value in our business.
Speaker #4: Our top below EBITDA priorities: we'll maintain liquidity to remain investment grade and reinvest in our acquisitions and share for corporate, including.
Speaker #4: We have remained strong, focused on winning margins and the December quarter as a continuation. Throughout was fiscal 2023, and '24, '25.
Speaker #4: And now, into the first buyback months of trend fiscal 2026, we have signed business with contracts with margins in the mid-20s and projected margins in the single gross digits.
Harsh Chugh: As our business mix increasingly shifts towards more post-spin contracts, you'll continue to see significant margin expansion in our reported results. We have again included a gross profit book-to-bill chart that illustrates how we have been creating and capturing value in our business. With an average projected gross margin of 26% on our $15.4 billion of signings over the last 12 months, we have added nearly $4 billion of projected gross profit to our backlog. Over the same period of time, we have reported gross profit of $3.3 billion. This means we have 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 1.2 over the last 12 months demonstrates how we are growing what matters most: the expected future profit from committed contracts.
Speaker #4: As our mix increasingly high the shifts pre-tax towards spin contracts , you'll more margin continue significant expansion in our reported business results post to .
Speaker #4: See, we have again included a gross bill chart that profit illustrates how we have been creating, capturing in our business. With a projected gross margin of 26% on our $15.4 billion of signings over the last 12 months, we have nearly $4 billion of projected gross profit to our book-to-backlog over same period of added time.
Harsh Chugh: With an average projected gross margin of 26% on our $15.4 billion of signings over the last 12 months, we have added nearly $4 billion of projected gross profit to our backlog. Over the same period of time, we have reported gross profit of $3.3 billion. This means we have 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 1.2 over the last 12 months demonstrates how we are growing what matters most: the expected future profit from committed contracts. It also highlights the quality of our post-spin signings. Our gross profit book-to-bill ratio, having been consistently above 1, means that we have been consistently growing our gross profit backlog over the last four years.
Speaker #4: gross reported profit of 3.3 billion . This the means we more gross have been adding backlog than our contracted book of has been PNL .
Speaker #4: Having a profit book-to-gross bill producing above one, and ours at 1.2 over the last 12 months, is what matters most for growing.
Harsh Chugh: It also highlights the quality of our post-spin signings. Our gross profit book-to-bill ratio, having been consistently above 1, means that we have been consistently growing our gross profit backlog over the last four years. As we have said previously, our core financial goals are to grow our revenues, expand our margins, increase our earnings, and generate Free Cash Flow. In light of our third quarter results, our outlook for Adjusted Pre-Tax Income this year is now in the range of $575 million to $600 million. We estimate that our Adjusted EBITDA margin in fiscal 2026 will be approximately 17.5%. We also continue to see opportunities to drive efficiency in our operations, both through advanced delivery and in SG&A functions.
Speaker #4: expected , demonstrates future from profit contracts . how we It also the quality of post highlights our spin our , the book . To bill Having been signings one means that we have gross been consistently growing our gross profit backlog the last .
Harsh Chugh: As we have said previously, our core financial goals are to grow our revenues, expand our margins, increase our earnings, and generate Free Cash Flow. In light of our third quarter results, our outlook for Adjusted Pre-Tax Income this year is now in the range of $575 million to $600 million. We estimate that our Adjusted EBITDA margin in fiscal 2026 will be approximately 17.5%. We also continue to see opportunities to drive efficiency in our operations, both through advanced delivery and in SG&A functions. On the topic of cash flow, with the expected cash tax of roughly $160 million and a net use of cash for working capital, this implies Free Cash Flow in the range of $325 million to $375 million for fiscal 2026.
Speaker #4: As we have said previously , our core financial are to and grow expand our margins over , increase our and earnings flow in third quarter our revenues , our results , above adjusted year now income the this range of pre-tax outlook for We estimate that our EBITDA margin ratio . is in 575 million to 600 million .
Speaker #4: As we have said previously , our core financial are to and grow expand our margins over , increase our and earnings flow in third quarter our revenues , our results , above adjusted year now income the this range of pre-tax outlook for We estimate that our EBITDA margin ratio .
Speaker #4: Fiscal 2026 will be approximately, like we said, 17.5%. We also continue to see opportunities to drive efficiency and generate free cash flow, both advancing through our goals and delivery as in previous years.
Harsh Chugh: On the topic of cash flow, with the expected cash tax of roughly $160 million and a net use of cash for working capital, this implies Free Cash Flow in the range of $325 million to $375 million for fiscal 2026. As Martin mentioned, the principal reasons for our revised fiscal 2026 outlook are the longer sales cycle, the expected revenue headwinds from our evolving partnership with IBM, the investments we have made to support future consult growth, and the fact that it takes time to adjust our hiring to respond to lower attrition. With that, Martin, I'll turn the call back to you.
Speaker #4: topic On the of four years functions With the flow expected cash cash tax of of our operations use of 160 million and a net cash for working capital in , this implies free flow in the cash of range 325 million to 375 million for fiscal 2026 , as Martin the principle reasons for our revised fiscal 2026 outlook are the longer cycle , the expected revenue headwinds from our evolving partnership with IBM , the investments we have made to future growth , the fact that it takes time to sales adjust hiring to lower .
Harsh Chugh: As Martin mentioned, the principal reasons for our revised fiscal 2026 outlook are the longer sales cycle, the expected revenue headwinds from our evolving partnership with IBM, the investments we have made to support future consult growth, and the fact that it takes time to adjust our hiring to respond to lower attrition. With that, Martin, I'll turn the call back to you.
Martin Schroeter: Thanks, Harsh. I want to note that today we disclosed that the filing of our quarterly report will be delayed, as described by our filing with the SEC. As we disclosed, following the receipt of voluntary document requests from the SEC, the company, through the audit committee of our board of directors, is reviewing our cash management practices, related disclosures, the effectiveness of internal control over financial reporting, and certain other matters. We are cooperating with the SEC. We do not expect a restatement or other impact to our financial statements. Due to the ongoing nature of these matters, we will not be able to comment further at this time. Before I open the call up to your questions, I want to thank the tens of thousands of Kyndryls around the world who are providing world-class services to our customers every day. Operator, let's move to questions.
Martin Schroeter: Thanks, Harsh. I want to note that today we disclosed that the filing of our quarterly report will be delayed, as described by our filing with the SEC. As we disclosed, following the receipt of voluntary document requests from the SEC, the company, through the audit committee of our board of directors, is reviewing our cash management practices, related disclosures, the effectiveness of internal control over financial reporting, and certain other matters. We are cooperating with the SEC. We do not expect a restatement or other impact to our financial statements.
Speaker #4: With that , Martin , I'll attrition turn the call back our to you .
Speaker #3: Thanks . Harsh
Speaker #3: to note . I want
Speaker #3: the disclosed that filing of our report delayed , as to
Speaker #3: filing described by our with the disclosed we of voluntary document requests from the and the company , support the audit committee of of is Directors , our cash management related practices
Speaker #3: effectiveness SEC of internal over financial reporting and certain other matters . We cooperating with the SEC . We do are expect a respond other impact to our financial statements not due to the ongoing nature of .
Speaker #3: control
Speaker #3: control
Martin Schroeter: Due to the ongoing nature of these matters, we will not be able to comment further at this time. Before I open the call up to your questions, I want to thank the tens of thousands of Kyndryls around the world who are providing world-class services to our customers every day. Operator, let's move to questions.
Speaker #3: not be able to comment this time . open the As Before I call up to your I want questions , tens of thousands of SEC , through around the world our Board who are providing world class services to our customers every .
Operator: As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile our Q&A roster. Our first question will be coming from Tien-Tsin Huang of J.P. Morgan. Your line is open.
Operator: As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile our Q&A roster. Our first question will be coming from Tien-Tsin Huang of J.P. Morgan. Your line is open.
Speaker #3: Operator . Let's move to questions to thank the .
Speaker #1: reminder As a
Speaker #1: to ask your kindreds announced . Please
Speaker #1: Star one on your telephone and wait for your name to be called.
Speaker #1: withdraw
Speaker #1: While we compile to press day roster
Speaker #1: our
Speaker #1: . Our please Q&A matters , we will first question will be coming Huang Tianjin reviewing of question , from One again . JP Morgan .
Tien-tsin Huang: Hi. Thanks. Good morning here, Martin and Harsh. I want to ask just on the outlook and the revision. I understand you can't speak to the filing here. But on the revision, given how confident you were last quarter in the revision, I'm trying to think about attribution and what really changed. I heard the sales cycles being delayed and, of course, the evolution of the IBM piece. So maybe can you just discuss what surprised you and how broad-based some of these issues were for the company?
Tien-tsin Huang: Hi. Thanks. Good morning here, Martin and Harsh. I want to ask just on the outlook and the revision. I understand you can't speak to the filing here. But on the revision, given how confident you were last quarter in the revision, I'm trying to think about attribution and what really changed. I heard the sales cycles being delayed and, of course, the evolution of the IBM piece. So maybe can you just discuss what surprised you and how broad-based some of these issues were for the company?
Speaker #5: think I
Speaker #5: think I
Speaker #5: good . , Martin
Speaker #5: good . , Martin
Speaker #5: I want someone to ask just on the morning and the press revision. I understand you can't speak to the Star one.
Speaker #5: filing the here , the on the given disclosures . outlook how
Speaker #5: filing the here , the on the given disclosures . outlook how were
Speaker #5: and the revision , quarter revision , trying to think and what about changed . but I heard the cycles delayed . And sales being of the and IBM piece .
Speaker #5: attribution
Harsh Chugh: Hey, Tien-Tsin. Nice to kind of hear your voice again. If you remember, during the last quarter, as we were guiding, we talked about 3 factors that we kind of got confidence from. One was the acceleration in the consult. We were expecting 2 points of additional growth from that, and hyperscaler, another additional growth of 2 points, and then rapid acceleration in the conversion of our sales pipeline. Those were kind of about 6 points. And I think we kind of fell short on all of them. Not that we didn't have the growth in consult, but it was 20% on constant currency. It was not what we were hoping for. And again, the sales cycle extension had the impact not only on the consult but also on hyperscaler as well as the acceleration we were expecting. So that kind of adds to about 6 points.
Harsh Chugh: Hey, Tien-Tsin. Nice to kind of hear your voice again. If you remember, during the last quarter, as we were guiding, we talked about 3 factors that we kind of got confidence from. One was the acceleration in the consult. We were expecting 2 points of additional growth from that, and hyperscaler, another additional growth of 2 points, and then rapid acceleration in the conversion of our sales pipeline. Those were kind of about 6 points. And I think we kind of fell short on all of them.
Speaker #5: Surprised by the evolution of some of these and how they are based—can you discuss that for us?
Speaker #4: Hey really Nice to your voice again . If you remember
Speaker #4: quarter, as we are guiding, we
Speaker #4: Those were the kind of points about the pipeline—about six.
Speaker #4: three company factors that we kind of got confidence on
Speaker #4: One was issues were the the consult . We were
Speaker #4: expecting two points of additional hear restatement or growth from that . And confident you
Speaker #4: hyperscaler another additional growth of
Speaker #4: two then points . And rapid acceleration
Speaker #4: two then points . And rapid
Harsh Chugh: Not that we didn't have the growth in consult, but it was 20% on constant currency. It was not what we were hoping for. And again, the sales cycle extension had the impact not only on the consult but also on hyperscaler as well as the acceleration we were expecting. So that kind of adds to about 6 points.
Speaker #4: we you kind of fell short on from . all of them . Not that , Tintin . we didn't have the Nice . consult , but it growth in conversion in 20% on constant sales what we , the were It was currency .
Speaker #4: hoping the And
Speaker #4: again , the sales cycle had not only on on the consult , but also on
Harsh Chugh: The continued headwind about IBM was another factor. So those are the primary drivers, along with some of the other things we talked about, ERP conversion onto the cloud platform. Those are market dynamics that we have to deal with. I think, Martin, you would like to add?
Harsh Chugh: The continued headwind about IBM was another factor. So those are the primary drivers, along with some of the other things we talked about, ERP conversion onto the cloud platform. Those are market dynamics that we have to deal with. I think, Martin, you would like to add?
Speaker #4: Hyperscaler, as well as the acceleration we were expecting, so that kind of impact is about six points. And what brought about IBM was another factor.
Speaker #4: So, those are the continued headwinds primarily, along with some of the things we talked the other day about—ERP conversion onto the cloud and platform. Those are market dynamics that we have to deal with.
Martin Schroeter: No, look, I'd say first, thanks, Tien-Tsin. I would add, as you heard, we got revenue back to flat. And as we start to share the difference between the evolving IBM relationship, you can see that without that headwind, we're actually growing the core part that matters so much to us. So the shape of that curve is kind of what we expected. As Harsh said, well, we were hoping and we're expecting to accelerate. We got good performance, but we didn't accelerate the way we had expected. And the world is getting more complex. AI is making customers rethink how their infrastructure should run. The sovereignty discussions around the world are top of mind for everybody. So we didn't accelerate as we expected we would.
Martin Schroeter: No, look, I'd say first, thanks, Tien-Tsin. I would add, as you heard, we got revenue back to flat. And as we start to share the difference between the evolving IBM relationship, you can see that without that headwind, we're actually growing the core part that matters so much to us. So the shape of that curve is kind of what we expected. As Harsh said, well, we were hoping and we're expecting to accelerate. We got good performance, but we didn't accelerate the way we had expected.
Speaker #4: Martin, you and I, I think, would like to add—of adds.
Speaker #3: No , look , I'd say that first , thanks , would add as you as John . I heard , you revenue . got revenue And know , we as We got to back to to start share the , the difference between the evolving you can see that , you know , that headwind , we're
Speaker #3: No , look , I'd say that first , thanks , would add as you as John . I heard , you revenue . got revenue And know , we as We got to back to to start share the , the difference between the evolving you can see that , you know , that headwind , we're actually flat .
Speaker #3: core part the that matters so much to as we shape of that are curve is you kind of what . As harsh said .
Martin Schroeter: And the world is getting more complex. AI is making customers rethink how their infrastructure should run. The sovereignty discussions around the world are top of mind for everybody. So we didn't accelerate as we expected we would.
Speaker #3: Well , we were hoping . And expecting to accelerate . We got good performance , but we didn't way we expected . world is And the relationship , getting accelerate the AI is is making customers AI without with rethink how their infrastructure run .
Speaker #3: The sovereignty discussions around the world are mind for everybody . So so we didn't we just didn't accelerate as we expected we .
Tien-tsin Huang: Got it. No, thank you both for that. And just my quick follow-up, just on the—I think you mentioned strategic markets and UK specifically. What are some of the changes that you might be putting in? What kind of costs might there be to do it or benefit? Just trying to understand how quickly that can be addressed. Thank you.
Tien-tsin Huang: Got it. No, thank you both for that. And just my quick follow-up, just on the—I think you mentioned strategic markets and UK specifically. What are some of the changes that you might be putting in? What kind of costs might there be to do it or benefit? Just trying to understand how quickly that can be addressed. Thank you.
Speaker #5: Got
Speaker #5: for that . And just my quick follow up , just on think you the I
Speaker #5: mentioned strategic how they're markets in UK specifically . What the changes that
Speaker #5: You mentioned strategic, how they're markets in UK specifically. What are the changes that you might be putting kind of top of, what do you benefit?
Martin Schroeter: Yeah, thanks, Tien-Tsin Huang. So a couple of things. We did, as we mentioned in our prepared remarks, we did see a pretty dramatic slowdown in attrition. And then on top of all of that, or in addition to that, we have, particularly in Strategic Markets and in the UKI, where we were investing, a lot of that investment is local. It's domestic, which tends to be much more expensive than the center-based hiring that we're doing. So we are addressing those. It doesn't happen, as Harsh said in his remarks, it doesn't happen immediately. But we will absolutely get the wiring diagram right. We have been very successful over the last four years in freeing up people through automation and then reskilling those people to put them into roles where somebody has left the firm. And so we know the wiring diagram works.
Martin Schroeter: Yeah, thanks, Tien-Tsin Huang. So a couple of things. We did, as we mentioned in our prepared remarks, we did see a pretty dramatic slowdown in attrition. And then on top of all of that, or in addition to that, we have, particularly in Strategic Markets and in the UKI, where we were investing, a lot of that investment is local. It's domestic, which tends to be much more expensive than the center-based hiring that we're doing. So we are addressing those. It doesn't happen, as Harsh said in his remarks, it doesn't happen immediately. But we will absolutely get the wiring diagram right. We have been very successful over the last four years in freeing up people through automation and then reskilling those people to put them into roles where somebody has left the firm.
Speaker #5: to to it or trying to
Speaker #5: addressed .
Speaker #3: Thank you . Yeah .
Speaker #3: Thank you . Yeah .
Speaker #3: So a couple of Thanks . the things . You as as we mentioned in our , prepared remarks , did see there be
Speaker #3: So a couple of Thanks . the things . You as as we mentioned in our , prepared remarks , did
Speaker #3: pretty dramatic
Speaker #3: . And then on would top of on all of in that or addition to IBM that Just have , we particularly markets . strategic And in the where we UK were investing a lot of that understand how investment is is local .
Speaker #3: It's domestic , which tends to be much more expensive than the center based hiring that So we are those . It doesn't happen addressing as as his should doesn't happen remarks , it Absolutely get but we will .
Speaker #3: diagram immediately , wiring been very successful over the four years the people through automation and then and we're doing . then we reskilling did those people to put them last into into roles in our somebody has , has , left is the firm .
Martin Schroeter: And so we know the wiring diagram works. And importantly, we also know that to the extent we make progress on this, we get to keep this. It shows up in our profits. So I feel like it's going to take us, it'll take us a quarter to get ourselves back on track here. Harsh, do you want to?
Martin Schroeter: And importantly, we also know that to the extent we make progress on this, we get to keep this. It shows up in our profits. So I feel like it's going to take us, it'll take us a quarter to get ourselves back on track here. Harsh, do you want to?
Speaker #3: And so has know the in wiring diagram the works . And expected importantly , we diagram , also know that to the extent we make we get to keep on this , progress this .
Speaker #3: shows right . It up in our So freeing up We I it's going feel like to take us , you know , it'll take us a quarter to back we're on , get back ourselves on track here .
Harsh Chugh: Yeah. I think Strategic Markets, if we kind of piece that part, I think the trend is not the same. Meaning, LA has done well. I think Martin mentioned Data Sovereignty is a bigger discussion that's happening in Europe, and that is a big component of Strategic Markets. And that was one of a major factors in our discussions with customers there. So I would say evolution of regulation and Data Sovereignty has been a big factor that certainly impacted a lot in Europe within Strategic Markets.
Harsh Chugh: Yeah. I think Strategic Markets, if we kind of piece that part, I think the trend is not the same. Meaning, LA has done well. I think Martin mentioned Data Sovereignty is a bigger discussion that's happening in Europe, and that is a big component of Strategic Markets. And that was one of a major factors in our discussions with customers there. So I would say evolution of regulation and Data Sovereignty has been a big factor that certainly impacted a lot in Europe within Strategic Markets.
Speaker #3: Do you
Speaker #3: Do you want to... think?
Speaker #4: markets strategic if you I kind of piece that part like I the trend is not the same meaning LA has done think . I think Martin mentioned data sovereignty is a well bigger Yeah , discussion .
Speaker #4: That's Europe . And that is a big of
Speaker #4: strategic happening market in . And that component one was of one of a major factors in our harsh said in discussions with customers .
Speaker #4: There. So I would say evolution of regulation has been a big factor, and that sovereignty certainly impacted a lot within strategic markets in Europe.
Operator: Operator, next question, please.
Lori Chaitman: Operator, next question, please.
Operator: Our next question will be coming from James Faucette of Morgan Stanley. Your line is open.
Operator: Our next question will be coming from James Faucette of Morgan Stanley. Your line is open.
Speaker #2: Operator next question please
James Faucette: Thank you. I wanted to delve a little bit deeper there on some of those factors. But first, recognizing you can't really say much about what is happening from a review perspective, but I am wondering, can you talk about how much some of that review may have impacted, if at all, your forward commentary? Can we start there?
James Faucette: Thank you. I wanted to delve a little bit deeper there on some of those factors. But first, recognizing you can't really say much about what is happening from a review perspective, but I am wondering, can you talk about how much some of that review may have impacted, if at all, your forward commentary? Can we start there?
Speaker #1: next question will be
Speaker #1: Fawcett of James, Morgan Stanley.
Speaker #1: open .
Speaker #6: Your line is say
Speaker #6: .
Speaker #7: I to wanted a little Thank you . deeper . is on on those factors , but delve Your line is There first , recognizing you say much can't really about happening from a review am what can you about much some some of of
Speaker #7: that review may if at forward commentary ? Can we start impacted , there is have open
Martin Schroeter: Sure. Look, as you know, you're an experienced analyst who's, I'm sure, dealt with companies that have been in these kinds of examinations. And the fact is, well, the fact is we just can't comment until the examination is complete. So the teams are working expeditiously so we can share more. The teams are working expeditiously so we can share our remediation plan. Having said all of that, I think the key message here is that we are not changing our fiscal 2028 goals. So we still see fiscal 2028 coming together in the time frames we talked about. And as we also said in the disclosures, we don't expect to have a restatement here. So I would say that until the work is finished, we can't comment more. But our fiscal 2028 goals are something we remain confident in, and we don't expect a restatement.
Martin Schroeter: Sure. Look, as you know, you're an experienced analyst who's, I'm sure, dealt with companies that have been in these kinds of examinations. And the fact is, well, the fact is we just can't comment until the examination is complete. So the teams are working expeditiously so we can share more. The teams are working expeditiously so we can share our remediation plan. Having said all of that, I think the key message here is that we are not changing our fiscal 2028 goals. So we still see fiscal 2028 coming together in the time frames we talked about.
Speaker #3: me your look as as you know , you're an experienced experienced
Speaker #3: who's , who's
Speaker #3: dealt with companies that have been in you're an these kinds all , of
Speaker #3: examinations and , and fact is and
Speaker #3: the the well , the fact is we just can't comment until the examination is ? , so the Sure . complete . talk teams are Let expeditiously .
Speaker #3: So we can share I'm sure more So are working expeditiously so we can share plan . remediation Having said all of that , I think the key message here is that the we are we are not fiscal 28 So goals .
Martin Schroeter: And as we also said in the disclosures, we don't expect to have a restatement here. So I would say that until the work is finished, we can't comment more. But our fiscal 2028 goals are something we remain confident in, and we don't expect a restatement. So, you want to dive into some of your other deeper questions?
Speaker #3: you know , we we still see 28 coming fiscal we , changing in the in the our timeframes we talked about and , and as , as we also said the in the in the disclosures , the , we don't expect the , to to in restatement So , have a so I would say that , you know , until the work is finished , we can't comment more .
Speaker #3: But our here . our fiscal 28 goals . something we remain Are don't don't in . expect we restatement . So we want to you want to into together you want to dive of your into some
Martin Schroeter: So, you want to dive into some of your other deeper questions?
Speaker #3: Confident. Expect a deeper question.
James Faucette: Yeah, yeah, sure. No, yeah, I appreciate that. So, I guess, following up on Tien-Tsin's questions, and you mentioned, I appreciate the breakdown of the different pieces. When you look at the extending sales cycles, etc., can you just talk about is this across all the different pieces themselves? And is there something that you can, I guess, encapsulate the types of incremental work or changes in work scope that your customers may be looking for that you hope to address as they go through these lengthened evaluation and sales cycles for you?
James Faucette: Yeah, yeah, sure. No, yeah, I appreciate that. So, I guess, following up on Tien-Tsin's questions, and you mentioned, I appreciate the breakdown of the different pieces. When you look at the extending sales cycles, etc., can you just talk about is this across all the different pieces themselves? And is there something that you can, I guess, encapsulate the types of incremental work or changes in work scope that your customers may be looking for that you hope to address as they go through these lengthened evaluation and sales cycles for you?
Speaker #7: Yeah , sure .
Speaker #7: that .
Speaker #7: that . So how I guess following up on tangents , and you And we I appreciate the mentioned Yeah , I breakdown of
Speaker #7: the different appreciate pieces when at like the other extending questions sales cycles , etc. you about is across all the different you this just pieces themselves look and are can is there something that , is can you I guess , encapsulate the types of of
Speaker #7: Incremental work or changes, scope that your customers may be looking for, that you're—that you hope to address as these work evaluation sales cycles—you can?
Harsh Chugh: I think it's more promising for us in terms of the types of conversations we are having. It's largely driven by a lot of industry dynamics. I will start with AI because it's causing a bit of industry disruption, many industries, and regulated customers that we deal with because they're getting threatened by kind of what I call non-traditional players. So that's kind of one. That kind of starts from the business process to the application layer to the infrastructure layer. So kind of that type of dynamic. And then Data Sovereignty and AI, which means, is data going to be closer to AI or AI going to be closer to data? I think that's kind of causing, and because we are in a long-term infrastructure modernization conversation, it becomes more complex for the decision-makers to think about the evolution of the industry, how it impacts.
Harsh Chugh: I think it's more promising for us in terms of the types of conversations we are having. It's largely driven by a lot of industry dynamics. I will start with AI because it's causing a bit of industry disruption, many industries, and regulated customers that we deal with because they're getting threatened by kind of what I call non-traditional players. So that's kind of one. That kind of starts from the business process to the application layer to the infrastructure layer. So kind of that type of dynamic. And then Data Sovereignty and AI, which means, is data going to be closer to AI or AI going to be closer to data? I think that's kind of causing, and because we are in a long-term infrastructure modernization conversation, it becomes more complex for the decision-makers to think about the evolution of the industry, how it impacts.
Speaker #7: they go
Speaker #4: it's it's I
Speaker #4: more for us in through terms
Speaker #4: Types of conversations we are having, and largely driven by an industry-lengthened lot of dynamics. And I will start with AI, because it's causing a — and we deal — think it's industries, because they're getting threatened by what I call — of the industry disruption — players.
Speaker #4: types of conversations we are having . And largely driven by a industry lengthened lot of dynamics . And I will start for with AI because causing a and it's we deal think it's industries because they're getting threatened by of what I call of the industry disruption .
Speaker #4: bit of
Speaker #4: regulatory kind of one that kind of from Many in the process the to application the infrastructure layer . So kind of that type of dynamic and then data sovereignty and AI , which non-traditional is data going to be closer to that's AI or AI going to be closer to think that's data ?
Speaker #4: kind of causing . And because we long , I long term infrastructure modernization conversation , it becomes more complex for the decision makers to think about the evolution of the industry , how it impacts with I are in a consult teams are think our engaged from a from those discussion .
Harsh Chugh: I think our consult teams are deeply engaged from those modernization discussions. I think our evolution, as Martin mentioned, not only being relevant from our partnership with IBM, as you mentioned, but relevance with a hyperscaler where we are growing and now our intent to kind of grow deeper in private cloud, it kind of makes us a bit more relevant across. So I feel very confident that the types of dialogue we are having is kind of much more balanced in terms of what we can bring than what we could have done at the time of spin. So it's the slowing, but the relevance of the types of discussion will make us more relevant to where customers are going than where we would have been previously.
Harsh Chugh: I think our consult teams are deeply engaged from those modernization discussions. I think our evolution, as Martin mentioned, not only being relevant from our partnership with IBM, as you mentioned, but relevance with a hyperscaler where we are growing and now our intent to kind of grow deeper in private cloud, it kind of makes us a bit more relevant across. So I feel very confident that the types of dialogue we are having is kind of much more balanced in terms of what we can bring than what we could have done at the time of spin. So it's the slowing, but the relevance of the types of discussion will make us more relevant to where customers are going than where we would have been previously.
Speaker #4: And I think our Martin , not mentioned being relevant from So partnership our evolution as you IBM , as but modernization mentioned , hyperscaler where growing and now we are our .
Speaker #4: kind of grow private cloud . makes us a deeply bit more relevant across so , so I And intent to feel very confident that with It kind of is , having is much kind of more balanced in relevance terms of what we can bring we could have done at with a the time of So it's slowing , but the relevance only the types of will , deeper will make us to where customers are going than where we would have been more previously relevant .
Operator: Operator, next question, please.
Lori Chaitman: Operator, next question, please.
Operator: Our next question will be coming from Ian Zaffino of Oppenheimer & Co. Your line is open.
Operator: Our next question will be coming from Ian Zaffino of Oppenheimer & Co. Your line is open.
Speaker #2: Operator next the question .
Ian Zaffino: All right. Thanks. Question will be on the buyback. We're doing the buyback here. What's kind of the message you're sending out here? Is it visibility? And I guess the question would be on visibility: is it's been very murky. And so given the murkiness of your visibility over the past 3 quarters or so, what gives you confidence in visibility going forward? Thanks.
Ian Zaffino: All right. Thanks. Question will be on the buyback. We're doing the buyback here. What's kind of the message you're sending out here? Is it visibility? And I guess the question would be on visibility: is it's been very murky. And so given the murkiness of your visibility over the past 3 quarters or so, what gives you confidence in visibility going forward? Thanks.
Speaker #1: Our next question will
Speaker #1: From Ian Zaffino of Oppenheimer. Your line is open, company.
Speaker #8: Hi . Thanks . You know , the please question will be on the buyback . You know , we're buyback here
Speaker #8: Hi . Thanks . You know , the please question will be on the buyback . You know , we're buyback here kind of .
Speaker #8: the message you're sending out here ? Is it visibility ? And I guess the question would be on dialogue we visibility What's is doing the been very , you know , it's murky .
Speaker #8: And so given the murkiness of your visibility over the past , you know , three quarters or so , what confidence gives you in visibility going forward ?
Harsh Chugh: Yeah, I think this is Harsh. Again, the principles around how we think about capital allocation, we have to be nimble. We look at every opportunity that stays in front of us. First, as you mentioned, we need to have strong balance sheet, good financial flexibility. We do like to do tuck-in acquisitions. We have debt which is maturing, so we kind of think about how we're going to deploy. And again, revolver was a part of it. So we think about capital allocation more holistically, and we have to be ready for whatever opportunity presents. But at the end of the day, we want to grow this business. So investing in the business will continue to be important, whether it's investment in Kyndryl Bridge, building our own internal capabilities, hiring more resources for Consult, and tuck-in acquisitions.
Harsh Chugh: Yeah, I think this is Harsh. Again, the principles around how we think about capital allocation, we have to be nimble. We look at every opportunity that stays in front of us. First, as you mentioned, we need to have strong balance sheet, good financial flexibility. We do like to do tuck-in acquisitions. We have debt which is maturing, so we kind of think about how we're going to deploy. And again, revolver was a part of it. So we think about capital allocation more holistically, and we have to be ready for whatever opportunity presents.
Speaker #8: Thanks .
Speaker #4: I think Yeah . this is harsh . Again , the principles we think around how We have capital to be like at we look allocation .
Speaker #4: nimble , every stays in front of us . first , as you Like mentioned , that to have we need balance sheet , good strong financial We opportunity do flexibility .
Speaker #4: like to do acquisitions . We tuck in debt , which is maturing . kind of have think about how So we we're going deploy to .
Speaker #4: Revolver part of So was it . about capital allocation we holistically was a . And we think have to be ready for whatever opportunity more presents .
Harsh Chugh: But at the end of the day, we want to grow this business. So investing in the business will continue to be important, whether it's investment in Kyndryl Bridge, building our own internal capabilities, hiring more resources for Consult, and tuck-in acquisitions. So I think it's going to be a balanced discussion, Martin, for you.
Speaker #4: But at the the day , we end of business . So this investing in the business continue to be important , will whether it's investment in bridge building , our own internal hiring than what more capabilities , resources for consult tuck in acquisitions .
Harsh Chugh: So I think it's going to be a balanced discussion, Martin, for you.
Martin Schroeter: Yeah. And I'd add one more thing. We've said now for a number of years that over time, the ability for us to convert profit into Free Cash Flow would basically be the difference would basically be cash taxes. And that's what we've delivered. That's what we've been that's what we've put on the chart in the prepared remarks. You'll see that over the last two years, our combined profit less the last two years of cash taxes is essentially where we're guiding Cash Flow to this year. So I think the clarity that we have and this business's ability to generate cash is exactly what we said it would be. And we see that continuing in the future as well.
Martin Schroeter: Yeah. And I'd add one more thing. We've said now for a number of years that over time, the ability for us to convert profit into Free Cash Flow would basically be the difference would basically be cash taxes. And that's what we've delivered. That's what we've been that's what we've put on the chart in the prepared remarks. You'll see that over the last two years, our combined profit less the last two years of cash taxes is essentially where we're guiding Cash Flow to this year. So I think the clarity that we have and this business's ability to generate cash is exactly what we said it would be. And we see that continuing in the future as well.
Speaker #4: I think it's spin. Going to be a balanced discussion. Martin.
Speaker #4: I think it's spin. Going to be a balanced discussion. Martin. So, for
Speaker #3: . And I'd add I'd add one more you You know , thing . said for now a number of years we've that the ability for profit us to flow convert cash be the would difference would basically be taxes into that's what we've that's what we've delivered .
Speaker #3: . So think And the , the , the the that we this , business's ability to cash is , is it would be .
Speaker #3: we've That's what been that's cash the chart what on the see that last we've put over the our two years , combined profit less the last two years of cash taxes is essentially where we're guiding , where we're guiding flow cash to this year .
Speaker #3: clarity 550
Speaker #3: this
Operator: Operator, next question, please.
Lori Chaitman: Operator, next question, please.
Operator: Question will be coming from James Friedman of Susquehanna. Your line is open.
Operator: Question will be coming from James Friedman of Susquehanna. Your line is open.
Speaker #3: And see that generate continuing exactly what future as well.
Speaker #2: Operator
Speaker #2: please . question
James Faucette: Hi. I just wanted to ask about the free cash flow and your comments, Harsh. You called out the working capital at $102 million. That looks good. The $217 million in free cash flow seemed fine. So when you look at the difference in your prior free cash flow, which was $550 million versus the $325 to 375 million, I mean, it doesn't seem like it's the change in operating current assets or working capital. Is it all just the pre-tax income revision?
James Friedman: Hi. I just wanted to ask about the free cash flow and your comments, Harsh. You called out the working capital at $102 million. That looks good. The $217 million in free cash flow seemed fine. So when you look at the difference in your prior free cash flow, which was $550 million versus the $325 to 375 million, I mean, it doesn't seem like it's the change in operating current assets or working capital. Is it all just the pre-tax income revision?
Speaker #1: We'll be coming from Question James of Friedman, Susquehanna. Your line is open.
Speaker #9: wanted I just to ask about the free cash flow and your comments . Harsh . Hi . you the working called out capital that looks good
Speaker #9: . The 217 in free cash flow seemed fine . So when we said you look the difference in your prior free cash
Speaker #9: at , which was
Speaker #9: versus the like it's doesn't seem the have and in operating current assets or working it all change capital . just the Is 325 to 375 , I mean , it pre-tax income revision ?
Harsh Chugh: Yeah, I think there are two components. One is the PTI that has a direct linkage. So it's roughly about $150 million from where we were. And working capital, while it was a benefit in the third quarter, it's going to be a big behind for us. That's kind of the biggest driver kind of from where I see the fourth quarter land. So I think that's kind of the balancing point, but largely driven because of the PTI change.
Harsh Chugh: Yeah, I think there are two components. One is the PTI that has a direct linkage. So it's roughly about $150 million from where we were. And working capital, while it was a benefit in the third quarter, it's going to be a big behind for us. That's kind of the biggest driver kind of from where I see the fourth quarter land. So I think that's kind of the balancing point, but largely driven because of the PTI change.
Speaker #4: Yeah , I think there are two components . the that that has a direct linkage like so . So it's roughly about 150 million were .
Speaker #4: we from where And capital while it a PTI in the was benefit third quarter , it's going to be a bit behind for us .
Speaker #4: kind That's of biggest driver kind of from working a from it's the the land . fourth quarter where I So I see the that's in kind of the balancing point .
James Faucette: Got it. Lori, if I could just sneak in one more. You did call that out, Harsh, in your prepared remarks about the fourth quarter. I don't remember. Did you quantify where we should be thinking about working capital for the fourth quarter?
James Friedman: Got it. Lori, if I could just sneak in one more. You did call that out, Harsh, in your prepared remarks about the fourth quarter. I don't remember. Did you quantify where we should be thinking about working capital for the fourth quarter?
Speaker #4: But think because change driven of.
Speaker #9: Got it. If I could just sneak in, Lori, did you call that out harsh in your prepared—one more—and in the fourth quarter?
Harsh Chugh: We have not quantified, but that's largely the difference between the PTI and what the working capital use is. So I think you're thinking right. Cash tax, we know. And then the remaining is driven by working capital use.
Harsh Chugh: We have not quantified, but that's largely the difference between the PTI and what the working capital use is. So I think you're thinking right. Cash tax, we know. And then the remaining is driven by working capital use.
Speaker #9: Remarks—I don't remember. Did you quantify where, thinking about working, we should be?
Speaker #4: We have not quantified, but that's— but
Speaker #4: the largely the difference between the the working use is . capital capital for think you're right PTI and what thinking , cash tax .
Speaker #4: the largely the difference between the the working use is . capital capital for think you're right PTI and what
Speaker #4: So, so I know then the remaining is driven by capital use.
James Faucette: Got it. Thank you. I'll drop back into queue.
James Friedman: Got it. Thank you. I'll drop back into queue.
Operator: Operator, next question, please.
Lori Chaitman: Operator, next question, please.
Operator: Our next question will be coming from Jonathan Lee of Guggenheim Partners. Your line is open, Jonathan.
Operator: Our next question will be coming from Jonathan Lee of Guggenheim Partners. Your line is open, Jonathan.
Speaker #9: Got it. Q, I'll jump.
Jonathan Lee: Great. Thanks for taking our questions. Given the shortfall in fiscal 2026, can you talk about the building blocks in the business that give you confidence in achieving your fiscal 2028 targets?
Jonathan Lee: Great. Thanks for taking our questions. Given the shortfall in fiscal 2026, can you talk about the building blocks in the business that give you confidence in achieving your fiscal 2028 targets?
Speaker #2: question please
Speaker #2: question please fourth quarter ? Next
Speaker #1: Our next question will be coming from Jonathan Lee of Guggenheim Partners. Your line is open.
Speaker #1: Great. Thanks for taking our question.
Speaker #10: our , given . You
Martin Schroeter: Sure, sure. It's a great question. So I'd say a couple of things. And obviously, I'll ask Harsh if he has anything to add. Our fiscal '28 targets, when we set them out a bit over a year, almost a year and a half ago now, were really built on a few elements. One was the fact that our cash flows, which had been heavily burdened by the early cash taxes we were paying, we saw our cash flows growing faster than profit because our cash tax position now was going to be relatively stable while we improved profitability dramatically. So that's what allowed cash to grow faster. And quite frankly, that phenomenon still exists. On the profit side, the primary driver is, I should say, two things.
Martin Schroeter: Sure, sure. It's a great question. So I'd say a couple of things. And obviously, I'll ask Harsh if he has anything to add. Our fiscal '28 targets, when we set them out a bit over a year, almost a year and a half ago now, were really built on a few elements. One was the fact that our cash flows, which had been heavily burdened by the early cash taxes we were paying, we saw our cash flows growing faster than profit because our cash tax position now was going to be relatively stable while we improved profitability dramatically. So that's what allowed cash to grow faster. And quite frankly, that phenomenon still exists.
Speaker #10: shortfall in fiscal
Speaker #10: the building blocks in the working you confidence in achieving your business that give
Speaker #10: 28 targets
Speaker #10: 28 targets
Speaker #3: a great Jonathan sure .
Speaker #3: question .
Speaker #3: things . Thank you obviously I'll So ? Sure , has . ask
Speaker #3: anything to back in the You know , our fiscal 28 , our fiscal 28 set them out Karsh targets , when we a bit over a year , And almost a year and And
Speaker #3: now we're really built on a on a add . few operator . the that our cash elements . , which had One was been heavily burdened by the fact early cash taxes paying .
Speaker #3: We were—we saw cash flows faster than because our profit cash was going. Position now to be growing stable.
Martin Schroeter: On the profit side, the primary driver is, I should say, two things. One, as we've shared every quarter, every reporting opportunity, what is going into the backlog has consistently been in that high single-digit, kind of 9% PTI range. And so for us, the driver of that profitability is not a trend or a building block as much as it is that over the time frames that we're talking about, the substantial majority, more than 90% of our P&L will be determined by those high 9% PTI backlog elements as opposed to the backlog we inherited. And when we put that guide out over a year and a half ago, that year was when only half of our P&L was determined by what we put in. So the cash flow growth comes from both the profit growth and from the better cash tax position we're in. That remains today.
Speaker #3: profitability So that's questions what allowed cash to grow faster . And quite frankly , that still exists flows we side , profit the the primary improved we saw is should say two things .
Martin Schroeter: One, as we've shared every quarter, every reporting opportunity, what is going into the backlog has consistently been in that high single-digit, kind of 9% PTI range. And so for us, the driver of that profitability is not a trend or a building block as much as it is that over the time frames that we're talking about, the substantial majority, more than 90% of our P&L will be determined by those high 9% PTI backlog elements as opposed to the backlog we inherited. And when we put that guide out over a year and a half ago, that year was when only half of our P&L was determined by what we put in. So the cash flow growth comes from both the profit growth and from the better cash tax position we're in. That remains today.
Speaker #3: One , as we've shared driver every quarter , every reporting opportunity , what going into the backlog as consistently been in is While that every high single that PTI range .
Speaker #3: And us , the driver of that is , is is not not of 9% ? building block as it trend or a much as for that profitability time frames that so talking about , the the substantial majority , in more than 90% of our PNL will be determined the those high backlog so elements as backlog .
Speaker #3: We when we a is put when we the is that guide out over a year and a that year half ago , was was when half of our PNL determined by what we was put in .
Speaker #3: So flow comes from both the growth profit growth the cash the from a , you know , the the better only tax position .
Martin Schroeter: The profitability comes from this shift over time to what we've put in the backlog versus what we inherited. That continues as well. Then I should add the revenue component. As you saw, outside of the more outside of the harder-to-predict IBM content, our revenue is growing. We've taken the IBM content from $4 billion down to $2 billion. So its impact in the future should likely diminish from the 3.5 points it has been, while at the same time, our hyperscaler business is already up to nearly $2 billion. Our consult business continues to grow. So the growth metrics, the growth drivers that we've had will just continue to punch bigger and bigger and bigger in the overall mix. Harsh, you want to?
Martin Schroeter: The profitability comes from this shift over time to what we've put in the backlog versus what we inherited. That continues as well. Then I should add the revenue component. As you saw, outside of the more outside of the harder-to-predict IBM content, our revenue is growing. We've taken the IBM content from $4 billion down to $2 billion.
Speaker #3: We've we're and in remains today the that from this shift over time to what we've put in the backlog versus what we profitability comes inherited .
Speaker #3: that And continues well . as So so by I , component , as add I should you you know , I saw revenue the the , you know , outside of the cash outside of the , the to harder predict IBM content .
Martin Schroeter: So its impact in the future should likely diminish from the 3.5 points it has been, while at the same time, our hyperscaler business is already up to nearly $2 billion. Our consult business continues to grow. So the growth metrics, the growth drivers that we've had will just continue to punch bigger and bigger and bigger in the overall mix. Harsh, you want to?
Speaker #3: Our revenue is growing . And , you know , we've IBM taken the four down from And so its impact in the future should , should likely diminish from the three and a half points .
Speaker #3: It has been . at the time , our business hyperscaler is already up to consult Our business continues to over the grow . growth nearly 2 billion .
Speaker #3: Metrics, the growth drivers that we've had punch so the bigger and bigger and bigger overall in the mix, will just to $2 billion.
Harsh Chugh: Yeah, I think two things. One, as you heard on the gross profit book to bill, that continues to kind of add. We had a $4 billion added in last 12 months versus what you saw is $3.3 billion that was used. And that's kind of one dimension. What we are signing and more and more of these signings are post-spin. So that kind of gives us the confidence. Number two, the level and relevance of our consult team in having a broader discussion about our engagement, which is across overall ecosystem that didn't exist two years or three years ago. So that kind of gives us confidence in the types of conversation because these are customers who we have had for decades. So they trust us. So this is kind of becoming more relevant across the broader ecosystem. So I think those are elements.
Harsh Chugh: Yeah, I think two things. One, as you heard on the gross profit book to bill, that continues to kind of add. We had a $4 billion added in last 12 months versus what you saw is $3.3 billion that was used. And that's kind of one dimension. What we are signing and more and more of these signings are post-spin. So that kind of gives us the confidence.
Speaker #3: continue to you want
Speaker #3: in the Do
Speaker #4: Yeah, I think one, as you heard,
Speaker #4: gross profit book to
Speaker #4: that continues
Speaker #4: We had an overall added Harsh. 12 months.
Speaker #4: What on $4 billion you saw is $3.3 billion that was used. Two things.
Speaker #4: kind of one in last assigning and more and more to . signings forced spin . of these So that that kind of gives us the confidence .
Harsh Chugh: Number two, the level and relevance of our consult team in having a broader discussion about our engagement, which is across overall ecosystem that didn't exist two years or three years ago. So that kind of gives us confidence in the types of conversation because these are customers who we have had for decades. So they trust us.
Speaker #4: Number two , the level and the relevance our consulting in that's having broader discussion what we about our engagement , which is of overall ecosystem across didn't that exist .
Speaker #4: Like two years or three years ago. So that kind of gives and confidence types of, because these are customers who we have had for, for—so trust us.
Harsh Chugh: So this is kind of becoming more relevant across the broader ecosystem. So I think those are elements. Third point, I would say, is that I think we're likely to be in a better opening position at the start of next year than where we started last year. That also gives us a better starting point.
Harsh Chugh: Third point, I would say, is that I think we're likely to be in a better opening position at the start of next year than where we started last year. That also gives us a better starting point.
Speaker #4: So this is kind of becoming more relevant across the broader ecosystem, those elements. And the third point I would say is that I think we're likely to, over decades.
Speaker #4: A better opening position at the start of the year than where last started, that starting better point gives us a, I think.
Jonathan Lee: Thanks for that. If I could quickly add a follow-up. When you think about some of the bookings softness, or rather the elongation of sales cycles, is there any sort of time frame as to when you think you could actually close some of these deals? Would it be within the fiscal year? Are we seeing pushouts until next fiscal? Thanks.
Jonathan Lee: Thanks for that. If I could quickly add a follow-up. When you think about some of the bookings softness, or rather the elongation of sales cycles, is there any sort of time frame as to when you think you could actually close some of these deals? Would it be within the fiscal year? Are we seeing pushouts until next fiscal? Thanks.
Speaker #10: Thanks for that. If I quickly
Speaker #10: follow up . You know , when
Speaker #10: about some of are the bookings rather elongation softness or of sales the So so there any sort cycles , is frame as to when you of time think you
Speaker #10: could of actually these , some of close some these deals ? within Would the
Harsh Chugh: All right. There is a timeline to many of these deals. Many of these deals are linked with renewals of our customers. Now, many of these discussions start 1 year, 2 years in advance. And that's kind of the discussion. So there is a timely nature of customers and the urgency for them to kind of sign. So I don't think so. It's an elongation that it's going to be multi-year elongation. We're talking about a couple of quarters now. That can still roll into other renewals that might be coming in the future. So I think it comes to what I call more stability in terms of the shift that happens. But at the same time, as the industry gets disrupted, as AI conversation happens, it's more and more content that we start to have discussions.
Harsh Chugh: All right. There is a timeline to many of these deals. Many of these deals are linked with renewals of our customers. Now, many of these discussions start 1 year, 2 years in advance. And that's kind of the discussion. So there is a timely nature of customers and the urgency for them to kind of sign. So I don't think so. It's an elongation that it's going to be multi-year elongation.
Speaker #10: Are we seeing pushes out until next fiscal? Thanks, Manny.
Speaker #10: we seeing push is outs until next fiscal ? Thanks many .
Speaker #4: timeline to many of these deals . Like many of also these deals are next with renewals of our we customers . Now , many of these discussions year two years in advance , and that's the So there is there is a start timely nature of customers kind of and the urgency for them to kind of sign .
Harsh Chugh: We're talking about a couple of quarters now. That can still roll into other renewals that might be coming in the future. So I think it comes to what I call more stability in terms of the shift that happens. But at the same time, as the industry gets disrupted, as AI conversation happens, it's more and more content that we start to have discussions. So if there is a slip in a deal, I'd rather have more content in my future deal than signing something which is not future-proof. I think I see it as an opportunity than something backwards.
Speaker #4: I don't think so . It's discussion . elongation that it's going to multi-year talking about a couple of that can is we're into other renewals that might in the be coming future .
Speaker #4: So be it comes to what I year . more more So elongation . stability This in the terms of shift that happens . But quarters now the same still roll time as the it industry call disrupted , conversation happens , it's more content
Harsh Chugh: So if there is a slip in a deal, I'd rather have more content in my future deal than signing something which is not future-proof. I think I see it as an opportunity than something backwards.
Speaker #4: that we gets have discussions . rather I'd a a deal , have more could at than signing something So more and which is not as AI proof .
Operator: Thanks, Harsh. Martin, that was our last question. Would you like to close the call?
Lori Chaitman: Thanks, Harsh. Martin, that was our last question. Would you like to close the call?
Speaker #4: I think of it as an opportunity, rather than something backwards-looking about the future I see.
Martin Schroeter: So look, everybody, thank you for joining us. As we look ahead and work toward our multi-year goals, it is, I think, important to recognize all of the progress we've made to date, how that progress has translated into a much higher-value services business, how it positions us to drive profitable growth, deliver higher earnings, and, as we've said, convert that into Free Cash Flow. We're focused on expanding Kyndryl Bridge and its footprint and its capabilities and continuing to integrate more and more of our Agentic AI capabilities into our services as well as into our own operations and the way we run. We will continue to leverage the momentum that we have in Consult and the Hyperscaler-related services as well as our other partners.
Martin Schroeter: So look, everybody, thank you for joining us. As we look ahead and work toward our multi-year goals, it is, I think, important to recognize all of the progress we've made to date, how that progress has translated into a much higher-value services business, how it positions us to drive profitable growth, deliver higher earnings, and, as we've said, convert that into Free Cash Flow. We're focused on expanding Kyndryl Bridge and its footprint and its capabilities and continuing to integrate more and more of our Agentic AI capabilities into our services as well as into our own operations and the way we run. We will continue to leverage the momentum that we have in Consult and the Hyperscaler-related services as well as our other partners.
Speaker #2: Thanks . Harsh
Speaker #2: question . if there is
Speaker #2: Would you like to take the call?
Speaker #3: look ,
Speaker #3: Thank you for joining us. As we look ahead and work toward our multiyear goals, it is important to recognize all of the progress we've made to date, and how that progress has translated into much higher value services for the business.
Speaker #3: how it positions us I'd rather to drive growth , profitable higher earnings , and as we've convert said , that into , into into free flow .
Speaker #3: You know , we're on on Kyndryl bridge . And its footprint and its continuing to integrate more and more Agentic capabilities into our services , of our as well operations .
Speaker #3: And the way we run. We will continue to leverage the expertise that we have in Consult and the Hyperscaler services, as well as our partners.
Speaker #3: And the way we run. We will continue to leverage the capabilities that we have in consult and the Hyperscaler services, as well as our partners. AI will further expand into the private momentum, other areas where related activity is pretty substantial due to all the things that are happening in the industry.
Martin Schroeter: We will further expand into the private cloud space where there is a pretty substantial renewed demand due to all the things that are happening in the industry: AI, data sovereignty, security, etc. At the same time, as we said, we will address our cost base as fast as we can, and we'll make sure we get that right. Thank you again for joining. We appreciate your time.
Martin Schroeter: We will further expand into the private cloud space where there is a pretty substantial renewed demand due to all the things that are happening in the industry: AI, data sovereignty, security, etc. At the same time, as we said, we will address our cost base as fast as we can, and we'll make sure we get that right. Thank you again for joining. We appreciate your time.
Speaker #3: AI , data sovereignty , security , etc. renewed the same time , as as we said , and at address our cost base and we will as fast as as can , and we'll make that sure we right .
Operator: This concludes today's program. Thank you for participating. You may now disconnect.
Operator: This concludes today's program. Thank you for participating. You may now disconnect.
Speaker #3: So thank you again for joining. We appreciate your time.
Speaker #1: this we concludes today's
Speaker #1: This concludes today's program. Thank you.
Speaker #1: participating . You may now disconnect . And cash .
