This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk05: Hello everybody and a warm welcome to the Kindrel Fourth Quarter Earnings Conference Call. My name is Melissa and I will be your operator. If you would like to ask a question following today's presentation, that will be star followed by one on your telephone keypad. If you do change your mind, that will be star followed by two. I now have the pleasure of handing over to our host today, Jennifer Hollander, Head of Investor Relations. Jennifer, over to you.
spk06: Good morning everyone and welcome to Kindrel's fourth quarter 2021 earnings call. Before we begin, I would like to remind everyone 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, and these statements speak only to our expectations as of today. For more details on some of these risks, please see the risk factors section of our Form 10 information statement filed with the Securities and Exchange Commission on October 12, 2021. Kindrel does not update forward-looking statements and expressly disclaims any obligation to do so. In today's remarks, we will also refer to certain non-GAAP financial measures. Corresponding GAAP measures and a reconciliation of non-GAAP measures to GAAP measures for historical periods are provided in the presentation materials for today's event, which are available on our website at investors.kindrel.com. I am pleased to be here with Kindrel's Chairman and Chief Executive Officer, Martin Schroeder, and Kindrel's Chief Financial Officer, David Weissner. Following the prepared remarks, we will hold a Q&A session. I would now like to turn it over to our Chairman and CEO, Martin Schroeder.
spk01: Thank you, Jenny, and thanks to all of you for joining Kindrel's first earnings call. I'm excited to update you on the significant progress we've made over the last four months as an independent firm and our outlook as a market leading IT services provider. But before we get started, like all of you, we are watching the events in Ukraine with deep concern. My thoughts are with the people there, including our 74 Kindrel employees and their families and friends. Our focus right now is on the safety of our people and their families in Ukraine. And our thoughts are also with our employees originally from Ukraine who are now working in other parts of the world. At last check, all our employees are accounted for and safe. Our key office remains closed, and we've been able to continue to support our customers' operations in the region. Back in October, before we spun off from IBM, we shared several expectations and goals with you. And we've entered 2022 with momentum. Our team is delivering on the strategy and objectives we've laid out. Our fourth quarter revenues and pre-tax income were in line with our guidance. And we've also quickly executed on our partnership agreements. We said that a key milestone would be our participation in the broader market ecosystem, which was not possible as a captive unit inside of IBM. We delivered new alliances with Microsoft and Google Cloud in the fourth quarter. And just last week, we announced a global alliance with Amazon Web Services, the largest cloud provider. Our ability to now bring the best technologies from the three largest hyperscalers to our customers is a huge asset as they accelerate their digital transformations. And it's a huge part of our growth strategy, too. It's one of the ways in which we'll participate in an expanded market opportunity of $510 billion by 2024. Something else I'm very proud of is the quality of our work, supporting our customers' mission-critical infrastructure, what I've called their hearts and lungs. During a spinoff like ours, there's a lot that can be distracting, but our people remain focused on delivering every day for our customers. And our quality of service is measured by our strong customer retention rates and growing scope, and also by our top tier net promoter scores, our strong achievement of service level agreements, and a long list of external accolades. We've also organized around our customers in a way that's making our go-to-market efforts more nimble. and we're laying out three major global initiatives to drive profitable growth and capture a larger share of wallet with our customers. I'll talk more about these in a few minutes. First though, let's talk about the market trends and the large and growing market opportunity we see for Kindrel. There are three trends dominating the global market that represent clear business opportunities for Kindrel. First is digital transformation and cloud migration. Companies continue to digitally transform to deliver better customer experiences and compete more effectively. And many customers continue to turn to cloud technology and often to multiple clouds to drive superior economics, rapid scalability, resiliency, and better performance. Our alliances with Microsoft, Google Cloud, and AWS put us in an ideal position. No matter which cloud technology our customers want to use, we can help them. Particularly since the links between cloud and data and legacy technologies are so critical for large organizations. As we continue to build out our certifications with each partner, and we've already ramped up, we're going to be uniquely positioned to serve customers. Second is rapid data growth. Data management is a critical element for any enterprise on a digital transformation journey. And it remains a significant sticking point for customers across our markets. We have the scale and expertise to help them. We are uniquely positioned not only to map out their data landscapes, but to show them how to best to access and use that data. Third, every CEO and CIO with whom I speak are extremely focused on cybersecurity and resiliency. especially as the current mix of solutions is highly fragmented and security threats pose near existential risks to enterprises. It is tough for organizations to understand what they need, what's available, and how to best implement those tools. We have the credibility, the trust, and the experience to help them both integrate and innovate. Further, amid these overarching trends, there's another dynamic that has been and continues to be extremely valuable to Kindrel. We are the world-class provider of managed infrastructure services, and organizations across a range of industries realize this work is both critical and not one of their core competencies. That's why they turn to the world-class managed service provider called Kindle. Now that we're independent, these trends have moved from being headwinds to being tailwinds for us. We're shifting beyond the constraints of being a captive unit inside of IBM and the associated traditional offerings. We're now free to expand the range of services we offer and the breadth of technologies we use, all in support of our customers' digital journeys. Becoming independent took our total addressable market from about $240 billion pre-spin to $415 billion on day one of our independence because of the new opportunities available to us in cloud and security and data and in automation. What's more, it's a market expected to expand to about $510 billion by 2024. So even modest share progress over the next several years can have a large impact on our $18.5 billion revenue base. In light of this larger and growing opportunity, we're transforming our go-to-market strategy to better serve our customers' growing multi-vendor technology needs. We're building on a strong foundation that includes our presence in 63 countries, our trusted relationships with a large and loyal customer base, and unrivaled expertise in what we do. With a new freedom to act, we're partnering with hyperscalers, with independent software vendors, and other technology leaders, allowing us to better serve our customers based on their needs and their technology preferences. and providing access to more technologies at scale will enable us to grow our share of wallet with existing and new customers. At the same time, with our independence comes a heightened focus on generating sustainable, profitable growth for Kindrel. We will not only look for our new revenue streams to be margin accretive with strong returns on investment, we will also focus by account to address the economics of commercial contracts IBM created when they spun us out. As I've mentioned, we've made rapid progress in the fourth quarter in entering the market ecosystem relevant to our customers in support of our go-to-market strategy. Our landmark global strategic alliance with Microsoft was announced just a week after our spinoff. Our global alliance with Google Cloud was announced in December and AWS last week. Our alliances with three major cloud hyperscalers are a significant part of our growth strategy. And these partnerships are about co-developing new solutions and upskilling our people. By the end of 2021, we earned more than 10,000 Microsoft Azure certifications, up from about a thousand at the end of 2020. We've also established Kindle University for Microsoft and a co-innovation lab so we can quickly bring integrated services to our customers. And I'm looking forward to next week when Microsoft CEO Satya Nadella and Microsoft Chief Commercial Officer Judson Althoff will address Kindrel's leadership team and share their insights on culture transformation and building a customer-centered organization. Additionally, we grew our Amazon Web Services certifications to more than 4,100, which is more than four times the certifications that our Kindrel teams had at the end of 2020. And we've gone from essentially zero to more than 2,000 Google Cloud certifications over the course of that year as well. We've also moved quickly to add other cloud technology partnerships like VMware and SAP and Pure Storage and more on the way. We just announced a strategic partnership with Nokia that will help us reach customers who are looking for LTE and 5G solutions as part of their industry 4.0 transformation. Because we've moved faster to enter that broader ecosystem and earned associated hyperscaler certifications, we can now meet a wider range of our customers' IT services needs. Our customers increasingly trust Kindrel to deliver the best technologies and services, not just the technology of a single partner. For example, we're helping Etihad Airways, a leading airline in the UAE, to implement a multi-cloud infrastructure using different public cloud providers. We're helping aerospace and defense company Raytheon Technologies to migrate workloads to the cloud and to help manage their hybrid cloud environments in partnership also with multiple technology providers. And Kindle will migrate Viewpoint's traditional IT infrastructure to Microsoft Azure to drive better flexibility, improved speed, and dynamic scalability. These are just three examples related to our cloud services opportunity, and we have momentum with our customers across our six practices. Our signage trajectory has strengthened progressively since our spin, and we've grown our projected profit margin on new contracts and contract extensions, reflecting our efforts to earn stronger returns. Let me share an example of how to think about the expanded opportunity for both Kindrel and our customers as a result of our entrance into the broader ecosystem. Now, this is a stylized example of a single customer. It's not meant to represent the entire portfolio, but we wanted to bring to life what our freedom of action means for both Kindrel and our customers. In this use case, what would have been a declining revenue customer becomes a top-line growth opportunity because we have an ability to deliver more value across our practices. Before the spin, our constrained focus on the IBM centered ecosystem, plus the deflationary nature of this business frequently resulted in declining revenue from a customer. The shift to public cloud was happening and our customers were spending more on IT services, but we couldn't fully participate in those journeys. Now we're investing in new capabilities and we're participating in a larger ecosystem. So in this example, as the customer adopts multiple clouds, our hyperscaler partnerships enable us to advance our customers' transformation. And we can deliver new capabilities in network and edge, applications, data and AI, and security and resiliency. So we get to increase our annualized revenue and we get a growing share of wallets. The progress we've made these past few months puts us on track to meet the milestones we shared with you back in October. We focused on significantly expanding our partnerships and technology ecosystem, investing in our employees to further build their capabilities, growing our revenue from advisory implementation services, all of which will ultimately help us return Kindle to revenue growth and expand our adjusted EBITDA margins. Now, as we work toward these goals today, I'd like to share three critical near-term initiatives we're implementing to move Kindrel forward. Think of them as three A's. Alliances, advanced delivery, and accounts. The first is driving signings, driving certifications, and then ultimately revenues with our new ecosystem alliance partners and capabilities. The second is transforming our service delivery through upskilling and automation, And the third is proactively addressing the elements of our business where we generate substandard margins. Let me provide additional detail around why each of these is so important to us. On alliances, look, I've discussed our alliances, and you can tell it's a source of excitement for us. Our new freedom to operate across a broader range of technologies will allow us to drive increased share of wallet with our existing customers, which will attract new customers and will ultimately drive revenue growth. In our first fiscal year as an independent company, as we begin to offer additional solutions to our customers, we expect to achieve some significant and noteworthy milestones. First, we're targeting roughly a billion dollars in signings tied to these hyperscaler partnerships, virtually all of which is incremental because we really weren't playing in this space before. We'll continue to grow our hyperscaler certifications to better meet our customers' cloud-related needs. And by next March, we'll enter our new fiscal year with about $200 million in annualized margin accretive revenue from the signings tied to those ecosystem partners. We will, of course, update you on our progress toward these milestones over the course of the year. Secondly, on advanced delivery, look, as a services business, our customers trust us with their hearts and lungs, and they want access to our skilled people. So as we shift our business mix to serve that larger addressable market with new capabilities, we need to align our people to that opportunity and to make sure we have the right certifications and the right experience in the right places relative to where we're building opportunities. upskilling and redeploying people to higher value and higher margin work also helps us backfill attrition and serve those new sources of revenue but the ability to do that to upskill and move our people it doesn't just happen that's where automating some of the delivery processes comes into play and our automation initiatives will free up thousands of experienced technologists and delivery experts to serve the new revenue streams associated with our hyperscaler partnerships all while enhancing delivery quality and driving some cost savings. Our automation program standardizes around a set of eight strategic tools. And on top of those eight foundational tools, we're then developing capabilities that extend automation to an entire process, which is much more impactful than simply automating a discrete task. Beyond automation, we're redefining new ways of working in an agile manner to support processes once certain activities have been automated. Clearly, this initiative is a big deal for us, and importantly, we're still in the early innings of achieving the quality and cost benefits that are available through automation. We'll report on our progress over the course of the year, but for advanced delivery, we expect to eliminate about $200 million in annualized costs by next March with a substantial upside beyond that savings run rate. The third element takes a fresh look at the parts of our business where we generate substandard margins. Considering our overall 2021 pro forma adjusted pre-tax margin of about 1% and assuming a dispersion of profitability across all of our relationships, it's clear that a significant number of our contracts fall into this category. As we've analyzed this, we've come to the view that it represents a roughly $800 million pre-tax profit opportunity for us. So let me explain the source and how we're going to address. When our operations were part of a larger company with customer relationships that spanned hardware and software and other parts of services, our contracts were optimized at the overall IBM level, IBM as a whole, and not, obviously, necessarily for our specific services businesses. Now, as an independent company, we are focused on turning around the relationships that are margin-dilutive, and we get there in a variety of ways. We can expand the relationships with new revenue streams that help increase our margins by leveraging our new alliances, our global practice offerings, and our ANIS business. We can manage our costs more tightly, especially optimizing our non-labor spend and we can reduce the extent to which we're providing higher cost customized solutions when we're only earning standardized solution rates. And as the contracts come up for renegotiation, which is often a year or two before expiration, we'll of course always look at earning the right returns. So look, it'll take time for us to realize all of this opportunity, and we'll figure out over time How do we get to the right spot? It is, though, because of the size, the opportunity that exists here, this is very meaningful. And we'll be spending a lot of time on how we engage with customers. How do we get to a win-win between Kindrel and our customer base, given the dynamics we see? So look, we'll engage with customers this year across the spectrum, but we think we can start to make some progress here, and by the end of the fiscal year, we could get to an annualized benefit of about $200 million, and that could deliver within the year, within the fiscal year 23, so April 1 to March 31, 2023, we think we can deliver as much as $75 million in-year benefit and again exit or enter fiscal year 24 at $200 million of annualized benefit. So again, we will report our progress on this initiative over the course of the year. So I hope that the theme that you're hearing, the theme of my remarks is clear. We are moving very forcefully to strengthen the margin profile of our business. We view this as an absolute necessity and our teams are tackling the opportunities in front of us with great urgency. The good news is we have multiple avenues of progress available to us beyond those initiatives I just shared, including continuing to lower our asset intensity. Obviously, expense management is always part of this, and the growth of our advisory and implementation services business, which can really enhance not only our customer transformations, not only does it yield a bit faster on the revenue side, but it provides a healthy margin. So these contracts tend to be a bit shorter term in nature, and they can give rise to longer managed services business as well. Now, before I turn over to David to discuss our financial results and some of those initiatives and put them in sort of context of the overall financial equation, I want to take a minute to share an important update on our environmental, our social, and our governance principles. Our environmental focus is on managing our climate impact. We're establishing Kindrel's operational baselines for carbon, for waste, and for water, and aligning with the recommendations of the Task Force on Climate-Related Financial Disclosure to set our net zero target. We will invest in the development and the deployment of renewable energy and commit to sourcing more than 75% of our electricity for our data centers from renewables. Kindrel's social strategy will focus on increasing overall diverse representation across our workforce, Executing a human capital strategy to encourage employee growth and embed skill development in the culture. And of course, engaging employees in corporate social responsibility initiatives to empower all 88,728 Kindrels to contribute to the causes they care about. We will achieve these goals through the execution of our inclusion, diversity, and equity strategy. And finally, on governance, Kindrels committed to embedding those ESG principles into our business operations, and that begins with establishing board and executive oversight of ESG initiatives and transparent reporting on our progress toward those ESG goals. Kindrel has also deployed a mandatory global ethics training to ensure that Kindrels comply with our high standards for business ethics. So we have more to do on the ESG front. We have a dedicated team who are already beginning to make firm, specific commitments to support our goals. which we intend to share with you about mid-year. Now with that, I'll hand over to David to take you through our financial results.
spk03: Thanks, Martin, and good morning, everyone. I'm proud of how our global team delivered in our first quarter as an independent company and of our continued progress in the first few months of 2022. Today, I'd like to discuss our fourth quarter and full year 2021 results, our balance sheet and liquidity, and our outlook. Our fourth quarter and full year revenues and pre-tax income were in line with the guidance we shared back in November. Thankfully, this will be the last period when we report our current results on a pro forma basis. In the fourth quarter, we generated pro forma revenue of $4.6 billion, which represents a 4% year-over-year decline in constant currency. The revenue decline reflects the continuing effects of having been operated as a captive subsidiary of our former parent prior to our spinoff, not the future potential of our business. Performa adjusted pre-tax income was $53 million, which is down compared to the prior year quarter, primarily due to higher IBM software costs, but is well ahead of our quarterly average for 2021. Performa adjusted EBITDA came in at $667 million, which was lower than our expectation, even though revenues and pre-tax income were in line. This was due to a switch in how our IBM software agreements and certain asset transfers were ultimately structured. We also had a negative impact from currency. These three items had an aggregate impact of $53 million, but other than currency, they didn't impact adjusted pre-tax income. For the full year, we generated pro forma revenue of $18.5 billion, pro forma adjusted EBITDA of $2.7 billion, and pro forma adjusted pre-tax income of $114 million. In the appendix of our presentation, we provided a bridge from our reported pre-tax income to our pro forma adjusted EBITDA for Q4 and the full year so that you can see how those figures have been calculated. Our approach is consistent with the framework we shared during our virtual investor day in October. And importantly, our calculations have performed adjusted EBITDA, back out cost allocations from IBM that we don't have anymore, and include standalone costs that we're incurring as an independent company working toward a return to revenue growth. Our signings in the fourth quarter and for the year were below our historical run rate and were clearly impacted throughout the year by a level of uncertainty around our impending spinoff. As Martin discussed, we see opportunities for signings to rebound now that the spin is behind us and to accelerate as a result of our new strategic partnerships and the growth opportunities embedded in our practices. A few other items tied to our financials. First, as we announced in January, we've revised our reportable segments to align with our post-spin operating structure. Going forward, we'll be reporting our revenues and adjusted EBITDA for four segments, as shown on the slide. Second, our fourth quarter and full-year reported results include transaction-related costs associated with our spinoff, including advisory banking and legal fees and employee retention expenses. Post-SPIN, we still have a considerable amount of separation-related work to do. As a result, we'll have SPIN-related expenditures related to systems migrations, rebranding, and a broad-based employee retention plan that IBM put in place. We anticipate cash outlays of roughly $500 million for these items in 2022 as we work to exit our transition services agreements with IBM as quickly as possible. Next, our Q4 and full-year reported results include a $469 million goodwill impairment. Let me explain the accounting dynamics behind this non-cash charge. In aggregate, the overall fair value of our company was greater than its book value. However, due to the accounting requirements for how our goodwill balance had to be allocated among our pre-spin segments and then further allocated among our new segments, Our goodwill balances in certain regions, particularly EMEA and the United States, were considered impaired. This was the case even though the cushion by which estimated fair values exceeded carrying values in our other segments was greater than the shortfall in EMEA and the United States. In any case, this is a non-cash charge and does not impact our adjusted results. And fourth, as we also shared a few weeks ago, our fiscal year end is changing to March 31, effective for the fiscal year beginning April 1, 2022 and ending March 31, 2023. This change will move our year end away from the holiday season and many of our customers' year ends, which we believe will be beneficial from a sales and operations perspective. On that point, We address our customer's needs, not only through our geographic operating structure, but also through our six global practices. Cloud, core enterprise, security and resiliency, applications data and AI, digital workplace, and network and edge. Many of our conversations with investors and analysts touch on the relative size and growth opportunities associated with our practices. So we wanted to provide some additional information on this topic. Cloud and core enterprise each represent about a third of our revenues, and each of the other four is an important component of our business. For many of our customers, we provide a broad, integrated set of services that span multiple practices. We're also continuing to refine the borders between some of our practices. We see meaningful growth opportunities in cloud, security, apps data and AI, and edge over the next several years, driven by our capabilities, by the industry tailwinds that Martin mentioned, and by our expanded strategic partnerships. Core enterprise and digital workplace are key components of many of our relationships as they provide services that are mission critical for our customers' operations. Our digital workplace capabilities have been particularly important during the pandemic and will be in the forefront as organizations rethink the future of work. So while our quarterly reporting will be based on our reportable segments, we wanted to give you a better sense of our practices, even as they continue to evolve. Our financial position remains strong. Our cash balance at December 31 was $2.2 billion. This cash, combined with available debt capacity under committed borrowing facilities, gives us more than $5 billion of liquidity at year end. Our debt maturities are well laddered from late 2024 to 2041. We had no borrowings outstanding under a revolving credit facility at year end, and our net debt was just over $1 billion. As a result, our net leverage sits well within our target range of less than one times net debt to adjusted EBITDA, and we're rated investment grade by both Moody's and S&P. In 2021, we generated pro forma adjusted free cash flow of $904 million. The biggest reason that our free cash flow, again, far exceeded our pre-tax income is that our net capital expenditures were $700 million below our depreciation expense. Part of this difference is due to our continuing transition toward being less asset intensive. Part is due to capital expenditures being a bit lower than usual during the spin process. in part is due to our pre-spin sale of two data centers. We also had the benefit of around $200 million of favorable working capital timing differences late in the year. As a result, and even though our pro forma adjusted free cash flow has exceeded $700 million in each of the last two years, I continue to view our normalized annual free cash flow as being in the $500 to $600 million range. As we think about capital allocation, our top priorities continue to be to maintain strong liquidity, remain investment grade, and reinvest in our business. Two sub points. First, we view being investment grade as a commercial imperative, given the importance of this to our customers. And second, because of the spin-related cash outlays we have in front of us, Most, if not all, of the free cash flow we generate this year is in many ways already spoken for. Turning to our outlook, because of the change in our fiscal year that makes this quarter a transition period for us, we're sharing an outlook specifically for the first calendar quarter of 2022, even though we don't generally expect to provide quarterly guidance. Today I'll also provide some preliminary thoughts about our fiscal year 23, which will be the 12 months ending in March 2023, and about benefits we expect from our key initiatives. We plan to provide more details about fiscal 2023 when we announce our first quarter transition period earnings in early May. Our goal for the first quarter is to grow signings year over year. It's a key priority for us. Of course, the vast majority of our Q1 revenue comes from our beginning of year backlog. Based on this, we expect first quarter revenues to decline roughly 5% in constant currency. We expect our adjusted EBITDA margin to be in the 12% to 13% range and our adjusted pre-tax margin to be around negative 1%, in both cases consistent with our first quarter 2021 pro forma results. As we look further ahead, our game plan is to continue to serve our customers seamlessly and to deliver solid results, even as we go through the three-year process of transforming our business, preparing to return to top-line growth and positioning ourselves for stronger margins and higher returns on invested capital. We expect to drive double-digit growth in signings over the course of fiscal 2023, and we even expect that growth to accelerate from the first half to the second half of the year. With us having already delivered on the first major post-spin goal we laid out, entering a significantly broader ecosystem of technology partnerships, growing signings becomes our next key milestone. We typically start each year with roughly 85% of our projected revenue already under contract, given the multi-year term of our customer relationships. Because of the nature of what we do and the long sales cycles and ramp-up times inherent in our business, it'll take time for our progress on signings to translate into incremental revenue and profits. In addition, as I'll discuss in more detail, our major initiatives will generate only partial-year benefits in fiscal 2023. Accordingly, we expect that our fiscal year 2023 adjusted results will look in many ways like our full-year pro forma 2021 results, with a year-over-year decline in revenues, mid-teens adjusted EBITDA margins, and pre-tax income in the range of breakeven. Obviously, this is not where we expect our results to be once our major initiatives are having a greater impact on our P&L and once we return to revenue growth in 2025. But the nature of an infrastructure business is that it does not turn on a dime, even though we're making rapid progress in expanding our technology alliances and even though the initiatives we're implementing this year represent large opportunities for us. On the flip side, once we have our business back on a growth trajectory, the momentum inherent in an infrastructure business will work in our favor, which is one of the reasons why the initiatives that Martin laid out are so important to us. These initiatives, driving certifications, signings, and revenues through our new ecosystem partners, transforming delivery for upscaling and automation, and addressing elements of our business with substandard margins, will layer into our results over the course of the year and beyond. Our alliances initiative will drive signings, revenue, and over time, roughly $200 million in annual pre-tax income. Our advanced delivery initiative will drive cost savings, equating over time to roughly $600 million in annual pre-tax income. And our accounts initiative will impact revenues both positively and negatively, and over time will drive annual pre-tax income of roughly $800 million. We're also pursuing growth in advisory and implementation services and among our global practices, and we'll be managing expenses carefully throughout our business. These efforts over time will contribute roughly $400 million in annual pre-tax income. In total then, we've identified paths to generate roughly $2 billion of contributions to our annual pre-tax income. This roughly $2 billion pre-tax income opportunity will mitigate the effects of near-term revenue declines and the $200 million a year increases in IBM software costs we face over the next three years. and even more importantly, it will increase margins. We intend to share updates on these initiatives with you in the future, particularly related to how they are impacting our signings, revenues, costs, and pre-tax income. We're actively executing against these initiatives. A year from now, at the end of fiscal 2023 next March, We expect our initiatives will be contributing to our earnings at a rate of roughly $500 million a year. With our IBM software costs rising, the net rate will be approximately $300 million a year. Because we'll be ramping up to this run rate over the course of the year, we estimate the gross in-year contribution from these initiatives to be in the $200 million range in fiscal 2023 and about $150 million net. And over time, our initiatives have the potential to add $1.4 billion annually to our pre-tax income. From a graphical perspective, we've laid out how we expect our strategies will help us deliver revenue and profit growth. For revenue, they represent building blocks that will move us from a starting point of declining revenues to our goal of annual revenue growth by 2025. For margin, they represent building blocks that will move us from a starting point of minimal pre-tax margins to a significantly stronger profit profile. What I want to emphasize most of all is that each of our major initiatives represents a medium-term opportunity to add hundreds of millions of dollars to our pre-tax income. Our recognized market leadership that trusts our customers' place in us Our growing network of strategic partnerships and our ever-expanding experience in delivering technology solutions differentiate us and propel us as a business. This strategic flywheel positions us well to achieve the milestones we've shared today. The components within our flywheel will benefit from the initiatives we're implementing and the actions we're taking. In closing, we're enthusiastic about our prospects as a leader in the markets we serve. We're moving aggressively to have our strong capabilities and high levels of customer satisfaction deliver more to our top and bottom lines. And we're proceeding decisively toward transforming our business to deliver future growth and financial results that better reflect our market position. With that, let me turn things back to Martin.
spk01: Thanks, David. Before we turn to Q&A, let me quickly summarize why we're so enthusiastic about the opportunity ahead. We made significant progress in the fourth quarter, and we're now positioned to participate in a much bigger and faster growing total addressable market. We're already deeply embedded with our customers, and they trust us to operate the hearts and lungs of their vital information systems. We're unmatched in terms of our expert and trusted people, our data, and our intellectual property. And we've embraced our new freedom to act, as you've seen with our recent partnership and customer announcements. The progress we're making in participating in a broader ecosystem and the initiatives we've shared today put us on a path to return to growth by 2025, as we focused on serving our customers throughout their digital journeys. This will be a particularly exciting year for Kindrel as we bring our plans to life and start to see outcomes and results from everything we've been building. So with that, David and I would be delighted to take your questions.
spk05: Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If you do change your mind, please press star followed by two. And please ensure that you are unmuted locally when you go to ask your question. As a reminder, please keep it to one question at a time. Thank you. We'll be taking our first question today from Tinjin Huang of JP Morgan. Tinjin, please go ahead.
spk01: Operator, we can't hear Tinjin.
spk05: You are unmuted, Tinjin.
spk02: Can you hear me now? I'm sorry, I don't know. Here we go.
spk05: Yes, I can hear you.
spk02: Yeah, sorry about that. I don't know what happened. Good morning. Thanks for the slides. It's great to see this and go through it here. I'll ask about signings if you don't mind. So just, you know, simplistically looking at book to bill, you know, looks like 0.95, 0.96 here in the fourth quarter. I heard David get comments around some of the framework to think about signings. Looks like double digits for this year and a little bit of a slow burn into the revenue, but just maybe anything to consider or think about with visibility on signings, anything interesting from a new logo versus existing client side, and then just the signings in relation to revenue retention. Any thoughts there as we start to build a, you know, get into a rhythm of thinking about signings in relation to revenue?
spk03: Sure, T.J., With respect to signings, we are enthusiastic about the opportunity for double-digit signings growth this year on a year-over-year basis, and we expect to start making progress there right away. As I look at our signings, I see growing share of wallet and growth with existing customers as being a really important part of that. We are adding new logos as well, but I really view share of wallet growth and having that drive in signings as being particularly important to us. And we feel very good about customer retention. Our retention rates have always tended to be very high, and that's just a natural part of our business model, driven by the customer satisfaction that we have and the service level achievement that we have going on. So I expect that will help with signings as well. And then the last piece that's going to be an important focus for us this year is the growth in advisory and implementation services revenues. And those signings are important for two reasons. Number one, they give rise to signings growth. Number two, they tend to give rise to revenues on a faster, more accelerated basis. as opposed to managed services signings, which typically play out over three, four, five, six years. So we're focused both on the significant signings growth we expect to achieve this year and on specific growth in advisory and implementation services signings.
spk02: Okay. Great. That's clear. Thank you. I had a second question, but happy to jump in the queue if you prefer.
spk05: Thank you, Tinjin. We'll take our next question from David Togut of Evercore. David, over to you. David, please ensure you're unmuted locally.
spk04: David, are you able to hear us? Millie, we're on for David Talgett. Good morning and thank you for taking the question. Hi, can you hear me?
spk01: Yes, we can Millie. Thank you. Millie, are you there?
spk04: I'll just have a question on capital allocation strategy. So can you give us your latest update on how you're thinking about it, and could dividends be considered within the next 12 months?
spk01: Yeah, well, I'll give you – thanks, Millie.
spk04: And how you're thinking about M&A.
spk01: Okay. Thanks, Millie. I'll give you my perspective. It's an interesting question and obviously an important one. So a few things. Directly on dividend within the next 12 months, I think that's highly unlikely. As David noted, most of our cash this year gets absorbed by transition costs gets absorbed by some retention programs that IBM put in place before we respond. So I don't see in the year an opportunity. And quite frankly, as you know, as I think everybody would expect, we need to get the firm on a stable footing, a stable margin profile, with an assured, as David noted earlier, an assured investment grade rating. So it's just a bit premature, I think, for us to be focused on returning capital via a dividend to shareholders. On the acquisition front, look, I think there are some interesting opportunities out there. From my perspective, if I think at a high level, There are opportunities, I think, for us to accelerate this transition through skills. Obviously, there is a substantial demand for talent, for the kind of talent we have, which we're keeping and which we are using to shift our business. But there are also some very important firms that do this kind of work that we might consider accelerating our progress towards some of these newer areas. And as we build out our security practice, our network and edge practice, you know, those are opportunities where we might consider them. And relatedly, but not identical, the other side of the acquisition spectrum is more IP related. You know, we didn't spend a lot of time in the prepared remarks talking about the service delivery platform that we're putting together from the IP and the data and the technology we have today. But keep in mind, we were spun out with more than 3,000 patents with with quite a few in the process. So we have a fair bit of IP that we're building a service delivery platform around, and we would, and we are looking at some things that might fit into there. It depends a lot, as does the discussion around investment-grade credit. It all depends on what's important to our customers. So our customers obviously need access to our skills. Our customers need a robust system. service delivery platform and our customers need us to be investment grade. So we will keep all of those things in context. So hopefully that's helpful. David, anything? No? Good. Thank you. Okay. Thanks, Millie. Operator, next.
spk05: Thank you. We'll now move to our next question from Jamie Friedman of Susquehanna. Jamie, over to you.
spk00: Good morning, Martin. Good morning, David. Wanted to ask about the partnerships. So Kindrel signed a flurry of these recent partnerships, Azure, AWS, Google, many others. I was wondering if you could describe at a high level some of the mechanics. How do these typically work? Are they go-to-market relationships? Is there training for KD employees? Is there a revenue share? Just some color around the partnerships would appreciate it. Sure, Jamie.
spk01: Thanks for the question. Thanks for calling in. So I would, the way to think about these partnerships is there really are three elements to each of them. Each of the elements is a little bit different depending on the nature of the partnership, but they're all built around three things. One is they are built around enhancing the kindrel skill set. So a co-investment in skills. In the case of Microsoft, it's called Microsoft University for Kindle. In the case of Google, it's called Google Cloud Academy for Kindle. So each of them has a very heavy co-investment component to it so we can build the skills, build the credentials that our teams need as we move into this ecosystem. So that's part one. Part two of these uh is a go-to-market a joint go-to-market with uh with the the partners so we actually show up together in front of our customers and that's uh it's worked really well for for the for the longest ones our our co-marketing our co uh our code go to market with microsoft is pretty well developed uh the teams are still you know they've got some some some um familiarity that they need to build around the world but But they are all of these, each of these is built around a joint go to market. And that allows obviously then the skills we build, the credentials we have to get put to work in front of customers so that we also build the experience and obviously we close some business. And then the third element of each of these is a joint innovation. So we are building innovation labs with each of the partners. That allows us to build and invest in some joint solution building with the technologies that the partner has, plus our service delivery platform, which can enable all of that. And then, as I said, we can go to market together. So there really are three pieces to this. Co-investment in our skill base, joint go-to-market, and co-innovation. Hopefully that's helpful. Got it. Thanks for the context. Thanks, Jamie. Operator, I don't know if Tenjin's still back on. He was nice enough to go back to the queue. Tenjin, are you still there? I am, if you can hear me.
spk05: Tenjin, go ahead.
spk02: Oh, good. Thanks, Tenjin. Yeah, please. Yeah, no, thanks for taking my follow-up. I just wanted to ask on advanced delivery. I thought that was really interesting on the upscaling and automation makes sense. I understand it's a million initial cost savings. I'm just curious how – and I'm not expecting to pre-announce a bigger number in the out years, but how much further can you take that in terms of, you know, potential from a cost perspective and then also from a revenue implications or revenue per employee implications, any consideration there that you upscale and automate?
spk01: Yeah, it's a good question. And look, I'd say a couple of things first, which is this business, like others, in a prior incantation with the old owners, has tried to change and create advanced delivery methods. This business has attempted automation and things. And And this one, I would say, it's different. It's obviously different because we have now, you know, different management, different approach, different freedom of action on how we go about doing this. And so there's a difference now relative to, I think, what may have been tried in the past. So that's one. It's really important, and we talked, excuse me, we talked, I mentioned a little bit about how these partnerships are around co-investment and skills. Look, there is a demand for skills out there that is unprecedented, and none of us, we don't expect it to change, our customers don't expect it to change, and everyone is out trying to find the people to fill the demand as as the market continues to grow, this for us is a massive opportunity to fill our skill needs, to move our really talented, trusted employees into the places where our customers are trying to go. And so as we create that opportunity and we give those people the time to go re-skill, this is a really powerful model for us. um and and and our early our the early signs because we're you know we're we're in the stage now we've piloted this think think of a a piloting this in in dozens and we're going to move that pilot into hundreds and in the dozens the the uh the the the learnings are very positive it it works you know the the people who again these customers trust get re-skilled they move into some of these newer areas and they wind up back in these accounts where the accounts trust them and love them to do the work they do. So as we scale that, as David mentioned in his prepared remarks, as we scale that from dozens now to hundreds, we think, and we'll see how it rolls out beyond that, but in the medium term, In the medium term, we think this is worth about $600 million to us, and we are very focused on it. Now, where does it go from there? Too soon to tell, right? We're still, again, in pilot. But as we said, we'll also provide updates on what our learnings are, how this is working. and we'll understand better, you know, because we have what I call the wiring diagram now, and now we'll learn more about the physics of how this works as we scale it. But this is a sizable opportunity and important one for us. So thanks for asking. Operator, I think, thanks, Jinjin. I think either Millie or David might be back from Evercore. I don't know.
spk05: Yeah, of course. Your line's now open. Just to confirm, you're unmuted. Please speak, Lydia or David.
spk04: Hi. Yeah, thank you for taking that question. Sorry about the lag on the line earlier. But just have kind of a follow-up in terms of margins. So in 4Q21, you guys had 14 or about 15% of adjusted EBITDA margin. kind of what drove the decline in margin expectation in your first quarter 2022 guide?
spk03: Sure. I would look at the first quarter guide as being very similar to the prior year first quarter. and not really look at it sequentially. So last year when the first quarter was also in that 12% to 13% range, we delivered 15% margins for the year. So I wouldn't read anything into the sequential decline that occurs there. There's some seasonality associated with that. And as a result, I would focus on the fact that Q1 margins are expected to be similar to where they were a year ago. And while our outlook for fiscal year 23 is preliminary at this point, I would emphasize that we're looking for a continuation of the sorts of margin trends that we had seen in fiscal 2021. So, from that perspective, you know, consistency year over year is the right takeaway from our guidance, and not to read anything in the sequential decline. Thank you, Millie.
spk04: Thank you, David. Thank you for the clarification.
spk01: Thank you. Thanks. So I think that's the end of the queue. We've we've we've tired them out. I guess, David, we've got a question. So a few things. One, thanks to everybody who called in. We'll have another call in early May as we as we indicated to talk about the quarter. But obviously, between now and then, we'll be spending lots of time with our investors. at various conferences, et cetera, to make sure that everybody understands where we are and, quite frankly, make sure everybody understands why we're so excited about the opportunity ahead of us. There is growth to be had as we've now expanded the addressable market in which we operate. There is opportunity to work with the largest technology providers on the planet as we use our freedom of action to create new partnerships. And as we talked about, I think in some detail here, these initiatives really help us shore up the margin profile of the company over the medium term. And as we said, we'll continue to share progress and signposts so that you know that we're on track. But thanks again, and we look forward to talking with you over the coming weeks and months. Thank you, Operator.
spk05: This concludes today's call. Thank you all for joining. You may now disconnect your lines.
Disclaimer