Kyndryl Holdings, Inc.

Good day and thank you for standing by. Welcome to the Kendrell 4th Fiscal Quarter 2026 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 a 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, Global Head of Investor Relations.

Good morning, everyone, and welcome to Kindle's earnings call for the fourth fiscal quarter and year-end March 31, 2026. Before we begin, I'd like to remind you that our remarks today include forward-looking statements. These statements do not guarantee future performance and speak only as of today, and the company assumes no obligation to update its forward-looking statements, except as required by law. Actual outcomes or results may differ materially from those suggested by forward-looking statements as a result of risks and uncertainties. For more information on some of these risks and uncertainties, please see the Risk Factors section of our annual report on Form 10-K, for the year ended March 31, 2025, and our quarterly report on Form 10-Q for the quarter ended December 31, 2025, as such factors may be updated from time to time in the company's subsequent filings with the SEC. Also, in today's remarks, we refer to certain non-GAAP financial metrics. Definitions and additional information about our calculation of non-GAAP financial metrics as well as 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. Following our prepared remarks, we will hold a Q&A session. I'd now like to turn the call over to Kindrel's Chairman and Chief Executive Officer, Martin Schroeder.

Thank you, Laurie, and thanks to each of you for joining us. In our fiscal year 2026, we delivered adjusted pre-tax income growth and margin expansion and generated over $400 million in free cash flow. This performance comes against the backdrop of an environment that has continued to extend sales cycles and weigh on our revenue and signings performance. Customers are telling us that they are eager to embrace innovative solutions and modernization strategies, yet they are increasingly thoughtful and deliberate in their IT decision making driven by the dynamic of sovereignty, AI, and cyber preparedness, aiming to balance transformation with operational stability in today's complex environment. Considering these dynamics, we continue to invest in Kindrel Consult, our alliance partnerships, and our agentic AI capabilities, all while supporting and modernizing our customers' most complex, mission-critical IT environments. Our strategic focus remains unchanged. We're focused on growing our revenues and earnings and generating cash to reinvest in our business. The successful execution and continuation of our advanced delivery initiative, the increasing use of AI across our own operations, and the new workforce rebalancing actions gives us confidence that we're progressing toward our multi-year objectives. Both Harsh and I will discuss this in more detail. We will deliver sustainable, profitable growth by increasing high-value consultant engagements, deepening capabilities with our alliance partners, and delivering innovative AI-led modernization services. As more post-spin signings convert into revenue in fiscal 27 and 28, these growth investments, paired with our own use of innovation to drive productivity, position us to achieve higher profitability going forward. On today's call, I'll highlight the underlying growth drivers that are strengthening our operations and the targeted actions we're taking in fiscal 27 to advance us towards our fiscal 28 goals. Let me start with Kindrel Consult, In fiscal 26, Kindrel Consult again delivered double-digit revenue growth, our third consecutive year of strong performance. We've invested heavily in Kindrel Consult, including developing and hiring forward-deployed engineers and human systems architects, and our AI innovation labs, where we co-create agentic solutions at scale with customers. We exited the year with Kindrel Consult signings exceeding revenue, positioning us well for another year of strong consult revenue growth. This demonstrates how enterprises are turning to Kindrel for our high-value services across agentic AI, IT modernization, public and private cloud, and cybersecurity to help them modernize at scale, strengthen resilience, and unlock greater business value. Turning to our hyperscaler-related revenue streams, we exceeded our initial target and realized nearly $2 billion in revenue in fiscal 26. Keep in mind, this revenue source was essentially zero four years ago and has consistently grown year after year. This underscores the significant progress we've made in strengthening our core capabilities and establishing ourselves as a vital partner for our customers and alliances. We've been deepening our relationships with hyperscalers and, most recently, developing new capabilities in areas such as data sovereignty and agentic modernization. Across the broader alliance ecosystem, Kindrel continues to build strong momentum by translating innovation into secure, scalable, and repeatable outcomes for customers. Additionally, we have continued to strengthen our collaborations with other important alliance partners beyond hyperscalers as private cloud becomes an important growth factor, including the likes of Broadcom, Dell, HP Enterprise, and many others. For fiscal 27, we expect another year of strong growth from Kindrel Consult and hyperscaler-related revenue streams. Over the last few years, our success with Kindrel Consult and hyperscalers has helped offset the headwinds we've been facing from our own account initiative, and more recently from customers' decisions to procure hardware and software directly from IBM. You can also see from the chart on the right that 80% of our revenue in fiscal 27 is expected to be derived from post-spin higher margin signings, supporting our multi-year objective of expanding projected pre-tax margins on post-spin signings into the high single digits. In fact, in fiscal 26, we signed 38 deals in excess of 50 million, of which more than 30% consisted of new scope or were new logos. Given the multi-year nature of our customer relationships, I'm encouraged that we've signed more than 125 large deals over the last three years. Importantly, the investments we've made in consult, alliances, and agentic AI capabilities have well positioned us in today's market where enterprises are turning to Kindle for their modernization needs. This reflects our ability to win large, complex deals despite a more challenging environment, including longer sales cycles. With our heritage and mission-critical expertise and IP combined with AI-powered Kindrel Bridge platform and our differentiated solutions centered around the Kindrel Agentech AI framework, Agentech service management, and digital trust, we are seeing results in modernizing our own operations and in helping our customers continuously modernize their IT infrastructure and applications. to scale AI, to unlock business value, and to enhance resiliency and address AI-enabled cyber threats. Every customer conversation right now is focused on agentic AI and what it means in the context of their business, returns on investment, implications for cybersecurity, their workforce and efficiency, and in regulated environments, compliance. As customers embrace the agentic era, expectations of IT organizations to reinvent themselves have changed. And when you consider additional factors such as increasing tech debt and operational costs, modernization is no longer optional. It is a requirement. And at the same time, customers need a different approach to modernization, as most traditional approaches are labor-intensive, slow, often encounter business disruptions, and miss the expected ROI, which is why most customers lack confidence in their ability to execute modernization effectively. Our Kindrel readiness report found that nearly half of organizations struggled to generate meaningful returns on AI because their IT environments, their infrastructure applications, and business processes simply were not built for it. It's like trying to run a shiny new 200 mile an hour bullet train on tracks built for 30 miles an hour. Our customers are challenged in moving from AI experiments to industrialized scale. In this rapidly evolving technological environment, Kindrel becomes even more essential to our customers, helping them to prepare, navigate complexities, and scale. Within our own delivery operations, we're using AI agents embedded in the Kindle Bridge platform to drive greater productivity and outcomes. For example, we're seeing incidents being resolved 70% to 90% faster, which means less disruption and more consistent service. We're seeing root cause analysis cycles approximately 75% faster, helping prevent the same issue from happening again. And we're seeing that the dependency on people's time reduced by 50% to 70% freeing up our people and their expertise for higher-value work that delivers transformation for customers and growth for Kindle. So let's now turn to how we're working with customers to deliver business outcomes across the modernization continuum using an agentic AI approach. Importantly, these aren't one-off engagements. They create clear paths for us to further develop and expand our long-term strategic partnerships with customers from infrastructure and applications into higher-value transformation work. We're working with a large European bank to build a joint competency center to establish a vendor agnostic hybrid cloud design while complying with data sovereignty requirements and providing control over their AI adoption. They need flexibility and control across public and private cloud with a single simple view across their entire estate. We're leveraging our deep platform engineering expertise and agentic modernization capabilities to rapidly deploy their shared cloud platform. By co-creating this future state together, we're also expanding our scope into the application layer. Next, with a global insurance company, the starting point was a decades-old mainframe environment running millions of lines of mission-critical code supported by a shrinking pool of in-house expertise. Such products have traditionally failed because of system complexity, limited documentation, and skill shortages. We used AI agents to rapidly understand the current functionality and rewrite the system to a modern cloud-native architecture. The business outcomes we're delivering include an agentic digital twin to retain institutional knowledge and a 50% faster data center exit. This has positioned us to replicate and apply our modernization approach to other mission-critical systems in other countries where they operate. And then with U.S. state government agencies, in this case the DMV, we have a repeatable solution underpinned by agentic AI to rapidly implement scalable and resilient digital platform services. The benefits of our approach include self-service for government employees and enhanced citizen experiences by reducing wait times and improving self-service. Importantly, we're deploying the solution across multiple states and countries as a standardized repeatable offering. In all three examples, we rewarded new scope and now expect to expand into new areas. Customers are selecting Kindrel for our decades of mission-critical engineering expertise and our unique approach to AI-led modernization services. We're a trusted advisor and long-term partner for our customers with differentiated solutions that center on achieving tangible business results. With that, I'd like to pass the call over to Harsh to discuss our fiscal year results and outlook, and then I'll close with a more detailed discussion on our multi-year objectives. Harsh?

Thanks, Martin, and hello, everyone. Today, I will focus my comments on our year-end results and our outlook for fiscal 2027. For fiscal year 2026, we generated 15.1 billion of revenue, flat from the prior year on a reported basis, and down 3% in constant currency. We exited fiscal 2026 with total signings of 13.5 billion. As previously discussed, both revenue and signings were impacted by extended sales cycles, particularly in the UK and strategic markets. and the evolution of our relationship with IBM. Our adjusted EBITDA in fiscal 2026 was $2.7 billion, and our adjusted pre-tax income was $581 million. Adjusted EBITDA margin increased 100 basis points, and our adjusted pre-tax margin increased 60 basis points year over year. reflective of a mixed shift in the business as more post-spin signings flow to the P&L. Our three A's initiative continue to be an important source of margin expansion and value creation for us. Through our alliances, we generated $1.9 billion in hyperscaler-related revenue in fiscal 2026, up 59% versus last year, and exceeded the 50% growth in hyperscaler-related revenue that we were expecting at the beginning of the year. Through advanced delivery, we continue to drive efficiency by incorporating more AI-based technology into our services, enabled through Kindle Bridge to further reduce our costs and increase our already strong service levels. Today, this is worth roughly cumulative $1 billion of savings a year to us. Our accounts initiative continues to address elements of contracts we inherited with substandard margins. We exited fiscal 2026 with $1 billion cumulative annualized profit savings from our focus accounts. A key takeaway point from this update on the three A's is that we have successfully implemented these initiatives and they have become a core part of our operational discipline. I want to provide an update on what we shared last quarter on our evolving partnership with IBM, largely driven by how customers are consuming IBM innovation. This chart illustrates more than a three-point adverse impact on revenue performance in constant currency since the spinoff, driven by our focus accounts initiative in our early years and more recently by this evolving relationship. As we have described before, at the time of spinoff, approximately 40% of our revenue from our inherited commercial agreements were in low to no margin position. Our annualized run rate or spend with IBM was nearly $4 billion. Over the past four years, we have addressed most of the focus accounts, leading to improved profitability gains. In fact, by the end of this fiscal year, our annualized run rate or spend with IBM was less than $2 billion, half of where it was when we were spun off. Over the past year, especially in the second half of our fiscal 2026, customers started changing how they consume our high value services and IBM innovation. While these changes do not affect the scope or margin of our services and our ability to grow our services content, they do have an impact on the size of our signings and consequentially our revenue over time. And as we have said, this has a limited impact on our earnings. In fiscal 2027, we are expecting similar headwinds to continue. Turning to our cash flow, our free cash flow was $406 million for the year, relatively in line with fiscal 2025, and approximately $50 million higher than the midpoint of our $325 to $375 million guidance we provided on our February earnings call. This performance was driven by stronger cash collections and lower net capex in the fourth quarter. For the full year, working capital and other was a use of approximately $250 million of cash, largely related to broad-based incentive compensation payments that occurred in fiscal first quarter, coupled with lower compensation accruals in the current year based on our performance. Net capex of $543 million was up $20 million from last year, yet it was below what we anticipated, largely due to changing customers' consumption behaviors with their buying direct from IBM. In the appendix, we include a bridge from our adjusted EBITDA to our free cash flow and more information on the free cash flow metric calculation. Today we have a strong conversion of earnings to free cash flow at the rate we have been targeting. You can see on this slide that over the last two fiscal years, we delivered more than a billion in adjusted PTI and less cash taxes of 300 million over the same two-year period. We generated over 800 million in free cash flow. We expect this same rate of earnings conversion to free cash flow going forward. While quarter-to-quarter dynamics can vary, over time this is our view on earnings to free cash flow conversion. Our financial position remains strong. Our cash balance at March 31st was $2.6 billion. Our cash is up $1.3 billion from the period ending December 31st. which includes $300 million from operations and the billion we drew under our revolving credit facility. Our debt maturities are well-laddered from late 2026 to 2041. We plan to refinance or use cash on hand to fund our near-term debt maturity of $700 million later this calendar year, and our pending acquisition of Solvenity which is now expected to close in the first half of fiscal 2027 for 100 million euros. Our net leverage ratio has been and continues to be well within our target range of one times adjusted EBITDA. We exited this fiscal year at 0.5 times, which is an improvement from 0.7 times at the end of our fiscal 2024. We are rated investment grade by the rating agencies. Under the share repurchase authorization, we bought back 11.6 million shares of common stock at a cost of 304 million in fiscal 2026, of which 3.3 million was purchased in the fourth quarter at a cost of 49 million. Since the inception of the program, we have repurchased 6% of our outstanding shares. As of March 31st, we have approximately 300 million capacity available under our current authorization. On capital allocation, our top priorities are to maintain a strong balance sheet and financial flexibility. We have remained focused on winning business with healthy margins, which takes significant discipline as enterprises prolong decision making. Over the last four years, we have signed contracts with projected gross margins in the mid-20s and projected free tax margins in the high single digits. We have again included a gross profit book-to-bill chart that illustrates how we have been creating and capturing value in our business. With an average projected gross margin of 26% on signings over the last three years, we have added more gross profit dollars to our backlog than we have reported as gross profit over the same period. Having a gross profit book-to-bill ratio at or above one over the last three years demonstrates the quality of our post-spend signings and the expected future profit growth from committed contracts. And as Martin has highlighted, new scope and new logos continue to increase as a percent of our large deal findings. Turning to our outlook for fiscal 2027, our outlook for adjusted pre-tax income is in the range of $600 million to $700 million. This pre-tax income outlook includes approximately $200 million of charges associated with the workforce rebalancing actions, which we expect to incur substantially in the first quarter of fiscal 2027. The savings from these actions will be primarily in the second half and will largely offset the charges. The impact on adjusted pre-tax income will largely be neutral on a full year basis. These actions are expected to yield annualized savings in the range of 400 to 500 million in fiscal 2028. With the expectation that most of the charges will take place in the first quarter, we expect our first quarter adjusted pre-tax income to be a low point in earnings for the year with meaningful profit improvement expected for the remaining nine months of the year. We expect our adjusted pre-tax income less cash taxes, which are estimated to be approximately $200 million, to convert to free cash flow in the range of $400 to $500 million. From a timing perspective, and similar to last year, the first half of the year, particularly our first quarter, will be a significant user of cash, largely due to annual software payments, and incentive-based compensation payments in subsequent quarters will be more favorable. Our fiscal 2027 outlook assumes that revenue will be flat to down 2% in constant currency. Within that, we expect Kindle Consult and our alliances-related revenue streams will continue to grow, while at the same time, as I discussed earlier, we are assuming that our evolving relationship with IBM will be a similar headwind to what we have been experiencing. Taking into consideration the pace of signings in fiscal 2026 and what is expected to sign in first half of 2027, we expect second half revenue to be stronger than first half. Let me now pass the call back to Martin to discuss a path toward a multi-year objective.

Thank you, Harsh. As we think about where we exited fiscal 26 and our areas of focus in fiscal 27, I want to spend a few minutes outlining why I'm confident in our ability to achieve our fiscal 28 targets. We're entering fiscal 27 with a five-point improvement in our beginning backlog for the year compared to fiscal 26. In addition, our pipeline includes scope expansions and new logos to support future signings growth and a better mix of higher value services. In fact, Kindle Consult signings exceeded revenue this fiscal year and we're driving both Kindrel Consult capacity and productivity. We've delivered strong growth in hyperscaler-related revenue streams, and with our customers' modernization needs accelerating and renewed demand in private cloud, we expect continued momentum across our alliance partners. We've been signing deals with projected pre-tax margins in the high single digits, and that pricing discipline will continue. We've transformed our business through the advanced delivery initiative, heavily embedding automation and AI into our operations, and upscaling our teams for higher-value work. We're infusing agentic AI into delivery of services through Kindle Bridge to address lower voluntary attrition rates and improve our SG&A efficiencies. We're taking workforce rebalancing actions to yield meaningful savings. We're confident in our strategic direction, and our financial position remains strong. We believe our focus on higher-value services, coupled with the actions we're taking to streamline our own operations positions us to navigate the evolving ways our customers consume IBM's innovation while keeping us on track toward our multiyear objectives. In fiscal 28, we continue to target more than $1.2 billion in adjusted pre-tax income and more than $1 billion in free cash flow, and these targets can be achieved on low single-digit constant currency revenue growth in fiscal 28. Before I open the call up to your questions, I'm going to briefly address the material weaknesses we disclosed last quarter. As a reminder, these issues did not impact our previously issued financial statements. We continue to make progress in addressing the identified weaknesses, and we expect to have the design, implementation, and testing of controls completed when we file our Fiscal 27 Form 10-K next year. We remain focused on strengthening our control environment and our processes, and further updates will be disclosed in our Fiscal 26 Form 10-K filed at the end of the month. Importantly, I want to thank Kindles around the world who are providing world-class services to our customers every day. Operator, let's move on to questions.

Thank you. At this time, we will conduct the 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. Also, please note, we will only allow one question per analyst.

Please stand by while we compile the Q&A roster. Our first question comes from Kevin Christianati at Scotiabank.

Hey there. Good morning. Can you hear me? We can. Great. Hey, thanks for all the detail on the drivers for 27 on the revenue. I'm wondering if you could talk about the macro and the buying decisions, maybe what you're seeing from a geographic perspective. You did mention, you know, there's still some issues in the UK and strategic markets. And I'm just wondering if you could talk about what would get you closer to that sort of flat growth for the year versus the negative 2% decline.

Yeah, great. Let me start. I'll ask Harsh to comment as well. A couple of things I think are important as we think about the the pace of signings, customer behaviors, et cetera, et cetera. First is what we do, right? So we are mission critical, which means that there are lots of stakeholders, regulators in many decisions, boards of our customers are involved. And we typically sign deals that are four or five or six years long. So our customers understand that the environment in which they operate is likely to change over those times. And so The nature of what we do provides an ability for them to be really thoughtful about how they want to commit. Secondly, they have choices, more choices than ever. They have the choice of the platforms they want to use. They have the choices around AI and how they want to deploy it and all the new capabilities that are coming out. for our customer base anyway, there's a substantial amount of tech debt and they need to make choices about that. And then finally, they each operate in an environment that is always concerned about security and resiliency. It's always concerned about the regulatory environment. And then increasingly, the discussion around sovereignty, not here in the US, but sovereignty is a big deal, data sovereignty, cloud sovereignty, et cetera, et cetera, et cetera. So the environment and the complexity and the nature of what we do says that our customers have to be thoughtful given the longer-term commitments they make. With all of that in mind, we do see good demand trends. Our pipeline as we enter this year is bigger than it was last year. The momentum we have. in the capacity we're building in Consult, our ability to help our customers with their most complex challenges around public and private clouds, et cetera, et cetera, et cetera, has a lot of momentum. The sovereignty discussion, though, is an important one, again, not in the US, but in Europe. I'll go to Europe for a second. And that just creates a need for more time. Customers have to be comfortable that they're going to know the sovereignty answer for more than six months. Again, these are longer term commitments. So the nature of what we do, the choices customers have, and the environment in which they operate tend to elongate sales cycles. But deals do get closed. In fact, we had a great April. because some of the deals that we had expected to close in March just took a little bit longer. And again, it was all of the stakeholders that are involved. And we had a press release, as did our customer a few days earlier this week. Bank of Luxembourg is a great example where we obviously had to spend time with the regulators, with the board, et cetera, et cetera. We got the deal done, so we had a great April. I don't expect as we go through this year that the environment is going to be any different. In fact, I think it's going to get more complex. I think sovereignty is going to become a bigger issue over time. I think the regulatory environment is always changing. I'll let Harsh talk a little bit about sort of the profile of what he sees and your question around what does it take to be at zero versus minus two. I would just remind again that we still see the same size impact from IBM and the IBM content this year. So our down two to flat is, you know, outside of the IBM content is up a bit more than one and we're up three depending on where we land. And that's, again, a demonstration of our capabilities, our work with our alliance partners, our consult momentum, et cetera, et cetera.

Harsh, you want to- Yeah, I think it's important to talk about a few things. Underneath, if you open under the covers, like this is after three years for the first time we had in fourth quarter growth in US, and we do see continuation of that. So now you connect back with the same organization discussion is happening with most of the customers. So you can clearly see the connection back with sovereignty, the delays that we see in those decision-making is more prominent in Europe versus in US. And that is kind of giving us a bit more confidence of how we get to where we need to get to after three years. And that I see as a build out of confidence. And then you say, how do you range between zero and two? is kind of what is the rate and pace of closure, because we still have a starting backlog, and there is still in-year revenue that you have to build, and that is going to be a function of the rate and pace of whether it's the large deal versus more consult-driven, smaller deals, kind of that has a different revenue yield, so you can be on two different sides of the pole depending on rate and pace and the type of transaction with a good mix we are starting, so that kind of gives us kind of from a signings to the waiting base of that signing and how you yield from that signing kind of gets you into the range with the two sides, one U.S. kind of with the strength and Europe with the sovereignty kind of one moving faster than the other one kind of with the delays that we are seeing that creates the range of possibilities.

Great, thank you. Operator, next question please.

Operator? Yes.

Our next question comes from James Fawcett at Mark & Stanley.

Thank you so much, and thanks for taking the time. I wanted to just touch on how you're thinking or where you're seeing customers prioritize spend and maybe how that's changed versus a year ago. And in particular, I've been intrigued by a lot of the technology evaluation that companies seem to be doing in where they want to push data and how they want to structure it for AI applications, whether that be in the cloud or maybe even running on-prem for longer, et cetera. So just love to get an update on where you're seeing customers prioritize their spend right now and how you're moving to address that.

So let me kind of talk about this Security, governance, evolution of AI, data sovereignty is kind of driving many of these discussions. And the emergence of private cloud, which was what I would call a couple of years ago was not as prevalent, has become very prevalent. And I think data and where you keep data and how you run AI and where you use what model is becoming important. I think private cloud has some evolution from that perspective compared to hyperscalers as to kind of what type of models you can use and where and who's investing. So that certainly is putting most of our customers in kind of what I call a dichotomy as to where I keep, because these are longer term decisions. But many of our customers are also in regulated industries, so they have important mainstream estate. So they're also saying, How do I provide microservices from my mainframe because I don't want to lose the capability and capacity it has? So how do I modernize the platform? How do I modernize my core banking application if you're a bank? So it's kind of, we are seeing most of the banks where you would have seen, especially in the regulated industries, kind of two states of work, kind of mainframe and hyperscaler. Now you have an added complexity of now because of data sovereignty, now they have to kind of think about that too. because that's becoming more and more important. How do I keep more control of my estate, my data, and AI, and do I bring AI models into my estate, or do I take my data into hyperscaler? So that is kind of the evolution you're seeing, and then some of it is going to be driven by the business process transformation they have to think about, which is agentic AI. How do they use agentic AI? And that kind of brings all their processes in quotient. It's a complex environment. It's a very complex environment, and it puts us right in the middle of those conversations because we have been with these customers for decades, and who knows their process and environment better than us? So that is an opportunity for us.

Yeah, no, I think, Harsh, you're right. I think the key word in all of our customers' minds is modernization, that it takes a slightly different form based on their starting point. Again, I'll go to Bank of Luxembourg, where we're going to help them improve their customers' experience with Agentic. So they want to be a leading European Agentic bank. I think that's driving a lot of investment dollars in our customer base. Whether that's, as Harsh said, well, private cloud, public cloud, it'll be a mix. And then obviously, because of role they play in the world, and particularly in Luxembourg, they're always looking to improve operational resilience, not only at the regulatory standards, obviously, but even to make sure they have the great customer experience. So modernization is the word of the day. Where they start depends on their tech debt, but agentic AI, modernization, resilience, they're all big investment themes here.

Great. Thanks. Operator, next question, please.

Our next question comes from Jamie Friedman at Susquehanna.

Hi, good morning. I appreciate all the additional disclosures here. This is really good, especially page 14 where you kind of sum it up, the signposts. I wanted to ask Martin, in terms of the evolving IBM relationship, the three-point unfavorable impact, And I got your comments about how that's going to impact fiscal 27. But if you think about how that is performing relative to the original guide out to 2028, I just don't remember if it was or if you said, was that already embedded in the assumption or is this evolving different than what you might have thought? Thank you.

Yeah, thanks. Thanks, Jamie. So, no, it is different from what we thought not only back in investor days, Two and a half years ago. It's also different from what we thought when we started last year. That's why we started to spend more time explaining it. And so the investor investment community can understand it. So we had assumed as we got through the focus account period that that we would or that our customers would continue to consume IBM's technology in the way they had in the past. It was not an unreasonable assumption at the time. And for a number of reasons, you know, now they have, customers have obviously choices. They have an ability to create a relationship. Some customers just like to have a direct relationship. And so, no, it has evolved differently from what we expected. But it's really only, not really, it is only on the revenue side. We have zero ability to mark up IBM's content within our deals. So it really just comes down for us to, customer's choice on how they want to consume that technology. And obviously, it would affect the size of our signings. It would affect the size of the backlog. It would affect the revenue performance. But without any ability to mark up their content, it doesn't have any impact on our profit. So it is different is the short answer to your question.

Okay. Thank you, Martin. I'll drop back in the queue.

Thanks. Operator, let's move to the next question, please.

Our next question comes from Tenjin Huang at JPMorgan.

Hey, thanks. Good morning. I'm just curious with the sales cycle staying so elongated here, what do you think is the catalyst to get sales cycles to normalize and get to a better place or even improve? I know you're talking to clients all the time. Is it something related to the frontier models getting better and more you know, clarity around agent deployment, things like that. I'm just trying to better understand what we should be watching for for that to heal.

Yeah, yeah. Look, you know, I'm not sure that on any individual customer basis that the environment is going to return, let's say, or resume something that existed in the past. Again, given the nature of what we do, the choices our customers have, and the environments in which they operate, I think everything, every bit of technology evolution continues to add complexity. So at the individual customer level, I think we're not going from where we are today back to some faster sales cycle. For us, the key, and I can ask Harsh to comment as well, for us, the key, and Harsh said it in his remarks, for us, the key is to make sure we're moving into new customers, to make sure we have new content in all of our deals so that that bigger pipeline yields in the timeframes that we need. So I don't think we're, like I said, I don't think we're going back on an individual customer basis to making decisions faster, but I do think for us our focus on expanding our footprint in our customer base as well as chasing and assigning new customers is critical for our business model.

Yeah, the other thing that I would add is kind of this is a year where we, for the first time, seeing a very high level of new scope in our pipeline. And I'll kind of use one example that Martin kind of mentioned in his prepared remarks. The European Bank, one of the first things we had to do with them was to kind of help them think about a vendor agnostic private cloud environment as they're thinking about how they're going to have more control on the data And they're kind of moving some of that away from hyperscalers because they're thinking about their own destiny in a different way. And then we are working in a joint collaboration, creating a center where we're going to jointly kind of work on this. But now the second thing that happens is because of the regulation in that European market, they have to get their services, which kind of the transactional system, cold banking sits on mainframe. it's on older application environment, which they have never been able to expose and they have to instantaneously provide those services to other banks, other ecosystem. Now we are helping them through agentic AI understand the COBOL environment, how you're gonna convert, what documentation exists is not even known. So now we are kind of taking a step up. So it's important that we continue to maintain a strong hold with the customer help them evolve not only from an infrastructure point of view, but now evolving into their application environment. This is kind of where what I call faster, smaller, kind of land and expand model through the new scope. That's going to be the next stage of our evolution than just big deals, renewals, which sometimes get longer. You just enter a customer but never leave. Follow their wallet. Yeah, that's helpful. Thank you.

Thanks, Harsh. Operator, I believe we have one more question in the queue.

Yes. Our last question comes from Jonathan Lee at Guggenheim Partners.

Great. Thanks for taking my question. I want to build off of Jamie's question from earlier. Your earnings materials point to your billion-dollar free cash flow target for fiscal 28. And we heard you highlight the $1.2 billion target for adjusted pre-tax income. But if we heard you correctly, you called out low single-digit revenue growth for fiscal 28, which sounds like a downtick versus your mid-single-digit fiscal 28 target from the analyst day. Can you unpack what's happening with the downtick there? Is that an IBM dynamic? And given the longer decision cycles and complexity, as well as sub 1X book to bill you saw this year, how should we think about the path to that fiscal 28 revenue growth?

So a couple things. One, again, as I mentioned with Jamie's question, when we set out the triple-double single, we did have a view about what the IBM content was going to be, and we assumed it was going to be kind of neutral, and that doesn't look like it's going to be neutral, right? We know last year was more than three points. This year, similar size. Over time, that will diminish. It's not going to be three points or more than three points forever. In the timeframes for 20, we'll see. We have to see, you know, how do we partner with them? What choices do customers make this year all throughout 27? And we'll then have a better view of whether our initial assumption about it being neutral will hold in the 28 itself. It has not held, as I said, for the first couple of years here. But again, the reason that the triple-double single holds up is because it has no impact on our profit. Harsh, do you want to add around it?

Yeah, I think if you look at the pipeline where we are starting and the scope of work we are doing, meaning if you look at two years back, the modernization data sovereignty was not a big question. So you have to kind of think about what does it mean from sales cycle extension and kind of our penetration. So we have to think about business and how we use HNTKR to be a bit more differently relevant. And if you look at the last four years, last four years of gross profit book to bill has been kind of above one. So that's kind of one. I look at my consult. My consult book to bill over the last three years have consistently been double-digit. kind of more than 1.1 so that's kind of another one and when I look at my consult pipeline which is around the new scope that also gives me the confidence that over the last three years we have signed more than what I have booked so that kind of continues to give me the confidence with the pipeline with the bookings I have and the relevancy of the type of discussion I'm having because these are higher margin services not just linked with an OEM like so that's kind of gives me path both from the revenue that we have to manage with the IBM relationship, but the larger relevancy with the customer and the wallet that we have to follow.

Good. Thank you, Harsh. I think based on the operator saying that was the last question, I do want to thank everybody for joining us today. As you've heard, our focus this year is to drive progress in across all of our targeted growth areas, Kindrel Consult, the hyperscaler work we do, our focus on modernization, and our customers' focus on modernizing in AI. And obviously, we're going to execute the actions that Harsh went into detail around to streamline how we operate. We've got a very focused team. We are confident that confident that we can deliver. We're confident in our ability to deliver on our multi-year objectives. And again, you see that in our prepared materials. And all at the same time, continue to do what we do every day, which is deliver the world's best infrastructure services to our customers. Thanks for joining.

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