coverage of IT services at Citi, and we're excited to have Kyndryl here today, and the format, what we'll do is we'll go through some fireside chat questions, and then feel free to raise your hand, and we'll try to get to you before we're out of time, but we're excited to have Martin Schroeter as the CEO and David Wyshner, the CFO, so we'll kick it off, and thanks for being here, gentlemen.
Thank you.
Thanks for having us.
I guess I wanted to start kind of thinking about the high level. As an independent company, you guys have obviously, you know, changed the whole picture here for Kyndryl: cultural transformations, the Three A's, investments and partnerships in technology. I was hoping you could start maybe and highlight the core elements of your strategy, why Kyndryl matters to its customers, and what you see driving the success.
Perfect. Yes. Thank you. Thank you. This should only take 33 and a half of the 33 and a half minutes we have left.
Yeah, I thought I'd start with an easy.
No, no, no. It's a great question. It's a great question. So look, what we got out of the spin were two things that we've been able to use to fundamentally reposition not what we do for our customers, but the breadth of what we can do and how we do it. So we got obviously an ability to invest. IBM obviously has an ability to invest, but they didn't invest in this space. And so with that ability to invest, we've brought new capabilities, innovation, and moved into market spaces that this customer base, quite frankly, has been asking us to play, and even when it was part of IBM. So as an example, we've built capabilities around other hyperscalers, which were just impossible to do because we couldn't invest.
And secondly, we got a freedom of action to pursue and be part of the ecosystem that really matters to our customers in the enterprise IT environment. And we were very quick to take advantage of both of those. So we were very quick, for instance, to create a very deep and meaningful partnership with Microsoft. We did that a week after we were spun out. So that's nearly four years ago now. And then that followed with Google and Amazon and Oracle and SAP and others that we couldn't just partner with. So it's a bit reductive, but between an ability to invest and the freedom of action, we've been able to reposition this firm so that it's very much part of our customer's future as opposed to just part of their past.
And at the same time then, and you brought up culture because it's a really important part of what we've done. We've been able to shift the culture from being part of a product business, and this is very much a services business, and services and product businesses don't have the same culture. We've been able to take on the culture to make this a great services business. And that's allowed our customers to be more and more increasingly comfortable with the direction we're headed, increasingly comfortable with our ability to solve their problems.
And as I said, we've used our ability to invest in our freedom of action to prove to them that we are not only a great services business culturally, but we are the deepest engineering talent that knows their challenges the best, that is now also an independent advisor on technology, on how to implement it and how to run it. So at a very high level, those two things, plus culture, have allowed us to reposition the firm. And we shorthanded all of that so that our investor base could follow along on our progress into what we call the Three A's. So we created a strategy focused on Advanced Delivery. We created a strategy focused on our Alliances and created a strategy focused on Focus Accounts.
That's allowed us to address the position in which we found ourselves when we were spun out and to improve profitability, to return the business to growth, et cetera, et cetera, et cetera. There's a lot more that we could get into. I'll ask David if he has a comment on any of this, but we have taken on the culture. We have created a strategy that our investors can easily follow our progress. The nature of what we do is very sticky with our customers. And as long as we continue to invest to bring innovation, as long as we show up as a great services partner, and as long as we remain that independent advisor, I think I feel great about the future. I feel great about where we're positioned in order to help them solve, quite frankly, their hardest problems in mission-critical infrastructure.
Yeah. And I'm sure we'll get into this, but the growth opportunities associated with this are really starting to become apparent too. And you can see it in the hyperscaler-related growth that we're delivering and particularly the way our Consult activities have grown over time, starting out at about 10% of our business, now over 20% on its way to 25%, where we're just more and more actively involved in the advisory and implementation work that our customers need in addition to the managed services work that we've always done.
Where were the investments focused to kind of change kind of the outlook? Where did you guys focus those investments? And I don't know if there's a dollar amount that you guys had to invest in the company.
Yeah. So a couple of things. So first, we invested with our partners pretty heavily in skills so that, as an example, we could create the volume of hyperscaler skills that we needed. We were spun out with, I would say, something in the dozens of hyperscaler-related skills. We had a lot of IBM cloud skills, but the market share just wasn't there to support it. So we invested quite heavily in skills. As we sit here today, we probably have between 35,000 and 40,000 people with hyperscaler credentials. So heavily in skills, heavily in our capabilities around security, around resiliency, and around network operations, very heavily in our skills around applications and data and obviously AI. And now we're in a place where we're investing heavily in our Consult skills. So there's a whole big element of investment on skills that, not behind us, but very good head start.
And then we invested quite heavily in the platform that allows us to do what we do. It's called Kyndryl Bridge. It's how we deliver services. And Kyndryl Bridge is the way we provide insights to our customers. It's the way, as I said, we deliver services. It's also the way, through its AIOps capabilities, that we've been able to automate so much of what we do on our customer's behalf. And that's allowed us to build now agents around how to run infrastructure. It's allowed us to be much more efficient with labor. So when I think about the quantum of investments, I would argue, and I think I know investors knew this, when we were spun out, we were losing money. So we were minus 3% PTI margin or so. And this year, we've guided to kind of a plus 5%.
So I would argue that within those first early years, we were asking our investors to support those investments by allowing us to lose money. And then we've now built that into the run rate. So obviously, we're growing profitability. We're improving profitability, dollar growth, not just margin, and we're able to invest. So we've repositioned the business in a way that, yes, we'll continue to invest. Yes, we'll continue to bring innovation in the form of bridge and in the form of new capabilities and skills, in the form of new security operations centers and network operations centers. But that's sort of now in the business model, if you will. So now we can do both. Now we can return to growth. David said there are plenty of growth opportunities. We can keep investing, and we can keep growing profitability.
Awesome. I wanted to ask about the accounts initiative in more detail, which to date, I think, has contributed to realized benefits of, I think it's $925 million. How do you address these focus accounts, and what's still left to go in this initiative?
Yeah, it's a great question. It has been the single largest contributor on a cumulative basis to our profitability improvement. So first, for context, so focus accounts were a thing. Focus accounts were something that we needed to address because the relationships that we inherited, the relationships that IBM spun out in the form of Kyndryl, were all envisioned in a different model. They were envisioned as an integrated services and product provider called IBM, none of which were envisioned with a separate services arm from a separate hardware and software arm.
When IBM created the commercial relationship between these two now separate firms, it took about 40% of our business and made it essentially break even on a gross profit dollar base, i.e., whatever we were paying for the hardware and the software that IBM created, plus our cost to deliver labor was basically all we were getting from customers. In total, when we talk about it, think about it, at the start, it's about $8 billion of our revenue annually, but that's only the annual revenue. The backlog associated with that was about $20 billion worth of backlog. We inherited a set of relationships that essentially translated into an uneconomic situation for us.
And so our focus account initiative was really about reimagining these relationships for the new reality: a commercial agreement with IBM that dictated how much we paid for hardware and software, a new set of capabilities from us, and innovation and investments in the form of Kyndryl Bridge, plus a new set of partners around us that we could work with. And we saw what I'll call patterns emerge from how we kind of worked our way through this, not through it yet, but how we worked our way through this. In many instances, it was doing more for the customers. It was expanding the scope at better margins. So we provide value. We get to capture some of that. And that allowed us to grow the relationships.
In some cases, because the single largest determinant tended to be the commercial relationship that IBM created between Kyndryl and IBM for the hardware and software, it was pulling the IBM hardware and software content out and having those customers go direct to IBM to procure it, and we would still run the services. So when you look at our revenue profile since the spin, and again, we've shared this, we engineered a decline in revenue in order to improve profitability dramatically. So in the first two years, we took out over $1 billion of revenue, and we added over $600 million worth of profit dollars. Not just focus accounts, but a big part of that was focus accounts. So we're about 85% of the way through now, I would say. There is a long tail to some of these relationships. But we'll keep making progress.
We'll keep bringing innovation. We'll keep expanding the scope with some of these customers, and we're able to do this, I would argue, the sort of unique, I think, we're able to do this because the nature of what we do for our customers, and they love the service we deliver. It's mission-critical. It's kind of hearts and lungs. They wanted us to figure out how can we get the relationship between the customer and Kyndryl back to a place where Kyndryl can keep investing in my account, can keep bringing me innovation, and again, most of them felt like we need to figure this out with Kyndryl. They were put in this position by IBM, and so we need to keep them on site as our infrastructure services provider, so again, not done, good progress, very good contributor to our profit growth.
But I would argue we're kind of unique in our ability to execute a leg of the strategy called focus accounts because of who we are, what we do, and how good we are at it. Anything you'd add?
Yeah. And financially, this has been incredibly powerful for us. When we announced the focus accounts initiative and said, "This is going to add $800 million a year of annual profit," that was a big audacious goal. And now we're already, as pointed out, at a $925 million run rate. We've raised our target for the initiative to get to $1 billion a year. And we feel really good about our ability to reach and surpass that contribution from this initiative, which, as I said, really makes it tremendously powerful and a huge source of value creation for us.
Great. I wanted to ask about the resilient top line. You guys delivered positive revenue growth in the fourth quarter of 2025 and significant margin expansion over the last two years. That, some of that was obviously coming from those focus accounts. But Q1 revenue did fall short of expectations. So I was hoping we could dig into that, get some color on what you're hearing from customers and the cadence we should expect to see that gets you to that full-year 1% or full-year revenue guide for fiscal year 2026.
Sure. Sure. So look, I think first quarter for us was, as we said on our call five weeks ago now, six weeks ago, it was the start we needed to deliver the year. I'll say more about that. And obviously, this year gets us to what we laid out in our Investor Day, not quite a year ago now, of what we shorthanded to triple, double, single. We'll triple cash flow over the next few years by doubling profit, and we'll exit fiscal 2028 with mid-single-digit revenue growth. And all of this, what we delivered in the first, how we positioned this year is all on track to do that. So I feel good about where we are and what we've gotten done. This is a business where we had great signings quarter last year, great signings year last year, book-to-bill well north of one.
Gross profit book-to-bill has been well north of one for a number of years, and that's important, but it's not enough in any one year to drive the top line growth, and as I mentioned earlier, through our focus accounts initiative, we engineered a pretty substantial decline in revenue, which starts as a substantial decline in signings, and so what you saw the prior two years was a book-to-bill well south of one by design, and that's what allowed us to grow profit, et cetera, et cetera, et cetera, so this year, as we think about the year, first quarter starts fine. The signings in the last 12 months, book-to-bill stays north of one, and I would expect that this year we'll have another book-to-bill north of one.
That will deliver, again, next year, another increment to what we'll grow this year, but that'll deliver another increment of growth next year, again, on our way to finish it kind of mid-single-digit growth. So for me, when I think about the vectors of growth that we've had, a couple of things that are worth mentioning. First, our alliances activity, which was a $1.2 billion last year on a full-year basis from basically a standing start at spin. We had really zero business built around the hyperscalers. So $1.2 billion last year, we said that will grow to $1.8 billion this year. And when we look at our first quarter performance, we're right on track to deliver that $1.8 billion. Consult also, great 12 months of prior 12 months of signings. Actually, the 12 months prior to that were also quite good.
So unlike the total, which we've engineered a decline, the Consult business in total has had a book-to-bill north of one essentially since we were spun out. And so what we see in Consult is good double-digit revenue growth as that converts now into revenue. And we see that continuing as well. So we have these two growth factors of alliances and Consult, which continue. And then, again, good book-to-bill in total last year. We'll have another good book-to-bill this year, which says that over time, the rest of the business, sort of the managed services business, doesn't represent a big engineered decline anymore, but rather it gets back to growth over time, which delivers then growth in the medium term. So first quarter I see as a good start, as we said on the call.
Second quarter will be a bit better sequentially from first, which is all we need to deliver the second half. The compares get a little easier second half, particularly third quarter, but all consistent again with us delivering single-digit revenue growth as we exit fiscal 2028. One important topic and sort of maybe linking two things. Part of why I think we wind up talking about these small numbers is because the magnitude of the two things we're talking about. So as I mentioned earlier, the focus accounts backlog that we inherited was like $20 billion, right? $8 billion of revenue in a year. So $20 billion, which we're working our way through, we've taken a lot of it out in the form of hardware and software on IBM. That'll come over time. That's what you see. That's part of what you saw in the first quarter.
And then the growth rates, the two vectors of growth are delivering growth, but the net of all of that, just for this year as an example, is only 1% growth, right? So the magnitude of, and we're a $15 billion company, so that's $150 million of revenue. So the magnitude of these two things is just sort of at a point where the backlog that we inherited that we're working down is massive. The growth that we're pointing to is still fairly small. As we get out of this fiscal year and we pump a little bit more growth, the focus account backlog continues to erode. This phenomena, I think, works its way out. But we are a backlog-based business. It's part of the value of the business model, I think, gives us good visibility to the long term.
But it does mean that in these quarters where the one is still so big and we have to work our way through it and the growth vectors yet aren't big enough or as big as we want them to be and only a small amount of growth, you get into these instances where you could look at it and go, "Well, it looked light. We feel good about it. I feel good about the quarter. I think we're well positioned for the year.
Particularly in the first quarter, what was the shortfall and why doesn't it linger throughout the year?
So a couple of things. One, focus accounts are certainly a part of what we've been engineering. And the offset to focus accounts has always been the two growth vectors. We know what the backlog looks like, and we know what the backlog runout looks like. And so we have pretty good visibility to what does that, how does that managed services business, the decline, how does it reduce over time. So we have pretty good visibility to that. And then on the other side, and we talked a little bit on the call about some deals that rolled over into the next quarter, many are closed, all will close at some point. We have, I think we're very good at predicting kind of the year when something will sign. We're less good at predicting the quarter for a number of reasons, regulators, business, whatever it is.
So that can have a small impact as well. So focus accounts certainly had an impact in the declines in the first quarter. And the things that were growing, we're not growing enough to kind of completely offset that, but we know what that looks like over time. And we feel good about the next three quarters to get us to the year.
Yeah. I wanted to drill in on some of those growth areas like Kyndryl Consult and the hyperscalers. How should we think about the sustainability of those and the contribution of the mix you're talking about as it hits the revenue line?
Yeah, sure. So look, I think in each case, we had a little bit of a catch-up. I think we're still a little bit in the catch-up mode on the hyperscaler activity. And what I mean by catch-up is we had essentially zero business with hyperscalers or capabilities built around the hyperscalers. So given the role we play in our customers' environments, our customers were asking us to help them with cloud migrations, with running their mission-critical on the cloud. So that catch-up has allowed us to grow up to $1.2 billion this year, another 50% growth. Over time, as the catch-up finishes, I think that business looks like hyperscaler growth, plus or minus a few points. So if hyperscalers are growing 26%-27% to 32%-33%, then I think we're within a few points of that kind of a growth rate over the long run.
And then on the Consult side, as David mentioned, it was a very small part, 10% of our revenue mix. And again, customers were asking this business to bring its advisory skills to bear to solve their toughest problems. And now with our investments, our additional capabilities, we've been able to grow that business. Some quarters, revenue grows 50%, 40%. Over time, that will also reduce, I think, to a good solid double-digit growth rate. But we still see the demand. We still see a book-to-bill that's well north of one. And while we've caught up, we're still not at the mix that we see in other businesses. So we took roughly 10% of our mix of revenue was advisory and Consult. We're now in the 20%. But we see others that have mixes of Consult in the 30%-40% range.
So I think there's still more that will drive a good tailwind for us over the medium term. Anything you'd?
Yeah, and Consult and hyperscalers are both opportunities for us to grow share of wallet and to expand into new customers, and we're seeing our ability to grab both of those growth opportunities for us, and I view share of wallet as being kind of a key source of maybe dollar growth, but at the same time, we've added hundreds of new customers since our spin, and often those start with a Consult relationship and/or hyperscaler-related activity, and then that translates into a combination of Consult work and managed services work over time.
Martin, you mentioned earlier the triple, double, single from the analyst day out. How should analysts or how should the investment community think about the progress and maybe describe your visibility and confidence going towards that mid-single-digit growth and top line? I think it's $1.2 billion plus in pre-tax earnings and $1 billion plus in free cash flow by fiscal year 2022.
Yeah, sure. Well, let me start with the triple first. So I'll work my way toward revenue growth. And excuse me, we built this in a way that I think is very logical, very easy to follow along. So tripling cash flow is, I wouldn't call it physics, but I would call it the fact base. And it's really driven by this idea that we were spun out with a horrible tax position. So we've been paying very heavily cash taxes in the first few years, even though we didn't make a ton of money. And the result of that is that over the next few years, as profit grows, we will not be paying a ton more in cash taxes. So our cash tax payments will basically be flat over the next few years while our profit moves to $1.2 billion, right? Profit is the double.
So cash taxes, assuming David fills out the tax forms correctly, which I'm sure he will, cash taxes are the driver that allows us to triple cash flow while profits double. Profits double, again, we're a backlog-based business. So we have to keep delivering what we do. We have to keep putting things in the backlog at a high single-digit margin. We share with our investor base every quarter what's going into the backlog. And for the last now nearly four years, it's been very consistently at 9%. So we know that the value capture is there. We have to deliver. Excuse me. But the other thing that happens is in a backlog-based business, even last year, a third year out of IBM, even last year, only half of our P&L was determined by what we put in. Half was still the inherited content that was spun out, right?
Because that's the nature of the contracts we have. We have four, five, six-year deals. So 50% was reflective of what we put in last year. 50% was reflective of what IBM spun out. This year, it moves to about two-thirds, one-third, which is great. But we're four years out now, right? So I go through all of that because in the timeframe that we laid out for investor day, fiscal 2028, it'll be over 90% from what we put in, which is that 9% margin. And it'll be less than 10% of what we inherited, which is a different margin profile. So that's what allows us to. We delivered a bit over 3% last year on a 50/50 mix. We're going to do 5% this year on a two-thirds, one-third mix. So delivering 9%, sorry, delivering $1 billion, right?
Doubling profit, $1.2 billion, doubling profit with nine going in and it representing 90%. It is a lot of work to be done. It's not like we can go on vacation for two and a half years. There's a lot to get done, but it's more physics than it is something else. We just have to keep doing what we've been doing. We have to keep putting high-quality value capture into the backlog, and we'll get to the double. And then importantly, so that's the triple. Triple is cash flow. The double is just a mix of our P&L over time for a backlog-based business. And then we wanted to build that very compelling triple double on a modest requirement for revenue growth. And the markets we serve, we think support a mid-single-digit growth rate.
Yes, it takes a little while to get there because, again, as I mentioned, one year of a book-to-bill north of one doesn't deliver growth immediately. It takes a few years of that. So we didn't want to put an enormous amount of pressure on the revenue growth required because of how it takes to turn this business. So, exiting a single-digit is sufficient for us to grow profits, but double profits and triple cash flow. So again, as we sit here now, I feel great about how we're positioned. We will get there. We will sign enough to continue to support that single-digit revenue growth. And obviously, the mix of the P&L and the cash and tax position allows us to deliver the double and the triple. Anything you'd add?
Nope.
Wanted to turn to the big debate of AI. Can you talk a little bit about how do you think the services industry will be impacted by AI positively or negatively? And then how do you see it for Kyndryl?
Yeah, it's a great question. So I think a few things that are important. First, we are massive users of and have implemented AI. It's the way Kyndryl Bridge runs. In the continuum of AI, I would put a lot of what Bridge runs on as the machine learning side of AI. So it can spot patterns. It can use our engineers then to validate those patterns. And then we can automate a fix across our entire global delivery platform. So we do that now 170-180 million times a month across our delivery platform. The use of automation to deliver what we deliver in a very efficient way. That's allowed us to manage our labor costs. It's allowed us to deliver higher quality. It's allowed us to be more responsive. So AI sits at the heart of how we do what we do.
It's also, obviously, like many others, we're experimenting with AI across our functions. So David's function's using it, operations, HR. Others are using it as well. And there's some good positive ways to run a company more efficiently with the use of AI spread through the functions. And that will also play a role for us over time. What we're seeing in the marketplace in terms of how does AI affect services, I think we sit in a somewhat unique spot in infrastructure for a number of reasons. First and foremost, as I said, we've been growing profit dollars, even though we've been shrinking our labor costs because we don't either create value or bill based on how many people are in an account, right? We're delivering outcomes to customers.
While as we get more efficient, we have to share some of that with our customers. That doesn't prevent us from growing profit and reducing labor in order to do it. So we have a slightly different relationship with AI. It's for us, it's a tailwind for us, particularly for profit. We also play in a space where what we do is not just can't be done by AI today. So AI is really good. If you went on to ChatGPT or Claude, you could ask it to write you a program. And while it'll write the code and while you may spend a little more on testing, it can actually write code. But if you went on to ChatGPT or Claude and said, "I run this Oracle database of this size across this network on this cloud provider.
And by the way, I have an x86 data center that's running blah, blah, SAP. And it just went down. What do I do?" You're not going to get an answer, right? ChatGPT, GenAI can't manage an infrastructure for you. But it can help you with elements of how you do your work. So we're sort of, I think the impact to services of AI is going to be mixed. It depends on where you sit in the value chain. If AI can do what you're doing, then obviously you should be figuring out how are you going to deliver value to customers in a different way. If customers can use AI to do what you're doing, then you really have a challenge. But as we sit here today, the data we have, which is more than anybody has on how infrastructure runs, is hugely valuable to how we deliver.
And nobody else has that data. But also, you just can't do what we do with AI in delivering infrastructure. In the future world where infrastructure and data matter, we're sort of right at the heart of that. So when we think about the what's next next for us, and I mentioned the number of automations we have, those automations are now supporting agents that we use that not only of our own agents, but that we integrate with our partners so that we can deliver outcomes to our customers again in a more efficient way. And yeah, we share some of that with them. But this is a very exciting time to be in infrastructure services because AI is a massive tailwind to how we do what we do more efficiently.
Has AI impacted pricing in infrastructure or not necessarily? Are the corporates asking, "Hey, you're obviously getting cost saves. How can we get some of those saves?
We've always been sharing savings and productivity. It's part of the way you win. But I will tell you, again, we're running mission-critical. We are dealing with regulators in every industry in every country. And so the question from regulators, as you would imagine around AI, is not the same one from the CIO. It's a different world. It will take a fair bit of work. And we're providing the advice. We're providing the run assistance to our customers. It will take a fair bit of work to get regulators comfortable with embedding AI into the systems of record that exist today, which is really what we run.
Yep. Yeah. And we also see AI as a growth opportunity for us. Our Apps, Data and AI practice has had some of the fastest signings growth across our entire business. And the infrastructure needs our customers have, data foundations, data architecture, networking, and security associated with their own AI implementations, all represent significant growth opportunities for us as we go to market and help them implement what they want to implement and have the compute power and the networking and the data foundations and the security and the resiliency to do it the right way.
Okay. I think we only got about 60 seconds left, so I do want to ask about capital allocation. I know it's $550 million of free cash flow this year. We talked about the billion plus in fiscal year 2028, and so you're going to be gathering up some cash. Is it M&A? Is it stock buybacks? Where should we see the capital allocation?
Look, I think you'll see both of the above, right, so we have made one acquisition. It's working out really, really well. We are always looking to either extend or extend our lead or to get to a critical mass in a specific area a little bit faster, so we'll keep looking at acquisitions, but as we've always said, these are small tuck-in acquisitions that aren't going to change the fabric of what we do or the role we play in our customers' environment.
Acquisitions are still on the list. And at the same time, we did initiate a share repurchase program and authorization last year. Our board approved. We've increased the activity under that. We're a little bit more than halfway through the authorization. And we've increased it each of the last three quarters. And look, given where we are, we're going to keep doing that as well. And then we see, as you said well, given the cash flow this year, we see an opportunity to return for another authorization at some point because we think it's a good bet for us to make.
Awesome. Well, great discussion. Thanks for being here, guys.
Thank you.
Thanks for having us.