Good morning, everyone. Thank you all for joining us today. I am Services team here at B of A, joined by David Wyshner, CFO of Kyndryl, and what I assume will be a very productive and exciting half-hour session. So, David, thank you very much for joining us.
Oh, Tyler, thanks very much for having me, for having us here at the Bo f A conference.
Great. So you've been with Kyndryl since the IBM spin in 2021. Maybe it might be helpful just to start by giving us your perspective on the major changes you've seen. You know, the company has gone through over that period. How would you describe how Kyndryl has been shaped by yourself? Martin, you know, the investment community got an update a few months ago at the recent Investor Day, but just a few more colors there would be helpful to start.
Sure. Let me start with who we are and what we do at Kyndryl. We're a leading provider, the leading provider of mission-critical technology services related to infrastructure. Really focused on designing and modernizing, and managing some of the world's most complex IT environments. In terms of what's changed for us as an independent company, I'd say that there are definitely a few things. The first has been our 3A strategy and how we identified that strategy and have implemented it over time, driving real progress in alliances that we have with other technology providers so that we can provide a broader range of technology services, you know, leveraging our legacy with IBM, but also having partnerships with Microsoft, Google, AWS, Dell, SAP, Cisco, and others so that we can provide a broader range of IT services to customers.
The second of the 3A's was advanced delivery, driving efficiency in how we provide our services and in providing a, you know, even better quality of service. At the same time, we drove optimization and cost savings. The third A is our accounts initiative, really making progress on the profitability of the 40% of our revenues at the time of spin that were not contributing to our profits. Those have been strategically some of the big changes for us. On top of that, we have also looked to drive a cultural transformation in our organization, building on the strong points of our, you know, the culture associated with our former parent, but adding to that a focus on being flat and fast and focused in how we do things, how we operate, and how we go to market, being really restless to drive progress for ourselves and for our customers.
The third thing, the most recent important change for us has been our return to growth, our pivot to revenue growth in the most recent quarter, delivering positive constant currency revenue growth, and our outlook for this year as well to have positive revenue growth. I see those as being the key changes for us and really the key sources of our progress.
That's great to hear. And the positive revenue growth is something obviously we'd love to see, you know, particularly given the macro environment that we're in right now. I think it'd be remiss if I don't lead with that. You know, the volatility in the market has been pretty well known. Can you just set the scene for us, help us understand how this period has compared to prior cycles? How does Kyndryl differentiate itself in the market? And, you know, what is enterprise clients partnering with Kyndryl on?
Yeah. So the, you know, given the mission-critical nature of our services, we're significantly insulated from the macro, probably not immune to it, but very significantly insulated there. I think our results, you know, the strong growth we've had in consult, the doubling of hyperscaler-related revenue, the return to overall revenue growth, really reflects Kyndryl-specific growth opportunities that we're taking advantage of as an independent company because of the role we play in our customers' technology estates. Those opportunities have been so much greater that they kind of dwarf the impact that the macro has on us. You know, and you could see that in the 26% revenue growth, the 49%, 46%, 47% signings growth that we had in consult last year. You know, those sorts of numbers just indicate how substantial the Kyndryl-specific opportunities are for us.
You know, in terms of, you know, specifically what, you know, within that, you know, what are the key themes that are driving growth, the things that, as you say, customers are turning to us for? I put cloud migration continues to be high on that list. Modernization is a, you know, a really important topic. Cybersecurity continues to generate a significant amount of demand. We see AI-related topics, including data optimization, data foundations to help enable AI solutions, is a hot topic. ERP-related work is getting a fair amount of attention, particularly related to SAP. I think, you know the, and then a theme that runs across a lot of work we do is our ability to provide end-to-end solutions. You know, customers really value that ability to solve things and operate things end-to-end rather than having a niche provider here and a niche provider there.
Our ability to bring technologies together and provide end-to-end solutions, I think, is really helpful as well.
It sounds like the sticky customer relationships that you have, the more mission-critical work that you're engaging with clients on, sort of protects any of that downside pressure potentially from the broader macro, it seems like.
It absolutely does. What we do is inherently sticky. It is essential. It is mission-critical. It is non-discretionary. That is a source of insulation. On top of that, when you know, if and when we see noise in the macro environment, we have a second layer of insulation associated with the fact that a lot of the things that we talk to customers about regularly become even more top of mind, how to be more efficient, how to optimize, how to be secure and resilient. I think in a risk-off environment, those issues, those topics become more top of mind. They get more attention. As I said, that becomes an additional driver of, you know, how we are protected from what is going on in the macro.
Are those client conversations you're having? Do they vary by end market? I know Kyndryl is incredibly well diversified when it comes to both geographic revenue growth and then also from a service mix. Just what are you hearing from that type of level?
Yeah, they do differ by end market. At the same time, as you point out, we tend to be highly diversified. The starting point, I would say, is the fact that mission-critical is mission-critical regardless of geography or vertical. That tends to be pretty consistent. We see some common themes among geographies and verticals, you know, that there's more tech being used to drive business outcomes. It's a long-term trend. Obviously, it's continuing. There's more tech, there's more cloud in folks' tech estates, and there's more security needs, security, and resiliency. They are each our own form of more cowbell, right? More tech, more cloud, more security.
The differences that we see among some of the verticals that we operate in, one that I'd call out is financial services, where regulatory change can have a significant impact on what people are looking at. We certainly have seen that in Europe in particular. Security issues are getting additional attention as well. When you have something like the large-scale power outage in Spain, people start thinking about resiliency and realizing what some of the risks are. Some of the issues around retail players in the U.K. are creating additional needs there. What we see are different issues sort of bubbling to the surface at different times for different industries and different geographies.
Interesting. That is very helpful. You recently provided your fiscal 2026 guidance, you know, because you are on the March cycle, you know, on the forecast call a few weeks ago. It was encouraging to see positive revenue growth. We briefly discussed that earlier. How should we be thinking about this growth as we move through fiscal 2026? Are there certain conditions you need to see in the market to achieve that target? Is it more blocking and tackling?
Yeah, I'd put it in the more blocking and tackling side of things. Given the nature of our business and the insulation from the macro that we have, our outlook should be pretty relevant, pretty applicable across a broad range of macro conditions this year. You know, a substantial amount of our revenue comes from contracts that are in place at the beginning of our fiscal year, which was in April. You know, about 75%-80% of our revenue this year will come from those in-place contracts already, with only about 20%-25% of revenue coming from in-year signings. And so that gives us visibility there. It reduces our exposure and creates a situation where, again, it's a pretty broad range of macro conditions that will allow us to achieve the numbers that we put out there, which are numbers that we're really excited about.
You know, $725 million or more of adjusted pre-tax income, which would be an increase of $240 million or more from the prior year. We see that translating into $550 million-ish of adjusted free cash flow, you know, really reflecting pre-tax income minus cash taxes, converting at 100% to free cash flow. With north of half a billion dollars of free cash flow, that will certainly allow us to, you know, that'll certainly support and enable the capital return terms to shareholders that we started with our share repurchase authorization announced in November, and buying back more than $60 million of stock in the most recent quarter.
Interesting. In addition to the solid fiscal 2026 numbers in November, you set out some pretty lofty but achievable medium-term targets. You know, it might be helpful just to remind us, sort of, what those targets are. If you can elaborate at all on the visibility you have, the line of sight you have into achieving those targets.
Absolutely. It's one of my favorite things to talk about because we were, you know, we were able in November to be differentiatingly clear about our outlook for fiscal year 2028, which sounds like it's a long way off, but actually for us, it starts just 22 months from now. What we laid out, we referred to as our triple, double, single, with cash flow growing to more than $1 billion a year in fiscal 2028. Our adjusted pre-tax income more than doubling to $1.2 billion or more in fiscal 2028. To achieve that, those cash flows and that earnings growth, we really only need revenue to progress toward the mid-single digits in fiscal 2028.
To your point, we feel really good about the achievability of this and the fact that those numbers, you know, represent a substantial change, a substantial step up from where we were in fiscal 2025 and even relative to the growth we're forecasting for fiscal 2026. We're really excited about the trajectory that we're on. I certainly hope that, you know, that having gone out with kind of a three-year out guide, people will also look at what we did, what we said three years ago about where we'd be now, and the fact that we very much delivered and over-delivered on that. I hope that gives people comfort in the visibility that we have and the ability of our team to execute, you know, to continue doing what we said we would do.
Yeah. One trend that we've seen fairly consistently over the past several quarters, speaking of execution, has been the success of the large deal wins that Kyndryl signed in 2026, if my memory serves me right, with a TCV over $100 million in fiscal 2025. Can you just walk us through what the competitive set looks like on those deals? To what extent is pricing a factor on those deals? How does the margin profile on those compare to the company average? Anyway, you want to take that.
Sure. Yeah. You know, I think we've been successful. We've been signing large deals and more large deals because we're really good at what we do. We're a leader in our space. As I mentioned, we've got technology alliances that allow us to be, you know, an objective end-to-end services provider. That, you know, that really is helping to drive the growth we're seeing in large signings. We had 26 deals with a total contract value of $100 million last year, you know, versus 15-ish in the year before. Real growth there. I think it's driven by the quality of service that we're able to provide to our customers. It's driven by the innovation that we're bringing to infrastructure services. As a leader in this space, we're able to invest in that and really drive, you know, new and better ways of working.
It's driven by the trust our customers have in our ability to deliver, to do for them what we say we're going to do. I think our track record and our incumbency are really helpful as well. The substantial majority of our large signings come from existing customers of ours. We also had a, you know, a couple of $100 million plus signings that were new logos for us as well. That's part of how we're supplementing our share of wallet growth with new logo growth. When you look at all these signings, price matters. We need to be competitive. I, you know, I don't view us as looking to win necessarily because we're the lowest cost, lowest price provider. I look for us to win because we, you know, we do mission-critical work really well.
You want your mission-critical, customers want their mission-critical work done by somebody they can really count on. That, you know, that to me is the biggest driver of us winning and how we compete, you know, now whether we're, you know, a point or two or three, you know, more or less expensive than someone else out there.
In addition to the large deal wins that you've signed, you know, signings trends, more generally speaking, have been pretty healthy. I mean, we've now seen, I think it's three consecutive quarters with an LTM booked- to- bill above one. That's great to see. Can you maybe just discuss sort of the mix of what the new deals contribute to that versus just renewals, what the ramp timing looks like on those deals, just as we look through, you know, into calendar 2025, calendar 2026? I'm just trying to get a good sense of the dynamic.
Yeah, we're really excited to be delivering a book- to- bill above one. You know, that's an important metric for us. When we look at the signings, you know, they have been really broad-based across geographies, across verticals, across practices, our six practices, and also in terms of consult versus managed services, seeing really strong growth there as well. I think the growth in consult is a really important part of our story, you know, delivering, as I mentioned, you know, 40% plus growth in consult signings, having that translate into 26% revenue growth in an environment where, you know, no one else in the space was putting up numbers like that.
It, you know, it points to the fact that we're really helping customers address modernization and security needs that they have and increasingly helping them think about AI as well, particularly data architecture and data foundation work associated with enabling AI solutions for our customers. I think that's going to continue to be an important area for us.
I'm glad you brought up consult because I did want to touch on it. It's one of the fastest- growing areas of the business. You know, the team's been able to take share in a very competitive market, you know, consistently putting up double-digit growth. Can you just walk us through how consult wins in the market and how we should be thinking about the consult contribution both to the company's overall growth profile and the margin dynamics there?
Yeah. Working backward a little bit there, it has been a big source of growth. It's grown from being about 10% of our business at spin to, you know, 20% this most recent year, on its way to 25% plus. You know, I think we're, you know, it has been a driver of growth and will continue to be a driver of growth for us. When we look back, we were under-penetrated and underrepresented in this space. The opportunity we're taking, one of the opportunities we're taking advantage of with our customers, is the, you know, things that we would have, should have, could have been doing for them, but for the fact that we were a captive subsidiary of a single technology provider.
Having expanded our alliances, having built our capabilities, having invested in this space, we're really well positioned to be providing advisory capabilities to our customers, you know, really related to their infrastructure, how to optimize it, how to modernize it, how to use it, and set it up to meet business needs. After doing advisory work, we can do implementation work, which also falls under consult. We do the managed services work that comes out of that as well. What's interesting is that with our Kyndryl Bridge operating platform, which is AI-enabled itself, we see in our customers' infrastructures where the challenges are, where the risks are, where the opportunities are, to, you know, to operate more efficiently or to have, you know, to address various risks.
That gives rise to us, you know, being able to talk to our customers about where they should invest. You know, almost everyone out there, particularly large organizations, have so much tech debt that this becomes like a flywheel or, you know, a cycle of, as an incumbent provider running their infrastructure, we have visibility to so many of these issues. We can identify what the, you know, biggest opportunities or the biggest pain points are, talk to customers about that, advise them on what to do, implement it, run it, and then repeat this cycle again with what's the, you know, what's the biggest next remaining pain point that needs to be addressed. I see that being not just a short-term and mid-term opportunity, but a long-term opportunity as well, because very few folks are actually spending enough each year to reduce tech debt.
You know, this cycle of addressing, you know, issues and challenges and opportunities in a large tech estate just continues to be a kind of self-filling bucket, if you will.
Sure. So consult 20 now coming to like 25% of total revenue. Is there a target that you have in mind as to what you think the optimal Kyndryl structure would look like with consult, or is it just?
Yeah. Yeah, I think, you know, managed services, running infrastructures is going to continue to be a very significant and substantial portion of what we do. But the, you know, I think given the progress from 10% to 20% of our revenues coming from consult already, we feel really good about the trajectory to get to 25% plus. You know, I wouldn't, you know, I don't see a situation where it's, you know, where somehow, you know, it's becoming like half of what we do, but the opportunity for it to be north of 25% as we continue to build out our capabilities and our track record is absolutely there.
How should we think about consult growth with respect to the mid-single digit, medium-term outlook?
Yeah. You know, we see consult continuing for the intermediate term to be a double-digit grower. At 20%-25% of our revenue, that creates the opportunity for it to be contributing two or three, maybe even four points of growth to that. The corollary or the algebra associated with that is really that we can get to mid-single- digit growth with managed services being a 2%-3% grower. I think there's upside beyond that, but we don't need heroic growth in managed services to achieve the targets we've laid out for revenue growth and earnings growth and margin expansion, and free cash flow growth. That's really exciting. You know, we'll look to grow revenue as quickly and rapidly as we can.
I think it's really important that the fiscal 2028 targets that we've laid out, you know, don't require growth that's, you know, that's way out of line with what portions of our business, particularly consult and hyperscaler-related work, have been contributing.
Within that 75%, that's the managed services component. How are you thinking about the service-level growth profile of the business? Are you expecting, you know, obviously data and AI should probably be one of the largest, faster-growing businesses, but just when we're sort of decompartmentalizing the components within managed services because it's such a key integral component of Kyndryl, how should we be thinking about that?
Yeah. So, you know, there are three or four pieces that I would highlight. Apps, data, our practices, apps, data, and AI. And that's about managing applications and establishing, architecting data, establishing data foundations to enable AI. I see that as a, you know, those areas are significant growth areas for us. Security and resiliency is going to continue to be a hot topic. I see that continuing for the foreseeable future. As a result, that's a meaningful growth opportunity for us. Cloud, cloud migration, cloud optimization-related work, and just the role that cloud is playing in our company's infrastructures, that will continue to represent a growth opportunity for us as well. Those are, you know, those are key elements among our practices. Then, as we talked about, consult is going to continue to be a driver across our, you know, across our practices.
Even in areas like core enterprise and mainframe-related work, we see opportunities for consult to be a driver of growth.
Do we need to see meaningful growth in the core mainframe component of the business to reach the mid-single digit, or is that?
We don't. You know, we view managed services and core as, you know, probably a, you know, kind of a stable business. But there are consult growth opportunities associated with that. I would expect the growth in that area to come from more consult-related work. Given our position as, you know, far and away the largest operators, you know, largest managers of mainframes in the world, with, you know, half of the outsourced managed mainframes are ours, that, you know, the role we can play in consulting there and our ability to learn really quickly from what, you know, what we're doing in, you know, one or two places and applying that to other geographies, other customers, other verticals, or even across a vertical becomes really powerful.
Yeah, that's interesting. You can apply the consulting business on top of core, on top of the managed services component. That seems to be interesting.
Absolutely. This is where our, you know, our leadership position and our incumbency position in, you know, so many large enterprises combine to be a, you know, really powerful tool, you know, really powerful lever for us to drive growth.
Yeah, that's great. I know we're running short on time, so I want to briefly touch on the IBM relationship. It's been a hot topic for the last couple of months for sure. You know, I think you did a nice job on the earnings call, sort of clarifying IBM as it relates to software costs. It might be helpful just to gain a little bit more color on what those costs were, what the sizing of it is, and how we should be thinking about that IBM relationship on a go-forward basis.
Yeah, IBM is an important partner of ours, and that's been true since our spinoff. And what we, you know, one of the biggest elements of the vendor relationship we have with IBM is that we, you know, we procure roughly $2 billion of software from our former parent each year. And the construct associated with that is that, you know, for the last several years, our annual costs were increasing $200 million a year under the construct that was put in place at the time of the spin. We're nearing the end of that now. We have our last three fiscal quarters of it this year. So there's a $150 million pre-wired Kyndryl-specific increase that we have to overcome this year, similar to the last few years. But this year is the end of it.
After that, the only price increases we'll face are the ones that IBM introduces to its customers broadly. Over the last few years, we've put more and more protections in place in our customer contracts. It really reduces our exposure to that. We won't be facing that, you know, that same headwind going forward, which is exciting.
Yeah. So don't expect to step up in costs as we go forward.
Right.
Sort of stay as you go.
That's right.
Great. I appreciate it. Thank you very much for taking the time. I know we're out. Thanks a lot, everyone, for joining us. Thanks again, David.
Thanks for having us.