Kyndryl Holdings, Inc.

Good morning and welcome to the Kendrell Fiscal Second Quarter 2023 Earnings Conference Call. Currently, all callers have been placed in a listen-only mode, and following management's prepared remarks, the call will be open for your questions. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If you need to remove yourself from the queue, please press star 2. At any time, if you should need operator assistance, please press star 0. Please be advised that today's call is being recorded. I will now turn the call over to Lori Chapman, Global Head of Investor Relations at Kindrel.

You may begin. Good morning, everyone, and welcome to Kindrel's earnings call for the quarter ended September 30, 2022, the second quarter of our fiscal year. 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, and these statements speak only to our expectations as of today. For more details on some of these risks, please see the risk factor section of our annual report on Form 10-K for the year ended December 31st, 2021. Kindrel does not update forward-looking statements and disclaims any obligation to do so. And today's remarks 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 events, which are available on our website at investors.kindrel.com. With me here today are Kindrel's Chairman and Chief Executive Officer, Martin Schroeder, and Kindrel's Chief Financial Officer, David Weichner. Following our prepared remarks, we will hold a Q&A session. I'd like to now turn the call over to our chairman and CEO, Martin Schroeder. Martin?

Thank you, Lori, and thanks to each of you for joining us today. This is an exciting week for Kendrell. It's the one-year anniversary since we separated from IBM to become the world's largest IT infrastructure services company. designing, managing, and modernizing complex mission-critical systems at scale for some of the world's largest organizations. Our transformation is well underway. We're executing on our strategy to drive profitable growth, and I'm even more enthusiastic about the opportunity today than I was a year ago. We understand that the macro environment is top of mind for many people, and we recognize the market uncertainties, currency headwinds, and inflation pressures that multinational corporations, including Kindrel, are facing today. For Kindrel, the essential non-discretionary nature of our business provides our revenue streams with some natural insulation to macro factors. Equally important, our execution on our three A's initiatives, alliances, advanced delivery and accounts, will deliver benefits we need to strengthen our overall business performance independent of the broader economy. On today's call, I'll update you on our strategy and how we're executing on our 3As. Then David will share details and our quarterly results, link our recent progress to our financial goals, and update our fiscal 2023 outlook to reflect currency headwinds and higher energy costs. As the world's largest IT infrastructure services company, building on 30-plus years of mission-critical experience, we entered our independence with expert people, long-standing customer relationships, and a ton of intellectual capital. We serve thousands of customers and operate in over 60 countries. Many of our customers have been working with Kindrel for decades, and we have top-tier customer satisfaction scores as measured by Net Promoter Score. With our independence, we doubled the size of our addressable market, formed meaningful alliances with nearly two dozen leading technology companies, and they have expanded both the scale and scope of our capabilities. We have unmatched expertise in managing hybrid on- and off-premise complex IT environments and have strengthened our capabilities through our six global practices. The combination of our expertise and our multi-vendor strategy enables us to expand the scope of our customer relationships and accelerate their digital journeys in cloud, security, data, and intelligent automation. We launched our three A's initiatives back in February. These initiatives are critical to our future success, and I'm encouraged by the significant progress we've made to date. We are tirelessly executing our three As to drive the progress and earnings contributions we've targeted. As a reminder, we provided targets of $1 billion in signings tied to hyperscaler alliances this fiscal year, $200 million in annualized cost savings from advanced delivery by fiscal year end, and $200 million of annualized pre-tax benefit from our accounts initiative. We're on track to deliver on our fiscal 2023 milestones for each of these initiatives. And keep in mind, our transformation work will not be done after this fiscal year. Over the medium term, these initiatives are expected to generate $1.6 billion in annual benefits, plus another $400 million that we're driving through growth and advisory services, our six practices, and expense management. In the first six months of this fiscal year, we generated $425 million of hyperscaler signings, putting us on track to achieve our billion-dollar annual target for our alliances initiative with a solid pipeline heading into our fiscal year-end. Since the beginning of the year, we've continued to develop our cloud-related capabilities with a 63% increase in hyperscaler certifications to now more than 26,000 on top of our existing IBM cloud certifications. Another proof point of how we're leveraging our new alliances is the growth we're experiencing in our advisory services signings which are up 43% so far this year. We recently branded our advisory services as Kindrel Consult to reflect the evolution of how we're delivering customer value by reducing business risk and supporting digital transformations. With our advanced delivery initiative, we're investing in intelligent automation, transforming the way we deliver services, and increasing our productivity. This program is making our customers' infrastructures more secure and more resilient. To date, we freed up 3,000 delivery professionals to backfill attrition or to be upskilled and redeployed to new opportunities. At the same time, it generated annualized savings of $150 million as of quarter end, on track to achieve or perhaps exceed our $200 million fiscal 2023 year-end objective. In our accounts initiative, we're addressing elements of our business with substandard margins. Our customers have been responding positively, and in many cases, we're driving margin growth by expanding the scope of work with higher-value services and optimizing our cost base through automation and greater standardization. Our engagement efforts so far have resulted in a meaningful increase in the projected margins associated with these accounts. In the September quarter, we're realizing pre-tax benefits at a rate of roughly $80 million a year and progressing toward our $200 million year-end run rate goal. To make our three A's more tangible, I want to share a handful of customer success stories that demonstrate our team's execution. There's a theme among these and other examples. It's that the combination of our broader technology ecosystem and our expanded capabilities through our six practices is resonating with customers and providing Kindrel with margin opportunity. Through our alliances initiative, we're winning assignments in a larger addressable market. For instance, for a longtime European-based telecommunication services customer, we've begun a multi-year project to migrate from private cloud to a hyperscaler, ensuring a secure and resilient hybrid IT environment. With a European-based media company who's been a customer for more than a decade, we've expanded our scope of work to modernize this digital experience and ensure a seamless migration to Microsoft Azure. And a multinational consumer goods company we're implementing an automation platform with a hyperscaler. In advanced delivery through automation and standardization, we're seeing more and more opportunity to increase service levels and systems resiliency. For example, we reduced high impact incidents by 90% for a global industrial company. For European professional services firm, we've nearly doubled the monthly automations to 700,000 that check and protect their systems. And by transforming the way we deliver our services to a European manufacturer, we freed up about 16% of that delivery team to drive increased system stability while also increasing our labor productivity. In accounts, we're expanding our profitability profile. For a European financial services firm, we leveraged our hyperscaler relationships and advanced delivery initiative to shift the scope of work toward higher value services and optimize the cost base. For another large global financial services company, we had the opportunity to expand our scope of work and further optimize our resources to increase productivity. In both cases, these changes are delivering roughly 10-point increases in gross margin. And for a banking software provider, we've been able to renegotiate the terms of our existing contract by leveraging our expanded capabilities, enhance our delivery and cost structure through automation, and grow the scope to include data application and AI work. In the process, we're realizing a $3 million annual increase in gross profit with that account. In a nutshell, our 3As initiatives are favorably impacting how we go to market and the economics associated with our business. As I mentioned, our alliances are an important element of our transformation and execution of our 3As initiatives. We focused on building relationships that really matter to our customers and have a sizable impact on their business. Together through our practices, we are co-creating, co-investing, and co-selling new and enhanced services. It's a win for our alliance partners, it's a win for our customers, and obviously a win for Kindrel. With Microsoft Azure, we recently announced an exciting new joint mainframe modernization offering that will allow our customers to better access and use data across a hybrid environment. Our financial services and other mainframe reliant customers will be able to capitalize on the AI innovations and scalability of Microsoft Azure while still counting on the reliability and security of the mainframe platform. We also introduced an integrated hybrid cloud solution with Microsoft and Dell Technologies to help customers accelerate cloud transformation projects. And with Google Cloud, we're delivering managed services for their new dual run offering that provides customers a safer approach to moving legacy mainframe workloads to the cloud. This past quarter, we also added Citrix, Elastic, EY59, and Teradata to our list of alliance partners. We see Kindrel operating at the heart of progress. Our alliances and our unparalleled ability to integrate great technologies from multiple sources into complex IT stacks are what will allow us to play this role for our customers in today's digital economy. To fully leverage these partnerships, in September we launched Kindrel Bridge, a new open integration platform that reflects our commitment to transforming how we deliver sophisticated services. Kindrel Bridge gives our delivery teams more automation and gives our customers more visibility and control into their complex IT estates. Our digital platform integrates existing tools, intellectual property, processes, and partnerships into a single operating environment. Over time, Kindrel Bridge will expand and grow and will move from observability, going from how to navigate our services and enhance IT operations, to self-service capabilities, and even the ability to digitally subscribe to provision and manage services, including services based on partners' technologies. Fundamentally, Kindrel Bridge offers our customers access to a 24-7 digital Kindrel that provides greater systems resiliency. And to align with our three A's, it strengthens our advanced delivery efforts and opens the door for us to capture new higher-value revenue opportunities that will expand our margins over time. So a year into our independence, we're operating and going to market differently with a new mission and value proposition. We've entered a broader technology ecosystem, our business transformation has gained momentum, and we're executing on a clearly defined set of key initiatives, our 3As. We continue to focus on driving our business toward a return to revenue growth in calendar 2025 and significant margin expansion. There is significant value to be created at Kindrel. Based on what we have seen internally and heard from our customers so far, we have the right strategy in place and are confident in our ability to execute and transform our business. Now with that, I'll hand over to David to take you through our results and our outlook.