Kyndryl Holdings, Inc.

Q4 2024 Earnings Conference Call

5/8/2024

spk15: Good morning, ladies and gentlemen, and thank you for standing by. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Kindrel Fiscal Fourth Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise, and after the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1 a second time.
spk14: Thank you, and I would now like to turn the conference over to Laurie Chapman, Global Head of Investor Relations. You may begin.
spk16: Good morning, everyone, and welcome to Kindrel's earnings call for the fourth quarter and fiscal year ended March 31, 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, and we are under no obligation to update them. 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 March 31, 2023. 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.kindrel.com. With me here 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 now like to turn the call over to Martin. Martin?
spk03: Thank you, Lori, and thanks to each of you for joining us. I am excited about all that we at Kindrel have accomplished in our second fiscal year as an independent company, and I cannot be more proud of our teams around the world. We delivered solid fourth quarter results, exceeded our full year targets on all of our 3A initiatives, alliances, advanced delivery, and accounts, and exceeded our guidance for fiscal 2024. We also delivered strong growth across Kindrel Consult. We expanded our hyperscaler relationships and accelerated adoption of Kindrel Bridge. And we're providing our fiscal 2025 outlook that includes substantial earnings growth and free cash flow. And importantly, we're pulling forward the timing of returning to revenue growth and now expect to deliver positive revenue growth in the fourth quarter of this fiscal year. With our consistently strong execution in fiscal 2024, we've proven that we can deliver on ambitious goals to strengthen our business and that we can grow in high-value areas that we target for growth. You may recall that this time last year, I said that our fiscal 2024 was a year of acceleration for Kindle. And as you can see from our performance, we've accelerated both our business transformation and our innovation, which have further solidified our leadership position in mission-critical IT services. We'll approach our third fiscal year with the same intensity and determination. This fiscal year, we will pivot from transformation to growth. It will be the year in which our top line inflects and half of our revenue is generated from higher margin post-spin signings. It will be another year in which we deliver double-digit revenue growth from Kindle Consult. It will be the year in which our hyperscaler-related revenue nears a billion dollars. It will be the first year that we will have the majority of our managed services customers operating on Kindle Bridge, allowing us to drive new levels of automation and innovation, and it will be another year in which we expect to deliver substantial earnings growth. So, on today's call, I'll share more detail on these pivotal shifts in our business, and I'll describe how major secular trends in IT are driving customer demand, fueling our return to growth, and putting Kindle at the center of our customers' digital transformations. David will then review our financial results and discuss our outlook for fiscal 2025. I want to start by highlighting the recent accomplishments that have set the stage for our growth trajectory. In fiscal 2024, we grew our adjusted pre-tax earnings by more than $380 million. We delivered double-digit growth in our more than $2 billion of consult revenue, and we drove triple-digit growth in hyperscaler-related revenue, validating our ability to return to growth. We grew our total signings, and even more importantly, the projected pre-tax margins on those signings were consistently in the high single digits, aligned with our medium-term targets. and we generated positive adjusted free cash flow, demonstrating our focus on cash generation that will support our long-term strategy and goals. Our advisory talent and consult, together with our design-led Kindrel Vital methodology and our Kindrel Bridge delivery services platform, allows us to co-create and innovate with our customers and our partners. We now have over 1,200 of our largest customers operating on the Kindrel Bridge platform, which is allowing us to deliver more value to customers, drive savings for Kindle through automation, and derive insights from AI learnings powered by the operational data associated with our scale. Even beyond Kindle Bridge, Consult, and Vital, we have executed powerfully throughout our business. We're delivering sophisticated, optimized, multi-vendor solutions to customers to help them address critical needs and major opportunities. We're delivering managed services more efficiently than ever. And as a result, and as we said we would, we're showing up differently for our customers and seizing opportunities that are unique to Kindrel. We've proven that Kindrel is a vital and trusted partner to our customers as we help them to run and transform their mission-critical, complex, hybrid IT estates. Our engineering and advisory talents, our unique operational data IP and embedded AI, our heritage and scale, enable us to meet our customers' evolving IT needs and uncover new value from past, current, and future technology investments. In fact, our expertise in both running and transforming IT estates differentiates us in the markets we serve and uniquely positions Kindrel at the heart of secular trends that are shaping the evolution of IT, namely the adoption of artificial intelligence, technology skill shortages, organizations' needs to modernize, cloud migration, and cybersecurity. We see these trends as continuing for the foreseeable future, and they're driving demand for our services. For example, through our data architecture capabilities, we're enabling enterprises to apply new AI and gen AI technologies to drive business outcomes. Through our global delivery centers, our scale and our training programs, we develop and make available the broad range of skills our customers need. Through Kindle Bridge, we're helping customers intelligently prioritize infrastructure needs, address technical debt, drive innovation, and uncover previously hidden risks. Through our hyperscaler alliances and mainframe modernization skills, we're helping customers migrate, manage, and optimize their hybrid IT estates across multiple cloud platforms, ensuring the right workload is on the right platforms. And through our global network of security operations hubs and our end-to-end cybersecurity services, we're helping customers protect, detect, and recover from cyber threats. What's more, the mission-critical nature of our work is increasingly consultative and tied to customer achievement of business outcomes. And because how important AI is to us and our customers, I want to spend a few minutes on the role Kindle plays in AI adoption and how we're applying our capabilities to unlock incremental growth opportunities. As we've mentioned, Kindrel is an AI beneficiary and an AI enabler. As the largest IT infrastructure services provider in the world, we have more tech stack operating data than anyone, and we're using machine learning with this data to give our customers and Kindrel a data-driven advantage in designing and managing systems. We're using AI and Kindrel Bridge to identify application performance patterns, produce actionable insights, reduce required maintenance, and prevent incidents from occurring. Bridge can operate as a self-healing architecture and is now producing 3 million actionable insights a month and is helping customers achieve nearly $2 billion of annual savings by avoiding maintenance and incident costs. In short, AI is powering Kindle Bridge and accelerating our advanced delivery initiative. At the same time, we're seeing revenue growth opportunities associated with both AI and GenAI. Our customers know that their AI is only going to be as good as their data, and this is creating demand for our expertise in data architecture that becomes the foundation for AI and Gen AI applications. And with our alliance partners, we're optimizing infrastructures to facilitate AI deployment in these complex IT environments. Based on our own positive experience with Kindle Bridge, we believe machine learning and Gen AI can have a substantial impact on many industries and enterprises. And we see AI readiness as a go-to-market opportunity for us and a natural extension of many of the services we already offer. In fact, revenue in our applications, data, and AI practice grew double digits this past fiscal year. As our business evolves and we move further away from our spin, our revenue mix will continue to shift to higher margin post-spin signings. This fiscal year, half of our revenue is coming from post-spin signings, and in fiscal 2026, it will be roughly two-thirds. This inflection point, when our P&L is largely determined by our higher margin post-spend signings, will dramatically strengthen our earnings and growth profile. Our forecast for fiscal 2025 is for adjusted pre-tax income of at least $435 million, reflecting a year-over-year increase of more than $270 million. And 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 have us on a path to deliver high single-digit adjusted pre-tax margins by fiscal 2027. And yes, the math associated with that is ultimately a billion dollars or more of adjusted pre-tax income with very strong conversion of our earnings into cash flow. I'm tremendously enthusiastic about how our strategic progress and our market leadership are driving solid operating performance and stronger financial results including our forecast to grow revenue in our fiscal fourth quarter, which begins less than eight months from now. As we approach the second half of this fiscal year, our purposeful efforts to shed low to no margin components of revenue will be largely behind us. At the same time, our top line will be driven by our ability to capitalize on our ecosystem of technology alliances and expand our share of wallet with existing customers. will increasingly benefit from growing demand for cloud, security, data, and AI services, and ultimately, we expect to gain overall market share as more enterprises look to Kindle for their mission-critical IT needs. We are creating significant value for our customers and will continue to be bold and ambitious to drive growth. We were born with great engineering talent, and as an independent company, we've been capitalizing on our expertise in providing mission-critical IT services by building our IP and expanding our core capabilities. Capabilities that align with the secular trends driving information technology in the ecosystem that matters to our customers and in the six practices that allow us to build and implement leading technology solutions. And having invested in our people and our technology to ensure we have the right skills and tools to meet our customers' needs, we're now hitting a pivotal shift in our business. We're not only helping organizations run their infrastructure in their business, We're now also helping them transform, building capabilities on new platforms, allowing them to leverage existing and new technology to drive business outcomes and differentiating Kindle in the process. We'll continue to execute our strategy with discipline and agility, and we'll build a culture of operational excellence and collaboration. We are confident that we have the right vision, the right strategy, and the right capabilities to capture future growth. And with that, I'll hand it over to David to take you through our results and our outlooks.
spk08: Thanks, Martin, and hello, everyone. Today, I'd like to discuss our quarterly and full-year results, our continued progress on our three AIDs initiatives, the solid margins at which we're signing customer contracts, and our outlook for fiscal year 2025, which began on April 1. We're enthusiastic about each of these topics and particularly our outlook. Our fourth quarter results reflect strong operational execution and continued progress on our key initiatives. In the quarter, revenue totaled $3.8 billion, a 9% decline in constant currency. The year-over-year decline was anticipated and primarily driven by our intentional exit from negative, no, and low margin revenue streams within ongoing customer relationships, not by macro factors. As Martin highlighted, we continue to gain momentum in higher margin advisory services. Kindle Consult revenues grew 15% year-over-year in constant currency, which underscores how we're growing our share in this higher margin, higher value-add space. Consult signings grew even faster at 30% in constant currency. Total signings grew 3% year-over-year in constant currency in Q4, our second consecutive quarter of signings growth, and we're up 3% in the year as a whole. Our signings growth for the year was strongest in our security and resiliency, core enterprise, and apps did in AI practices. And with our momentum driving a strong April, our trailing 12-month signings through April 30 are up 7% year over year. Our fourth quarter adjusted EBITDA grew 19% to $566 million, and our adjusted EBITDA margin increased by 350 basis points year over year. to 14.7%. Adjusted pre-tax income was $30 million, a $91 million improvement in profit year over year. Consistent with the trends driving our performance all year, our three A's were the key driver of our earnings growth again in Q4. For fiscal year 2024 as a whole, we generated $16.1 billion of revenue, Our adjusted EBITDA grew 20% to $2.4 billion, and our adjusted pre-tax income was $165 million, representing a $382 million increase from the prior year. We expanded our adjusted EBITDA margin by 310 basis points and our adjusted pre-tax margin by 230 basis points year over year, which were above our targets and represent a momentous leap forward on our path to high single-digit adjusted pre-tax margins. Our financial progress reflects our strategic achievements, 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 as an independent company, skating to where the puck is going in terms of our customers' future IT needs. Our performance in fiscal 2024 gives us strong momentum as we go forward. So, as encouraged as I am by the earnings growth we've delivered, I'm even more enthusiastic about how, throughout the year, we also positioned Kindrel for future revenue, margin, and profit growth. The March quarter was a continuation of us signing business with healthy margins. Throughout fiscal 2024, we 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-spend contracts, you'll see significant margin expansion in our reported results. In the middle graph on slide 13, we've 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 $12.5 billion of signings this past year, we've added over $3 billion of projected gross profit to our backlog. Over the same period of time, we've reported gross profit of $2.9 billion. This means we've been adding more gross profit to our backlog than our contracted book of business has been producing in our P&L. Having a gross profit book-to-bill ratio above 1 at 1.1 is a measure of how we're growing what matters most, the expected future profit from committed contracts. And we've been doing this consistently over the last two years. Turning our cash flow and balance sheet, we generated adjusted free cash flow of $291 million in fiscal year 2024. Our growth capital expenditures were $651 million, and we received a larger than typical $138 million of proceeds from asset dispositions. Taxes being taxes were use of cash. We 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 March 31 was $1.6 billion. Our cash, combined with available debt capacity under committed borrowing facilities, gave us $4.7 billion of liquidity at fiscal year end. We refinanced our $500 million term loan in Q4. As a result, our debt maturities are now well laddered from late 2026 to 2041. We had no borrowings outstanding under a revolving credit facility, and our net debt at quarter end was $1.7 billion. As a result, our net leverage sits well within our target range. We are rated investment grade by Moody's, Fitch, and S&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. Our 3A strategy has been a grand slam home run. It's helped us strategically transform our business. It's galvanized our people around initiatives that are game changers for us and for our customers, and it's delivered huge financial benefits. As a reminder, at the start of the year, 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. During the year, we raised each of these targets by $100 million, and we exceeded each of the raised targets. Through our alliances, we recognized more than $150 million in hyperscaler-related revenue in the fourth quarter. As Martin mentioned, this brought our year-to-date hyperscaler revenue to $500 million, triple our prior year total. Through our advanced delivery initiative, powered by Kindrel 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 Kindrel and our customers. To date, we've been able to free up more than 9,500 delivery professionals to address new revenue opportunities and backfill attrition. This is worth roughly $575 million a year to us, representing a $75 million 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 fourth quarter, we increased the cumulative annualized profit from our focus accounts by $125 million to $600 million. You know, two years ago, we laid out bold ambitions that over the medium term, advanced delivery will drive cost savings equating to roughly $600 million in annual pre-tax income, and accounts will drive annual pre-tax income of $800 million or more. Due to our progress to date, we're raising the ultimate benefits that we expect from these initiatives by $200 million each to $800 million and $1 billion, respectively. In fiscal 2025, we'll generate incremental benefits from each of our three A's, For alliances, we expect hyperscaler-related revenue to approach $1 billion, roughly double our 2024 level. We expect our advanced delivery initiative to reach $750 million in annualized savings and to deliver $200 million of incremental benefit year over year. And in focus accounts, we expect to reach $850 million of annualized savings by year-end, and to deliver $300 million of incremental profit this year compared to last. Roughly half of the benefits from advanced delivery and accounts is the full-year benefit of the actions we took in fiscal 2024, and half is the part-year benefit of additional actions we'll take in fiscal 2025. In baseball, you can't have back-to-back Grand Slams but in our business and through the 3As, we can. In fact, the 3As are becoming a regular part of our operating model rather than distinct initiatives. As we look ahead to fiscal 2025, our core financial goals are to continue to expand our margins, grow our earnings, inflect our revenues back to growth as the year progresses, and generate free cash flow. Our outlook is for revenue to be in the range of $15.2 to $15.5 billion, a decline of 2% to 4% in constant currency. We still have two quarters to go until the anniversary when most of our significant actions to step away from low to no margin revenues took effect. So we expect our year-over-year revenue declines will decrease as the year progresses and we return to year-over-year revenue growth in the fourth quarter. Based on recent exchange rates, currency movements are having a $230 million negative impact on reported revenue, but where that lands will depend on how exchange rates move over the next 11 months. In aggregate, then, we estimate that our adjusted EBITDA margin in fiscal 2025 will be at least 16.2%, an increase of at least 150 basis points versus fiscal 2024. and our outlook for adjusted pre-tax income is at least $435 million. This means growing our adjusted pre-tax income by at least $270 million and increasing our adjusted pre-tax margin by nearly 200 basis points year over year. This means we're doubling down on the strong earnings and margin growth we delivered in fiscal 2024 and keeps us right on track to be generating high single-digit adjusted pre-tax margins in fiscal 2027. Two more items to note regarding our outlook. We continue to see opportunities to drive efficiency in our operations, both through advanced delivery and in SG&A functions. While we manage labor costs primarily through hiring and attrition, we expect to incur workforce rebalancing charges of roughly $100 million in fiscal 2025. It's important to note that the anticipated charges associated with this program are included in our fiscal 2025 outlook for adjusted EBITDA, adjusted pre-tax income, and adjusted free cash flow, whereas our adjusted results in fiscal 2024 excluded such charges. Also, as part of managing our costs in CapEx, our teams have been working to make our compute and storage hardware last longer. As a result, we're now able to extend the depreciable lives of these assets from five years to six. This benefit will be largely offset by the end of the benefit we've had from certain assets having been transferred to us from our former parent pre-spin at cost. The combined impact of these two non-cash changes will be a roughly $50 million year-over-year reduction in our depreciation expense. Looking at the first quarter in particular, our year-over-year constant currency revenue decline will be similar to Q4, and our adjusted pre-tax income should be modestly higher than the $47 million we reported in last year's first quarter. On the topic of cash flow, For the year as a whole, we project roughly $700 million of net capital expenditures in fiscal 2025 and about $725 million of depreciation expense. We expect to pay roughly $150 million in cash taxes. Unlike fiscal 2024, we won't have any below-the-line systems migration outlays. As a result, we're forecasting roughly 100% conversion of adjusted pre-tax income, less cash taxes, into free cash flow. From a timing perspective, Q1 will be a significant user of cash due to annual software and incentive payments, and subsequent quarters will be more favorable. 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. To wrap up, our business model centers around providing mission-critical services to large, complex organizations that rely on our technology experts and insights to operate and advance their businesses. Our leading market position in IT infrastructure services and the mission-critical nature of what we do distinguish us from other providers of IT services. Our service levels and customer satisfaction scores make it clear that we serve our customers extremely well. And the growth we're delivering through our alliances with multiple technology providers further differentiates us. Our fiscal 2024 results demonstrate that we're successfully realizing the substantial opportunities we have, and we're fortunate to have a long, strong runway of additional growth opportunities in front of us.
spk04: With that, Martin and I would be pleased to take your questions.
spk14: And thank you.
spk15: We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 a second time. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. We ask that you please limit yourself to one question and one follow-up. And again, it is star 1 to join the queue. And your first question comes from Divya Goyal with Scotiabank. Your line is open.
spk01: Good morning, everyone. Great quarter.
spk10: So, David, you mentioned towards the end of your script about the macro resilience of Kindrel. So between Martin and yourself, you guys elaborate in the interest of investors, what makes Kindle so macro resilient, despite a weakness being continuously noted across the technology services ecosystem? And how would this resiliency help you if the interest rates were to truly not go down as anticipated beginning of the year?
spk03: Yeah, thanks, Divya, and thanks for the nice comment about the quarter. We feel really good about the year we just finished, and as I noted in my prepared remarks, and you heard it in David's as well, we're very excited about the year. You know, I think what we're seeing, and I think what we've been focusing our investors on is the investments we've made in our people, the investments we've made to expand their skills, the investments we've made to build new capabilities, combined with the investments we've made in our IP and our ability to turn our data into insights for our customers, given the role we play in their environments. And again, we're mission critical. So you combine great skills and engineering talent, new capabilities and innovation in the form of Kindle Bridge and actionable insights. And you put all of that into the context of business outcomes for customers in Mission Critical. And I think you see why we see the momentum in our business and why it can continue. We recognize that we have only gotten Kindrel Bridge into about just over half the customer base. So we have a lot more to do. And even with that deployment, where we're generating about 3 million actionable insights for our customers per month, we have a lot more to get done. So look, we'll continue to invest in our skills. We'll continue to work with the ecosystem that matters to our customers. We'll continue to build new capabilities, and we'll continue to develop and deploy Kindle Bridge more broadly. And so as we move into a more consultative form of selling, which makes it very clear to our customers how our work is tied to business outcomes, I think we feel quite confident, quite good about our ability to keep momentum going in our consult business. Would you add anything, David? No, I'm good. Okay. Thank you, Divya.
spk10: And just as a follow-up on this very comment that you made, Kindle Consult, so obviously it had an impressive growth this quarter itself. considering how the consult business broadly, again, broadly thinking about it, the consulting businesses have been a little bit constrained with respect to the dollars being allocated, but your consult business has been growing impressively. So could you elaborate on what is it that's truly driving the significant growth and a reasonable run rate? I know David mentioned double digit, but what in our mine could be, for ourselves, could be a reasonable run rate for the consult business on a go-forward basis.
spk03: Yeah, so a couple of things, and then obviously I'll ask David if he wants to supplement. The nature of the consult opportunities and the focus we have around infrastructure is one that is not discretionary, is one that really needs to be addressed, no matter what the economic environment is. When Kindrel engages with a customer and provides insights into how their systems are running, those insights can be geared toward helping them optimize their systems. In a macro environment, by the way, everyone's looking to drive productivity, so helping them optimize systems is something that our consult business does quite well. helping them, for instance, achieve their carbon reduction plans, which Kindrel Bridge, again, can help them understand how they're creating carbon across their footprint, helping them keep up with global best practices from the myriad of technologies, helping them understand the monitoring, getting ahead of problems, all of these things, again, related to infrastructure, all of these things in the mission-critical world will continue to drive our consult business. From a run rate perspective, and again, I'll ask David to comment as well, when we started talking about Kindrel Consult about two and a half years ago, we identified already then that we had a bit of catching up to do, if you will, that we mixed very light in the advisory side and that we thought the growth path a very solid double-digit growth path we would have in front of us for quite a while, and I think that's what we're still experiencing. We are growing the mix of Kindrel Consult within the overall Kindrel revenue mix. We are continuing to hire consultants, so we're putting more feet on the ground to help, and we are deploying Kindrel Bridge more broadly across the customer-based And in markets, by the way, that probably have a kind of a high single-digit growth rate to them, so we're gaining share across the consult space in the markets we serve. So, again, I'll ask David to comment, but I think we've got a really good long-term growth trajectory ahead of us in Kindrel Consult, and it is part of why we see ourselves getting back to overall revenue growth in the fourth quarter of this year. David? That's right.
spk08: And just to put a numbers around that in fiscal 2024, we saw our consult revenue up 16% in constant currency. It's become about 15% of our business overall. We see it getting over the next few years to 20-ish percent of our business. And given that composition of our revenue mix that we have, it means our consult business is already quite sizable, north of $2 billion a year. And as a result, the double-digit growth we're seeing has a really significant positive impact on us. From a strategic perspective and an operational perspective, the growth we're seeing in consult really gives us confidence in our ability to drive growth in areas like consult and hyperscalers that we focus on for growth and that we're confident that that votes really well for our return to growth later this year. And then the last thing I'd mention about consult that's really important is that ideally we're doing advisory work and implementation work in consult that then gives rise to a managed services tail. So it actually is a positive feeder, not only in its own right as a source of revenue growth that tends to have attractive margins associated with it, it also drives managed services revenues over time in many cases as well.
spk11: That's incredible. Thanks a lot for the call.
spk16: Thanks, Divya. Operator, next question, please.
spk15: Your next question comes from the line of Tin Jin Wang with JP Morgan. Your line is open.
spk00: Hey, thanks. Good morning. Really good results here. I want to ask on signings. I know you mentioned the inflection and you've been marching towards that for a bit, but new logo versus renewals, any comments on pricing? I know that, you know, in general, you're doing some transition with respect to pricing the back book, but we're still hearing a lot of commentary around, you know, difficulty in getting projects started and, and difficulty in pricing and whatnot. So I'm just curious around all of that.
spk03: Yeah. Tingen, thank you. And thank you again for the nice – thank you also for the nice comments. So a few things on signings. As you know, as we've described very consistently, as we focused on moving the business away from low, no, and negative margin business, That has had an impact on the overall signings, but that's part of why we've driven so much progress and profit. So that focus continues to diminish over time. We made a lot of progress last year, and we drove a lot of profit progress while doing that. And even with the focus on profit, we managed to get a little bit of growth, right, low single-digit growth out of the overall signings number last year. And we would expect that we will continue to build on that base. Within that, as we've talked about, we've focused on our customer base. We've focused on expanding our relationships and wallet share within our customer base. So we are getting a fair bit of new scope within the existing customer base. And I know you made a distinction around new logo. Yes, we're winning some new customers, some entirely new customers. It just hasn't been a focus for us. However, having seen what our teams can execute within our customer base around new scope, having seen the positive response to the capabilities we've built, and having seen the positive response to the innovation we're bringing, once we turn our sights toward new customers in earnest and at scale, I'm confident that not only will we grow the scope within our customer base, but we'll bring on new logo as well in order to drive a continued revenue growth path over the long term.
spk00: Okay, very good. Just then, my quick follow-up just on gross margins. We're very healthy ahead of what we had. Do you feel like you're in a good place from a delivery standpoint? I know different pockets of the world are seeing different issues with respect to tech labor. Do you feel like you're in a good place? I know some of the workforce rebalancing is calming down here as well, but any updated thoughts there? Thank you.
spk03: Again, I'll ask David for his comments as well. Look, our delivery remains world-class. Our delivery is the reason our customers are willing to take the journey with us into new spaces. It's the reason they're willing to engage with us and our alliance partners in new scope. And our team has done a phenomenal job for the last two and a half years in delivering every day. And our focus around advanced delivery and our focus around Kindle Bridge has always been part of helping that. It has always been focused on delivering even higher quality, automating more so that so that our customers have a better experience. So I feel, you know, touch wood, I feel like the role we play, which our teams take very seriously, the role we play in our customers' mission-critical environments is the one that motivates them every day to get up and deliver great service, and I think we're doing that.
spk08: Yeah, I think that's right. The gross margin improvement that we delivered last year is in the 300 basis point range. So we're making a tremendous amount of progress there. And I feel really good about where we are from a delivery perspective for two reasons. Number one, through our advanced delivery initiative, we've driven a substantial amount of progress, reaching $575 million of annualized savings already. you know, shows the progress that we've made. And we continue to have opportunity to drive incremental efficiencies from where we are. And intention, that's one of the reasons we've increased the ultimate goal for advanced delivery from the $600 million we had initially targeted to $800 million now. So it's a sign that we've got more runway and more benefits still to be gained in this area. That's good stuff. Thank you.
spk16: Thanks, Tenjin. Operator, next question, please.
spk15: Your next question comes from the line of Jamie Friedman with Susquehanna. Your line is open.
spk07: Hi. Thank you for taking my question. I'll echo the congratulations. A lot of hard work here this year. I wanted to ask particularly about the accounts in the three A's on page 15. I'm just wondering, Martin and David, if I could get your perspective as to why that, because this is a key part of the investment thesis, why that seems to be performing better and faster with the $300 million of year-over-year earnings benefit. Why Why is that exceeding your expectations?
spk03: Yeah, so a few things. Thank you again. Thank you also for the nice comments. Look, when we began and laid out the strategy, the 3A strategy, and particularly on account focus, we felt very confident that our customers would engage us. and come with us on this journey because of the role we play in their environments, because of the trust that we've built up over years and years and years. And the fact is, we're really good at what we do. So they love the engineering talent. They love the services we provide. So we were very confident in that. Now, having said that, we also made a bunch of assumptions around the timing for these and what the ultimate landing spot would be, as in How much content will come out? How much new scope will we get? What's the quarter in which or the year in which some of these customers will all align to get to a new relationship and sort of re-energize these relationships? And so we made a bunch of assumptions. And the fact is that while we were confident going in with the basis for the strategy and We didn't know how long it would take. We didn't know what they would look like on the other side. And we didn't know what ultimately the ins and outs, the puts and takes would be in these relationships. And what's turned out is that they are as enthusiastic, our customer base is as enthusiastic to work their way through these as we expected. And we're just getting them done a bit faster. And I think that's because We have invested heavily in new capabilities, so we show up with new ideas. We've invested heavily in innovation, so we show up with new tools, a new platform to help them get more insights. And we put all of that into a context of a business outcome for them, so it makes it easy to understand and easy to see why this will be better for us and obviously be better for them as well. And remember, all of this was in the context of how do we accelerate it from just its natural renewal periods, which extend well out into next six, seven, eight years. So we made a lot of assumptions. The investments we've made in our people, in the ecosystem, and in our IP and data are paying off, and customers see the benefit to sort of resetting, if you will, these relationships, and they're better off and Obviously, we're better off.
spk07: Okay, thanks for that. And then for my follow-up, David, you were going kind of quick there, and there was something you said that I don't actually see in the slides, but I'm sure it's me, not you. But when you were talking about the 575s, I may have misheard, I apologize, but I thought that you annualized the savings, I thought related to reskilling, but it doesn't seem to be in the transcripts. How are you annualizing the 575?
spk08: Yeah, so the 575 million is the benefit that we're getting from advanced delivery compared to where we started. So in fiscal 23, at the end of fiscal 23, we were at a $275 million run rate from advanced delivery. And by the end of fiscal 24, we had increased that by $300 million to a $575 million annual run rate. And we expect that to continue to grow from there. So that's really the key numbers, the key measure of our progress there that we point to. Got it. Okay. Thank you very much.
spk17: Thanks, Jamie.
spk16: Operator, next question, please.
spk15: Your next question comes from the line of David Togut with Evercore ISI. Your line is open.
spk13: Thank you. Good morning, and thanks for taking my question. I apologize if this has been asked. There are several calls this morning, but the strength and demand for Kindrel Consult was notable, particularly against the consulting industry environment, which has been under pressure. Of course, Kindrel Consult is non-discretionary, and the weaknesses elsewhere are really more in discretionary-related demand But could you go a level deeper on demand drivers for Kindrel Consult, you know, in particular how durable those demand drivers are, you know, if we look to FY25 and beyond?
spk03: Sure. Sure, David. Thank you. And thank you for the nice comments, and thank you for joining. Kindrel Consult has come up, and we do recognize that the performance that we're delivering and our view is not – what you're seeing in many other places. And I think the reasons for that, which I'm going to talk about, the reasons for that are enduring and, in fact, can continue, I think, for a period of time. So at our heart, as we've been talking about, we've been investing quite heavily in our team's skills. We've been investing heavily in building new capabilities and And we've been investing quite heavily in building out our IP and the use of our data around Kindle Bridge. And so as our teams engage with new capabilities, with innovation, and with relevant business outcome-oriented ideas for our customers to pursue, in this environment, in any environment, which can be around, for instance, how to optimize their systems. Everyone's interested in productivity in a macro environment like this, around resiliency, around how to get ready, for instance, for Gen AI, et cetera. Because of the role we play in their environments and the mission-critical nature of what we do, those investments are paying off. And we expect them to continue. And in fact, Keep in mind that Kindle Bridge is only in about half of our customer base as we sit here today. So as we continue to build new capabilities with our alliance partners, as we continue to invest in Kindle Bridge and bring new functionality and make more use of our data across a broader element, a broader piece of our customer base, I see the enduring nature of why we're outperforming, why we're performing differently than what you see from others. I think that continues.
spk08: Yeah, and when you think about some of the initiatives we've been pursuing, you can really see consult at the nexus of them. It's an area of focus in and of itself, but Kindle Bridge gives rise to additional consult opportunities and consultative selling opportunities. The alliances we have are very helpful from a consult perspective. Our practices are driving progress there, particularly in areas like cloud migration and mainframe modernization and security and resiliency and and obviously AppState and AI, and even regulatory changes like DORA, the Digital Operational Resilience Act, and the EU is giving rise to additional needs for consult work on our behalf. So we really see that, you know, we see consult benefiting from a number of different initiatives and actions we've taken, and even, you know, some elements of the macro environment.
spk13: Understood. And then just as a quick follow-up, Your guide to return to revenue growth or to achieve revenue growth in 4Q of FY25 seems a little early relative to the initial kind of spin presentation you gave. Is that a correct conclusion? And if so, what gives you the incremental confidence that you can get to revenue growth in 4Q FY25?
spk03: Yeah, so thanks, David. So we've, you know, for two and a half years since we laid out the investment thesis for two and a half years ago, we said calendar 25 is the year in which we would get back to revenue growth. And really what we're saying now is that, and obviously calendar 25 starts in our fourth fiscal quarter. So really what we're saying is that because of the progress we've made in the two growth factors, which we've always been counting on to drive us back to growth, Kindrel Consult and the alliances as an example, and the fact that we've You know, we've done the hard work, the deepest part of the work last year around focus accounts and cleaning out the backlog. And we've eliminated or neutralized, if you will, the other areas that we've been trying to take out of our business, like low margin, no margin OEMs. that we are confident now in that calendar 25, which we're still confident calendar 25 actually can translate to fourth quarter of this year, which is the beginning. So for those who interpreted calendar 25 as maybe second half versus first half, so we're probably a bit more accelerated than what they would have thought. But look, we've got all the momentum going. We've gotten a lot of – we've chopped a lot of wood last year around what the inhibitors to growth were, and we got great momentum in the growth drivers. So we feel good about it.
spk12: Understood. Thank you very much.
spk16: Thanks, David. Operator, I believe that was our last question in the queue.
spk15: Yes. So that will conclude our question and answer session for today, and I will now turn the conference back over to Mr. Martin Schroeder for closing remarks.
spk03: Thank you, Operator. Thanks, and thanks for everybody for joining us. Look, I hope you can hear how proud we are and how energized we are by the progress we've made in the last fiscal year and how our very unique run and transform approach is resonating with and adding a lot of value to our customers because it allows them to to continuously innovate while maintaining their operational excellence, which in the spaces where we operate mission critical is absolutely vital. So we're in a fantastic position as we start this fiscal year. We've got many, many opportunities to win, and we're going to capitalize on those opportunities in order to drive profitable growth. You know, as we look ahead to our third year as an independent company, I remain as excited as ever about the growth potential in front of us. And our foundational progress to date allows us to continue serving our customers' mission-critical needs with more capabilities and more innovation than ever before. So thanks again for joining us.
spk15: Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect. Thank you. you Thank you. Bye. Thank you. Good morning, ladies and gentlemen, and thank you for standing by. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Kindrel Fiscal Fourth Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise, and after the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one a second time. Thank you.
spk14: And I would now like to turn the conference over to Lori Chapman, Global Head of Investor Relations. You may begin.
spk16: Good morning, everyone, and welcome to Kendrell's earnings call for the fourth quarter of and fiscal year ended March 31, 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, and we are under no obligation to update them. 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 March 31, 2023. 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.kindrel.com. With me here 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 now like to turn the call over to Martin. Martin?
spk03: Thank you, Lori, and thanks to each of you for joining us. I am excited about all that we at Kindrel have accomplished in our second fiscal year as an independent company, and I cannot be more proud of our teams around the world. We delivered solid fourth quarter results, exceeded our full year targets on all of our 3A initiatives, alliances, advanced delivery, and accounts, and exceeded our guidance for fiscal 2024. We also delivered strong growth across Kindrel Consult. We expanded our hyperscaler relationships and accelerated adoption of Kindrel Bridge. And we're providing our fiscal 2025 outlook that includes substantial earnings growth and free cash flow. And importantly, we're pulling forward the timing of returning to revenue growth and now expect to deliver positive revenue growth in the fourth quarter of this fiscal year. With our consistently strong execution in fiscal 2024, we've proven that we can deliver on ambitious goals to strengthen our business and that we can grow in high-value areas that we target for growth. You may recall that this time last year, I said that our fiscal 2024 was a year of acceleration for Kindle. And as you can see from our performance, we've accelerated both our business transformation and our innovation, which have further solidified our leadership position and mission-critical IT services. We'll approach our third fiscal year with the same intensity and determination. This fiscal year, we will pivot from transformation to growth. It will be the year in which our top line inflects and half of our revenue is generated from higher margin post-spin signings. It will be another year in which we deliver double-digit revenue growth from Kindle Consult. It will be the year in which our hyperscaler-related revenue nears a billion dollars. It will be the first year that we will have the majority of our managed services customers operating on Kindle Bridge, allowing us to drive new levels of automation and innovation, and it will be another year in which we expect to deliver substantial earnings growth. So, on today's call, I'll share more detail on these pivotal shifts in our business, and I'll describe how major secular trends in IT are driving customer demand, fueling our return to growth, and putting Kindle at the center of our customers' digital transformations. David will then review our financial results and discuss our outlook for fiscal 2025. I want to start by highlighting the recent accomplishments that have set the stage for our growth trajectory. In fiscal 2024, we grew our adjusted pre-tax earnings by more than $380 million. We delivered double-digit growth in our more than $2 billion of consult revenue, and we drove triple-digit growth in hyperscaler-related revenue, validating our ability to return to growth. We grew our total signings, and even more importantly, the projected pre-tax margins on those signings were consistently in the high single digits, aligned with our medium-term targets. and we generated positive adjusted free cash flow, demonstrating our focus on cash generation that will support our long-term strategy and goals. Our advisory talent and consult, together with our design-led Kindrel Vital methodology and our Kindrel Bridge delivery services platform, allows us to co-create and innovate with our customers and our partners. We now have over 1,200 of our largest customers operating on the Kindrel Bridge platform, which is allowing us to deliver more value to customers, drive savings for Kindle through automation, and derive insights from AI learnings powered by the operational data associated with our scale. Even beyond Kindle Bridge, Consult, and Vital, we have executed powerfully throughout our business. We're delivering sophisticated, optimized, multi-vendor solutions to customers to help them address critical needs and major opportunities. We're delivering managed services more efficiently than ever. And as a result, and as we said we would, we're showing up differently for our customers and seizing opportunities that are unique to Kindrel. We've proven that Kindrel is a vital and trusted partner to our customers as we help them to run and transform their mission-critical, complex, hybrid IT estates. Our engineering and advisory talents, our unique operational data IP and embedded AI, our heritage and scale, enable us to meet our customers' evolving IT needs and uncover new value from past, current, and future technology investments. In fact, our expertise in both running and transforming IT estates differentiates us in the markets we serve and uniquely positions Kindrel at the heart of secular trends that are shaping the evolution of IT, namely the adoption of artificial intelligence, technology skill shortages, organizations' needs to modernize, cloud migration, and cybersecurity. We see these trends as continuing for the foreseeable future, and they're driving demand for our services. For example, through our data architecture capabilities, we're enabling enterprises to apply new AI and Gen AI technologies to drive business outcomes. Through our global delivery centers, our scale and our training programs, we develop and make available the broad range of skills our customers need. Through Kindle Bridge, we're helping customers intelligently prioritize infrastructure needs, address technical debt, drive innovation, and uncover previously hidden risks. Through our hyperscaler alliances and mainframe modernization skills, we're helping customers migrate, manage, and optimize their hybrid IT estates across multiple cloud platforms, ensuring the right workload is on the right platform. And through our global network of security operations hubs and our end-to-end cybersecurity services, we're helping customers protect, detect, and recover from cyber threats. What's more, the mission-critical nature of our work is increasingly consultative and tied to customer achievement of business outcomes. And because how important AI is to us and our customers, I want to spend a few minutes on the role Kindle plays in AI adoption and how we're applying our capabilities to unlock incremental growth opportunities. As we've mentioned, Kindrel is an AI beneficiary and an AI enabler. As the largest IT infrastructure services provider in the world, we have more tech stack operating data than anyone, and we're using machine learning with this data to give our customers and Kindrel a data-driven advantage in designing and managing systems. We're using AI and Kindrel Bridge to identify application performance patterns, produce actionable insights, reduce required maintenance, and prevent incidents from occurring. Bridge can operate as a self-healing architecture and is now producing 3 million actionable insights a month and is helping customers achieve nearly $2 billion of annual savings by avoiding maintenance and incident costs. In short, AI is powering Kindle Bridge and accelerating our advanced delivery initiative. At the same time, we're seeing revenue growth opportunities associated with both AI and GenAI. Our customers know that their AI is only going to be as good as their data, and this is creating demand for our expertise in data architecture that becomes the foundation for AI and Gen AI applications. And with our alliance partners, we're optimizing infrastructures to facilitate AI deployment in these complex IT environments. Based on our own positive experience with Kindle Bridge, we believe machine learning and Gen AI can have a substantial impact on many industries and enterprises. And we see AI readiness as a go-to-market opportunity for us and a natural extension of many of the services we already offer. In fact, revenue in our applications, data, and AI practice grew double digits this past fiscal year. As our business evolves and we move further away from our spin, our revenue mix will continue to shift to higher margin post-spin signings. This fiscal year, half of our revenue is coming from post-spin signings, and in fiscal 2026, it will be roughly two-thirds. This inflection point, when our P&L is largely determined by our higher margin post-spend signings, will dramatically strengthen our earnings and growth profile. Our forecast for fiscal 2025 is for adjusted pre-tax income of at least $435 million, reflecting a year-over-year increase of more than $270 million. And 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 have us on a path to deliver high single-digit adjusted pre-tax margins by fiscal 2027. And yes, the math associated with that is ultimately a billion dollars or more of adjusted pre-tax income with very strong conversion of our earnings into cash flow. I'm tremendously enthusiastic about how our strategic progress and our market leadership are driving solid operating performance and stronger financial results including our forecast to grow revenue in our fiscal fourth quarter, which begins less than eight months from now. As we approach the second half of this fiscal year, our purposeful efforts to shed low to no margin components of revenue will be largely behind us. At the same time, our top line will be driven by our ability to capitalize on our ecosystem of technology alliances and expand our share of wallet with existing customers. will increasingly benefit from growing demand for cloud, security, data, and AI services, and ultimately, we expect to gain overall market share as more enterprises look to Kindle for their mission-critical IT needs. We are creating significant value for our customers and will continue to be bold and ambitious to drive growth. We were born with great engineering talent, and as an independent company, we've been capitalizing on our expertise in providing mission-critical IT services by building our IP and expanding our core capabilities. Capabilities that align with the secular trends driving information technology in the ecosystem that matters to our customers and in the six practices that allow us to build and implement leading technology solutions. And having invested in our people and our technology to ensure we have the right skills and tools to meet our customers' needs, we're now hitting a pivotal shift in our business. We're not only helping organizations run their infrastructure in their business, We're now also helping them transform, building capabilities on new platforms, allowing them to leverage existing and new technology to drive business outcomes and differentiating Kindle in the process. We'll continue to execute our strategy with discipline and agility, and we'll build a culture of operational excellence and collaboration. We are confident that we have the right vision, the right strategy, and the right capabilities to capture future growth. And with that, I'll hand it over to David to take you through our results and our outlooks.
spk08: Thanks, Martin, and hello, everyone. Today, I'd like to discuss our quarterly and full-year results, our continued progress on our three AIDS initiatives, the solid margins at which we're signing customer contracts, and our outlook for fiscal year 2025, which began on April 1. We're enthusiastic about each of these topics, and particularly our outlook. Our fourth quarter results reflect strong operational execution and continued progress on our key initiatives. In the quarter, revenue totaled $3.8 billion, a 9% decline in constant currency. The year-over-year decline was anticipated and primarily driven by our intentional exit from negative, no, and low margin revenue streams within ongoing customer relationships, not by macro factors. As Martin highlighted, we continue to gain momentum in higher margin advisory services. Kindle Consult revenues grew 15% year-over-year in constant currency, which underscores how we're growing our share in this higher margin, higher value-add space. Consult signings grew even faster at 30% in constant currency. Total signings grew 3% year-over-year in constant currency in Q4, our second consecutive quarter of signings growth, and we're up 3% in the year as a whole. Our signings growth for the year was strongest in our security and resiliency, core enterprise, and App State and AI practices. And with our momentum driving a strong April, our trailing 12-month signings through April 30 are up 7% year over year. Our fourth quarter adjusted EBITDA grew 19% to $566 million, and our adjusted EBITDA margin increased by 350 basis points year over year. to 14.7%. Adjusted pre-tax income was $30 million, a $91 million improvement in profit year over year. Consistent with the trends driving our performance all year, our three A's were the key driver of our earnings growth again in Q4. For fiscal year 2024 as a whole, we generated $16.1 billion of revenue. Our adjusted EBITDA grew 20% to $2.4 billion, and our adjusted pre-tax income was $165 million, representing a $382 million increase from the prior year. We expanded our adjusted EBITDA margin by 310 basis points and our adjusted pre-tax margin by 230 basis points year over year, which were above our targets and represent a momentous leap forward on our path to high single-digit adjusted pre-tax margins. Our financial progress reflects our strategic achievements, 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 as an independent company, skating to where the puck is going in terms of our customers' future IT needs. Our performance in fiscal 2024 gives us strong momentum as we go forward. So, as encouraged as I am by the earnings growth we've delivered, I'm even more enthusiastic about how, throughout the year, we also positioned Kindrel for future revenue, margin, and profit growth. The March quarter was a continuation of us signing business with healthy margins. Throughout fiscal 2024, we 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-spend contracts, you'll see significant margin expansion in our reported results. In the middle graph on slide 13, we've 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 $12.5 billion of signings this past year, we've added over $3 billion of projected gross profit to our backlog. Over the same period of time, we've reported gross profit of $2.9 billion. This means we've been adding more gross profit to our backlog than our contracted book of business has been producing in our P&L. Having a gross profit book-to-bill ratio above 1 at 1.1 is a measure of how we're growing what matters most, the expected future profit from committed contracts. And we've been doing this consistently over the last two years. Turning to our cash flow and balance sheet, we generated adjusted free cash flow of $291 million in fiscal year 2024. Our growth capital expenditures were $651 million, and we received a larger than typical $138 million of proceeds from asset dispositions. Taxes being taxes were use of cash. We 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 March 31 was $1.6 billion. Our cash, combined with available debt capacity under committed borrowing facilities, gave us $4.7 billion of liquidity at fiscal year end. We refinanced our $500 million term loan in Q4. As a result, our debt maturities are now well laddered from late 2026 to 2041. We had no borrowings outstanding under a revolving credit facility, and our net debt at quarter end was $1.7 billion. As a result, our net leverage sits well within our target range. We are rated investment grade by Moody's, Fitch, and S&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. Our 3A strategy has been a grand slam home run. It's helped us strategically transform our business. It's galvanized our people around initiatives that are game changers for us and for our customers, and it's delivered huge financial benefits. As a reminder, at the start of the year, 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. During the year, we raised each of these targets by $100 million, and we exceeded each of the raised targets. Through our alliances, we recognized more than $150 million in hyperscaler-related revenue in the fourth quarter. As Martin mentioned, this brought our year-to-date hyperscaler revenue to $500 million, triple our prior year total. Through our advanced delivery initiative, powered by Kindrel 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 Kindrel and our customers. To date, we've been able to free up more than 9,500 delivery professionals to address new revenue opportunities and backfill attrition. This is worth roughly $575 million a year to us, representing a $75 million 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 fourth quarter, we increased the cumulative annualized profit from our focus accounts by $125 million to $600 million. You know, two years ago, we laid out bold ambitions that over the medium term, advanced delivery will drive cost savings equating to roughly $600 million in annual pre-tax income. and accounts will drive annual pre-tax income of $800 million or more. Due to our progress to date, we're raising the ultimate benefits that we expect from these initiatives by $200 million each to $800 million and $1 billion, respectively. In fiscal 2025, we'll generate incremental benefits from each of our three A's, For alliances, we expect hyperscaler-related revenue to approach $1 billion, roughly double our 2024 level. We expect our advanced delivery initiative to reach $750 million in annualized savings and to deliver $200 million of incremental benefit year-over-year. And in focus accounts, we expect to reach $850 million of annualized savings by year-end and to deliver $300 million of incremental profit this year compared to last. Roughly half of the benefits from advanced delivery and accounts is the full-year benefit of the actions we took in fiscal 2024, and half is the part-year benefit of additional actions we'll take in fiscal 2025. In baseball, you can't have back-to-back Grand Slams But in our business and through the 3As, we can. In fact, the 3As are becoming a regular part of our operating model rather than distinct initiatives. As we look ahead to fiscal 2025, our core financial goals are to continue to expand our margins, grow our earnings, inflect our revenues back to growth as the year progresses, and generate free cash flow. Our outlook is for revenue to be in the range of $15.2 to $15.5 billion, a decline of 2% to 4% in constant currency. We still have two quarters to go until the anniversary when most of our significant actions to step away from low to no margin revenues took effect. So we expect our year-over-year revenue declines will decrease as the year progresses and we return to year-over-year revenue growth in the fourth quarter. Based on recent exchange rates, currency movements are having a $230 million negative impact on reported revenue, but where that lands will depend on how exchange rates move over the next 11 months. In aggregate, then, we estimate that our adjusted EBITDA margin in fiscal 2025 will be at least 16.2%, an increase of at least 150 basis points versus fiscal 2024. And our outlook for adjusted pre-tax income is at least $435 million. This means growing our adjusted pre-tax income by at least $270 million and increasing our adjusted pre-tax margin by nearly 200 basis points year over year. This means we're doubling down on the strong earnings and margin growth we delivered in fiscal 2024 and keeps us right on track to be generating high single-digit adjusted pre-tax margins in fiscal 2027. Two more items to note regarding our outlook. We continue to see opportunities to drive efficiency in our operations, both through advanced delivery and in SG&A functions. While we manage labor costs primarily through hiring and attrition, we expect to incur workforce rebalancing charges of roughly $100 million in fiscal 2025. It's important to note that the anticipated charges associated with this program are included in our fiscal 2025 outlook for adjusted EBITDA, adjusted pre-tax income, and adjusted free cash flow, whereas our adjusted results in fiscal 2024 excluded such charges. Also, as part of managing our costs in CapEx, our teams have been working to make our compute and storage hardware last longer. As a result, we're now able to extend the depreciable lives of these assets from five years to six. This benefit will be largely offset by the end of the benefit we've had from certain assets having been transferred to us from our former parent pre-spin at cost. The combined impact of these two non-cash changes will be a roughly $50 million year-over-year reduction in our depreciation expense. Looking at the first quarter in particular, our year-over-year constant currency revenue decline will be similar to Q4, and our adjusted pre-tax income should be modestly higher than the $47 million we reported in last year's first quarter. On the topic of cash flow, For the year as a whole, we project roughly $700 million of net capital expenditures in fiscal 2025 and about $725 million of depreciation expense. We expect to pay roughly $150 million in cash taxes. Unlike fiscal 2024, we won't have any below-the-line systems migration outlays. As a result, we're forecasting roughly 100% conversion of adjusted pre-tax income, less cash taxes, into free cash flow. From a timing perspective, Q1 will be a significant user of cash due to annual software and incentive payments, and subsequent quarters will be more favorable. 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. To wrap up, our business model centers around providing mission-critical services to large, complex organizations that rely on our technology experts and insights to operate and advance their businesses. Our leading market position in IT infrastructure services and the mission-critical nature of what we do distinguish us from other providers of IT services. Our service levels and customer satisfaction scores make it clear that we serve our customers extremely well. And the growth we're delivering through our alliances with multiple technology providers further differentiates us. Our fiscal 2024 results demonstrate that we're successfully realizing the substantial opportunities we have, and we're fortunate to have a long, strong runway of additional growth opportunities in front of us.
spk04: With that, Martin and I would be pleased to take your questions.
spk14: And thank you.
spk15: We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 a second time. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. We ask that you please limit yourself to one question and one follow up. And again, it is star 1 to join the queue. And your first question comes from Divya Goyal with Scotiabank. Your line is open.
spk01: Good morning, everyone. Great quarter.
spk10: So, David, you mentioned towards the end of your script about the macro resilience of Kindrel. Between Martin and yourself, you guys elaborate in the interest of investors, what makes Kindle so macro resilient despite a weakness being continuously noted across the technology services ecosystem? And how would this resiliency help you if the interest rates were to truly not go down as anticipated beginning of the year?
spk03: Yeah, thanks, Divya, and thanks for the nice comment about the quarter. We feel really good about the year we just finished, and as I noted in my prepared remarks, and you heard it in David's as well, we're very excited about the year. You know, I think what we're seeing, and I think what we've been focusing our investors on is the investments we've made in our people, the investments we've made to expand their skills, the investments we've made to build new capabilities, combined with the investments we've made in our IP and our ability to turn our data into insights for our customers, given the role we play in their environments. And again, we're mission critical. So you combine great skills and engineering talent, new capabilities and innovation in the form of Kindle Bridge and actionable insights. And you put all of that into the context of business outcomes for customers in Mission Critical. And I think you see why we see the momentum in our business and why it can continue. We recognize that we have only gotten Kindrel Bridge into about just over half the customer base. So we have a lot more to do. And even with that deployment, where we're generating about 3 million actionable insights for our customers per month, we have a lot more to get done. So look, we'll continue to invest in our skills. We'll continue to work with the ecosystem that matters to our customers. We'll continue to build new capabilities, and we'll continue to develop and deploy Kindle Bridge more broadly. And so as we move into a more consultative form of selling, which makes it very clear to our customers how our work is tied to business outcomes, I think we feel quite confident, quite good about our ability to keep momentum going in our consult business. Would you add anything, David? No, I'm good. Okay. Thank you, Divya.
spk10: And just as a follow-up on this very comment that you made, Kindle Consult, so obviously it had an impressive growth this quarter itself. considering how the consult business broadly, again, broadly thinking about it, the consulting businesses have been a little bit constrained with respect to the dollars being allocated, but your consult business has been growing impressively. So could you elaborate on what is it that's truly driving the significant growth and a reasonable run rate? I know David mentioned double digit, but what in our mine could be, for ourselves, could be a reasonable run rate for the consult business on a go-forward basis.
spk03: Yeah, so a couple of things, and then obviously I'll ask David if he wants to supplement. The nature of the consult opportunities and the focus we have around infrastructure is one that is not discretionary, is one that really needs to be addressed, no matter what the economic environment is. And when Kindrel engages with a customer and provides insights into how their systems are running, those insights can be geared toward helping them optimize their systems. In a macro environment, by the way, everyone's looking to drive productivity. So helping them optimize systems is something that our consult business does quite well. helping them, for instance, achieve their carbon reduction plans, which Kindrel Bridge, again, can help them understand how they're creating carbon across their footprint, helping them keep up with global best practices from the myriad of technologies, helping them understand the monitoring, getting ahead of problems, all of these things, again, related to infrastructure, all of these things in the mission-critical world will continue to drive our consult business. From a run rate perspective, and again, I'll ask David to comment as well, when we started talking about Kindrel Consult about two and a half years ago, we identified already then that we had a bit of catching up to do, if you will, that we mixed very light in the advisory side and that we thought the growth path a very solid double-digit growth path we would have in front of us for quite a while, and I think that's what we're still experiencing. We are growing the mix of Kindrel Consult within the overall Kindrel revenue mix. We are continuing to hire consultants, so we're putting more feet on the ground to help, and we are deploying Kindrel Bridge more broadly across a customer-based And in markets, by the way, that probably have a kind of a high single-digit growth rate to them, so we're gaining share across the consult space in the markets we serve. So, again, I'll ask David to comment, but I think we've got a really good long-term growth trajectory ahead of us in Kindrel Consult, and it is part of why we see ourselves getting back to overall revenue growth in the fourth quarter of this year. David? That's right.
spk08: And just to put a numbers around that in fiscal 2024, we saw our consult revenue up 16% in constant currency. It's become about 15% of our business overall. We see it getting over the next few years to 20-ish percent of our business. And given that composition of our revenue mix that we have, it means our consult business is already quite sizable, north of $2 billion a year. And as a result, the double-digit growth we're seeing has a really significant positive impact on us. From a strategic perspective and an operational perspective, the growth we're seeing in consult really gives us confidence in our ability to drive growth in areas like consult and hyperscalers that we focus on for growth, and we're confident that that votes really well for our return to growth later this year. And then the last thing I'd mention about consult that's really important is that ideally we're doing advisory work and implementation work in consult that then gives rise to a managed services tail. So it actually is a positive feeder, not only in its own right as a source of revenue growth that tends to have attractive margins associated with it, it also drives managed services revenues over time in many cases as well.
spk11: That's incredible. Thanks a lot for the call.
spk16: Thanks, Divya. Operator, next question, please.
spk15: Your next question comes from the line of Tin Jin Huang with JP Morgan. Your line is open.
spk00: Hey, thanks. Good morning. Really good results here. I want to ask on signings. I know you mentioned the inflection and you've been marching towards that for a bit, but new logo versus renewals, any comments on pricing? I know that, you know, in general, you're doing some transition with respect to pricing the back book, but we're still hearing a lot of commentary around, you know, difficulty in getting projects started and, and difficulty in pricing and whatnot. So I'm just curious around all of that.
spk03: Yeah. Tingen, thank you. And thank you again for the nice – thank you also for the nice comments. So a few things on signings. As you know, as we've described very consistently, as we focused on moving the business away from low, no, and negative margin businesses, That has had an impact on the overall signings, but that's part of why we've driven so much progress and profit. So that focus continues to diminish over time. We made a lot of progress last year, and we drove a lot of profit progress while doing that. And even with the focus on profit, we managed to get a little bit of growth, right, low single-digit growth out of the overall signings number last year. And we would expect that we will continue to build on that base. Within that, as we've talked about, we've focused on our customer base. We've focused on expanding our relationships and wallet share within our customer base. So we are getting a fair bit of new scope within the existing customer base. And I know you made a distinction around new logo. Yes, we're winning some new customers, some entirely new customers. It just hasn't been a focus for us. However, having seen what our teams can execute within our customer base around new scope, having seen the positive response to the capabilities we've built, and having seen the positive response to the innovation we're bringing, once we turn our sights toward new customers in earnest and at scale, I'm confident that not only will we grow the scope within our customer base, but we'll bring on new logo as well in order to drive a continued revenue growth path over the long term.
spk00: Okay, very good. Just then, my quick follow-up just on gross margins. We're very healthy ahead of what we had. Do you feel like you're in a good place from a delivery standpoint? I know different pockets of the world are seeing different issues with respect to tech labor. Do you feel like you're in a good place? I know some of the workforce rebalancing is calming down here as well, but any updated thoughts there? Thank you.
spk03: Again, I'll ask David for his comments as well. Look, our delivery remains world-class. Our delivery is the reason our customers are willing to take the journey with us into new spaces. It's the reason they're willing to engage with us and our alliance partners in new scope. And our team has done a phenomenal job for the last two and a half years in delivering every day. And our focus around advanced delivery and our focus around Kindle Bridge has always been part of helping that. It has always been focused on delivering even higher quality, automating more so that so that our customers have a better experience. So I feel, you know, touch wood, I feel like the role we play, which our teams take very seriously, the role we play in our customers' mission-critical environments is the one that motivates them every day to get up and deliver great service, and I think we're doing that.
spk08: Yeah, I think that's right. The gross margin improvement that we delivered last year is in the 300 basis point range. So we're making a tremendous amount of progress there. And I feel really good about where we are from a delivery perspective for two reasons. Number one, through our advanced delivery initiative, we've driven a substantial amount of progress, reaching $575 million of annualized savings already. you know, shows the progress that we've made. And we continue to have opportunity to drive incremental efficiencies from where we are. And intention, that's one of the reasons we've increased the ultimate goal for advanced delivery from the $600 million we had initially targeted to $800 million now. So it's a sign that we've got more runway and more benefits still to be gained in this area. That's good stuff. Thank you.
spk16: Thanks, Tenjin. Operator, next question, please.
spk15: Your next question comes from the line of Jamie Friedman with Susquehanna. Your line is open.
spk07: Hi. Thank you for taking my question. I'll echo the congratulations. A lot of hard work here this year. I wanted to ask particularly about the accounts in the three A's on page 15. I'm just wondering, Martin and David, if I could get your perspective as to why that, because this is a key part of the investment thesis, why that seems to be performing better and faster with the $300 million of year-over-year earnings benefit. Why Why is that exceeding your expectations?
spk03: Yeah, so a few things. Thank you again. Thank you also for the nice comments. Look, when we began and laid out the strategy, the 3A strategy, and particularly on account focus, we felt very confident that our customers would engage us. and come with us on this journey because of the role we play in their environments, because of the trust that we've built up over years and years and years. And the fact is, we're really good at what we do. So they love the engineering talent. They love the services we provide. So we were very confident in that. Now, having said that, we also made a bunch of assumptions around the timing for these and what the ultimate landing spot would be, as in How much content will come out? How much new scope will we get? What's the quarter in which or the year in which some of these customers will all align to get to a new relationship and sort of re-energize these relationships? And so we made a bunch of assumptions. And the fact is that while we were confident going in with the basis for the strategy and We didn't know how long it would take, we didn't know what they would look like on the other side, and we didn't know what ultimately the ins and outs, the puts and takes would be in these relationships. And what's turned out is that they are as enthusiastic, our customer base is as enthusiastic to work their way through these as we expected, and we're just getting them done a bit faster. And I think that's because We have invested heavily in new capabilities, so we show up with new ideas. We've invested heavily in innovation, so we show up with new tools, a new platform to help them get more insights. And we put all of that into a context of a business outcome for them, so it makes it easy to understand and easy to see why this will be better for us and obviously be better for them as well. And remember, all of this was in the context of how do we accelerate it from just its natural renewal periods, which extend well out into next six, seven, eight years. So we made a lot of assumptions. The investments we've made in our people, in the ecosystem, and in our IP and data are paying off. And customers see the benefit to sort of resetting, if you will, these relationships, and they're better off and Obviously, we're better off.
spk07: Okay, thanks for that. And then for my follow-up, David, you were going kind of quick there, and there was something you said that I don't actually see in the slides, but I'm sure it's me, not you. But when you were talking about the 575s, I may have misheard, I apologize, but I thought that you annualized the savings, I thought related to reskilling, but it doesn't seem to be in the transcript. How are you annualizing the 575? Yeah, so the 575 million is the benefit that we're getting from advanced delivery compared to where we started.
spk08: So in fiscal 23, at the end of fiscal 23, we were at a $275 million run rate from advanced delivery. And by the end of fiscal 24, we had increased that by $300 million to a $575 million annual run rate. And we expect that to continue to grow from there. So that's really the key numbers, the key measure of our progress there that we point to. Got it. Okay. Thank you very much.
spk17: Thanks, Jamie. Operator, next question, please.
spk15: Your next question comes from the line of David Togut with Evercore ISI. Your line is open.
spk13: Thank you. Good morning, and thanks for taking my question. I apologize if this has been asked. There are several calls this morning, but the strength and demand for Kindrel Consult was notable, particularly against the consulting industry environment, which has been under pressure. Of course, Kindrel Consult is non-discretionary, and the weaknesses elsewhere are really more in discretionary-related demand But could you go a level deeper on demand drivers for Kindrel Consult? You know, in particular, how durable those demand drivers are, you know, if we look to FY25 and beyond?
spk03: Sure. Sure, David. Thank you. And thank you for the nice comments, and thank you for joining. Kindrel Consult has come up, and we do recognize that the performance that we're delivering and our view is not – what you're seeing in many other places. And I think the reasons for that, which I'm going to talk about, the reasons for that are enduring and, in fact, can continue, I think, for a period of time. So at our heart, as we've been talking about, we've been investing quite heavily in our team skills. We've been investing heavily in building new capabilities and And we've been investing quite heavily in building out our IP and the use of our data around Kindle Bridge. And so as our teams engage with new capabilities, with innovation, and with relevant business outcome-oriented ideas for our customers to pursue... in this environment, in any environment, which can be around, for instance, how to optimize their systems. Everyone's interested in productivity in a macro environment like this, around resiliency, around how to get ready, for instance, for Gen AI, et cetera. Because of the role we play in their environments and the mission-critical nature of what we do, those investments are paying off. And we expect them to continue. And in fact, Keep in mind that Kindle Bridge is only in about half of our customer base as we sit here today. So as we continue to build new capabilities with our alliance partners, as we continue to invest in Kindle Bridge and bring new functionality and make more use of our data across a broader element, a broader piece of our customer base, I see the enduring nature of why we're outperforming, why we're performing differently than what you see from others. I think that continues.
spk08: Yeah, and when you think about some of the initiatives we've been pursuing, you can really see consult at the nexus of them. It's an area of focus in and of itself, but Kindle Bridge gives rise to additional consult opportunities and consultative selling opportunities. The alliances we have are very helpful from a consult perspective. Our practices are driving progress there, particularly in areas like cloud migration and mainframe modernization and security and resiliency and and obviously AppState and AI, and even regulatory changes like DORA, the Digital Operational Resilience Act, and the EU is giving rise to additional needs for consult work on our behalf. So we really see that, you know, we see consult benefiting from a number of different initiatives and actions we've taken, and even, you know, some elements of the macro environment.
spk13: Understood. And then just as a quick follow-up, Your guide to return to revenue growth or to achieve revenue growth in 4Q of FY25 seems a little early relative to the initial kind of spin presentation you gave. Is that a correct conclusion? And if so, what gives you the incremental confidence that you can get to revenue growth in 4Q FY25?
spk03: Yeah, so thanks, David. So we've, you know, for two and a half years since we've laid out the investment thesis, two and a half years ago, we said calendar 25 is the year in which we would get back to revenue growth. And really what we're saying now is that, and obviously calendar 25 starts in our fourth fiscal quarter. So really what we're saying is that because of the progress we've made in the two growth vectors, which we've always been counting on to drive us back to growth, Kindrel Consult and the alliances as an example, and the fact that we've You know, we've done the hard work, the deepest part of the work last year around focus accounts and cleaning out the backlog. And we've eliminated or neutralized, if you will, the other areas that we've been trying to take out of our business, like low margin, no margin OEMs. that we are confident now in that calendar 25, which we're still confident calendar 25 actually can translate to fourth quarter of this year, which is the beginning. So for those who interpreted calendar 25 as maybe second half versus first half, so we're probably a bit more accelerated than what they would have thought. But look, we've got all the momentum going. We've gotten a lot of – we've chopped a lot of wood last year around what the inhibitors to growth were, and we got great momentum in the growth drivers. So we feel good about it.
spk12: Understood. Thank you very much.
spk16: Thanks, David. Operator, I believe that was our last question in the queue.
spk15: Yes. So that will conclude our question and answer session for today, and I will now turn the conference back over to Mr. Martin Schroeder for closing remarks.
spk03: Thank you, Operator. Thanks, and thanks for everybody for joining us. Look, I hope you can hear how proud we are and how energized we are by the progress we've made in the last fiscal year and how our very unique run and transform approach is resonating with and adding a lot of value to our customers because it allows them to to continuously innovate while maintaining their operational excellence, which in the spaces where we operate mission critical is absolutely vital. So we're in a fantastic position as we start this fiscal year. We've got many, many opportunities to win, and we're going to capitalize on those opportunities in order to drive profitable growth. You know, as we look ahead to our third year as an independent company, I remain as excited as ever about the growth potential in front of us. And our foundational progress to date allows us to continue serving our customers' mission-critical needs with more capabilities and more innovation than ever before. So thanks again for joining us.
spk15: Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
Disclaimer

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Q4KD 2024

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