Kyndryl Holdings, Inc.

Good day and thank you for standing by. Welcome to the Kindle Fiscal First Quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Lori Chapman. Please go ahead.

Good morning, everyone, and welcome to Kindle's earnings call for the first fiscal quarter ended June 30th, 2024. Before we begin, I'd like to remind you that our remarks today will include forward-looking statements. These statements are subject to risk factors that may cause our actual results to differ materially from those expressed or implied. These forward-looking statements speak only to our expectations as of today. For more details on some of these risks, please see the risk factor section of our annual report on form 10K and for the year ended March 31st, 2024. In today's remarks, we'll also refer to certain non-GAP financial metrics, corresponding GAP metrics, and a reconciliation of non-GAP metrics to GAP metrics for historical periods are provided in the presentation materials for today's event, which are available on our website at .kindle.com. With me here are Kindle's chairman and chief executive officer, Martin Schroeder, and Kindle's chief financial officer, David Weichner. Following our prepared remarks, we'll hold a Q&A session. I'd now like to turn the call over to Martin. Martin?

Thank you, Lori, and thanks to each of you for joining us. On today's call, I'll update you on our continued progress and execution to drive our growth strategy. David will then review our recent financial results and our increased fiscal 2025 earnings outlook. We delivered another strong quarter and are off to a fast start to fiscal 2025. Signings are up 14% in the quarter in constant currency and they're up 7% over the last 12 months and the projected pre-tax margin on these signings is in the high single digits. In the first quarter, pre-tax earnings were up significantly year over year and we remain on track to deliver significant cash flow this year. Our performance was once again powered by strong growth in Kindle Consult and hyperscaler related revenue as well as our ability to drive efficiency through automation and deliver innovation through Kindle Bridge, our AI-powered open integration platform. As we progress through the fiscal year, we'll continue to execute our growth strategy, drive substantial financial progress and focus on returning to top line growth in the fourth quarter. There's a reason we're winning, why we're succeeding at such a rapid pace. Our expertise in both running and transforming IT estates is differentiating us in the markets we serve and uniquely positions us at the center of the secular trends that are shaping the evolution of IT. These trends, the adoption of artificial intelligence, cloud migration and management, increasingly hybrid environments, technology skills shortages and cybersecurity are driving demand for our services, fueling our growth and further cementing our trusted relationships with our customers. For example, we're working with travel, transportation and other customers to apply new AI and generative AI technologies to drive business outcomes through our data architecture capabilities. With Kindle Bridge, we're helping healthcare, manufacturing and other customers intelligently prioritize infrastructure needs and address previously hidden risks. Through our hyperscaler alliances and mainframe modernization skills, we're helping financial services, communications and other customers migrate, manage and optimize their hybrid IT estates across multiple cloud platforms, ensuring the right workload is on the right platform. And through a global network of security operations hubs and end to end security services, we're helping customers in the media, public and other sectors protect, detect and address cyber threats. As a result, we're seeing growing demand for Kindle Consult services, all powered by our unique and impactful combination of run and transform capabilities. In fact, I wanna highlight the importance of Kindle Consult. Our advisory services have been consistently growing in the double digits and accounted for 17% of our revenue in the quarter. We recognize that the strength we're delivering in Kindle Consult stands out in the current environment and we believe the reasons for our exceptionalism are enduring. Our global team of consultants, data architects and engineers have deep domain knowledge on the mission critical systems underpinning our customers' operations. This expertise is built on decades of experience with some of the world's most complex technology environments. Pairing our Kindle Consult skills and expertise with the IP and data in Kindle Bridge, our consult teams engage with customers to share actionable insights that can produce meaningful business outcomes. We're helping customers understand how to optimize their hybrid IT systems, how to measure and address their tech debt, how to structure their data so they can embrace AI and gen AI, how to enhance security and resiliency, how to manage regulatory change and how to modernize business processes and related application infrastructures to streamline operations and drive productivity gains. So as our customer strategies and IT evolve, we're in the IT trenches with them, delivering capabilities they need based on our end to end understanding of their technology estate and now doing so with the objectivity and broad alliances that come as a market leading independent company. Customers want to engage with our technology consultants because of the role Kindle plays in their environments, the mission critical nature of what we do and the deep technology expertise and industry knowledge Kindle Consult can bring to bear. We're also seeing increased demand for our services as a result of greater cyber regulation, especially in the EU. For all these reasons, Kindle Consult is a $2.5 billion revenue stream for us with a significant runway for growth. Revenue stream is valuable both because of the margins directly associated with it and because of the ongoing managed services work that accompanies so many IT modernization assignments. Kindle Consult will continue to grow as we further expand our relationships with our alliance partners like Microsoft and Google and AWS and most recently SAP. Last week we announced that we're now a rise with SAP delivery partner, which will unlock new consult opportunities across our practices. And more generally, Kindle Consult, like our hyperscaler alliances, underscores that where we focus on growth, we deliver. Another key driver of our success is Kindle Bridge, the industry leading operating platform we introduced in 2022, built on our IP and experience managing complex, large scale, hybrid, mission critical technology estates. Customers are faced with complexity everywhere, technical, organizational, and operational, and they must work in new ways to gain observability and data insights across their entire IT environment. With Kindle Bridge, we give our customers unprecedented observability across their full IT estate, regardless of how complex it might be. This is a powerful value proposition that allows us not only to fortify how we run our customers' IT environments, but also to proactively identify ways in which we can transform their infrastructure to deliver the digital business outcomes they need. Since we launched Kindle Bridge, we've expanded our capabilities to include services such as delivering AI infused operational insights, security operations as a platform, application modernization, and regulatory compliance. With Bridge, we're delivering more than 110 million automations per month, ranging from security patches to version upgrades to configuration changes to best practice implementations. This drives speed, reliability, and productivity of IT operations and powers business outcomes for our customers. To date, by avoiding major incidents and reducing plan maintenance costs, we've provided customers with productivity benefits totaling nearly $3 billion a year with more to come. For example, by using Kindle Bridge, a leading automotive manufacturer in Japan has seen a reduced number of incidents, faster recovery time, and lower labor costs as it shifts its way of working to more proactive data-driven operations. Separately, by implementing Kindle Bridge for a global advertising firm, we significantly increased our customers' productivity and enhanced their creative team's IT experience. Through automated remediation, we also reduced their disruptions by more than 30% and have cut the occurrence of more severe incidents in half. And 13 days ago, when one vendor's cybersecurity update shut down servers around the world, Kindle Bridge allowed us to deliver accelerated recovery to hundreds of impacted customers. We rapidly engaged thousands of Kindle technical experts around the world to manage the recovery -to-end for our customers. And with our real-time observability into which applications and servers were affected worldwide, our experts were able to act immediately and recover systems according to our customers' priorities. And with Kindle Bridge and our knowledge of our customers' tech infrastructures, we were able to address most of the 45,000 enterprise servers that were impacted in every mission-critical application within 24 hours of the outage. On a more routine level, Kindle Bridge is a natural source of Kindle consult opportunities for us. Bridge differentiates us by providing data-driven insights into customers' IT environments. For example, Bridge and Consult come together in our discussions with CIOs and CTOs on AI readiness, data architecture, security, and resiliency. And with Bridge as a single source of truth, we are uniquely positioned to discuss how to architect data so they can be responsibly exposed to AI platforms, how to maintain resiliency features, and how to ensure data remains secure. Kindle Bridge is therefore the foundation for our recently announced partnership with NVIDIA. Our customers want us to have NVIDIA's tools accessible through Kindle Bridge to help them accelerate their adoption of AI and meet growing regulatory requirements. So we're excited about the opportunities ahead as we combine our expertise with Kindle Bridge Insights and Kindle Consult Outcomes. The investments we've made in capabilities and innovation directly align with our customers' top IT priorities and make us an ever more essential services provider to them. And they're driving growth with apps, data, and AI, hyperscaler and security and resiliency signings, all of which have grown double digits over the past year. As we've highlighted before, this fiscal year, half of our revenue is coming from post-spin signings that have higher margins. And in fiscal 2026, it'll be roughly two thirds. This inflection point, when our P&L is largely determined by our post-spin signings, will dramatically strengthen our earnings and growth profile. Our updated forecast for fiscal 2025 is for adjusted pre-tax income of at least 460 million, reflecting a -over-year increase of at least 295 million. 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 strong conversion of our earnings into cashflow. And importantly, fiscal 2025 is the year that we're pivoting to growth. 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. As I mentioned, we expect to deliver strong growth and consult. We're also on track to generate nearly a billion dollars in hyperscale related revenue, and we're seeing more and more opportunities through Kindle Bridge to increase our share of wallet with existing customers. There is a growing demand for cloud migration, cloud management and optimization, security and resiliency and 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're not only helping organizations run their infrastructure in their business, we're also helping our customers transform, building capabilities on new platforms, allowing them to leverage existing and new technology to drive business outcomes and differentiating Kindle in the process. With Kindle Bridge, consult and our practices, 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 as a result, as we said, we're showing up differently for our customers and seizing opportunities that are unique to Kindle. In light of all these opportunities, we're planning to host our first Postspin Investor Day in New York on November 21st. This will be an in-person and live webcast event, so please save the date and stay tuned for more details. Now with that, I'll hand over to David to take you through our results and our outlook. Thanks, Martin, and

hello everyone. Today I'd like to discuss our first quarter results, our continued progress on our three A's initiatives, the solid margins at which we're signing customer contracts and our increased outlook for fiscal year 2025. The punchline is that we're off to a strong start. Our first quarter results reflect strong operational execution and continued progress on our key initiatives. In the quarter, revenue totaled $3.7 billion in 8% 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. It's also sequentially one point stronger than the year over year decline we reported last quarter and about a point better than we'd expected. Currency headwinds impacted our reported revenue by $100 million year over year. As Martin highlighted, we continued to gain momentum in higher margin advisory services. Kindle Consult revenues grew 14% year over year in constant currency, which underscores how we're growing our share in this higher value add space. Kindle Consult signings grew even faster, up 49% in constant currency. Total signings grew 14% year over year in constant currency in Q1, our third consecutive quarter of signings growth, which was strongest in our core enterprise, apps, data, and AI, and security and resiliency practices. Our first quarter adjusted EBITDA was $556 million, and our adjusted EBITDA margin increased by 30 basis points year over year to 14.9%. Adjusted pre-tax income grew 96% to $92 million. Our financial progress continues to reflect 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 positioning Kindle to meet our customers' future IT needs. Our first quarter results also include a number of puts and takes, and I want to make sure our operational progress is clear. Our $92 million of adjusted pre-tax income reflects the workforce rebalancing charges we incurred, the increase in IBM software costs that was structured into our spinoff, and currency headwinds. Mitigating these were a vendor credit related to a focus account, and a benefit from the change in the useful life of our equipment that we discussed on our last earnings call. Beyond these five items that in aggregate offset each other, our underlying operations delivered a year over year increase of more than $40 million in adjusted pre-tax income, primarily reflecting our execution and progress on our 3As initiatives. The 3As have helped us strategically transform our business. They've galvanized our people around initiatives that are game changers for us and for our customers, and they've delivered huge financial benefits. Through our alliances, we generated $210 million in hyperscaler-related revenue in the first quarter. This puts us on track to deliver nearly a billion dollars of hyperscaler-related revenue this year, double our fiscal 2024 total. Through our advanced delivery initiative powered by Kindle 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 Kindle and our customers. To date, we've been able to free up more than 10,500 delivery professionals to address new revenue opportunities and backfill attrition. This is worth roughly a cumulative $650 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 first quarter, we increased the cumulative annualized profit from our focus accounts by $125 million to $725 million. As we pivot to growth this year and the 3A's become a regular part of our operating model, they remain an important source of margin expansion and value creation for us. So, as encouraged as I am by the earnings growth we've delivered, I'm even more enthusiastic about how we continue to position Kindle for future revenue, margin, and profit growth. The June quarter was a continuation of us signing business with healthy margins. Throughout Fiscal 2024 and now into the early part of Fiscal 2025, 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-spin contracts, you'll see significant margin expansion in our reported results. We've again included a gross profit -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 $13 billion of signings over the last 12 months, 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 -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. We've been doing this consistently over the last two plus years. Turning to our cash flow and balance sheet, as expected, our first quarter was a seasonal user of cash due to annual software and incentive payments. Our adjusted free cash flow was negative $116 million in the quarter. Our gross capital expenditures were $122 million and we received $24 million of proceeds from asset dispositions. We've provided a bridge from our adjusted pre-tax income to our free cash flow, as well as a bridge from our adjusted EBITDA to our free cash flow in the appendix. Importantly, our use of cash in the first quarter doesn't change our expectation of roughly $300 million of positive adjusted free cash flow this year. Our financial position remains strong. Our cash balance at June 30 was $1.3 billion. Our cash combined with available debt capacity under committed borrowing facilities gave us nearly $4.5 billion of liquidity at quarter end. Our debt maturities are 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 $2 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 target has been to keep net leverage below one time suggested EBITDA and we ended the quarter at 0.86 times. In terms of M&A, we do not need acquisitions to execute our growth strategy, so we will continue to be very selective, focusing on small tuck-in acquisitions like SkyTap that complement our existing expertise and opportunities. As we've said previously, 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 for fiscal 2025 continues to be for revenue to decline 2 to 4 percent constant currency. This implies revenues of $15.2 to $15.5 billion. We still have a quarter to go until we laugh when our most significant actions to step away from low to no margin revenues took effect. So we expect our -over-year revenue declines will be lower in the back half of the year and as we return to revenue growth in the fourth quarter. We've increased our outlook for adjusted EBITDA margin and adjusted pre-tax income to reflect the strong performance we delivered in Q1. Our outlook for adjusted EBITDA margin increases to at least 16.3 percent and our outlook for adjusted pre-tax income increases to at least $460 million. Looking at the second quarter in particular, our -over-year constant currency revenue decline will be similar to Q1 and our adjusted pre-tax income should be slightly higher than the $25 million we reported in last year's second quarter. Included in our pre-tax guidance for Q2 is approximately $40 million of workforce rebalancing charges. On the topic of cash flow for the year as a whole, we project $700 million of net capital expenditures, a similar amount of depreciation expense, and $150 million in cash taxes. This translates to the roughly $300 million in adjusted free cash flow in fiscal 2025 that I mentioned earlier. 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 tech services. Our service levels and customer satisfaction scores make it clear that we serve our customers extremely well. And our fiscal first quarter results demonstrate continued operational execution that's putting us on pace to achieve our fiscal year 2025 targets. With that, Martin and I would be pleased to take your questions.

Thank you. Martin, are you ready for your first question?

You bet.

At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please limit to one question and one follow-up question. One moment while we compile the Q&A roster. Our first question comes from the line of Tianxin Huang with JP Morgan. Your line is now open.

Thank you. Good morning. Good results here. Just on the signing side, I wanted to ask on the trend of, or if there's any interesting observations on mix of renewal versus new work or even new logos. I know there's good progress in building quality gross profit, but just curious if the composition is changing at all. Are there any signs of delays in some of the backlog converting? Thanks.

Thanks, Tianxin, and thanks for the nice comments and good morning. A few things in terms of composition. As you saw, now a very consistent solid growth rate in Kindle consults, so the signings reflect us mixing more toward our advisory side. The run side of our business, the managing run is still obviously substantial in the bulk of our business, but again, we're seeing really good demand on the consult side of our business. This is now the third quarter in a row of total signings. So as we look at getting back to growth in fourth quarter, revenue growth in fourth quarter, we feel increasingly confident about the trajectory of our overall signings profile as well. Now, as you know, and as we've said before, as we work our way through our focus accounts, there are a number of elements that reduce, if you will, the overall signings and scope that we take out. But at the same time, we are growing scope in the labor elements and the elements that are important to our business model. So the scope expansion that we see doing more work within our clients, even though some of the resell and low margin content comes out, is still giving us, it suggests that the value we're bringing and the value propositions we're bringing are quite powerful. And then finally, again, as I mentioned earlier, we've had three good quarters of overall growth, even stronger in consult. But as we sit here, we just had a great July. So I think it's likely we're going to have a fourth quarter coming up of good growth in total signings as well.

Not great to hear the July comment, too. Thanks for that, Martin. Just my follow up, just on the I heard David, you mentioned don't need to do deals to hit your targets. You'll be focused on tuck in acquisitions, but have to ask your appetite here to do larger acquisitions, given where you are in the transformation of the three A's. Even if it's opportunistic, any thoughts there would be appreciated.

Well, David's here, but I'm going to jump in as well. And certainly, David made some comments in his prepared remarks around that we don't need to do acquisitions. Look, the whole business, as we've talked about for a number of years, is focused on delivering the financial performance that we laid out two and a half years ago. As I mentioned, when you do the math in fiscal 27, that's a billion dollars of adjusted PTI. We put on the table this year another big step toward that profit. And that's what this whole business is working on. We are focused on delivering the return to revenue growth in the fourth quarter. We're focused on delivering nearly a $300 million improvement in adjusted PTI this year, again, on our way to a billion in total. As we said before, we are focused on our balance sheet in the form of making sure we maintain investment grade and make sure we have the right liquidity to support the business. And I think our words on the topic match kind of the actions. And what I mean by that is when you look at what we actually have done, we've now bought Skytap. Skytap is a really good, I think, model for how we think about small tuck-in acquisitions that support what we see our customers needing. In the case of Skytap, we have a great partner with whom we go to market. It's an area where we have good brand permission. And by the way, it's completely consistent with us achieving all of the financial objectives that we set out already, again, two and a half years ago on our way to fiscal 27. So that's what Kindle is working on. I mean, that's kind of how I think about it. Anything David, you did ask you, by the way. That was just my preface for you.

The comments I made, we made about not needing any acquisition were exactly what we meant. Thanks, Tingen.

Operator, next question,

please. Our next question comes from the line of Ian Zaffino with Oppenheimer & Co. Your line is now open.

Hi, Grace. Thank you very much. Just kind of wanted to get your sense of growing confidence in the margins. What is basically giving you confidence in that? Maybe just kind of the components, whether it's from advanced delivery, all the other initiatives you can maybe help us understand. Thank

you. Yeah, sure. Thank you. And thanks for joining the call this morning. I'll start and then obviously I'll ask David to make some comments as well. The confidence that we get in our margin profile is really probably just best displayed in the charts we shared during our prepared remarks. We've shared this chart very consistently and you can see since spin that we have consistently delivered margins that will put us into that high single digit pretext margin range as more and more of our P&L is determined by our post spin signings versus the signings that we were spun out with. So between what we've put in the backlog, every quarter since spin, which is consistent with high single digit, our ability to, and we see those coming through the P&L obviously now and as we work our way through this year, we're 50-50 between inherited backlog versus backlog. We've created, which is a sort of a tipping point for our overall P&L and next year it'll be two thirds roughly that our P&L is determined by post spin signing. So with the performance of what's going in the backlog and as David spent a little bit of time in his prepared remarks, the gross profit dollar book to bill, not only is the margin profile consistent, but it's in growth mode. The gross profit dollar book to bill is greater than one. And now we're getting back to, as I mentioned earlier, three quarters of signings growth with likely a fourth quarter, we feel pretty good about the next quarter as well. So we're seeing not only profit book to bill growth, we're seeing consistent value capture in what's going in the backlog and now we're getting back to revenue growth. So the confidence I think comes from the data. David, do you want to? I completely

agree and it's the data and the execution that we've had over the last few years since we became an independent company. You're seeing the growth in consult signings and consult revenues is part of it and the growth in hyperscaler related revenue is part of it as well. And as I mentioned on the call, those are great examples of how we're able to grow and really succeed in the areas that we focus on for growth. Martin mentioned the signings growth that we've had now. Quarters, a strong July that we had, that's another example. The execution on our 3As consistently over the last couple of years and the tremendous impact that 3As are having are also examples of what gives us confidence going forward. And then the last one I'd mention on that is what we referred to as our did versus bid results. How our contracts perform relative to where we price them. And that has tended to be strong and consistently strong for us. So the fact that we're signing business with high projected single digit margins gives us a lot of confidence that we'll be able to deliver those sorts of margins from those contracts.

Okay, great. And maybe just a little bit of a follow up here kind of in the same vein. You know, I think I heard a billion dollar pre-tax income number. Is that new? I know you kind of hinted and we kind of went through numbers, but we didn't quite get to a billion. And so I'm trying to understand is this new? Is there more confidence in that? And how do we think about that?

Yeah, so one, it's not new. When we talked about the 3 A's already two and a half years ago, we laid out the path to get there. We were talking about exactly this data. And we've been consistently sort of reaffirming, if you will, that the data supports that trajectory in the timeframes we originally laid out. So certainly not new. And again, as we trundle through quarter after quarter and we keep delivering and the team keeps executing on the 3 A's and we see the momentum we're capturing and the value we're capturing in Kindle Consult. And then we add to that some of the newer things. So as you saw, we were in the early stages. We created what I think is going to be quite a meaningful partnership with NVIDIA. You just saw us do something with SAP and their Rise platform, which is going to represent another big opportunity for us. So all of the data continues to support what we laid out two and a half years ago and what we've continued to talk about, which was in what we said at the time, medium term, which is now only a couple of years away, fiscal 27. In the medium term, this business, very stable business, but it will get back to good rates of growth and it will deliver a billion dollars of adjusted PTI.

OK, great. Yeah, because the street is just not there yet. So I'm glad to hear that you're looking for something that's better than the street. So I'll let someone else jump on. Thank you very much. Thank you.

Operator, next question,

please. Thank you. Our next question comes from David Toget with Evercore ISI. Your line is now open.

Thank you. Good morning, Martin and David. Martin, could you speak to the kind of detailed underlying drivers of the 49 percent constant currency growth and Kindle consult bookings in Q1, sort of underlying drivers and sustainability? And then I'll ask my follow up up front of David, which is the signaling of capital returns over time. Do you need to get to the billion in pre-tax income in FY27 to start returning capital, or could that happen before then? Thank you.

I'll go. I think he asked me first, David. So I'm going to go first. Go ahead. That's OK. Look, I think the Kindle consult performance is it. Look, we see what's going on and what others are announcing. So it is unique, I think, to us. But there's a reason that we're winning. And I think it's based in it's based in our expertise in what we would call run and transform, which is what customers want. Customers need, they know they need to transform their IT estates. But they also know because of the nature of what we do that that it has to happen while they are running. And so we are uniquely positioned with the skills and capabilities not only that we have in our deep insights, but we've made a lot of investments in capabilities and skills to move our customers to be able to move our customers into the future. And then you add to that the investments we've made in innovation like Kindle Bridge. And by the way, since we're the largest, we have more data about how infrastructures work and how do you optimize them. So all of that comes together in the form of Kindle Consult. And Kindle Consult is benefiting from our customers' deep insights that we're providing. Kindle Consult is benefiting from our deep insights into how their systems are working. And so when we look at the nature of the work we do, it's probably maybe it's best to talk about what it is and what it isn't. And maybe that's the best way to understand why this exceptionalism that we see will continue. First, everything we do within our value props has a strong business case tied to it. Those business cases sometimes are to help customers become AI ready. Sometimes they're to help customers respond to a new regulatory regime like Dora in Europe and around resilience. So each of these has a strong business case. So they're not science experiments. Companies have to do these things if they're going to be competitive or if they're going to respond to either competitive opportunities or, as I said, a new regulatory regime. Secondly, these are high value to these companies, which means they're also high value to us. This is not staff augmentation that you can respond with based on a different macro environment. So and each of them is in support of our customers' strategy. It has a long-term element. While the business case is good and the returns are good and they're suitable in the macro environment that our customers sit in, they're high value and they support their strategy. I think that's not something that's going to change. The role we play and the momentum we have says to us that we've made tremendous progress. Since we were spun out in mixing toward advisory, I think there's still a lot more to go there. I think the growth continues for—we've got a good growth driver here. But with that, because I think that maybe feeds into David's answer to your question, because Kindle Consult is one of the two growth vectors that we put on the table already two years ago, the other one obviously being the alliances activity. But David, I'll turn it over to you.

David Morgan Yeah, and thanks, David, very much for the question on capital returns. It's a very important topic for us. I think we've been really consistent in saying that over time, our leadership position in IT infrastructure services combined with the benefits that we're generating from the 3A's really should allow us to expand our margins and then ultimately be in a position to consider regularly returning capital to shareholders all while remaining investment grade, which is really important to us. We do not need to be at a—in my opinion, we don't need to be at a billion dollars of pre-tax income in order to be able to return capital to shareholders, but nothing will come of nothing. I think the key metric that will determine our ability to return capital to shareholders is really our adjusted pre-tax income. And to me, it needs to be higher than 1% of revenue, which is where it was last year, where it is on an LTM basis. That's what really needs to move up in order for us to be generating the sustainable free cash flow and earnings levels and margin that's supportive of providing capital returns.

Operator, can we move to the next question, please? Yes, we can. Our next question comes from Divya Goyal with Scosha Bank. Your line is now open.

Thank you, everyone, and good to see the ongoing progress on the company's growth here. I wanted to ask actually a big, big question on the broader macro. So as the interest rates potentially start to come down across North America, Martin, could you help us understand how would Kindle broadly benefit from that improvement from a revenue growth standpoint?

Sure. Thanks, Divya, and thanks for the nice comments. Two things come to mind, and I'll talk about the one that's obviously important to our financial picture, and then I'll talk about customers. I do think customers will react and we will benefit as they start to reposition themselves for a lower interest rate environment. First and foremost, with the yen, I'll go back to the yen so high. Our second biggest country is Japan. We are long the yen forever, basically, because it's a very profitable area for us. Having the yen come off its lows and start to make its way back is obviously a big benefit to us and our financial model. Now, on the customer side, when you think about the role we play in our customers' environments, and banking is a big element, financial services in total is our biggest industry, but industrials, telecoms, airline travel, all of these customers are investing and considering their focus as they deal with the macro. Right now, obviously, we play a big role in helping them optimize and helping them save money, but at the same time, we're well positioned to help them to start ramp up their investments again when they're ready, when they see a macro environment that is suitable. That means for us that they're going to want to start to work on the data architectures they need in order to be ready to use generative AI as an example. That means they're going to ramp up their investments in order to improve the resiliency that maybe a new regulatory regime requires. It means for us additional opportunity because, again, in an environment like this, we can help them save money, but it also will allow us then to capture their reinvestment as they get their businesses ready for the future. All of that has to happen on a transformed and modernized and contemporary infrastructure. That's why we tend to lead all of these things. I think that's part of what you see in our Kindle Consult performance to date is we sit at the heart of what they need to get done, what our customers need to invest in, in order to prepare their businesses for whatever future is there.

That's helpful, Martin. Just on the same theme, actually, broadly right now, there is that discussion going on with respect to AI, GenAI implementations, not being at the same pace as anticipated by the market. That said, to your point, enterprises actually are working towards getting the infrastructure ready for AI implementation from a cybersecurity standpoint. Could you actually elaborate on this last point that you made and talk a little bit more about what is Kindle as an infrastructure services management company actually seeing from enterprises currently on the AI front?

Absolutely. And again, this is a place where we play a very strong role with our customers. To oversimplify this, there is right now a pretty substantial chasm in a large enterprise between the line leader, the business line leader who wants to use generative AI to help her run her business and the IT organization that needs to ensure, particularly if it's a regulated entity, that needs to ensure it understands the security implications, the data management implications, and all the other things that have to happen. We help our customers bridge that chasm through consult. We help our customers bridge that chasm through education. That's what we're seeing today in our customer base. To the extent that the line leadership in a company and the IT shop in the company start to come together, you will see much more rapid progress in what customers talk about with regard to their use of gen AI. But again, all of that has to happen first. The CIO needs to be sure that whatever large language model they're using and wherever the data is coming from, as an example, those servers have all the patches they need. They need to make sure that they can answer the question for a regulator who can see your data right now. So that chasm needs to get bridged. We see it getting bridged and we're helping our customers work their way through that. Right now, it's heavily focused on bringing the CIO and the CIO organization into a readiness phase. And then it'll get deployed more rapidly. But we sit in the middle of that now and we're seeing the benefit and helping our customers through that. Sorry, sorry, David. David's going to pile on.

Yeah, certainly a lot of the media attention over last year has been on generative AI. But old fashioned AI is really important. And what we're seeing with Kindle Bridge is a tremendous amount of opportunity to create and add value through the use of AI and machine learning in particular. And the benefits that we're delivering, the automations associated with that, the insights that we're generating in Kindle Bridge, again, using more regular AI and traditional AI rather than generative AI and large language models is really quite incredible. And so I think we're probably not the only ones doing that. We see customers getting value out of that in many ways as well. But I think we're a real leader in terms of the amount of value we're able to generate and deliver by applying Kindle Bridge and the AI enabled elements of it to generate all these insights and to operate in a more optimized way.

Great. Thank you. Thanks, David. Operator, I think we have one last question.

Thank you. Our last question comes from the line of Jamie Friedman with Susquehanna International Group. Your line is now open.

Hi. Good morning. Thanks for sneaking me in. Martin, I was just wondering, I've tracked the narrative since the separation two and a half years ago. And it does seem like Consult is outperforming what you had set up at that time. I knew you knew there was a lot of white space. But the services space is not doing anything like what you're doing. I realize it's off a smaller base. So anyway, could you give us some, and I know other people have asked you about this, but can you give us some use cases and why you think that your consult position may be outperforming

the wider industry? Sure. Thanks, Jamie. And thanks for the nice, again, thanks for the nice comments and for joining. So look, I think when you when David touched on this briefly with Kendrell Bridge, but when you think about the knowledge, the depth of knowledge that we have, just the raw engineering that we have and the skills and the talent that we have that understand our customer systems better than anybody, that was what we started with. And to that, and by the way, this is the trusted group of engineers that run the world's most important, most critical systems. To that, we've invested quite heavily to take those skills and supplement them with much more industry standard skills. So now you have not only the group of engineers who understand your systems, but now they are contemporary and relevant in a much broader industry context. And add to that, that we've invested heavily in Kendrell Bridge, which gives insights we're generating, as we said in our prepared remarks, we're generating over three million insights per month to help our customers, which is saving them money. So you take the engineering and the trust we started with, you invest heavily in the people so that they have the most contemporary skills, you invest in joining the ecosystem that really matters to our customer base, you invest heavily in innovation so that you show up with new ideas and with insights that customers cannot get anywhere else. And it's not, I guess, it's not a surprise to me. And yes, we did talk about it two and a half years ago, but it's not a surprise to me that we, Kendrell, sit now at the heart, at the nexus of the secular trends that our customers are either excited by because they're opportunities like AI, like innovation on clouds, but also they're trying to manage like skill shortages or new regulatory requirements or security challenges or the need for resiliency, et cetera, et cetera, et cetera. So I think it comes down to us for we started really well with the talent that our customers trust running the most important workloads. We added to that a substantial amount of investment in our people. We've added a substantial amount of investment in innovation. And we've joined the ecosystem that's relevant to our customers. And you put all that together. And that's why we sit again at the nexus of the secular trends that our customers are dealing with. Everyone, everyone is trying to figure out how to transform digitally. And I think the other thing that we've noticed and customers are telling us is that there are really aren't any challenges they're facing that they can't solve now with technology, reaching new customers, reaching existing customers more efficiently, knowing more about your customers, running more efficiently, internally optimizing your business, transforming what you see in technology into a new business model. All of that all of that happens now with technology as a base. And that means that the infrastructure has to participate, has to be a big part of that transformation journey.

Yeah. And leveraging our capabilities and as Martin said, investing in our capabilities in consult has been a big part of our strategy. You know, like McCartney said, when this is part of our strategy, when you've got a job to do, you've got to do it well. You have to give the other fellow help. Other fellow help. And for us, that really means investing in consult and being in a position where we can lead and win and compete very effectively in this space. And that's showing up in the 49% signings growth. You saw this last quarter in the consistent double digit growth we're delivering in consult.

Great. Thanks, David. Thank you.

Thanks, Chloe. I'll drive back in.

Okay, great. Operator, we're going to have Martin say a couple of closing words, but I think that closes out our queue.

Perfect. I'm showing no further questions at this time. I would now like to turn it back to Martin for closing remarks.

Yeah, thanks, Operator. Thanks, everybody, for joining us again today. Hopefully, you can get a sense and you can hear how enthusiastic we are about the strong start to the fiscal year. And look, I also want to add and share the gratitude with the whole Kindrel team for their hard work and the contributions and their efforts. Including, by the way, the tremendous job that the Kindrel team did in recovering our customers from the crowd strike incident. It was just a phenomenal, phenomenal display of engineering prowess and urgency in support of important customers. Look, we're in a tremendous position in our third year as an independent company. Our unique run and transform approach is absolutely resonating with and adding a lot of value to our customers because it supports their continuous innovation while maintaining their operational excellence. We, as a firm, are capitalizing on the many opportunities we have to drive profitable growth. You see that not only in the data, but you see that in the things that are going to affect the data in the future, as I mentioned earlier. A recent enhanced partnership with SAP. SAP Rise is going to be a big part of how we bring value in the future. NVIDIA would be another one. All now announced, but not yet part of the data, but the data looks great in progress so far. David and I, we're looking forward to getting together with the investors, with our analyst community at our upcoming investor conference, as we said, on Investor First, Investor Day, on November 21st. In the meantime, thank you again for joining us. We'll talk to you again in the quarter. Thanks, everybody.

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