Good day, and thank you for standing by. Welcome to the Kyndryl Fourth Quarter 2025 Earnings Conference Call. At this time, all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session. [Operator Instructions] 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 Chaitman, Global Head of Investor Relations. Please go ahead.

Good morning, everyone, and welcome to Kyndryl's earnings call for the fourth quarter and fiscal year ended March 31, 2025. Before we begin, I'd like to remind you that our remarks today 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. Also, in today's remarks, we 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 for today's call are Kyndryl's Chairman and Chief Executive Officer, Martin Schroeter and Kyndryl's Chief Financial Officer, David Wyshner. 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. Kyndryl has been an independent company for over three years now, and I am so proud of what our global team continues to accomplish. We've solidified our market leadership position in mission critical technology services, and we've been executing a powerful and highly effective strategy centered around building our capabilities, skills, partnerships and innovation to drive sustainable growth. With relentless focus and dedication to our customers, our people have propelled our success and will continue to do so. So on today's call, we'll focus on how we'll accelerate our momentum going forward. But first, I want to share the highlights from fiscal 2025. Simply put, we had another great year. Signings were up 48% in constant currency to more than $18 billion, earnings increased $317 million to $482 million in adjusted pretax income. We generated $446 million in adjusted free cash flow, a 53% increase from last year. And in the fourth quarter, we achieved a significant milestone by returning our top line to positive constant currency growth. Kyndryl Consult continued to deliver above market growth with revenue increasing more than 25% this year and Kyndryl Bridge continues to enhance the value we deliver to our customers through actionable insights. Our 3A initiatives have transformed our company and we once again surpassed our full year targets for each of them. Among our alliances, hyperscaler related revenue more than doubled this year to $1.2 billion. We reached $775 million in annualized savings from Advanced Delivery and another $900 million from our accounts initiative. As we enter a new fiscal year for Kyndryl, our 3As have shifted from being initiatives that drove our turnaround to pillars of our profitable growth strategy. In fact, our fiscal 2025 results not only exceeded…

Thanks, Martin, and hello, everyone. Today, I'd like to discuss our fourth quarter results, our continued progress on our 3A's initiatives, the solid margins at which we're signing customer contracts, and our outlook for fiscal year 2026, which began on April 1. We're proud of finishing strong in fiscal 2025and we're enthusiastic about how our market leadership, strategy and capabilities have positioned Kyndryl for profitable growth in fiscal 2026 and beyond. Our fourth quarter results reflect strong operational execution and continued progress on our key initiatives. In the quarter, revenue totaled $3.8 billion a 1.3% year over year increase in constant currency. Returning a positive constant currency revenue growth is an important milestone for us. Key drivers of our growth were Kyndryl Consult, where our revenues grew 45% in the quarter and hyperscaler related work, where our revenues more than doubled. Our $5.5 billion of signings made Q4 our sixth consecutive quarter of signings growth and brings our full year signings growth to 46%. Our strength continues to be broad based across our practices and geographic segments with Kyndryl Consult signings growing at the same rate as our aggregate signings growth. Our fourth quarter adjusted EBITDA was $698 million and our adjusted EBITDA margin was 18.4%, up 370 points year over year. Adjusted pretax income was $185 million, 6 times what it was a year earlier, and our adjusted pretax margin increased 410 basis points year over year. Included in our $185 million of adjusted pretax income was $23 million in workforce rebalancing charges and the contractually committed $50 million year over year increase in IBM software costs that we've discussed on prior calls. As a result, our underlying operational momentum is even stronger than the $150 million plus increase in adjusted pretax income we reported in Q4. Through our…

Thank you. At this time, we will conduct a question and answer session. [Operator Instructions] Martin, are you ready for your first question?

Yes, sir. Thank you, operator.

All right. One moment for our first question comes from Jamie Friedman from Susquehanna. Please go ahead.

Hi. Good morning and congratulations on a year well done. So Martin, my first question is for you. I was wondering how you think of the accomplishments in 2025 and your preliminary view of the positioning of the company mindshare and technology in 2026. How does that set you up for the midterm cadence that you shared at the Analyst Day?

Yes, good. Well, thank you, Jamie. Thanks for joining and thanks for the nice comments on the year we just finished. If I think back to three and half years ago when we laid out, I think a very clear strategy that was unique to us with very clear signposts on how to follow our progress. I think last year was a reflection of another great step, another great example of execution on a strategy that will continue to carry us into the medium term. Look, the medium term goals that we laid out, I think are what we're all focused on and this year, this fiscal year that we just guided towards is another good step toward that. But over the long term, what we've all been working on and what we've been talking about for three point five years, and I think again it's really becoming evident now is one, the power of this business model given the role we play in our customers' environments, the visibility we have to the future is starting to become evident too. Three and a half years ago, obviously, the world has changed and three and a half years the world will be different again, but we have been executing and delivering in pretty much exactly what we said we would get done. And I think the read through is that we do kind of control our own destiny here, not that we're not affected by the outside world, but as long as we continue to invest in innovation, as long as we continue to invest in capabilities, then our ability to not only see the future, but to deliver that future to our investors is should be quite evident as well over the last few years. And then I point to this team's strong execution. So we're in a great space with a great business model. We have control, we'll continue to invest. This is another big year of investment for us, which means we control our own destiny through the midterm again, and this team has demonstrated an ability to execute. So I think we're very well positioned to deliver everything that we've talked about back in November and the last year and the last quarter were evidence of how we've continued to do that.

And then for my follow-up, I'd be interested in your perspective on where you are with the journey with the focus accounts. Are you closer to the middle or the end at this point? And what have you learned from the kind of restructuring or the conversations at least, from those accounts that that got you here, since the separation three and half years ago?

Yes, thanks, Jamie. So look, the view we had when we started this was that the work we do is really important, that we're really good at it. And if we could engage with our customer base, we could reimagine these relationships at quite frankly an accelerated pace than what we were faced with if we just looked at what the backlog had. And I think that's what we've proven now, because of the quality of what we bring, the role we play in our customers' environments, they have been our customers have been really willing provided we showed up with some innovation, with some new ideas, with some ways to address their challenges of the future that they would be keen to and willing to reimagine how these relationships worked. And I think that's what my observation over the last three and a half years that the teams have done an amazing job of doing that and says a lot about the quality of the talent and the skills we have. It says a lot about our ability to discern the future for our customers and bring them on this journey with us. And it says a lot about us as an organization and our focus on the bottom line and capturing the value we're creating. So when we started this three and half years ago, we said it would be worth $800 million over the medium term. We've obviously exceeded that. But we are getting toward the end of this now from a focus account perspective. We're not through 100% of them. There is a long tail to this. But in terms of driving to getting us here, there is we are well through the -- I call it the substantial majority. Maybe David has a more specific way to identify substantial majority, but we're probably three quarters of the way through this from a revenue perspective. But again, I would go back to what does it prove? It proves that the work we do is valuable, the investments we've made are paying off, that our customers love what we do. And we are very much now part of their future and not just part of their past.

Yeah. And we are about, I'd say, 75% of the way through, three quarters of the way through on revenue, but we've already achieved 90% of our targeted savings. So we're with $900 million of annualized benefits on the focus accounts. The target that started out at $800 million is now $1 billion. And I think we're well positioned to exceed that as we work through the remainder of the accounts and drive not only margin improvement there, but also growth in the top line.

Great. Thanks. Operator, if we move to the next question, please.

Thank you. Our next question comes from Tien-Tsin Huang from JPMorgan. Please go ahead.

Thanks. Congrats on the positive revenue growth milestone. Good to see that. I also like Martin some big discussions or going through some of the larger deals you guys won, which brings me to my question around book to bill. Do you think book to bill, given some of the wins that you've had in the pipeline that you can still maintain this book to bill above one for the better part of fiscal ‘26? And I'm curious, given some of the larger deals, maybe what the duration of the backlog looks like, is that changing just to think about ACV maybe improving underneath it? Thank you.

Yeah. Thanks, Tien Tsin, and thanks for the nice -- also thanks for the nice comments on the quarter. Look, a couple of things. And you were one of the people and you know this business well. So you were on this early and three and half years ago we were talking about how does Kyndryl get back to growth? You need a book to bill north of one etcetera, et cetera. You know this because you were at the heart of the questions and doing the work. And as you said well, if we're going to continue growth, which is what we see now and what we certainly put on the table back in November over the medium term, then we do have to continue to have a book to bill north of one and that's what we see over the medium term, right, in order to drive that continued growth. Now one year of book to bill doesn't get us everything we need and so we have to execute again, but the capabilities we've built, the innovation we've built is showing up really well and it's driving the kind of performance that we saw for instance in our Consult business where 50% signings growth in the year is driving 29% revenue growth where for instance from a standing start from essentially nothing we built last year of services around our alliance activity, around our hyperscaler alliance activity that turned into more than $1 billion of business per year and those will keep growing. So yes, the short answer is yes, we recognize and expect that we will continue to deliver a book to bill north of one. We would, as we've always said, encourage everybody to look at this over a 12 month trailing basis because in any given quarter, we could be phenomenal, it could be for whatever reason, it's just too short a period. But we feel good about the momentum we're seeing, the vectors of growth that we've been pointing to and our ability to continue to drive a book to bill north of one.

Perfect. And just my follow-up within that was the ACV question, because I think you guided to consult growing in the double digit. I know it's running very hot in '25. So I think that'll give you some short term lift in conversion, but then you have a lot of longer duration deals as well. Can you just talk about ACV and how the year will play out with consult presumably growing a little bit slower and backlog conversion making up for it to get to that positive revenue growth for the year?

Sure. We do expect consult to continue to grow top line double digits in fiscal ‘26. So it will continue to be a significant contributor to our growth. When we look at signings last year, a couple of points worth mentioning. First, overall, signings grew about 46%, Consult grew 47%, and that means managed services growth was right there as well with very strong growth. And so we're seeing, call it, a good balance in our growth between the two. Consult signings will tend to turn into revenue a little bit faster. Managed services contracts tend to be longer and we really like what they do for our backlog because it's really committed revenue and committed profitability that we're adding to our unrecorded balance sheet. And in terms of ACV, what we saw was our average signing was probably a few months longer last year. So about 75% to 80% of our growth was due to just additional activity and then 20% to 25% of our 46% growth was driven by having a longer duration on average. And really the example that you mentioned highlights, we're very focused on growing ACV and individual accounts, growing our revenue there. And the opportunities that we have to expand scope in our relationships really end up being a big driver of that ACV growth.

Thanks. Operator, next question please.

Thank you. Our next question comes from Ian Zaffino from Oppenheimer. Please go ahead.

Hi, great. Thank you very much. Very good quarter. Wanted to ask on the guide and the revenue growth that you're expecting for the year. I would have expected with signings growth 46% or so, that might seem very conservative. So maybe kind of walk us through how you're kind of getting there. And I know that there are some legacy signings that are starting to fall off. And maybe the better question is how do we think about revenues, maybe not just this current year, but subsequent years as some of those legacy signings roll off? And I would imagine revenues would then accelerate, but I hope we understand that a little bit. Thanks.

Yeah, sure. Thank you. And thanks for the nice also thanks for the nice comments on the year and the quarter we just finished. I think there's a few things worth pointing out. One is as I talked about earlier, three and half ago, we were trying to prove to everybody that we could grow. And what is really nice about your question, what's really nice about the position we're in now is now we're talking about why can't you be growing faster, which is quite frankly, it's just it's fabulous. Team's done a nice job of repositioning this business and executing a plan that got us to this point. So we're delighted. As you said well, look, we have a really good book to bill from last year. But the two prior years with our work on focused accounts and our intent to improve profitability first, we also have to -- that's all in the backlog as well. So what we wanted to make sure that everybody understood is that in this very strong profit improvement year again, this very strong cash flow growth again, all consistent with what we laid out over the medium term back in November that we're not relying on substantial revenue growth to get there. even though last year when we were still working on focused accounts, we had a 2 point year to year improvement in revenue growth, right, from down 6 to down 4 . And now we're saying we're only really relying on one. That's a big step up obviously in the improvement, but with now more and more of our P&L determined by what we put in the backlog, what we've been able to shape and what is coming out into our P&L this year, it says that we have…

Okay, understood. And then as a follow-up, it seems that you have incredible amount of visibility, just in the business and the way the state of the contracts work. And like I said earlier, you're coming off this massive acceleration in the business. So how are you then thinking about, I guess, capital allocation, and maybe your tolerance or your appetite to get a little bit more aggressive on that side? Thanks.

Yeah, thanks. So it's once again relative to where we started, it's great to be talking about how we're going to be allocating capital. And I think we've continued to do two things. We've continued to look for opportunities to invest in our own business. We've done one acquisition, which is working out really, really well. And I would say that we continue to look for tuck in acquisitions that can accelerate our position in the marketplace that can maybe expand capabilities within things we're already doing. So first and foremost, we'll look to invest in the business because we see so much opportunity. And the other thing, I'm really pleased that probably a little bit ahead of what everyone expected last November, the Board approved the initiation of a share repurchase program, which we've been doing. And we see great value in the stock here. So we'll obviously continue to allocate capital to our shareholders as well to return them their money. So we see opportunities in both continue to invest. This is a business model that has great visibility to the future. So we have an ability to not only invest, but we have an ability to return capital. And I think we'll continue to do both of those things. I think we have an opportunity to do both. Anything you would add, Dave?

No.

There you go.

All right. Great. Thanks for the color.

Thank you.

Great. Operator, next question please.

Thank you. Our next question comes from Divya Goyal from Scotiabank. Please go ahead.

Good morning, everyone. Thanks a lot for the color you provided. I actually wanted to go back and circle back on the accounts discussion that we had and maybe just get a little bit more clarity on the impact of macro on some of your strategic global accounts. I'm trying to understand what are their key priorities and could they be impacted given all the global uncertainties out there? And I'm also in line trying to understand what is the percentage of revenue that could be potentially exposed to macro uncertainties if at all? Thank you.

Yes. Thanks, Divya. So a couple of things. Uncertainty seems to be the sort of the most commonly used word in the business press these days. I would say that for us, the good news is we're in the productivity business. We help drive productivity, create opportunities, optimize, consolidate, deconsolidate if that's what our customers are trying to do. And so this environment tends to be a tailwind for us because our customers need help in preparing their infrastructure for whatever macro environment they're envisioning. And that's true not only of macro, which as you know well, are we in this period of uncertainty for two months, three months or a year, we don't know. But we know that they're always going to be preparing for the future they see. It's also true with regard to technology. And over the last 20 plus years, I think the world has observed that no matter what the business problem is, technology is part of that answer. So if you're trying to find new customers, if you're trying to create a better employee experience, if you're trying to get yourself ready for a new regulatory environment or if you're trying to prepare for a new view of your own macro environment, technology is a part of that and that's why it tends to be a tailwind for us because they need an infrastructure to execute that strategy, whatever it is that is secure and resilient and fit for purpose. So for us, I would say uncertainty tends to translate, but in all its forms tends to translate to a bit of a tailwind. And then your second question, look, how much of our business is subject to it? We enter a year as is typical, we enter a year with 70%, 75% of our year under contract, right. So the revenue that we already have for the year that was represented in the guide is somewhere between 70% 75% booked. And so yes, we have to continue to execute on signing deals and converting those to revenue throughout the whole year and in order to deliver the year, but we're very comfortable, we're very confident with the trends we're seeing, the role we play in our customers' environments and the capabilities and innovation we're bringing that we'll continue to be able to execute that. And again, I'd go to the momentum we see in consult as a good data point. The momentum we see in our hyperscaler alliance activity is a good data point with other things now picking up. The work that we're doing with SAP and RISE is an important addition this year. So most of the substantial majority of our year is this year is under backlog. And we see really good demand trends given what we do and the role we play and the capabilities we have to deliver the year.

That's great. Just as a follow-up for doing this discussion here, Martin. I wanted to get a little bit more color quickly on Kyndryl Bridge. Is it fair to assume that Kyndryl Bridge can provide some additional leverage in such uncertain macro conditions when global clients potentially pull back on new implementations or enhancements? And could Kyndryl Bridge actually help the company uncover new opportunities here in the company? Thank you.

Yeah. Thanks, Divya. The short answer is yes. So among the many capabilities that Bridge has around observability and keeping your systems optimized and resilient, et cetera. One of the things it can do is help uncover unused resources. And you can imagine in a big sprawling corporation, how many, for instance, unused public cloud instances are out there because they were used for something and then they need it anymore, but somebody needs to find that and identify it and then get it turned off. So among the many capabilities that Bridge brings to customers is a very direct example is an ability to uncover unused resources. But there's also a whole host of what we call actionable insights that we're delivering to our customers every month to help them optimize, to help them get ahead of problems, each of which is tied to one of their business outcomes. So yes, Bridge is becomes not only it's only the way we do our work, it's also providing some it's also providing a lot of actionable insights to our customers to help them optimize, to help them find savings in this case, to help them get ahead of challenges that they may have so that they can save money. What A, not only, but the A real cost in anybody's infrastructure is both the planned downtime and quite frankly the unplanned downtime. And we've been very public that we believe we saved customers across our portfolio billions of dollars just from the use of Bridge in managing better planned downtime and also avoiding unplanned downtime. So there's real benefits here.

Yeah. And I just wanted to add on the call it macro uncertainty point that in the fourth quarter, our consult signings grew 37%. And that was obviously a period of time where there's a little bit more uncertainty. And I think the growth we delivered in Consult signings sort of highlights as a proof point how we're insulated to the macro environment and really executing on a series of opportunities that are unique and specific to us, allowing us to perform really quite differently than the, call it, the overall market with growth in the 37% range last quarter.

Great. Thank you. Operator, I think we have one more question in the queue.

Thank you. All right. Our next question comes from Tyler DuPont from Bank of America. Please go ahead.

Good morning, Martin and David. Thanks for taking the questions. I want to start just by echoing the congratulations on the quarter. It's nice to see returns positive constant currency growth, definitely moving in the right direction there. But I wanted to first ask about growth trends in the Consult business. First, if you could maybe just discuss the go to market in Consultants and if that's changed at all in recent quarters, given the solid growth that we've seen and the fact that this component keeps increasing as a percent of total, I think it's now around 25% as of 4Q. How should we anticipate the growth there and any margin dynamics among those contracts compared to the company average worth mentioning?

Yeah. Thanks, Tyler. Thanks for the nice comments. So two things. First on the revenue trajectory and let me start with the mix because while it is certainly what you said is right, 25% of our revenue now. Remember that while the numerator has been growing very, very well and we've been executing well, the numerator being the Consult. The total we've been engineering a decline in because of the focus account activity. So that product is obviously grown faster. And now that we're back to growth in total, I would expect that while the numerator will continue to grow quite well, it won't be making the sort of the progress that we've seen when we started three and half years ago with it under 10% of our overall mix, now improving dramatically 2.5x to 25, but that progress will slow notwithstanding that we continue to see great momentum in our Consult signings and obviously that will convert to revenue as David said well earlier tends to be a bit faster than our managed service business. And then on margin profile, what we see is that the margins in Consult tend to be a little bit higher, not dramatically, but they're accretive to the overall margin profile. And that's part of why with faster growth plus accretive to margins, part of why we're investing so heavily this year in our consult business. And it's all part of what we guided to profit. So while again, we have another big step up in profit year to year, which we're delighted and excited about that includes an acceleration, if you will, of our investments in our consult business. It includes a continuation of our investments in Kyndryl Bridge, it includes continuation of our investments in our partnerships, et cetera, but an acceleration in Consult. So yes, it's growing faster. It will continue to grow faster than the overall. The mix won't move up as much because the total is now growing and it is accretive at the bottom line.

Understood. That's helpful, Martin. And then just on margins, particularly from a bookings lens, again nice to see signings maintain that 9%-ish adjusted PTI margin profile. But given the strength in bookings that you've seen over the past several quarters, have you given any thought to maybe flexing that pricing muscle a bit harder?

Have we given any thought? Look, we want to get paid for the great work we do and teams have done a really nice job of creating and quite frankly capturing the value that we're helping our customers create. So I think it's a testament and the data shows the value of what we do, our customers desire for us to continue to be a big part and invest in their accounts. And this is a good spot for us. This is a good spot for us to land. This is a number that we've been talking about for three and half years. We always said that within the capabilities we have and the investments we're making that we can capture high single digit PTI margins. And this is the right place for us to be. So I feel great about the margin profile of what we're putting in. I feel great about what it says about how our customers think about us. And as long as we continue to invest and I laid out, I gave you a bit more color on investment. As long as we continue to invest to bring new capabilities and to innovate, I think this is a good reflection of how we can get paid for what we're doing. David, you want to? All right. Operator, I think that's the end of the question. So let me just wrap up quickly. First, thanks everybody for joining and thanks for the questions. When I think about the year ahead, as you could hear from our commentary from the data, it's all about profitable growth for us. Our first three and half years, we had to fix the business and we had to do that while we continue to support our existing customers with the best services in the world and that's exactly what this team has done. We've invested in innovation, we invested in our capabilities, we invested in our partnerships, all of which will continue to do and in fact accelerate. And as a result, we're able now to engage differently with our customers, not just focused on meeting them where they are and what we can do for them today, but helping them achieve their business outcomes, capturing new opportunities and obviously supporting their objectives, so that we're part of their future as well. And all of that happens because of the tens of thousands of Kyndryls around the world working together every day as a flat and fast and focused teams. And they've really earned the right to win and they've earned the right to keep winning and that's what you'll see from us. So thanks again everybody for joining the call

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