Good day, and thank you for standing by. Welcome to the Kyndryl Second Quarter 2026 Earnings Conference Call. [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.

Good morning, everyone, and welcome to Kyndryl's earnings call for the second fiscal quarter ended September 30, 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, 2025. 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.kyndryl.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. In the second quarter and first half of the year, we delivered margin expansion, a substantial increase in earnings and strong growth in both Kyndryl Consult and Hyperscaler-related revenue streams. Our trailing 12 months revenue book-to-bill remains above 1, illustrating the quality of our recent signings supporting our future revenue growth. We're reaffirming our outlook for fiscal year 2026, and we're pleased that our internal cash generation and balance sheet strength position us to increase our share repurchase program by $400 million, reflecting our confidence in achieving our fiscal 2028 objectives. Focusing on revenue, even though we successfully signed most of the deals that have slipped out of Q1, our revenue for the quarter again came in about $100 million below what we were targeting. We expected a strong September to drive a sequential uptick in our year-over-year revenue comp that didn't fully materialize. The underlying dynamics are that our growth drivers like Kyndryl Consult and Hyperscaler-related revenue are working well and resonating with customers. We're increasingly working to expand scope in our contract renewals, which has led to longer sales cycles since these large complex deals often involve replacing incumbents or transitioning in-sourced work to Kyndryl. We still expect these expanded scope deals to close before our fiscal year-end. And third, our focus on margin expansion is a revenue headwind for us because we've taken low-margin hardware and software content out of our customer relationships. We estimate that this was roughly a 4-point drag on revenue growth in Q2 without which our constant currency revenue growth would have been positive. You can see the benefit of this strategy in our earnings. We entered the third quarter with a record pipeline that supports second half signings growth and…

Thanks, Martin, and hello, everyone. Today, I'd like to discuss our second quarter results, the solid margins at which we're signing customer contracts and our outlook for fiscal year 2026. In the quarter, revenue totaled $3.7 billion, down 1% from the prior year quarter on a reported basis and 3.7% in constant currency. We continue to gain momentum in higher-margin advisory services. Kyndryl Consult revenues grew 25% year-over-year in constant currency, which underscores how we're expanding our share in this higher value-add space. Our Q2 signings, as expected, dipped year-over-year, primarily because of the exceptionally strong Q2 we had last year. That said, our last 12 months signings total of $15.6 billion was 104% of our last 12 months revenue, giving us a book-to-bill ratio above 1. As Martin mentioned, we continue to see particularly strong signings growth in our applications data and AI and digital workplace practices, reflecting strong demand for services in these domains. Earnings in the quarter were solid as more and more of our revenues coming from higher-margin post-spin signings. Our adjusted EBITDA increased 15% year-over-year to $641 million, and our adjusted EBITDA margin was 17.2%, up 250 basis points year-over-year. Adjusted pretax income grew 171% to $123 million, and our adjusted pretax margin increased 210 basis points year-over-year. Our 3A initiatives continue to be an important source of margin expansion and value creation for us and remain integral parts of our operational and go-to-market approach. Through our alliances, we generated $440 million in Hyperscaler-related revenue in the second quarter. This puts us on track to exceed the 50% growth in Hyperscaler-related revenue that we targeted at the beginning of the year. And other alliances from Cisco, Dell and HPE to Databricks, Rubric and Palo Alto Networks are also fueling our ability to offer cutting-edge hybrid…

[Operator Instructions] Martin, are you ready for questions?

Yes. Thank you, operator.

Our first question comes from Jamie Friedman at Susquehanna.

Congratulations on a strong quarter. I wanted to ask something about the capital allocation opportunities for the company, $725 million of adjusted pretax income is your target for the year and the free cash flow of $550 million. So it gives you a lot of optionality on the capital allocation, which is attractive to the investment thesis. So just trying to figure out from your perspective, what the priorities are from the capital allocation side?

Sure. Thanks, Jamie. So and thank you for joining this morning and for the nice comment. I'd say a few things. Obviously, we're investing in our business in the form of CapEx, and we'll continue to do that. And we're also investing in new capabilities and then accelerating our capabilities. And you saw that this morning in the form of our -- now pending acquisition of Solvinity in the Netherlands. And then outside of that, obviously, because we do see very strong cash flow growth, we see an opportunity to return capital to shareholders. We started last year with a $300 million share repurchase, and then we followed that up this year with an increased approval from the Board for a $400 million share repurchase. So I think going forward, we have those same opportunities. We'll continue to invest in the business. We'll continue to accelerate our lead in certain areas where we see opportunities in the form of tuck-in acquisitions, and we'll continue to return capital to shareholders.

And then just for my follow-up, I wanted to ask about AI. I know you had some comments last night in your prepared remarks about AI. I think that there's some reference that 25% of the workloads, maybe that's the wrong word, but the number might be right, are informed or delivered through AI. So Martin, a high-level perspective on how AI may inform the competitive position and mind share of Kyndryl going forward?

Yes. Thanks, Jamie. So just to make sure we have the number clear in your head. We said in our prepared remarks this morning that about 25% of our signings have AI-related content all ready. And for us, we do AI-related work primarily in our cloud practice and our digital workplace practice and obviously, in our apps data and AI practice. And our AI-related work is focused on data architecture and data migration services that allow our customers' AI models to operate. We have in digital workplace services, obviously, AI-enabled solutions that our customers are consuming. And then we also do, obviously, cloud migration work to enable our customers to adopt AI. And then finally, we have some development agentic AI development that our customers are starting to consume now. And that gets them ready for AI that helps modernize their infrastructure so that they can turn their AI pilots into scaled components of how they run their business. So it's focused on those practices. The other thing I'd say is it's pretty broad-based. We work with insurance companies and banks and manufacturers and health care providers and government agencies as well on deploying agents now because they're really trying to transform -- they're trying to transform their business processes. And obviously, these are very complex IT estates, and that's why Kyndryl Bridge is such an important part of this because it gives them the data they need and the visibility they need to how their business processes are working. And that, again, extends our lead our competitive advantage in these mission-critical workflows. So yes, about 25% of our signings now have that form of AI-related content.

Our next question comes from James Faucette at Morgan Stanley.

On your CapEx and acquisitions, you've been pretty clear that you plan to do some tuck-in acquisitions. But can you give a little more color on the kinds of things that you're looking for? And maybe give us a sense of what those valuations look like? And how should we think about allocation to CapEx and acquisitions versus buybacks? Do you have a targeted level or range that we should be thinking about?

Sure. Thank you. And thanks for joining. When we -- when I think about the 2 acquisitions we've done so far, I'd say that they have sort of common characteristics. First and foremost, they are very much in -- they are very much part of what we do today, right? We are the world's largest infrastructure services provider. Our acquisition a couple of years ago was focused on moving power architecture on to Microsoft's cloud, very squarely in the middle of how we operate, and it gave us the technology and the IP we needed to help accelerate our customers' move to the cloud. So everything about that is what we do today. It was just a way to accelerate. Solvinity today is, again, it's a managed private cloud sort of a structure where in all over the world, and we see this in our surveys, all over the world, people are worried about sensitive workloads, about regulatory requirements, about cloud sovereignty. And so what this allows us to do is, again, what we already do, we advise, we implement, we manage clouds on behalf of our customers, both private and hybrid. And this is now another step into the sovereign world for us in Europe. So they all have this consistency around what we do today. It's -- again, it's either accelerating what we're already doing or allowing us to move into a very specific part of the market in this case, again, Sovereign Cloud in Europe. And this is about -- look, it's about the right size for us. It was EUR 100 million. You'll see that in the Q later today, it was EUR 100 million purchase price at a reasonable kind of a multiple. So when it -- we would expect it would close probably late our fiscal year, first half next calendar year sometime. And again, we're not looking to change who we are. We're trying to stay -- we will stay focused on mission-critical infrastructure services. With regard to other capital allocation, how to think about it, I think the 2 data points now that you have that we've given everybody on, for instance, on share repurchase are starting to form a pattern. That doesn't mean -- that we can't do something differently if the market changes, but we do view our stock as a pretty good -- as a very good value here. So last year at $300 million, it was sort of what I'll call a trailing the cash flow generation of the business. This year at $400 million, again, it's trailing the cash flow of our business. So as we grow, we obviously have opportunities to continue to increase that, but we'll do it more on a trailing basis, so we keep the flexibility that we need within the business. We keep the strong balance sheet we have, et cetera, et cetera. I'll ask David if he has anything he wanted to add to that.

That's right, Martin. When we -- in terms of capital expenditures, in particular, we expect those to be around 4% to 5% of our revenues over time. The substantial majority of that is to support our customers' infrastructure and IT needs, call it, 3 to 4 points out of the 4 to 5. And the remaining point is really related to our needs as a corporation with more than 70,000 employees around the world. So that's how we get to a 4% to 5% of revenue number. When we think about our free cash flow, it's actually calculated after our capital expenditures. So those CapEx are, if you well funded by -- before we get to the free cash flow that can be deployed elsewhere. And as Martin was saying, I think about us being able to pursue both share repurchases and tuck-in acquisitions. It's not an either/or for us, and you could see that in our announcements yesterday and today, where we announced both the share repurchase authorization increasing and the tuck-in acquisition of Solvinity.

That's great. And then just quickly, can you give a quick comment or summary of how you're finding customer decision cycles right now? Do they seem about normal? Or are there any movement in those sales cycles?

They seem fairly -- they seem normal to me. I think what we are experiencing is not that they're changing. It's just that as we move to add new scope as we add new customers, there's a tendency given what we do and the mission-critical nature of what we do, there's a tendency to be cautious, and there's a tendency to make sure that everything is right because these have to go well. That's true whether it's a new customer and it's true if you're just adding new scope. We obviously have renewals that we're doing, but in the substantial majority of cases, there's new content coming in. We had an example in our prepared remarks this morning that shows how we grow within our accounts. So I don't see any difference in decision-making from our customer standpoint, but I do see that because of what we're -- how we're growing and the new capabilities we're bringing in, there's -- just a consistent level of care because they have to go well, these mission-critical relationships have to be perfect all the time.

Our next question comes from Tien-Tsin Huang at JPMorgan.

Just on the -- just thinking about the revenue, I appreciate the second half discussion and Martin, you said demonstrably stronger second half. But I'm just thinking about the $100 million in revenue below expectations and with the September month and the deal slippage, the revenue conversion then doesn't that push out put greater risk in the second half relative to what you thought in the beginning of the year? Or is that being made up with some of the incremental consultant resources that you also discussed in the prepared remarks?

Yes. Thanks, Tien-Tsin. Look, there are, I think, some things we -- obviously, we know, as we sit here today, and we tried to lay this out, David, at the tail end of his remarks, we know that we enter the second half with a contracted backlog that is in a better position, and we also know that we wrap on a divestiture we did last year. So the starting point in the second half is a couple of points stronger than what the first half was, right? So we know that. There is certainty around that. We also know that the demand profile in our consult business and our investments in our capacity will deliver an acceleration in the second half. And that's fairly -- it's fairly evenly split in the third and fourth quarter. And our momentum in the hyperscaler business -- the hyperscaler-related business, there's real momentum here. It's supported by what we see in our customers' cloud growth and we see that continuing as well. And then the last piece is -- and maybe this is part of what you're trying to really, really get to. Yes, we have a stronger pipeline than we had. And yes, the content within that pipeline has a slightly nearer-term realization element to it because of the way these deals are shaped and constructed and because of what's in them. So they could move. As we've always said, we're better at predicting the year in which something signs than the quarter in which something signs. And we don't need to sign all of them, obviously, to deliver. But these -- my experience is that these -- the renewals, the scope expansion, all these deals, they can shift quarter-to-quarter. They're not likely to shift year-to-year. So with what we know, again, second half starting point is an improvement from the first half. The investments in the demand and our ability to meet the demand we see in Consult drives an improvement. The hyperscaler-related businesses do have a lot of momentum and continue to have a lot of momentum. And then the deals we're working on just have stronger near-term content. So I feel good about how we start the second half.

Our next question comes from Ian Zaffino at Oppenheimer.

Just on the pipeline, very strong here. Maybe tell us what verticals or geographies have been particularly strong. Also, when we talk about like expanded scope or content, can you maybe give us an example or 2 about that? And also in this pipeline, what sort of confidence that this is going to close and be converted?

Sure. I'll start with the verticals, and then we'll go to an example. On the verticals, I'd say retail and travel and TMT, technology, media and telecommunications have been the strongest for us. Financial services has been okay in terms of levels of activity. And perhaps not too surprisingly, given uncertainty out there in the market, I'd say industrials and the public sector have been probably a little bit on the lighter side among our verticals. And then in terms of examples, I think the -- there are a number of them. There's one we talked about, the financial services firm example that we walked through where we're actually doing multiple things. The first is that we're expanding what we do into a different geography for a multinational firm. The second is that we're taking on additional work. And the most typical form that's going to take for us is a situation where we're running historical or legacy elements of the infrastructure ones that we often have been involved in for multiple years. And now with the freedom of action we have as an independent company, we're expanding into areas that are beyond that, hyperscaler-related activity being tops on the list, additional cybersecurity content being common. We're doing often more network-related activity for our customers as well. And the pitch associated with this is really about us being an end-to-end solution provider, which is something that customers really value in their provider of mission-critical IT services, because it reduces the number of, I guess, potential air gaps and finger pointing that can exist and it drives efficiency, it drives faster problem solving. It drives accountability. And it plays to our strengths in terms of our ability to convene all of these capabilities in one spot in a way that really…

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