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Earnings call: Kyndryl reports strong Q2 with strategic growth

Published 22/11/2024, 04:10 am
KD
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In its second-quarter earnings call for fiscal year 2024, Kyndryl showcased a robust performance, underlining the success of its strategic transformation and expansion in business operations. Despite a revenue decline, the company achieved a record in post-spin signings, with an impressive year-over-year growth. Adjusted EBITDA and pre-tax income saw significant increases, and the company is on track to meet its full-year financial projections, including a return to revenue growth in the fourth quarter.

Key Takeaways

  • Record post-spin signings at $5.6 billion, marking a 132% increase year-over-year.
  • Q2 revenue reached $3.8 billion, with a 7% decline in constant currency.
  • Adjusted EBITDA stood at $557 million, with a margin of 14.8%.
  • Adjusted pre-tax income rose by 80% to $45 million.
  • Kyndryl Consult's revenue and signings experienced significant growth.
  • Hyperscaler-related revenue is expected to hit $1 billion this fiscal year.
  • Ten deals over $100 million were signed, including a landmark $2 billion agreement.
  • The company anticipates returning to year-over-year revenue growth in Q4.
  • An adjusted free cash flow of $300 million is projected for fiscal 2025.
  • Kyndryl's first post-spin Investor Day is scheduled for November 21st.

Company Outlook

  • Kyndryl expects to see year-over-year revenue growth in Q4.
  • The company predicts a full-year adjusted EBITDA margin of at least 16.3%.
  • A forecast of at least $460 million in adjusted pre-tax income for fiscal 2025 has been set.

Bearish Highlights

  • There was a 7% decline in Q2 revenue in constant currency terms.

Bullish Highlights

  • Kyndryl reported substantial growth in its consultancy business, with Kyndryl Consult revenue up by 23% and signings increasing by 81%.
  • Hyperscaler-related revenue is on a strong trajectory, aiming for $1 billion in the current fiscal year.

Misses

  • The company did not mention any specific areas where targets or expectations were not met during the quarter.

Q&A highlights

  • The CEO and CFO emphasized the company's strategic focus on cloud migration, AI readiness, and cybersecurity.
  • They reiterated their commitment to margin expansion and the generation of free cash flow growth over the medium term.
  • The executives discussed the company's largest independent deal and the importance of offering multi-vendor solutions to meet customer needs.

Kyndryl (ticker: KD), in its earnings call, demonstrated a strong second quarter for the 2024 fiscal year, with a focus on strategic growth areas such as cloud migration, AI readiness, and cybersecurity. The company's financial performance indicates resilience, with significant increases in adjusted EBITDA and pre-tax income, despite a slight decline in revenue. The record post-spin signings and the growth in Kyndryl Consult's revenue and signings showcase the company's expanding market presence. With the anticipation of year-over-year revenue growth in the fourth quarter and a positive outlook for fiscal 2025, Kyndryl is positioning itself for continued success. The upcoming Investor Day will likely provide further insights into the company's long-term strategy and financial goals.

Full transcript - Kyndryl Holdings Inc (NYSE:KD) Q2 2025:

Conference Operator: Good day, and thank you for standing by. Welcome to the Kyndryl Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. 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 Chapin, Head of Investor Relations. Please go ahead.

Lori Chapin, Head of Investor Relations, Kyndryl: Good morning, everyone, and welcome to Kyndryl's earnings call for the Q2 ended September 30, 2024. Before we begin, I'd like to remind you that our remarks today will include forward looking statements. These statements are subject to risk factors that may cause our actual results to differ materially from those expressed or implied. These forward looking statements speak only to our expectations as of today. For more details on some of these risks, please see the Risk Factors section of our annual report on Form 10 ks for the year ended March 31, 2024.

In today's remarks, we'll also refer to certain non GAAP financial metrics. Corresponding GAAP metrics and a reconciliation of non GAAP metrics to GAAP metrics for historical periods are provided in the presentation materials for today's event, which are available on our website at investors. Kyndryl.com. With me here are Kyndryl's Chairman and Chief Executive Officer, Martin Schroeder and Kyndryl's Chief Financial Officer, David Weishner. Following our prepared remarks, we will hold a Q and A session.

I'd now like to turn the call over to Martin. Martin?

Martin Schroeder, Chairman and Chief Executive Officer, Kyndryl: Thank you, Laurie, and thanks to each of you for joining us. On today's call, I'll update you on our continued progress and execution to meet our customers' large and complex technology needs and to drive our growth strategy. David will then review our recent financial results and our fiscal 2025 earnings outlook. We delivered another strong quarter for signings, margins and cash flow generation. It was a record post spin quarter for signings, which have grown 33% over the last 12 months to $16,000,000,000 We signed 10 deals of more than $100,000,000 in the quarter, including our largest deal as an independent company, a scope expansion that will generate more than $2,000,000,000 of revenue over the next 5 years.

Clearly, our signing strength will power our return to sustained revenue growth. And as David will discuss, what's even more encouraging is that the projected pre tax margins on our signings continue to be in the high single digits. In the quarter, adjusted pre tax earnings were up substantially year over year and we remain on track to deliver significant cash flow this year. Our performance was once again led by double digit growth in Kyndryl Consult and strong momentum in hyperscaler related revenue, as well as our ability to continue to drive efficiency and deliver innovation through automation and Kyndryl Bridge, our AI enabled open integration platform. In addition, our 3A's initiatives, alliances, accounts and advanced delivery continued to generate significant incremental benefits in the quarter.

There have been multiple disruptions across the competitive landscape and we are leveraging the investments we've made and our differentiated mission critical capabilities to take advantage of select opportunities to win new customers and additional scope. Having invested when others have pulled back, we're in a great position to continue to capitalize on these opportunities. As we head into the second half of this year, we'll continue to focus on driving substantial financial progress and on returning to top line growth in the Q4. There's a reason why we're delivering our 4th consecutive quarter of signings growth. It's our expertise in both running and transforming IT estates that differentiates us in the markets we serve, enabling us to increase our share of wallet and grow our customer base.

As you've heard me say before, Kyndryl is uniquely positioned to address secular IT trends, cloud migration and management, increasingly hybrid IT environments, technology skill shortages, cybersecurity risks and the adoption of artificial intelligence. Kyndryl Consult is strategically positioned at the nexus of these secular trends. Our consult revenue has been consistently growing in the double digits. And this quarter, our consult signings and revenue were up 81% and 23% respectively. Consult

Martin Schroeder, Chairman and Chief Executive Officer, Kyndryl: is

Martin Schroeder, Chairman and Chief Executive Officer, Kyndryl: now a $2,500,000,000 plus revenue stream for us with significant runway for continued growth. This revenue stream is valuable and central to our strategy, not only because of the margins directly associated with it, but also because of the ongoing managed services work that accompanies so many IT modernization assignments. Over the last year, we've delivered significant signage growth in both consult and managed services. Our Kyndryl consult teams have decades of experience with deep domain knowledge on our customers' mission critical systems. This experience paired with the IP and data in Kyndryl Bridge enables us to turn technical value into business value.

And we're engaging more and more with CIOs and CTOs on modernization, data architecture, AI readiness, efficiency, security resiliency and governance. The 7 figure assignments that we're winning to help customers with their data foundations and AI readiness are examples of that. Another key driver of our success and confidence in our future growth trajectory is our deep relationships with the 3 major hyperscalers and other top tier technology leaders. Over the last year, we've more than doubled our revenue from services we provide that are related to the hyperscalers and we expect to reach $1,000,000,000 in hyperscaler related revenue this fiscal year. With our mainframe modernization skills and hyperscaler alliances, we're migrating, managing, optimizing and securing our customers' IT environments across multiple cloud platforms and helping them ensure that the right workload is on the right platform.

Our growth is fueled by providing customers with higher value solutions that leverage both our extensive know how and our alliance partners' capabilities. Together, we're focused on joint enablement activities, co marketing and incremental training, all of which bring solutions to the market that addressed our customers' most pressing needs. Because of our alliances, the skills we can bring to bear and the freedom of action we have as an independent company, we are frequently expanding the scope of services we provide to existing customers to now include mainframe modernization and cloud migration services. At the same time, we're also beginning to add more new logos where Kyndryl Bridge is at the core of our service delivery across multiple platforms involving 1 or more hyperscalers. Separately, last month we published the inaugural Kyndryl Readiness Report.

This report analyzes what business and IT leaders see as the big picture challenges and opportunities in today's global business landscape, how their IT helps them prepare for those risks and capitalize on opportunities and what specific factors enable or hinder progress. I am really excited about the report because it combines our proprietary Kyndryl Bridge operational data with survey data from over 3,000 senior leaders in 18 markets. By combining operational data with survey data, the report assesses and compares the perception of IT readiness versus the reality of readiness with the goal of helping companies uncover new value from past, current and future technology investments. Among our key findings, more than 90% of the leaders surveyed believe their infrastructure is world class, yet fewer than 40% believe they are ready for potential risks coming their way. Cybersecurity is the number one concern regarding risk readiness closely followed by policy and regulatory requirements and emerging technologies including AI.

2 thirds of CEOs are concerned that their IT is outdated carrying vulnerabilities, skills gaps and has challenges for modernization. And 40% of mission critical components such as servers, storage, networks and operating systems are approaching or at their end of life. These factors are why tech modernization is a top priority for business and IT leaders. However, more than 70% of participants indicated they are still in the early stages of modernization. For enterprises to progress on their modernization journey and make their organizations more ready for the future, leaders need to overcome their prioritization paralysis.

And that is precisely the role that Kyndryl plays as a trusted partner, providing a differentiated pragmatic approach to modernization. We offer unmatched expertise in designing, building and managing mission critical workloads. We provide unprecedented observability and valuable insights from Kyndryl Bridge and we collaborate with hyperscalers and other top tier technology providers to accelerate the pace of our customers' IT transformations. As we've highlighted before, our evolving business mix where we're focusing on higher value services for our customers is driving increased profitability and fueling future top line growth. This fiscal year, half of our revenue is coming from post spin signings that have higher margins than our backlog did at spin.

And in fiscal 2026, it will be roughly 2 thirds. This inflection point when our P and L is largely determined by our post spin signings will dramatically strengthen our earnings and growth profile. Our forecast for fiscal 2025 is for adjusted pretax income of at least $460,000,000 reflecting a year over year increase of at least $295,000,000 As David will explain in more detail, the margins at which we're signing contracts and the other actions we're taking to grow our profitability keep us well on track to deliver high single digit adjusted pre tax margins by fiscal 2027. And yes, the math associated with that is ultimately $1,000,000,000 or more of adjusted pretax income with strong conversion of our earnings into cash flow. Our confidence stems from Kyndryl's unique set of attributes that position us well for sustainable growth.

Our customers want to work with us for a number of reasons, including we have mission critical expertise and domain knowledge throughout our 6 global practices to manage increasingly complex hybrid IT estates and address tech debt. Because we've established and expanded relationships with hyperscalers and other top tier technology providers to accelerate the pace of mainframe modernization and cloud migration. Because we've invested in our advisory talent, our Kyndryl consult teams have the know how to make our customers' IT to states optimized, secure, resilient and regulatory compliant. And they know how to architect data for our customers so they can be responsibly and securely adopt and leverage AI. And finally, because we're making ongoing investments in Kyndryl Bridge that's enabling unprecedented observability, actionable business insights and valuable outcomes that align with our customers' business strategies and goals.

In short, we are delivering sophisticated optimized multi vendor solutions to customers that allow them to address critical needs and major opportunities. Through Kyndryl Bridge, automation and AI, we're delivering managed services more efficiently than ever. And as a result and as we've said, we're showing up differently and powerfully in the IT services market. Lastly, I want to remind you all that we'll be hosting our 1st post spin Investor Day in New York on November 21. This will be an in person and live webcast event available on our Investor Relations website where we will delve deeper into our strategy and key priorities that will drive our next chapter of growth and margin expansion.

I also want to highlight that we recently published our 2nd corporate citizenship report. It describes our notable progress as a multinational organization, our role as a provider of essential services, our focus on managing our environmental impacts, our Kyndryl Way culture and our principled approach to corporate governance. I'm very proud of the Kyndryl team and the progress we've made and I encourage you to review it on our website. Now with that, David will take you through our results and our outlook.

David Weishner, Chief Financial Officer, Kyndryl: Thanks, Martin, and hello, everyone. Today, I'd like to discuss our Q2 results, our continued progress on our 3A initiatives, the solid margins at which we're signing customer contracts and our outlook for fiscal year 2025. The theme that you'll pick up is strong execution on our powerful strategy. In the second quarter, revenue totaled $3,800,000,000 a 7% decline in constant currency. The year over year trend was anticipated and primarily driven by our intentional exit primarily in prior quarters from negative, no and low margin revenue streams within ongoing customer relationships, not by macro factors.

It's also sequentially 1 point stronger than the year over year decline we reported last quarter. We also reported the strongest quarter of signings in our history as an independent company. Total (EPA:TTEF) signings grew 132% year over year. Our $5,600,000,000 signings made Q2 our 4th consecutive quarter of signings growth and brings our trailing 12 month signings growth to 33%. We saw strength across all 6 of our practices, each of which reported signings growth of 30% or more in the quarter, and we delivered growth across our 4 geographic segments, each of which reported signings growth in the quarter.

As Martin highlighted, we continue to gain momentum in higher margin advisory services. Kyndryl consult revenues grew 23% year over year, which underscores how we're growing our share in this higher value add space. Kyndryl Consult signings grew even faster, up 81%. Over the last 12 months, we've seen strong growth in Kyndryl Consult with signings up 41% year over year. And importantly, we're also delivering growth in managed services.

Our managed services signings have increased 32% in the last 12 months. Our 2nd quarter adjusted EBITDA was $557,000,000 and our adjusted EBITDA margin was 14.8%. Adjusted pre tax income grew 80% to $45,000,000 Our financial progress continues to reflect our strategic execution, leveraging technology alliances, stepping away from empty calorie revenues, fixing focus accounts, growing the consult portion of our business, driving efficiency throughout our operations and positioning Kyndryl to meet our customers' future IT needs. Included in our $45,000,000 of adjusted pre tax income was $39,000,000 in workforce rebalancing charges. The contractually committed $50,000,000 increase in IBM (NYSE:IBM) software costs and a $40,000,000 impact from currency movements that all operated as headwinds.

Mitigating this, we also had a $20,000,000 net benefit from depreciation changes. Excluding these items, we delivered a year over year increase of $129,000,000 in adjusted pre tax income, which reflects our execution and progress on our 3A's initiatives. Through our alliances, we generated $260,000,000 in hyperscaler related revenue in the Q2. This puts us on track to deliver $1,000,000,000 of hyperscaler related revenue this year, double our fiscal 2024 total. Through our advanced delivery initiative powered by Kyndryl Bridge, we continue to drive automation throughout our delivery operations, incorporate more technology into our offerings, reduce our costs and increase our already strong service levels.

It's a win win for Kyndryl and our customers. To date, we've been able to free up more than 11,500 delivery professionals to address new revenue opportunities and backfill attrition. This is worth a cumulative $700,000,000 a year to us, representing a $50,000,000 increase in our annual run rate this past quarter. Our accounts initiative continues to remediate elements of contracts we inherited with substandard margins. In the Q2, we increased the cumulative annualized profit from our focus accounts by $50,000,000 to $775,000,000 Clearly, the 3 As remain an important source of margin expansion and value creation for us.

Consistent with what I've shared in prior quarters, I'm particularly enthusiastic about how we continue to position KINDRAIL for future revenue, margin and profit growth. As we grew signing substantially this past quarter, we continue to command attractive margins on our signings. Throughout fiscal 2024 and now through the first half of fiscal twenty twenty five, we've signed contracts with projected gross margins in the mid-20s and projected pre tax margins in the very high single digits. Therefore, as our business mix increasingly shifts toward more post spin contracts, you'll see significant margin expansion in our reported results. We've again included a gross profit book to bill chart that accentuates how we've been creating and capturing value in our business.

With an average projected gross margin of 26% on our $16,000,000,000 of signings over the last 12 months, we've added over $4,000,000,000 of projected gross profit to our backlog. Over the same period of time, we've reported gross profit of $3,000,000,000 This means we've been adding significantly more gross profit to our backlog than our contracted book of business has been producing in our P and L. Having a gross profit book to bill ratio above 1 at 1.4 over the latest 12 months is a key measure of how we're growing what matters most, the expected future profit from committed contracts. And with our gross profit book to bill ratio having been consistently above 1, that means that we've been consistently growing our gross profit backlog over the last 2 plus years. Turning to our cash flow and balance sheet.

Our adjusted free cash flow was $56,000,000 in the quarter. Our gross capital expenditures were $134,000,000 and we received $30,000,000 of proceeds from asset dispositions. We've provided a bridge from our adjusted pre tax income to our free cash flow as well as a bridge from our adjusted EBITDA to our free cash flow in the appendix. Our financial position remains strong. Our cash balance at September 30 was $1,300,000,000 Our cash combined with available debt capacity under committed borrowing facilities gave us $4,500,000,000 of liquidity at quarter end.

Our debt maturities are well laddered from late 2026 to 2,041. We had no borrowings under our revolving credit facility and our net debt at quarterend was $1,900,000,000 Our target has been to keep net leverage below 1x adjusted EBITDA and we ended the quarter well within our target range at 0.84x. We're rated investment grade by Moody's (NYSE:MCO), Fitch and S and P. On capital allocation, our top priorities continue to be to maintain strong liquidity, remain investment grade and reinvest in our business. As our earnings increase, they'll drive meaningful free cash flow growth.

As a result, over time, we'll be in a position to consider regularly returning capital to shareholders, all while remaining investment grade. As we've said previously, our core financial goals are to continue to inflect our revenues back to growth as the year progresses, expand our margins, grow our earnings and generate free cash flow. Our outlook for fiscal 2025 continues to be for revenue to decline 2% to 4% in constant currency. This implies revenues of $15,200,000,000 to $15,500,000,000 based on recent exchange rates. We continue to expect to return to year over year revenue growth in the Q4.

We're reaffirming our outlook for adjusted EBITDA margin and adjusted pretax income to reflect the execution against our plan we delivered in Q2. Our outlook for full year adjusted EBITDA margin is at least 16.3% and our outlook for adjusted pretax income is at least $460,000,000 Looking at the Q3 in particular, our year over year constant currency revenue decline will be meaningfully smaller than our Q2 decline and our adjusted pretax income should be more than double the $63,000,000 we reported in last year's Q3. In total, we expect to deliver more than 60% of our full year adjusted PTI in the 1st 3 quarters of the year. Included in our guidance for the Q3 is approximately $20,000,000 of workforce rebalancing charges. The timing of these charges has been weighted toward the earlier part of the year, while our revenues are slightly tilted toward the latter half.

On the topic of cash flow, for the year as a whole, we project $675,000,000 of net capital expenditures and a similar amount of depreciation expense as well as $150,000,000 in cash taxes. This translates to roughly $300,000,000 in adjusted free cash flow in fiscal 2025 consistent with our prior outlook. Over the medium term, we remain committed to delivering significant margin expansion and generating free cash flow growth. We have a solid game plan to drive our strategic progress and this game plan starts with the steps we've already taken to expand our technology alliances, manage our costs and earn a return on all of our revenues. Stepping back from the financials, because we provide mission critical services to large important organizations, Kyndryl powers economic progress around the world.

What we do matters. And our leading market position in IT infrastructure services, our strong service levels and the mission critical nature of what we do distinguish us from other providers of tech services. These attributes that differentiate us give us opportunities for profitable growth that are specific to Kyndryl and we're moving aggressively to seize them. You can see our progress in the margin expansion we've been delivering in our Q2 and LTM signings growth and in our planned return to revenue growth in the Q4. And we plan to talk more about this during our Investor Day on November 21.

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

Conference Operator: Thank you. At this time, we'll conduct a question and answer session. Martin, are you ready for your first question?

Martin Schroeder, Chairman and Chief Executive Officer, Kyndryl: Yes, sir. Thank you very much.

Conference Operator: All right. Please stand by while I compile the Q and A roster. Our first question comes from Dhivya Gual from Scotiabank (TSX:BNS). Please go ahead.

Dhivya Gual, Analyst, Scotiabank: Hello, everyone. Good morning. Great quarter here. Martin, could you provide us a little bit more color in terms of the macro impact on the signings? Do you potentially see the signings momentum to pick up more significantly as the macro improves and the rates start to continue to come down?

Martin Schroeder, Chairman and Chief Executive Officer, Kyndryl: Yes. Good morning, Dhivya, and thank you for the nice comments. I think what I'd start with is what we've been talking about and what we shared a few weeks ago in the form of the 1st Kyndryl Readiness Report. And in that, which is a combination of our data and we obviously have more data on the state of the world's technology infrastructure than anybody else, along with what the leaders of companies are faced with and how they feel about their readiness for the future. And so when we think about the challenges they have, when they think about the opportunities that they're looking at, and we think about our capabilities and the innovation we bring and the skills we bring, I think we do in our part of the long term secular trends that are driving the markets we serve to continue to grow over the long term.

So I feel really good about how we've invested to build new capabilities, about how we've invested to bring innovation in a very unique way in a space that is extraordinarily important to either again manage the risks that the leaders of companies see coming or to take advantage of Kyndryl with the secular trends will continue to provide long term signings and therefore long term revenue growth for us.

Dhivya Gual, Analyst, Scotiabank: That's helpful. Just as a quick follow-up and I'll pass the line right after is considering where things are broadly with the election and everything, where do you see the global enterprises place? Like we talked about core modernization generally, AI is a big team that continues to evolve. How do you see global enterprises and the global C suite executives position from an investment standpoint when it comes to the core modernization, the AI readiness related investments, given the role such an important role Kyndry plays in the infrastructure side of things?

Martin Schroeder, Chairman and Chief Executive Officer, Kyndryl: Yes, it's a great question. And look, I think the way our customer base and the respondents, for instance, to our readiness survey, I think the way they feel is sort of at the beginning of a journey that they know they have to go down. So the digitization of the economy is going to keep happening. They know they need to be a part of it. They know they need to invest in, for instance, AI.

And the work we do to help them get ready for that is part of what we're already seeing in our consult results, as part of what we're already seeing in our managed results. And at the same time, while they're trying to invest for the future to take advantage of opportunities, they're also trying to keep the bad guys at bay, cybersecurity and resilience, it's very high on their list of things they need to invest in. And they're also trying to adjust to whatever the regulatory regime happens to be and we're headed toward obviously different regulatory regimes, but probably not that different when it comes to cybersecurity or resiliency. You still need to have resilient systems. You still need to be safe from the bad guys.

So I expect that from our customers' perspective that they've all they each accept that digitization of the economy is coming that there are opportunities for them to continue to invest in to take advantage of that. And at the same time, they're going to have to both respond to the regulatory regime and keep the bad guys at bay. And that again, that's the role we play in helping them do all those things. So I see continued investment in IT. There are very few companies who don't believe that IT is either a very big part or a substantial part of solutions to almost every problem that they have.

So that's the world we live in today and I expect that to continue.

Lori Chapin, Head of Investor Relations, Kyndryl: Thanks, Divya. Operator, can we move to the next question?

Conference Operator: Thank you. One moment for our next question. Our next question comes from Jamie Friedman from Susquehanna. Please go ahead.

Jamie Friedman, Analyst, Susquehanna: Hi, good morning. And let me echo the congratulations. Martin, I was wondering about the 10 large deals of $100,000,000 plus. Is there any that's a big number, a big number for anyone, a big number for you. I think it's a lot more than what we had seen in the past.

Is there any common pattern that you're seeing in terms of what those customers are looking for and why they're renewing now?

Martin Schroeder, Chairman and Chief Executive Officer, Kyndryl: So, yes, a few things, I think that are fairly consistent. 1, in each of these, I wouldn't think of them just necessarily as a renewal now. It's rather, I think of them and what we're seeing is that a very consistent acceptance of the capabilities that we've invested in and a desire to modernize with the company that's investing in the infrastructure space, which is us. So they're looking obviously for deep engineering skills and deep capabilities. And at the same time, they're looking for innovation that the Kyndryl Bridge provides to give them observability and help them to manage their ever sprawling IT infrastructure.

So think of these think of each of these as reflecting continued investment in their digitization. Think of each of these as additional scope for us. So not just renewing what we've done in the past and think of each of these as generally reflecting each of our practices. So I think every one of them has each of the practices represented. And importantly, think of them as both a consulting element and you see that in the consult growth and as well as a managed element.

And David noted in his prepared comments the very high double digit growth we're getting from the managed business. So these are the pattern is scope expansion for us as we invest, as we bring the best skills to help them with their biggest challenges or take advantage of their opportunities. It's pretty broad based. It has each of our practices. It has consult and it has manage.

So it's a pretty whole of firm, if you will, approach that our customers are taking up from what they see from Kyndryl.

Jamie Friedman, Analyst, Susquehanna: Got it. And then could I just ask is the is there any other pattern that you're noticing in those for example? Are they consistent with the vertical callouts on Page 17 of the PowerPoint or from a service line perspective or a regional perspective? Are any of them in any particular region or vertical? Thank you.

Martin Schroeder, Chairman and Chief Executive Officer, Kyndryl: Yes, sure. Thanks, Jamie. And thanks for the nice comments at the beginning as well. Look, in any given quarter, the signings mix will obviously reflect the customer base more or less than any given quarter. Over time that industry mix is where we've been is where we're mixed and I would expect that will shift slowly over time.

From a regional perspective, each of the regions, each of our segments grew signings in the quarter, some obviously faster than others. And when you double, obviously, there's some big growth numbers in there. But each of the segments grew as well. And I would say that again, our ability to deliver on a global basis with a single global delivery platform, which means our capabilities can reach each of our customers across all of our practices. I think that to me is the end to end kind of go to market that we've been building so that each of our customers in each of the industries we serve can take advantage of innovation, can take advantage of skills and experience wherever they happen to be.

So I think it's again, it's broad based. The large deals that we signed this quarter, obviously a reflection of the confidence and the trust that our customers and our new logo customers, by the way, they're not all existing customers now, but some of them are new logo customers as well that they see coming from Kyndryl in the form of innovation and experience and depth of skills.

David Weishner, Chief Financial Officer, Kyndryl: And Jamie, one of the things this is David. One of the things I think is really important is that we're achieving the signings growth while continuing to be really disciplined about the margins at which we're signing business and really successful and effective in making sure we get reasonable margins on this business and continuing to sign new contracts with an expected high single digit pre tax margin. I think that's as we highlighted in the deck that we shared, our gross profit book to bill is remarkably high and we're adding a lot of embedded value to our backlog.

Jamie Friedman, Analyst, Susquehanna: Got it. Thank you both.

Lori Chapin, Head of Investor Relations, Kyndryl: Thanks, Jamie. Operator, next question please.

Conference Operator: Thank you. One moment for our next question. Our next question comes from Tien Tsin Huang from JPMorgan (NYSE:JPM). Please go ahead.

Tien Tsin Huang, Analyst, JPMorgan: Sorry, can you hear me now? Hello? Yes,

Martin Schroeder, Chairman and Chief Executive Officer, Kyndryl: we can hear your Tien Tsin. Thanks.

Tien Tsin Huang, Analyst, JPMorgan: Hey, Martin. Sorry about that. Just switching phones here. Just I also wanted to ask about the really strong signings. I always we see that always my go to is asking about replenishing the pipeline.

So just curious from here if you feel this kind of signings momentum is sustainable. I know it's very broad based, which is encouraging, but how does the replenishment opportunity look like?

David Weishner, Chief Financial Officer, Kyndryl: Good morning. Thanks for the question. We absolutely think it's sustainable and it has been sustainable. So we actually try to look and prefer to look at signings over in LTM, a latest 12 months basis. And we're seeing north of 30% growth over that period of time.

Our book to bill ratio is now at 1, and we see an opportunity for that to move up as well. And as Martin was saying, the role we're playing with customers, the range of capabilities we're able to bring to bear, our ability to offer end to end solutions and the know how that we have combined with the technology alliances we have has absolutely put us in a position where the growth trajectory that we're on is sustainable and I think going to be really valuable for us. And frankly, it's one of the areas that we plan to talk more about at our Investor Day on 21st because we think it's really important part of our story and the way we've developed as an organization over the last 3 years, positioning the business for sustainable long term growth.

Martin Schroeder, Chairman and Chief Executive Officer, Kyndryl: The one thing I'd add Tien Tsin and I think David described it really well, but one thing I'd add is keep in mind that Kyndryl Bridge is also a way for us to provide actionable insights to our customers. So that fuels our Kyndryl consult growth over the long term as well. So we have an ability to deliver value through Kyndryl consult. Obviously, we have really delivered great value through Bridge, which our customers appreciate the observability. They appreciate the visibility they get to their systems, but it also gives them insights that nobody else can, nobody else has that they can also take advantage of.

Tien Tsin Huang, Analyst, JPMorgan: Yes. No, it sounds like you got a lot of good things going on there. So that's great to hear. Just my follow-up and I'll have to ask it here if it's okay, just the decision to not raise your outlook, a little bit of a change in pattern results clearly been quite good. So, update us there?

Martin Schroeder, Chairman and Chief Executive Officer, Kyndryl: Yes, sure. Look, I'll start. I'm sure David might have something. Look, we had a great quarter and we feel great about how we finished the first half of the year. It gives us a lot of momentum going into the second half.

We're really obviously, we're really pleased with the continued signings momentum, which positions us well. And the signings momentum is really is coming from the growth factors that we have been talking about now for just over 3 years, right. We're just on our 3rd birthday a couple of days ago. So with the consult momentum, with Alliance's momentum really hitting and with the at least guidance we have out there, we feel like we're really well positioned to deliver another great year, which remember the year has pretty substantial profit improvement already and it also has the return to revenue growth. So with the momentum, with another great quarter, so really, really good first half relative to where we guided, I think we feel good about second half.

And the second half represents a big improvement in profitability. And keep in mind and you know this Tien Tsin because you've been around the business quite a bit. This year only half, even after 3 years, this year only half of our revenue comes from what we've added to the backlog. The other half still represents what we've inherited. And as we get further and further away from that, the spin date, obviously, the role in our P and L of the inherited backlog continues to diminish.

So we've got a lot of growth and a lot of acceleration ahead of us here as we move further from the spin date.

Tien Tsin Huang, Analyst, JPMorgan: Yes. No, agree with all that. Happy 3 year birthday and see you in a couple of weeks.

David Weishner, Chief Financial Officer, Kyndryl: Thank you.

Lori Chapin, Head of Investor Relations, Kyndryl: Thanks, Jin Ji. Operator, next question please.

Conference Operator: Thank you. One moment for our next question. Our next question comes from Isaac Sehausen from Oppenheimer. Please go ahead.

Martin Schroeder, Chairman and Chief Executive Officer, Kyndryl: Hey, good morning. This is Isaac on for Ian Spino. My question is on consult revenue and signings. Maybe if you'd be able to provide some higher level commentary where you're seeing for growth between new logos and existing customers? And then secondly, maybe how those margins on those consult signings compared to managed services and some of the other work?

Thanks.

David Weishner, Chief Financial Officer, Kyndryl: Sure. Good morning, Isaac. In consult, we're seeing strength in a number of different areas. Our revenues are up north of 20% year over year and that compares to up 14% in the prior quarter in constant currency. So we're seeing not only growth, but an acceleration of that growth in the most recent quarter.

Consults now up to 19% of our total revenue in the most recent quarter. So it's becoming a more and more important part, a larger part of what we do. We're really excited about that. Consult is really spanning the range of our practices and the range of our offerings. So we're using consult in a number of areas, so we're providing advisory services in a number of different areas related to the capabilities that we bring to bear.

We think that's really helpful to our customers. From a margin perspective, consult tends to be a few points higher than our managed services in general. And that's often the way we price it. On occasion, we'll with a new logo opportunity, we'll use consult assignments as the starting point for building that relationship. And so we consider consult to be a big value add in existing relationships, but it's also where we typically or often will start new logo relationships.

And so we think our presence in this space is extremely important and valuable from that perspective as well. And I would say lastly that this is more and more something that we're becoming known for. Our history obviously is on the managed services side, but the growth in consultant and our ability to bring together a wide range of technologies, the capabilities that we have, the insights from Kyndryl, Bridge, all the technologists that we have is really putting us in a position where we can deliver a lot of value to customers through these consult assignments. And I think that's what's driving our growth and it's driving a lot of repeat business from our customers in this area as well.

Martin Schroeder, Chairman and Chief Executive Officer, Kyndryl: Yes. Thank you. David, I just would supplement that. I think it's well said. I just supplement it.

I mean, I guess the way I think about this and our experience is that kind of all roads lead to infrastructure and all roads lead to Kyndryl. So if you pick up a newspaper and read about the new, for instance, regulatory requirements for resiliency across the European financial sector called Dura, the acronym for it, you should assume and you would be correct in assuming that we're doing a lot of consult work for our customer base on getting them ready for Dura. If you pick up a newspaper and read about GenAI or a new large language model or that's used in a test case, again, it's going to start with that customers data architecture, data security and resiliency features that they're going to need. And again, that leads back to Kyndryl and our practices. And I could go on and on and on when you read about healthcare industry needing to take advantage of innovation on a cloud while at the same time protecting this data and getting ready for the future, again, that's where we are with our healthcare customers.

So over and over and over again and the reason where we see this long term growth trend is because we sit at the heart of what customers are facing, our customers are facing with regard to how do I take advantage of the opportunities I see or how do I manage the risk or get ready for the regulatory regime I see. So it's as David said, well, it's widespread, it's across our practices and customers need help getting ready for their digitized future.

Martin Schroeder, Chairman and Chief Executive Officer, Kyndryl: Okay. That's very helpful. Thank you. And then I just had a quick follow-up on the cloud business and hyperscaler partnerships. It sounds great to see the strong growth there.

I'm just curious what you're seeing as far as trends with clients either staying on premise, helping to move fully to the cloud or remain in hybrid, and if you've seen any notable shifts over the past 12 months or so? Thank you.

Martin Schroeder, Chairman and Chief Executive Officer, Kyndryl: Yes. I see a continuation of the idea that innovation is showing up on clouds. Our customers who are not the born on the cloud crowd obviously, our customers live and work in a hybrid environment. And so in order for them to get to the innovation that they see, in order for them to move, if you will, where the workload runs to where the data is or is collected. And quite frankly, in order to get the right workload on the right platform, I think that trend continues.

We don't see it slowing down. We see new opportunities. We see new complexity being introduced into systems because not all innovation is available everywhere. So our customer base is now thinking how do I make sure I can get the innovation I need. But I haven't seen in the last 12 months, which is the timeframe unit.

I have not seen a dramatic any kind of change in customers' desire to or use of moving to creating a more hybrid environment by moving things to where they should run. And again, over and over that tends to be a cloud or a mix of what they're doing today plus supplemented by public cloud, etcetera, etcetera. As David said earlier, one of the things we're noticing in consult is that a lot of the repeat business we get is growing that consult around cloud migration. But again, I don't see that as a change in trajectory. It's just us winning more and more and more of that business as our customer base and our prospect base continue to take advantage of our investments and capabilities and our investments in innovation.

Lori Chapin, Head of Investor Relations, Kyndryl: Great. Thank you. Thanks, Isaac. Operator, I think there's one more question in the queue.

Conference Operator: Thank you. One moment for our next question. Our next question comes from Divya Goyal from Scotiabank. Please go ahead.

Dhivya Gual, Analyst, Scotiabank: Sorry, guys. I think there's a confusion. I did not raise my hand again.

Martin Schroeder, Chairman and Chief Executive Officer, Kyndryl: All right. Thanks, Divya.

Lori Chapin, Head of Investor Relations, Kyndryl: All right, Divya. Thank you. Thanks, Divya.

Conference Operator: I am showing no further questions. I will now turn it back over to Martin for closing remarks.

Martin Schroeder, Chairman and Chief Executive Officer, Kyndryl: Thank you. Thank you very much and thanks to everybody for joining us today. As you can tell, we continue to execute on all of the opportunities that we see ahead of us. The strategies we've laid out now 3 years ago have are clearly driving the kind of financial progress that we've described. In fact, I'd say we're ahead of the progress that we've described.

So we have a very exciting second half, but more importantly, we have a very exciting future ahead of us as we move further and further from the spin date. Our unique run and transform approach is resonating with and delivering a ton of value to our customers because each of them is trying to figure out how do they continuously innovate while maintaining the operational excellence they need for the kinds of systems we run mission critical systems. And so for us at Kyndryl, we'll continue to capitalize on those opportunities to drive profitable growth. We'll continue to meet our customers both current and future IT needs as we continue to invest in new capabilities, new innovation and bring all of that to our customers. It is pretty clear I think that we continue to move toward our potential here and we're very excited by it.

So one more plug for our Investor Day, David and Lori and I and a few others of the leadership team will be there November 21st and we're looking forward to having you join that as well. So thanks everybody for joining.

Conference Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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