Good day, and thank you for standing by. Welcome to the Kyndryl Fiscal Third 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, Global Head of Investor Relations. Please go ahead.

Good morning, everyone, and welcome to Kyndryl's earnings call for the third fiscal quarter ended December 31, 2025. Before we begin, I'd like to remind you that our remarks today includes 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 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.kyndryl.com. Following our prepared remarks, we will hold a Q&A session. I'd now like to turn the call over to Kyndryl's Chairman and Chief Executive Officer, Martin Schroeter. Martin?

Thank you, Lori, and thanks to each of you for joining us. Today, we announced a few leadership changes and, important for this call, Harsh Chugh has been appointed interim Chief Financial Officer. He's joining us on today's call and will walk through the quarter in more detail. Harsh is a seasoned leader with extensive experience in our business, finance and the technology industry. We are fortunate to have his leadership to guide our finance organization as we continue to execute our priorities. With that, let's turn to the third quarter. We delivered margin expansion, higher earnings and positive free cash flow. Our 3% top line growth was unchanged in constant currency. We've been investing to support future growth opportunities, and the base we're building is strengthening our profitability as our mix of post-spin signings convert over time. With $3.9 billion of signings in the quarter, including 11 signed contracts exceeding $50 million each, and $15.4 billion over the last year, our trailing 12-month revenue book-to-bill ratio remains above 1.0. And we're pleased that disciplined execution has ensured that signed contracts come with solid projected margins. While we made progress in the third quarter, I want to share some thoughts on what is different from the start of our fiscal year that drove our second half outlook to be below what we were targeting. For some context, we're in a services business, operating mission-critical systems that require multiyear customer commitments. With the accelerating pace of new AI capabilities being introduced and regulatory uncertainties specifically on data sovereignty, long-term agreements have become more complex, and therefore, sales cycles are taking longer. Additionally, the timelines for large enterprise ERP transitions to cloud solutions have extended, which has also contributed to longer sales cycles. These dynamics were particularly noticeable in Kyndryl Consult's third…

Thanks, Martin, and hello, everyone. Today, I would like to discuss our third quarter results and our outlook for fiscal 2026. In the quarter, revenue totaled $3.9 billion, up 3% from the prior year quarter on a reported basis and unchanged in constant currency. This represented 3 points of revenue growth sequentially, but behind what we were expecting. The variances versus our expectations were concentrated in our Strategic Markets and U.K. operations, which we are taking actions to address. And despite our efforts to get deals over the finish line, we have continued to experience longer sales cycle. With that said, we continue to deliver strong growth in Kyndryl Consult, which grew 20% year-over-year in constant currency. Kyndryl Consult now represents 25% of our total revenue in the quarter. This underscores how we are expanding our role with higher value services. While our Q3 signings decreased 3% year-over-year, our last 12 months' signing totaled $15.4 billion. As a result, our book-to-bill ratio was above 1 over the last 12 months. We continue to see strong demand for our modernization services. In fact, we recently announced a 5-year contract extension with Hertz to modernize its IT infrastructure. Our adjusted EBITDA decreased 1% year-over-year to $696 million as depreciation and amortization were a larger percent of our cost in last year's third quarter. Adjusted pretax income grew 5% year-over-year to $168 million, which reflects incremental benefits from our three-A's initiative, partially offset by the incremental investments we are making primarily in Kyndryl Consult to drive further growth. Our three-A's initiatives continue to be an important source of margin expansion and value creation for us. Through our Alliances, we generated $500 million in hyperscaler-related revenue in the third quarter, a 58% increase year-over-year. This puts us on track to exceed the 50% growth…

Thanks, Harsh. I want to note that today, we disclosed that the filing following of our quarterly report will be delayed as described by our filing with the SEC. As we disclosed, following the receipt of voluntary document request from the SEC, the company, through the Audit Committee of our Board of Directors, is reviewing our cash management practices, related disclosures, the effectiveness of internal control of our financial reporting and certain other matters. We are cooperating with the SEC. We do not expect a restatement or other impact to our financial statements. Due to the ongoing nature of these matters, we will not be able to comment further at this time. Before I open the call up to your questions, I want to thank the tens of thousands of Kyndryls around the world who are providing world-class services to our customers every day. Operator, let's move to questions.

[Operator Instructions] Our first question will be coming from Tien-Tsin Huang of JPMorgan.

Martin and Harsh, I wanted to ask just on the outlook and the revision. I understand you can't speak to the filing here. But on the revision, given how confident you were last quarter and the revision, I'm trying to think about attribution and what really changed. I heard the sales cycles being delayed and, of course, the evolution of the IBM piece. So maybe can you just discuss what surprised you and how broad-based some of these issues were for the company?

Tien-Tsin, if you remember during the last quarter, as we were guiding, we talked about three factors that we kind of got confidence from. One was the acceleration in the Consult, we were expecting 2 points of additional growth from that; and hyperscaler, another additional growth of 2 points; and then rapid acceleration in the conversion of our sales pipeline. Those were kind of about 6 points. And I think we kind of fell short on all of them. Not that we didn't have the growth in Consult, but it was 20% on constant currency. It was not what we were hoping for. And again, the sales cycle extension had the impact not only on the Consult, but also on hyperscaler as well as the acceleration we were expecting. So that kind of adds to about 6 points. And the continued headwind about IBM was another factor. So those are the primary drivers, along with some of the other things we talked about, ERP conversion onto the cloud platform, those are market dynamics that we have to deal with. Anything, Martin, you would like to add?

No. Look, I'd say, first, thanks, Tien-Tsin. I would add, as you heard, we got revenue back to flat. And as we start to share the difference between the evolving IBM relationship, you can see that without that headwind, we were actually growing the core part that matters so much to us. So the shape of that curve is kind of what we expected. As Harsh said well, we were hoping and we're expecting to accelerate. We got good performance but we didn't accelerate the way we had expected. And the world is getting more complex. AI is making customers rethink how their infrastructure should run. The sovereignty discussions around the world are top of mind for everybody. So we just we didn't accelerate as we expected we would.

Got it. And just my quick follow-up just on the -- I think you mentioned Strategic Markets and U.K. specifically. What are some of the changes that you might be putting in? What kind of cost might there be to do it or benefit? Just trying to understand how quickly that can be addressed.

Yes. Thanks, Tien-Tsin. So a couple of things. As we mentioned in our prepared remarks, we did see a pretty dramatic slowdown in attrition. And then on top of all of that or in addition to that, we have particularly Strategic Markets, and in the UKI where we were investing, a lot of that investment is local, it's domestic, which tends to be much more expensive than the center-based hiring that we're doing. So we are addressing those. As Harsh said in his remarks, it doesn't happen immediately, but we will absolutely get the wiring diagram right. We have been very successful over the last 4 years in freeing up people through automation and then reskilling those people to put them into roles where somebody has left the firm. And so we know the diagram. The wiring diagram works. And importantly, we also know that to the extent we make progress on this, we get to keep this. It shows up in our profit. So I feel like it's going to take us a quarter to get ourselves back on track here. Harsh, do you want to take the question?

Yes. I think Strategic Markets, if you kind of piece that part, like I think the trend is not the same, meaning. L.A. has done well. I think Martin mentioned data sovereignty is a bigger discussion that's happening in Europe, and that is a big component of Strategic Markets. And that was one of major factors in our discussions with customers there. So I would say, evolution of regulation and data sovereignty has been a big factor that certainly impacted a lot in Europe within Strategic Markets.

Our next question will be coming from James Faucette of Morgan Stanley.

I wanted to delve a little bit deeper there on some of those factors. But first, recognizing you can't really say much about what is happening from a review perspective. But I am wondering, can you talk about how much some of that review may have impacted, if at all, your forward commentary? Can we start there?

Sure. Look, as you know, you're an experienced analyst, who's, I'm sure, dealt with companies that have been in these kinds of examinations. And the fact is we just can't comment until the examination is complete. So the teams are working expeditiously so we can share more. The teams are working expeditiously so we can share our mediation plan. Having said all of that, I think the key message here is that we are not changing our fiscal '28 goals. So we still see fiscal '28 coming together in the time frames we talked about. And as we also said in the disclosures, we don't expect to have a restatement here. So I would say that until the work is finished, we can't comment more. But our fiscal '28 goals are something we remain confident in, and we don't expect a restatement. So do you want to dive into some of your other deeper questions?

Yes, sure. No, yes, I appreciate that. So I guess following up on Tien-Tsin's questions, and you mentioned -- appreciate the breakdown of the different pieces. When you look at like the extending sales cycles, et cetera, can you just talk about is this across all the different pieces themselves? And is there something that you can, I guess, encapsulate the types of incremental work or changes in work scope that your customers may be looking for that you hope to address as they go through these lengthened evaluation and sales cycles for you?

I think it's more promising for us in terms of the types of conversations we are having, and it's largely driven by a lot of industry dynamics. And I will start with AI because it's causing a bit of industry disruption, many industries and regulated customers that we deal with, because they're getting threatened by kind of what I call nontraditional players. So that's kind of one. That kind of starts from the business process to the application layer to the infrastructure layer, so kind of that type of dynamic. And then data sovereignty and AI, which means is data going to be closer to AI or AI going to be closer to data? I think that's kind of causing -- and because we are in long-term infrastructure modernization conversation, it becomes more complex for the decision makers to think about the evolution of the industry, how it impacts. And I think our Consult teams are deeply engaged from those modernization discussion. And I think our evolution, as Martin mentioned, not only being relevant from our partnership with IBM as he mentioned, but relevance with a hyperscaler where we are growing, and now our intent to kind of grow deeper in private cloud, it kind of makes us a bit more relevant across. So I feel very confident that the types of dialogue we are having is kind of much more balanced in terms of what we can bring than what we could have done at the time of spin. So it's the slowing, but the relevance of the types of discussions will make us more relevant to where customers are going than where we would have been previously.

Our next question will be coming from Ian Zaffino of Oppenheimer & Co.

Question will be on the buyback. I see that we're doing the buyback here. What's kind of the message you're sending out here? Is it visibility? And I guess the question would be on visibility is it's been very murky. And so given the murkiness of your visibility over the past 3 quarters or so, what gives you confidence in visibility going forward?

Yes. This is Harsh. Again, the principles around how we think about capital allocation, we have to be nimble. Like we look at every opportunity that stays in front of us. Like, first, as we mentioned, we need to have a strong balance sheet, good financial flexibility. We do like to do tuck-in acquisitions. We have debt which is maturing so we kind of think about how we're going to deploy. And again, revolver was a part of it. So we think about capital allocation more holistically and we have to be ready for whatever opportunity presents. But at the end of the day, we want to grow this business. So investing in the business will continue to be important, whether it's investment in Kyndryl Bridge, building our own internal capabilities, hiring more resources for Consult and tuck-in acquisitions. So I think it's going to be a balanced discussion. Martin, please.

Yes. And I'd add one more thing. We've said now for a number of years that over time, the ability for us to convert profit into free cash flow, the difference would basically be cash taxes. And that's what we've delivered. That's what we've put on the chart in the prepared remarks. You'll see that over the last 2 years, our combined profit, less the last 2 years of cash taxes is essentially where we're guiding cash flow to this year. So I think the clarity that we have and this business' ability to generate cash is exactly what we said it would be. And we see that continuing in the future as well.

Next question will be coming from James Friedman of Susquehanna.

I just wanted to ask about the free cash flow and your comments, Harsh. You called out the working capital of $102 million. That looks good. The $217 million in free cash flow seemed fine. So when you look at the difference in your prior free cash flow, which was $550 million versus the $325 million to $375 million, I mean, it doesn't seem like it's a change in operating current assets or working capital. Is it all just the pretax income revision?

Yes. I think there are two components. One is the PTI. That has a direct linkage. So it's roughly about $150 million from where we were. And working capital, while it was a benefit in the third quarter, it's going to be a bit behind for us. That's kind of the biggest driver kind of from where I see the fourth quarter lands. So I think that's kind of the balancing point, but largely driven because of the PTI change.

Got it. Lori, if I could just sneak in one more. And you did call that out, Harsh, in your prepared remarks about the fourth quarter. I don't remember. Did you quantify where we should be thinking about working capital for the fourth quarter?

We have not quantified, but that's largely the difference between the PTI and what the working capital use is. So I think you're thinking right. Cash tax, we know. And then the remaining is driven by working capital use.

And our next question will be coming from Jonathan Lee of Guggenheim Partners.

Given the shortfall in fiscal '26, can you talk about the building blocks in the business that give you confidence in achieving your fiscal '28 targets?

Sure. Sure. It's a great question. So I'd say a couple of things, and obviously, I'll ask Harsh if he has anything to add. Our fiscal '28 targets, when we set them out a bit over a year, almost 1.5 years ago now, were really built on a few elements. One was the fact that our cash flows, which had been heavily burdened by the early cash taxes we were paying, we saw our cash flows growing faster than profit because our cash tax position now is going to be relatively stable while we improved profitability dramatically. So that's what allowed cash to grow faster. And quite frankly, that phenomenon still exists. On the profit side, the primary driver is -- I should say two things. One, as we've shared every quarter, every reporting opportunity, what is going into the backlog has consistently been in that high-single-digit kind of 9% PTI range. And so for us, the driver of that profitability is not a trend or a building block as much as it is that over the time frames that we're talking about, the substantial majority, more than 90% of our P&L, will be determined by those high 9% PTI backlog element as opposed to the backlog we inherited. And when we put that guide out over 1.5 years ago, that year was when only half of our P&L was determined by what we put in. So the cash flow growth comes from both the profit growth and from the better cash tax position we're in. That remains today. The profitability comes from the shift over time to what we've put in the backlog versus what we inherited. And that continues as well. And then I should add the revenue component. As you saw, outside of the harder-to-predict IBM content, our revenue is growing. And we've taken the IBM content from $4 billion down to $2 billion and so its impact in the future should likely diminish from the 3.5 points it has been, while at the same time, our hyperscaler business is already up to nearly $2 billion. Our Consult business continues to grow. So the growth metrics, the growth drivers that we've had will just continue to punch bigger and bigger and bigger in the overall mix. Harsh, do you want to...

Yes. I think two things. One, as you heard on the gross profit book-to-bill, that continues to kind of add. We had $4 billion added in the last 12 months versus what you saw is $3.3 billion that was used. And that's kind of one dimension, like what we are signing. And more and more of these signings are post-spin so that kind of gives us the confidence. Number two, the level and relevance of our Consult team in having a broader discussion about our engagement which is across overall ecosystem that didn't exist like 2 years or 3 years ago, so that kind of gives us confidence in the types of conversation. Because these are customers who we have had for decades, right? So they trust us. So this is kind of becoming more relevant across the broader ecosystem. So I think those are elements. And third point I would say is that I think we're likely to be in a better opening position at the start of next year than where we started last year. So that also gives us a better starting point.

If I could quickly add a follow-up. When you think about some of the bookings softness or rather the elongation of sales cycles, is there any sort of time frame as to when you think you could actually close some of these deals? Would it be within the fiscal year? Or are we seeing push-outs until next fiscal?

There is a timeline to many of these deals. Like many of these deals are linked with renewals of our customers. Now many of these discussions start a year, 2 years in advance, and that's kind of the discussion. So there is a timely nature of customers and the urgency for them to kind of sign. So I don't think it's elongation that it's going to be multiyear elongation. We're talking about a couple of quarters now that can still roll into other renewals that might be coming in the future. So I think it comes to, what I call, more stability in terms of the shift that happens. But at the same time, as the industry gets disrupted, as AI conversation happens, it's more and more content that we start to have discussions. So I'd rather -- if there is a slip in a deal, I'd rather have more content in a future deal than signing something which is not future proof. I think I see it as an opportunity than something backwards.

Thanks, Harsh. Martin, that was our last question. Would you like to close the call?

So look, everybody, thank you for joining us. As we look ahead and work toward our multiyear goals, it is, I think, important to recognize all of the progress we've made to date, how that progress has translated into a much higher value services business, how it positions us to drive profitable growth, deliver higher earnings and, as we said, convert that into free cash flow. We're focused on expanding Kyndryl Bridge and its footprint and its capabilities and continuing to integrate more and more of our agentic AI capabilities into our services as well as into our own operations and the way we run. We will continue to leverage the momentum that we have in Consult and the hyperscaler-related services as well as our other partners. We will further expand into the private cloud space where there is a pretty substantial renewed demand due to all the things that are happening in the industry, AI, data sovereignty, security, et cetera. And at the same time, as we said, we will address our cost base as fast as we can, and we'll make sure we get that right. So thank you again for joining. We appreciate your time.

And this concludes today's program. Thank you for participating. You may now disconnect.