Kyndryl Holdings, Inc.

Good morning, ladies and gentlemen. Welcome to Kendra's first fiscal quarter 2024 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automatic message advising your hand is raised. Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Laurie Treadman, Head of Investor Relations. Please go ahead.

Good morning, everyone, and welcome to Kendrell's earnings call for the first fiscal quarter ended June 30th, 2023. Before we begin, I'd like to remind you that our remarks today will include forward-looking statements. These statements are subject to risk factors that may cause our actual results to differ materially from those expressed or implied, and these statements speak only to our expectations as of today. For more details on these risks, please see the risk factors section of our annual report on Form 10-K for the year ended March 31, 2023. Kindrel does not update forward-looking statements and disclaims any obligation to do so. In today's remarks, we'll 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 Weissner. Following our prepared remarks, we will hold a Q&A session. I'd like to now turn the call over to Martin. Martin?

Thank you, Lori, and thanks to each of you for joining us. On today's call, I'll update you on the substantial progress we're making as a company and the meaningful implications of that progress. David will then review our recent financial results, our updated and improved fiscal 2024 outlook, and how we're changing the margin profile of our focus accounts. We are off to a very strong start in fiscal 2024. Our first quarter results exceeded our expectations and positioned us well for the year as a whole. Our 3A initiatives, alliances, advanced delivery, and accounts were at the core of our success. Kindrel Consult, Kindrel Bridge, and our efficiency efforts also helped drive our results. We extended and expanded customer relationships in ways that would be mutually beneficial, and we're raising our earnings outlook for fiscal 2024. In short, we're moving even faster than before to deliver progress, and we'll talk more about our achievements on the 3As and our updated full-year outlook. But before we do that, there are three declarative statements I want to make. First, annual losses are now behind us. We expect to make money this year and each year going forward as measured by our adjusted pre-tax income. Second, we remain committed to delivering revenue growth in calendar 2025 and in fiscal 2026. That means that our revenue will bottom out in calendar 2024 or fiscal 2025. And we expect that bottom will be within a few percentage points of our revenues this fiscal year as we retain the substantial majority of our focus accounts and their revenue. And third, as a result of our execution and accelerated pace of our transformation, we'll deliver the profit goals we've previously shared on the timelines we've previously shared. And our medium term target is for adjusted pre-tax margins to be in the high single digits. This year, our fiscal 2024, will be a year of acceleration for Kindrel. We're already seeing that in our first quarter results and our operating trends. We're accelerating our transformation with new alliance signings and revenue, with benefits from advanced delivery, with a massive improvement in our focus accounts, with rapid growth in Kindrel Consult, with our technology leadership through Kindrel Bridge, with our cost savings through our internal rationalization and transformation, And, of course, the culture change we're driving through the Kindrel way. These are powerful dynamics for our near-term and medium-term value creation. Stepping back a bit, as I think about Kindrel, I believe our leadership in the markets we serve and the way we're building toward future growth are creating a compelling value proposition that is not yet well appreciated across the investment community. We've previously highlighted a number of the key components of our value proposition, and I want to clearly connect the dots as to how these elements of our business model are building value for us. First, we're the world's largest provider of IT infrastructure services, double the size of the next largest players. Our scale and our industry leadership foster innovative solutioning and service excellence because of our unique position on the industry learning curve and the mission critical nature of what we do. We've been delivering double-digit revenue growth in Kindrel Consult, the higher margin, higher value-add advisory portion of our business, despite the macro environment. And over the medium term, we now expect Kindrel Consult to grow to 20% of our revenue, one-third more than our previous target of 15%. And by delivering and accelerating customer business outcomes that are informed by our extensive operational experience, Kindrel Consult will support our future revenue growth and margin expansions. We are aggressively fixing our focus accounts. With these customers, as we discussed last quarter, we're adding profitable scope, removing unprofitable scope, driving efficiencies largely through automation, which enhances service quality, and we're adjusting pricing when appropriate, and only rarely are we exiting relationships. We're approaching an inflection point in our business mix, with fiscal 2025 being a year when roughly half of our revenue will come from post-spin signings. and fiscal 2026 being the first year when our revenues and earnings will be primarily determined by contracts that Kindrel signed. The three A's, the anticipated upswing in our revenue trajectory and the tipping point of controlling our own destiny through our revenues coming mostly from post-spend signings are what will propel us from modestly positive adjusted pre-tax earnings this year to high single-digit margins in the medium term. And our cash flow is expected to grow in conjunction with our adjusted pre-tax income with strong conversion of adjusted net income to cash. Together, these elements of our business model form, I believe, a compelling value proposition. And I want to emphasize how enthusiastic we as a management team are about the margin trajectory that we've laid out and are already delivering on. Our 3A initiatives are major proof points. In fact, they're driving momentum throughout our business and fostering additional progress each quarter. As a reminder, we provided fiscal 2024 targets of $300 million in revenue tied to hyperscaler alliances, $450 million in cumulative annualized cost savings from advanced delivery by fiscal year end, and $400 million of cumulative annualized pre-tax benefit from our accounts initiative. We made excellent progress toward our goals in the first quarter putting us well on track to deliver or exceed our fiscal 2024 milestones for each of these initiatives. Through our alliances, we're building the portion of our customer relationships that include cloud-based content. In the first quarter, we recognized more than 80 million in hyperscaler-related revenue, putting our run rate ahead of our $300 million full-year target. We've also continued to increase our hyperscaler certifications to more than 37,000, which is 70% higher than a year ago. Our growth stems from joint enablement activities with our partners, co-marketing to enterprise customers, and incremental training programs, all of which help us deliver higher value solutions that address customers' most pressing needs. Our advanced delivery initiative is transforming the way we deliver our services with automation tools and resources. To date, we've been able to free up more than 6,500 delivery professionals to address new revenue opportunities and to backfill attrition. This is worth roughly $375 million a year to us, representing the $75 million increase in our annual run rate this past quarter. And we continue to see significant automation opportunities across our delivery operations as we improve service levels, reduce our costs, and incorporate more technology, including Kindrel Bridge, into our offerings. Our accounts initiative has been and will continue to be a global effort focused on fixing elements of contracts with substandard margins. We're a trusted partner for our customers, and that trust is what brings our customers to the table. In the first quarter, we've increased the annual profitability of our focus counts to more than $300 million, which is a $90 million increase from our run rate just three months ago. More generally, we view successful execution of our three A's as the clearest and fastest path toward achieving sustainable, profitable growth. In each quarter, there are additional customer examples that demonstrate our team's successful execution of our three As. The underlying theme among them is that the combination of our alliances and our expanded capabilities, including Kindrel Consult, Bridge, and Vital, is resonating with our customers and providing Kindrel with new revenue streams and higher value opportunities. Here are a few of my favorites from the first quarter. With one banking customer who we've been working with for over a decade, We recently expanded beyond our managed services to include Kindrel Consult and will help the bank build and deploy AI into its core banking services. Second, in conjunction with a contract renewal with one of our largest customers, we expanded our scope of work to include Kindrel Consult and AWS Cloud Migration and Management. And with one of our largest, larger focus accounts that was undergoing the digital transformation and becoming increasingly unprofitable for us, we're adding consult, we're adding mainframe modernization and cloud-based work, and we're accelerating our customers' digital transformation while removing third-party purchases that were uneconomic for us and fixing the margins associated with the account. Innovation. Innovation that is practical and useful is what's allowing Kindrel to show up differently for our customers. David Miller- Kindle bridge is an open integration services platform powered by AI and machine learning that we offer to our customers to accelerate automation drive efficiencies enhance security and resiliency and create a more sustainable technology estate. David Miller- We have more than 500 enterprise customers operating on Kindle bridge with more than 1000 expected by the end of the year. David Miller- And we recently announced that we're helping these customers both reduce risk and save more than a billion dollars annually through their early adoption of Kindle bridge. Now, we view artificial intelligence as a multifaceted opportunity for us as we both apply AI in our operations and enable our customers to use AI in their business. AI is already driving enhanced operating performance in applications like Kindrel Bridge, and it's beginning to generate revenue growth opportunities as customers need additional help with data architecture and to implement AI at scale, and it's going to allow us as an organization to operate more efficiently. We're not going to make AI our fourth A, but we clearly see it as an accelerator of our advanced delivery initiative, a component of our alliance's growth, and a source of future cost savings opportunities. In fact, this week, we'll announce that we're working with Microsoft to help our customers accelerate the responsible adoption of generative AI solutions in their enterprises. And in another area where innovation is critical, we've recently announced that we've significantly expanded the end-to-end cybersecurity services we offer enabling enterprise customers to detect, respond to, and recover from cyber attacks. We're opening next-generation security operations hubs in key geographies around the world, which will enable Kindle's already $2 billion security and resiliency practice to expand our presence into this nearly $50 billion market. By offering security operations as a unified modular platform, we enable customers to retain existing security investments while augmenting their infrastructure with new services. To sum up, we are highly enthusiastic about our recent results and the path in front of us. And we're confident we have the right strategy in place to drive progress. We have the right leadership, talent, know-how, and alliances to execute our business transformation. And our fiscal 2023 and first quarter 2024 results, including our execution against the three A's, gives us strong positive momentum. Looking ahead, we'll use our intellectual property, our alliances, and our scale to further expand our capabilities, to differentiate ourselves in the markets we serve, and to strengthen our leadership position. We're engaging with customers and IT decisions further up the technology stack, including discussions about how to enable AI in their businesses. Our unmatched expertise in mainframe modernization and hybrid IT environments allows us to provide thought leadership with Kindrel Consult, deliver innovation with Kindrel Bridge, and meet our customers' objectives for robust application of new technologies. We're capitalizing on growth opportunities across our practices, and particularly in cloud security, network and apps, and data and AI. In short, we're engaging with customers where they want us to be, at the center of a collaborative relationship in which technology drives business outcomes in a reliable, secure way. This is allowing us to access incremental market opportunities to grow our share of wallet with existing customers, to win new customers, and to transform Kindrel. Now, with that, I'll hand over to David to take you through our results and our outlook.