Kyndryl Holdings, Inc.

Good day, and thank you for standing by. Welcome to the Kendrell's second quarter 2024 earnings conference call. At this time, our participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 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, Head of Investor Relations.

Please go ahead.

Good morning, everyone, and welcome to Kindle's earnings call. The second quarter ended September 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 factors section of our annual report on Form 10-K for the year ended March 31, 2024. 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?

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 meet our customers' large and complex technology needs and to drive our growth strategy. David will then review our recent financial results and our fiscal 2025 earnings outlook. we delivered another strong quarter for signings, margins, and cash flow generation. It was a record post-spin quarter for signings, which had grown 33% over the last 12 months to $16 billion. We signed 10 deals of more than $100 million in the quarter, including our largest deal as an independent company, a scope expansion that will generate more than $2 billion of revenue over the next five years. Clearly, our signing strength will power our return to sustained revenue growth. And as David will discuss, what's even more encouraging is that the projected pre-tax margins on our signings continue to be in the high single digits. In the quarter, adjusted pre-tax earnings were up substantially year over year, and we remain on track to deliver significant cash flow this year. Our performance was once again led by double-digit growth in Kindrel Consult and strong momentum in hyperscaler-related revenue. as well as our ability to continue to drive efficiency and deliver innovation through automation and Kindle Bridge, our AI-enabled open integration platform. In addition, our three A's initiatives, alliances, accounts, and advanced delivery, continue to generate significant incremental benefits in the quarter. There have been multiple disruptions across the competitive landscape, and we are leveraging the investments we've made and our differentiated mission-critical capabilities to take advantage of select opportunities to win new customers and additional scope. Having invested when others have pulled back, we're in a great position to continue to capitalize on these opportunities. As we head into the second half of this year, we'll continue to focus on driving substantial financial progress and on returning to top-line growth in the fourth quarter. There's a reason why we're delivering our fourth consecutive quarter of signings growth. It's our expertise in both running and transforming IT estates that differentiates us in the markets we serve, enabling us to increase our share of wallet and grow our customer base. As you've heard me say before, Kindle is uniquely positioned to address secular IT trends, cloud migration and management, increasingly hybrid IT environments, technology skills shortages, cybersecurity risks, and the adoption of artificial intelligence. Kindle Consult is strategically positioned at the nexus of these secular trends. Our consult revenue has been consistently growing in the double digits. And this quarter, our consult signings and revenue were up 81% and 23% respectively. Consult is now a $2.5 billion plus revenue stream for us with significant runway for continued growth. This revenue stream is valuable and central to our strategy, not only because of the margins directly associated with it, but also because of the ongoing managed services work that accompanies so many IT modernization assignments. Over the last year, we've delivered significant signage growth in both consult and managed services. Our Kindrel Consult teams have decades of experience with deep domain knowledge on our customers' mission-critical systems. This experience, paired with the IP and data in Kindrel Bridge, enables us to turn technical value into business value. And we're engaging more and more with CIOs and CTOs on modernization, data architecture, AI readiness, efficiency, security, resiliency, and governance. The seven-figure assignments that we're winning to help customers with their data foundations and AI readiness are examples of that. Another key driver of our success and confidence in our future growth trajectory is our deep relationships with the three major hyperscalers and other top-tier technology leaders. Over the last year, we've more than doubled our revenue from services we provide that are related to the hyperscalers, and we expect to reach a billion dollar in hyperscaler-related revenue this fiscal year. With our mainframe modernization skills and hyperscaler alliances, we're migrating, managing, optimizing, and securing our customers' IT environments across multiple cloud platforms and helping them ensure that the right workload is on the right platform. Our growth is fueled by providing customers with higher value solutions that leverage both our extensive know-how and our alliance partners' capabilities. Together, we're focused on joint enablement activities, co-marketing, and incremental training, all of which bring solutions to the market that address our customers' most pressing needs. Because of our alliances, the skills we can bring to bear, and the freedom of action we have as an independent company, We are frequently expanding the scope of services we provide to existing customers to now include mainframe modernization and cloud migration services. At the same time, we're also beginning to add more new logos where Kindle Bridge is at the core of our service delivery across multiple platforms involving one or more hyperscalers. Separately, last month we published the inaugural Kindle Readiness Report. This report analyzes what business and IT leaders see as the big picture challenges and opportunities in today's global business landscape, how their IT helps them prepare for those risks and capitalize on opportunities, and what specific factors enable or hinder progress. I am really excited about the report because it combines our proprietary Kindle Bridge operational data with survey data from over 3,000 senior leaders in 18 markets. By combining operational data with survey data, the report assesses and compares the perception of IT readiness versus the reality of readiness, with the goal of helping companies uncover new value for past, current, and future technology investments. Among our key findings, more than 90% of the leaders surveyed believe their infrastructure is world-class, yet fewer than 40% believe they're ready for potential risks coming their way. Cybersecurity is the number one concern regarding risk readiness closely followed by policy and regulatory requirements and emerging technologies, including AI. Two-thirds of CEOs are concerned that their IT is outdated, carrying vulnerabilities, skills gaps, and has challenges for modernization. And 40% of mission-critical components, such as servers, storage, networks, and operating systems, are approaching or at their end of life. These factors are why tech modernization is a top priority for business and IT leaders, However, more than 70% of participants indicated they are still in the early stages of modernization. For enterprises to progress on their modernization journey and make their organizations more ready for the future, leaders need to overcome their prioritization paralysis. And that is precisely the role that Kindrel plays as a trusted partner, providing a differentiated, pragmatic approach to modernization. We offer unmatched expertise in designing, building, and managing mission-critical workloads We provide unprecedented observability and valuable insights from Kindle Bridge, and we collaborate with hyperscalers and other top-tier technology providers to accelerate the pace of our customers' IT transformations. As we've highlighted before, our evolving business mix, where we're focusing on higher-value services for our customers, is driving increased profitability and fueling future top-line growth. This fiscal year, half of our revenue is coming from post-spin signings that have higher margins than our backlog did at spin. 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 forecast for fiscal 2025 is for adjusted pre-tax income of at least $460 million, reflecting a year-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 keep us well on track 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 cash flow. Our confidence stems from Kindle's unique set of attributes that position us well for sustainable growth. Our customers want to work with us for a number of reasons, including we have mission-critical expertise and domain knowledge throughout our six global practices to manage increasingly complex hybrid IT estates and address tech debt. Because we've established and expanded relationships with hyperscalers and other top-tier technology providers to accelerate the pace of mainframe modernization and cloud migration. because we've invested in our advisory talent. Our Kindrel Consult teams have the know-how to make our customers' IT estates optimized, secure, resilient, and regulatory compliant. And they know how to architect data for our customers so they can be responsibly and securely adopt and leverage AI. And finally, because we're making ongoing investments in Kindrel Bridge, That's enabling unprecedented observability, actionable business insights, and valuable outcomes that align with our customers' business strategies and goals. In short, we are delivering sophisticated, optimized, multi-vendor solutions to customers that allow them to address critical needs and major opportunities. Through Kindle Bridge, automation, and AI, we're delivering managed services more efficiently than ever. And as a result, and as we've said, we're showing up differently and powerfully in the IT services market. Lastly, I want to remind you all that we'll be hosting our first Post-Spin Investor Day in New York on November 21st. This will be an in-person and live webcast event available on our investor relations website, where we will delve deeper into our strategy and key priorities that will drive our next chapter of growth and margin expansion. I also want to highlight that we recently published our second corporate citizenship report. It describes our notable progress as a multinational organization, our role as a provider of essential services, our focus on managing our environmental impacts, our Kindrel way culture, and our principled approach to corporate governance. I'm very proud of the Kindrel team and the progress we've made, and I encourage you to review it on our website. Now, with that, David will take you through our results and our outlook.

Thanks, Martin. And hello, everyone. Today, I'd like to discuss our second quarter results, our continued progress on our 3A initiatives, the solid margins at which we're signing customer contracts, and our outlook for fiscal year 2025. The theme that you'll pick up is strong execution on our powerful strategy. In the second quarter, revenue totaled $3.8 billion, a 7% decline in constant currency. The year-over-year trend was anticipated and primarily driven by our intentional exit primarily in prior quarters 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. We also reported the strongest quarter of signings in our history as an independent company. total signings grew 132% year over year. Our $5.6 billion of signings made Q2 our fourth consecutive quarter of signings growth and brings our trailing 12-month signings growth to 33%. We saw strength across all six of our practices, each of which reported signings growth of 30% or more in the quarter, and we delivered growth across our four geographic segments, each of which reported signings growth in the quarter. As Martin highlighted, we continued to gain momentum in higher margin advisory services. Kindrel Consult revenues grew 23% year-over-year, which underscores how we're growing our share in this higher value-add space. Kindrel Consult signings grew even faster, up 81%. Over the last 12 months, we've seen strong growth in Kindrel Consult with signings up 41% year-over-year. And importantly, we're also delivering growth in managed services. Our managed services signings have increased 32% in the last 12 months. Our second quarter adjusted EBITDA was $557 million, and our adjusted EBITDA margin was 14.8%. Adjusted pre-tax income grew 80% to $45 million. Our financial progress continues to reflect our strategic execution, 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 Kindrel to meet our customers' future IT needs. Included in our $45 million of adjusted pre-tax income was $39 million in workforce rebalancing charges, the contractually committed $50 million increase in IBM software costs, and a $40 million impact from currency movements that all operated as headwinds. Mitigating this, we also had a $20 million net benefit from depreciation changes. Excluding these items, we delivered a year-over-year increase of $129 million in adjusted pretax income, which reflects our execution and progress on our three A's initiatives. Through our alliances, we generated $260 million in hyperscaler-related revenue in the second quarter. This puts us on track to deliver a billion dollars of hyperscaler-related revenue this year, double our fiscal 2024 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 11,500 delivery professionals to address new revenue opportunities and backfill attrition. This is worth a cumulative $700 million a year to us, representing a $50 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 second quarter, we increased the cumulative annualized profit from our focus accounts by $50 million to $775 million. Clearly, the three A's remain an important source of margin expansion and value creation for us. Consistent with what I shared in prior quarters, I'm particularly enthusiastic about how we continue to position Kinroll for future revenue, margin, and profit growth. As we grew signing substantially this past quarter, we continue to command attractive margins on our signings. Throughout fiscal 2024 and now through the first half of fiscal 2025, we've 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-BIN contracts, you'll see significant margin expansion in our reported results. We've again 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 $16 billion of signings over the last 12 months, we've added over $4 billion of projected gross profit to our backlog. Over the same period of time, we've reported gross profit of $3 billion. This means we've been adding significantly 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 one at 1.4 over the latest 12 months is a key measure of how we're growing what matters most, the expected future profit from committed contracts. And with our gross profit book to bill ratio having been consistently above one, That means that we've been consistently growing our gross profit backlog over the last two plus years. Turning to our cash flow and balance sheet, our adjusted free cash flow was $56 million in the quarter. Our gross capital expenditures were $134 million, and we received $30 million in proceeds from asset dispositions. We've provided a bridge from our adjusted pretax 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 September 30 was $1.3 billion. Our cash combined with available debt capacity under committed borrowing facilities gave us $4.5 billion of liquidity at quarter end. Our debt maturities are well-laddered from late 2026 to 2041, We had no borrowings under our revolving credit facility, and our net debt at quarter end was $1.9 billion. Our target has been to keep net leverage below one times adjusted EBITDA, and we ended the quarter well within our target range at 0.84 times. We're 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. As we said previously, our core financial goals are to continue to inflect our revenues back to growth as the year progresses, expand our margins, grow our earnings, and generate free cash flow. Our outlook for fiscal 2025 continues to be for revenue to decline 2 to 4% in constant currency. This implies revenues of $15.2 to $15.5 billion based on recent exchange rates. We continue to expect to return to year-over-year revenue growth in the fourth quarter. We're reaffirming our outlook for adjusted EBITDA margin and adjusted pre-tax income. to reflect the execution against our plan we delivered in Q2. Our outlook for full-year adjusted EBITDA margin is at least 16.3%, and our outlook for adjusted pretax income is at least $460 million. Looking at the third quarter in particular, our year-over-year constant currency revenue decline will be meaningfully smaller than our Q2 decline. And our adjusted pretax income should be more than double the $63 million we reported in last year's third quarter. In total, we expect to deliver more than 60% of our full-year adjusted PTI in the first three quarters of the year. Included in our guidance for the third quarter is approximately $20 million of workforce rebalancing charges. The timing of these charges has been weighted toward the earlier part of the year, while our revenues are slightly tilted toward the latter half. On the topic of cash flow, for the year as a whole, we project $675 million in net capital expenditures and a similar amount of depreciation expense, as well as $150 million in cash taxes. This translates to roughly $300 million in adjusted free cash flow in fiscal 2025, consistent with our prior outlook. 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. Stepping back from the financials, because we provide mission-critical services to large important organizations, Kindrel powers economic progress around the world. What we do matters. And our leading market position in IT infrastructure services, our strong service levels, and the mission critical nature of what we do distinguish us from other providers of tech services. These attributes that differentiate us give us opportunities for profitable growth that are specific to Kindrel and we're moving aggressively to seize them. You can see our progress in the margin expansion we've been delivering in our Q2 and LTM signings growth and in our planned return to revenue growth in the fourth quarter. And we plan to talk more about this during our investor day on November 21st. With that, Martin and I would be pleased to take your questions.

Thank you. At this time, we'll conduct a question and answer session. As a reminder, to ask a question, you 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. Martin, are you ready for your first question?

Yes, sir. Thank you very much.

All right. Please stand by while I compile the Q&A roster.

Our first question comes from Davia Gwal from Scotiabank.

Please go ahead.

Hello, everyone. Good morning. Craig Corder here. Martin, could you provide us a little bit more color in terms of the macro impact on the signings? Do you potentially see the signings momentum to pick up more significantly as the macro improves and the rates start to continue to come down?

Yeah. Good morning, Divya, and thank you for the nice comments. You know, I think what I'd start with is what we've been talking about and what we shared a few weeks ago in the form of the first Kindrel readiness report. And in that, which is a combination of our data, and we obviously have more data on the state of the world's technology infrastructure than anybody else, along with what the leaders of companies are faced with, and how they feel about their readiness for the future. And so when we think about the challenges they have, when they think about the opportunities that they're looking at, and we think about our capabilities and the innovation we bring and the skills we bring, I think we do and are part of the long-term secular trends that are driving the markets we serve to continue to grow over the long term. So I feel really good about how we've invested to build new capabilities, about how we've invested to bring innovation in a very unique way in a space that is extraordinarily important to either, again, manage the risks that the leaders of companies see coming or to take advantage of the opportunity. So the alignment of Kindrel with the secular trends will continue to provide long-term signings and therefore long-term revenue growth for us.

That's helpful. Just as a quick follow-up, and I'll pass the line right after, is considering where things are broadly, you know, with the election and everything, where do you see the global enterprises place? Like, you know, we talked about co-modernization generally. AI is a big theme that continues to evolve How do you see global enterprises and the global C-suite executives' position from an investment standpoint when it comes to the co-modernization, the AI readiness-related investment, given the role, such an important role Kindle plays in the infrastructure side of things?

Yeah, it's a great question. And look, I think the way our customer base and the respondents, for instance, to our readiness survey, I think the way they feel is, is sort of at the beginning of a journey that they know they have to go down. So the digitization of the economy is going to keep happening. They know they need to be a part of it. They know they need to invest in, for instance, AI. And the work we do to help them get ready for that is part of what we're already seeing in our consult results, is part of what we're already seeing in our managed results. And at the same time, while they're trying to invest for the future to take advantage of opportunities, they're also trying to keep the bad guys at bay. You know, cybersecurity and resilience sits very high on their list of things they need to invest in. And they're also trying to adjust to whatever the regulatory regime happens to be. And we're headed toward, you know, obviously different regulatory regimes. but probably not that different when it comes to cybersecurity or resiliency. You still need to have resilient systems. You still need to be safe from the bad guys. So I expect that from our customers' perspective that they each accept that digitization of the economy is coming, that there are opportunities for them to continue to invest in, to take advantage of that, and at the same time, At the same time, they're going to have to both respond to the regulatory regime and keep the bad guys at bay. And again, that's the role we play in helping them do all those things. So I see continued investment in IT. There are very few companies who don't believe that IT is either a very big part or a substantial part of solutions to almost every problem that they have. So that's the world we live in today, and I expect that to continue.

Thanks, Divya. Operator, can we move to the next question?

Thank you. One moment for our next question. Our next question comes from Jamie Friedman from C-School Hana. Please go ahead.

Hi. Good morning, and let me echo the congratulations. Martin, I was wondering about the 10 large deals of $100 million plus. Is there any that's a big number, a big number for anyone, a big number for you. I think it's a lot more than what we had seen in the past. Is there any common pattern that you're seeing in terms of what those customers are looking for and why they're renewing now?

So, yeah, a few things I think that are fairly consistent. One, In each of these, I wouldn't think of them just necessarily as a renewal now. It's rather I think of them and what we're seeing is that a very consistent acceptance of the capabilities that we've invested in and the desire to modernize with the company that's investing in the infrastructure space, which is us. So they're looking, obviously, for deep engineering skills and deep capabilities. And at the same time, they're looking for innovation that the Kindle Bridge provides to give them observability and help them to manage their ever sprawling IT infrastructure. So think of each of these as reflecting continued investment in their digitization. Think of each of these as additional scope for us, so not just renewing not just renewing what we've done in the past. And think of each of these as generally reflecting each of our practices. So I think every one of them has each of the practices represented. And importantly, think of them as both a consulting element, and you see that in the consult growth, and as well as a managed element. And David noted in his in his prepared comments, the very high double digit growth we're getting from the managed business. So these are, the pattern is scope expansion for us as we invest, as we bring the best skills to help them with their biggest challenges or take advantage of their opportunities. It's pretty broad based. It has each of our practices. It has consult and it has manage. So it's a pretty whole of firm, if you will,

uh uh approach that our customers are taking up uh from from what they see from kendrell i got it and then could i just ask is the is there any other pattern that you're noticing in those for example it are they consistent with the vertical call outs on page 17 of the PowerPoint or from a service line perspective? Or a regional perspective? Are any of them in any particular region or vertical?

Thank you. Yeah, sure. Thanks, Jamie. And thanks for the nice comments at the beginning as well. Look, in any given quarter, the signings mix will obviously reflect the customer base, you know, more or less in any given quarter over time that that industry mixes where we've been is where we're mixed and i would expect that will shift slowly over time from a regional perspective each of the regions each of our segments grew signings in the quarter some some obviously faster than others and when you double obviously there's some big growth numbers in there but But each of the segments grew as well. And I would say that, again, our ability to deliver on a global basis with a single global delivery platform, which means our capabilities can reach each of our customers across all of our practices, I think that to me is the end-to-end kind of – go-to-market that we've been building so that each of our customers in each of the industries we serve can take advantage of innovation, can take advantage of skills and experience wherever they happen to be. So I think, again, it's broad-based. the large deals that we signed this quarter are obviously a reflection of the confidence and the trust that our customers and our new logo customers, by the way, they're not all existing, well, they're customers now, but some of them are new logo customers as well, that they see coming from Kindrel in the form of innovation and experience and depth of skills.

And, Jamie, one of the things, this is David, one of the things I think is really important is that we're achieving this signings growth Well, continuing to be really disciplined about the margins at which we're signing business and really successful and effective in making sure we get reasonable margins on this business and continuing to sign new contracts with an expected high single-digit pre-tax margin. I think that's, you know, as we highlighted in the deck that we shared, our gross profit book to bill is remarkably high, and we're adding a lot of embedded value to our backlog. Got it. Thank you both.

Thanks, Jamie. Operator, next question, please.

Thank you. One moment for our next question. Our next question comes from Tianjing Wang from J.P. Morgan. Please go ahead.

Sorry, can you hear me now? Hello?

We can hear your attention. Thanks.

Hey, Martin, sorry about that. Just switch your phones here. I also wanted to ask about the really strong signings. I always, when we see that, always my go-to is asking about replenishing the pipeline. So just curious from here if you feel, you know, this kind of signings momentum is sustainable. I know it's very broad-based, which is encouraging, but how does the replenish opportunity look like?

Good morning. Thanks for the question. We absolutely think it's sustainable, and it has been sustainable. So, you know, we actually try to look and prefer to look at signings over an LTM, a latest 12-month basis, and we're seeing, you know, north of 30% growth over that period of time. Our book-to-bill ratio is now at one, and we see an opportunity for that to move up as well. And as Martin was saying, the role we're playing with customers, the range of capabilities we're able to bring to bear, our ability to offer end-to-end solutions, and the know-how that we have combined with the technology alliances we have has absolutely put us in a position where the growth trajectory that we're on is sustainable and I think going to be really valuable for us. And frankly, it's one of the areas that we plan to talk more about at our investor day on the 21st, because we think it's a really important part of our story and the way we've developed as an organization over the last three years, positioning the business for sustainable long-term growth.

One thing I'd add, Tenjin, and I think David described it really well, but one thing I'd add is keep in mind that Kindle Bridge is also a is also a way for us to provide actionable insights to our customers. So that fuels our Kindrel Consult growth over the long term as well. So we have an ability to deliver value through Kindrel Consult. Obviously, we have an ability to deliver great value through Bridge, which our customers appreciate the observability. They appreciate the value. the visibility they get to their systems, but it also gives them insights that nobody else can, nobody else has, that they can also take advantage of.

Yeah, no, sounds like you got a lot of good things going on there, so that's great to hear. Just my follow-up, and now I have to ask it here, if it's okay, just the decision to not raise your outlook, a little bit of a change in pattern results, it's clearly been quite good, so update us there.

Yeah, sure. Look, I'll start. David might have something. Look, we had a great quarter and we feel great about how we finished the first half of the year. It gives us a lot of momentum going into the second half. We're really, obviously, really pleased with the continued signings momentum, which positions us well. And the signings momentum is, you know, really is coming from the growth factors that we have been talking about now for just over three years, right? We were just on our third birthday a couple of days ago. So, So with the consult momentum, with alliances momentum really hitting, and with the at least guidance we have out there, we feel like we're really well positioned to, you know, to deliver another great year, which remember the year has pretty substantial profit improvement already. And it also has the return to revenue growth. So with the momentum, with another great quarter, so really, really good first half relative to to where we guided, I think we feel good about second half. And a second half represents a big, you know, big improvement in profitability. And keep in mind, and you know this, Tingen, because you've been around the business quite a bit. This year, only half, even after three years, this year, only half of our revenue comes from what we've added to the backlog. The other half still represents what we've inherited. And As we get further and further away from the spin date, obviously, the role in our P&L of the inherited backlog continues to diminish. So we've got a lot of growth and a lot of acceleration ahead of us here as we move further from the spin date.

Yep. No, agree with all of that. Happy three-year birthday, and see you in a couple weeks. Thank you.

Thanks, Vincent. Operator, next question, please.

Thank you. One moment before our next question. Our next question comes from Isaac Salhausen from Oppenheimer. Please go ahead.

Hey, good morning. This is Isaac on for ENC. My question is on consult revenue and sign-ins. Maybe if you'd be able to provide some higher-level commentary, what you're seeing for growth between new logos and existing customers, and then secondly, maybe how those margins on those consult sign-ins compare to managed services and some of the other work. Thanks.

Sure. Good morning, Isaac. In consult, we're seeing strength in a number of different areas. Our revenues are up north of 20% year over year, and that compares to 14% in the prior quarter in constant currency. So we're seeing not only growth, but an acceleration of that growth in the most recent quarter. Consult's now up to 19% of our total revenue in the most recent quarter. So it's becoming a more and more and more important part, a larger part of what we do. We're really excited about that. Consult is really spanning the range of our practices and the range of our offerings. So we're using Consult in a number of areas, or we're providing advisory services in a number of different areas related to the capabilities that we bring to bear. We think that's really helpful to our customers. From a margin perspective, consult tends to be a few points higher than managed services in general. And that's often the way we price it. On occasion, we'll, you know, with a new logo opportunity, you know, we'll use consult assignments as the starting point for building that relationship. And so we consider consult to be a big value add in existing relationships. but it's also where we typically or often will start new logo relationships. And so we think our presence in this space is extremely important and valuable from that perspective as well. And I would say, lastly, that this is more and more something that we're becoming known for. Our history, obviously, is on the managed services side, but the growth in Consult and our ability to bring together a wide range of technologies, the capabilities that we have, the insights from Kindle Bridge, all the technologies that we have is really putting us in a position where we can deliver a lot of value to customers through these consult assignments. And I think that's what's driving our growth and it's driving a lot of repeat business from our customers in this area as well.

Yeah, thank you, David. I just would supplement that. I think that's well said. I guess the way I think about this and our experience is that kind of all roads lead to infrastructure and all roads lead to control. So if you pick up a newspaper and read about the new, for instance, regulatory requirements for resiliency across the European financial sector called DORAS, the acronym for it, you should assume and you would be correct in assuming that we're doing a lot of consult work for our customer base on getting them ready for DORA. If you pick up a newspaper and read about GenAI or a new large language model or its use in a test case, again, it's going to start with that customer's data architecture, data security, and resiliency features that they're going to need. And again, that leads back to Kindrel and our practices and And, you know, I could go on and on and on. When you read about healthcare industry needing to take advantage of innovation on a cloud while at the same time protecting its data and getting ready for the future, again, that's where we are with our healthcare customers. So over and over and over again, and the reason we see this long-term growth trend is because we sit at the heart of what customers are facing. Our customers are facing with regard to how do I take advantage of the opportunities I see or how do I manage the risk or get ready for the regulatory regime I see. So it's, as David said, well, it's widespread, it's across our practices, and customers need help getting ready for their digitized future.

Okay, that's very helpful. Thank you. And I just had a quick follow-up on the cloud business and hyperscaler partnerships. It's obviously great to see the strong growth there. I'm just curious what you're seeing as far as trends with clients either staying on-premise, you know, helping to move fully to the cloud or remaining hybrid, and if you've seen any notable shifts over the past 12 months or so. Thank you.

Yeah, I see a continuation of, you know, the idea that innovation is showing up on clouds Our customers, who are not the born on the cloud crowd, obviously, our customers live and work in a hybrid environment. And so in order for them to get to the innovation that they see, in order for them to move, if you will, where the workload runs to where the data is or is collected, and quite frankly, in order to get the right workload on the right platform, I think that trend continues. We don't see it slowing down. We see new opportunities. We see new complexity being introduced into systems because not all innovation is available everywhere. So our customer base is now thinking, how do I make sure I can get the innovation I need? But I haven't seen in the last 12 months, which is the time frame unit, I have not seen a dramatic, any kind of change in customers' desire to or use of of moving to creating a more hybrid environment by moving things to where they should run. And, you know, again, over, over and over, that tends to be a cloud or a mix of what they're doing today, plus supplemented by public cloud, etc, etc. As David said earlier, you know, one of the one of the things we're noticing in consult is that a lot of the repeat business we get is growing that consult around cloud migration, But, again, I don't see that as a change in trajectory. It's just us winning more and more and more of that business as our customer base and our prospect base continue to take advantage of our investments and capabilities and our investments in innovation.

Great. Thank you. Thanks, Isaac. Operator, I think there's one more question in the queue.

Thank you. One moment before our next question. Our next question comes from Divya Goyal from Scotiabank. Please go ahead.

Sorry, guys. I think there's a confusion. I did not raise my hand again. All right.

Thanks, Divya.

All right, Divya. Thank you.

Thanks, Divya. I am showing no further questions. I will now turn it back over to Martin for closing remarks.

Oh, thank you. Thank you very much. And thanks to everybody for joining us today. As you can tell, we we continue to execute on all of the opportunities that we see ahead of us. The strategies we've laid out now three years ago are clearly driving the kind of financial progress that we've described. In fact, I'd say we're ahead of the progress that we've described. So we have a very exciting second half, but more importantly, we have a very exciting future ahead of us as we move further and further from the spin date Our unique run and transform approach is resonating with and delivering a ton of value to our customers because each of them is trying to figure out how do they continuously innovate while maintaining the operational excellence they need for the kinds of systems we run, mission-critical systems. And so for us at Kindrel, we'll continue to capitalize on those opportunities. to drive profitable growth. We'll continue to meet our customers' both current and future IT needs as we continue to invest in new capabilities and new innovation and bring all of that to our customers. It is pretty clear, I think, that we continue to move toward our potential here, and we're very excited by it. One more plug for our Investor Day. You know, David and Lori and I and a few others of the leadership team will be there November 21st, and we're looking forward to having you join that as well. So thanks, everybody, for joining.

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