Kyndryl Holdings Stock

I'm Bryan Keane. I cover the IT services sector here at Citi, and we're excited to kick off the Citi TMT Conference with Kyndryl. We have Martin Schroeter, the CEO and Chairman; and Ellen Johnson, who's the CFO. So I'm going to run through my list of questions here. And if anybody has got a question, just feel free to raise your hand, and we can get a mic to you or I can ask a question for you.

So first, Martin and Ellen, thanks for coming.

Thank you.

just thinking kind of big picture here, Kyndryl provides the critical IT services to enterprises. In your conversations with CEOs and CIOs, what are the biggest priorities on their tech agenda? And are you guys positioned to remain their partner of choice and deepen the relationship by expanding your scope of service?

Okay. So first, we do run the systems that run the world. So we run 5 of the 7 largest airlines. We run 50 of the largest insurance companies. We run most of the big banks around the world, et cetera, et cetera, et cetera. So our point of view -- my point of view is going to reflect that big, large company sort of set of priorities. Our customers are increasingly focused on really 3 things. One is modernizing their infrastructure. Our customers, and just based on the very quick description I gave you, you would guess that our customers are not the born-on-the-cloud crowd. Our customers have evolved their enterprise IT landscape over, many of them, decades. And so the new technologies that are now available to them, each of which they're keen to pilot and experiment with and then put into scale production, each of them needs to figure out how to modernize that infrastructure. Sometimes it comes from the infrastructure, sometimes it comes from the application side and sometimes it comes from a business process, but each of them needs to modernize because the technologies of today, if you use a metaphor, the technologies of today are a bullet train that can travel 200 miles an hour, but the tracks were built for 30 miles an hour.

So #1 priority, our customer base needs to modernize in order to take advantage of the new technologies. And by the way, the new technologies are the ones that the new entrants are trying, the new technologies are the ones that are going to find their way into the fastest movers. So modernization top of their list.

Second, we live in an increasingly security risk world, so both cybersecurity and more importantly, the resilience that's required. By and large, our customers, I think, would say that a security risk is not the existential threat. It's the resiliency characteristics that you need in order to come back online in order to continue to provide services for your customers. So in a -- at a time of modernization, at a time of heavy investment to bring those -- that infrastructure up to speed, they also need to be aware of an increasing threat environment, so cybersecurity and resiliency stay top of mind.

And then third, and this is different, sort of different in different parts of the world. But our customer base is, again, I gave you a brief description. You would speculate that many of our customers are in regulated industries, certainly, which they are. So there is -- even if regulated or unregulated, there's an increasingly complex geopolitical environment that they need to navigate. And so when they're thinking about who do they trust and how do they partner with us, they're also thinking about longer-term decisions. They're thinking about something that's going to last 5 or 6 or 7 years. And so in an environment where some of the leading technology firms, some of the new AI firms are making like really game-changing announcements every 4 or 5 or 6 weeks, where the regulatory environment is changing rapidly as geopolitics push politicians and others to create new regulatory regimes, our customers have top of mind this whole new set of stakeholders now around how do I get comfortable that I have the right partner that I can stick with. They're going to bring me into the future when I know that in a week or a month or a year, a lot can change again.

So the world is getting increasingly complex. And that's why they use their trusted partner for many, many years like Kyndryl. That's why we're also signing a lot of new business. That's why we're also signing a lot of new scope with our customers because we have the expertise, the engineering talent, the innovation that allows them to be comfortable that we can navigate those big priorities, modernization, cybersecurity and resiliency in an ever-changing geopolitical landscape.

Let me just ask you on modernization. I feel like we've been working through that for a long, long time. Is there an inroad of when we finally get fully through? Or is this an ongoing process for years?

I think modernization will always be with us, right? Because today's technology is going to be stale in, sometimes it's an hour, sometimes it's in a decade, right? And plus because of, again, the geopolitical world changing, things come and go in and out of sort of top of mind. So as an example, we are seeing now a bit of a resurgence in private cloud where 5 years ago, 6 years ago, 7 years ago, private cloud had started to not shrink, but public cloud was more important in certain ways. Private cloud is kind of coming back now. Again, in this case, it's because of geopolitical. And the private cloud providers, the people who can build the technology for private clouds have brought a lot of innovation to market. So I don't think the idea of modernization is ever going to go away. I think it's always going to be with us. For us, it means that we have to continuously invest in where the world is going. We have to continually build skills that are relevant for today's times.

Our view is that the half-life of skills today is probably 18 to 20 months. That's why we have such a heavy investment in skills and education and constantly, constantly creating new credentialing for our employees. And similarly, the idea of modernization is not just a technology idea, but we know our customers, employees, we know the workforce because our customers tell us the workforce is not ready. So there's a modernization element that's always going to be with the workforces that we help our customers with as well. So I think the short answer is, modernization is here forever.

The U.S. segment had 5% revenue growth, I think, for 2 consecutive quarters. Can you just talk about what is driving that growth and how sustainable it is going forward?

Yes, yes, sure. So first, I would say, arguably, the U.S. is probably the most competitive marketplace there is for a few reasons. One, everybody is here. Every competitor is here. Market access is quite good. So everybody is here. That's one. Two, every technology is here, either it's invented here or it's brought here very quickly. And in that environment, it's my litmus test for how competitive are we? How -- what are the value propositions that we're bringing? How deep are our industry skills? And how are we packaging all of Kyndryl together in order to deliver a compelling value for our customers? And so for us, it's very positive to see that the U.S. has returned to growth, the U.S. has great signings performance because it tells us that what we're delivering to our customers in that most -- arguably most competitive marketplace where there aren't as many distractions as there might be in other places, tells us we're doing really, really well.

So we've won some very substantial new logos in the U.S. in certain industries. That was driven by our mission-critical expertise. It's driven by our Kyndryl agentic framework, which tells our customers how to use agentic in their systems. It's also driven by some new business process innovation that we're bringing to things like state governments, where we're running a number of DMVs, a number of divisions of motor vehicle because they need to modernize the way they engage with the citizenry in order to provide a more positive experience. So for me, the growth in the U.S., the demand we're seeing in the U.S., the scope expansion that we're getting from our existing customers, plus the new logos that we have driven in the U.S. is a great indicator of how competitive we are, the value props we're able to put on the table and how our teams are making that shift into the agentic world.

And then can you take all that process and that learnings in the U.S., and can you transfer it abroad?

So the short answer is absolutely. So we run a single global delivery platform. So everything we deliver into the U.S., and we do it on a worldwide platform. Everything we deliver in the U.S., we can deliver anywhere else as well. Now when you get outside the U.S., the value perhaps change because the priorities change a little bit. So there's a lot of discussion right now in Europe, as everybody knows, around sovereignty, data sovereignty, AI sovereignty, services sovereignty and the Europeans are debating and considering how they want to deal with the sovereignty issue. That's part of why I say the U.S. is the most competitive because we just don't have the sovereignty issue here, really is -- it really is who has the best value prop for the problem that our customers are facing, again, across what I mentioned around modernization, cybersecurity and resiliency.

In Europe, the priorities are a little bit different. Asia similarly, some places sovereignty is kind of top of mind, in some places, they're really just about how do I get a value prop that's compelling. So the short answer again, for that particular question, we run a single global delivery platform. We can deliver what we deliver in the U.S. anywhere in the world. And we take those value propositions that we've created. We tend to be more industry than geography-based, but we take those value propositions. And we do show up in our customers in order to help them modernize.

So as an example, we just signed a pretty substantial new relationship with the Bank of Luxembourg, obviously, European, obviously, regulated, and we will turn the Bank of Luxembourg into the first European agentic bank. That was the structure. I mentioned that one because some of what we've done here in the U.S. is as we start to move up to the application modernization world, shows up very strongly also in the Bank of Luxembourg. So infrastructure modernization is part of what we've been doing for a long time. Application modernization is something that we've been delivering now in the U.S., and now we're bringing some of that to Europe as well with some -- again, some good wins.

As I mentioned, private cloud is not as big here in the U.S., but in Europe, private cloud is big. And so we have a lot of new logo, a lot of scope expansion around building and delivering private cloud environments into that customer base because, again sovereignty is kind of top of mind for many of them.

So just staying on that, I think you guys were seeing elongated sales cycles in Europe and Asia Pacific. A lot of that was due to geopolitical and some of the sovereignty issues. Are you still seeing those elongated sales cycles? And then is there a way to get around that, maybe starting a renewal process earlier?

So we do typically -- so it's still top of mind, right? So sovereignty is still, like I said, top of mind. We start discussing with our customers usually 18 months before they get to sort of end of the contract term, which is very logical. Whether it signs in the fifth quarter before or the fourth or the third, our customers need to get to the right spot. They obviously don't want to be in the last quarter. They would feel kind of exposed if the whole thing were ending in a few months. But they have time. And as I mentioned earlier, because they're going to make a long-term commitment, 5, 6, 7 years, and they know that the world is going to change dramatically, they're being very thoughtful and -- about who do they want to partner with. And there's a whole new list of stakeholders now in the discussion. I mean not 20, but you do have additional scrutiny from regulators on what are you signing up to do and with whom for a long period of time.

You do have additional challenges to navigate in terms of not only the regulatory environment, but the geopolitical environment, as I mentioned. And we've seen a number of countries head down different paths, particularly in Europe on how to deal with geopolitical uncertainty. Some are trying to support local champions and -- for certain workloads, for certain government kinds of workloads. So you have a whole new set of stakeholders. But we have typically sort of seen elongated sales cycles. I don't expect it to change. I don't see it elongating further, but we did see a slight uptick in how long it took to get things closed, again, because you have new stakeholders, you have long-term commitments and you have a world that's changing so fast, they just need to be sure that this long-term commitment is not going to be something that they're unhappy with in 12 months time.

What's driving the strength you guys are seeing in KD Consult and hyperscalers? And do you expect both to continue to be key drivers of growth for KD going forward?

Yes, yes. So the short answer is yes. So we expect -- I expect that the momentum we've seen in Consult and the momentum we've seen in our hyperscaler related businesses will continue. So let me start with hyperscalers because I think it's a -- it's indicative of what kind of results you can drive when you're the trusted partner, when you have deep, deep understanding of your customers' environments, and you align and partner with the companies that really matter to the customer base in our industry.

So when we were spun out nearly 5 years ago now, the commercial construct between IBM and Kyndryl meant that Kyndryl had to buy from IBM about $4 billion worth of stuff every year. That was a construct that IBM created. Last year, we finished with just under $2 billion. So we've been successfully pulling the IBM content out. We still do the services. So the labor-driven elements that sit underneath that, we still have, in fact, are growing. We run more than half of the world's outsourced mainframes. But the IBM hardware and software content, which we've been focused on, we called it focus accounts for 4 years, the IBM hardware and software content, we found ways to get our customer base to buy that directly from IBM. So we went in that space. We took the $4 billion down to $2 billion, and it will continue to shrink in our revenue base. At the same time, the revenue we had from working with AWS and Google and Azure was zero at spin. It was zero. And last year, we finished just over, just call it, $2 billion worth of revenue. And we did it because we invested in skills. We have 30,000 credentials now across the hyperscalers. So we invested in skills. We built new capabilities around -- specifically around those clouds around resiliency, around security, around data management. And then we partnered with them and we built a partnering culture because this customer base has been asking this business to help them with their most difficult technical challenges like moving workloads on to the cloud and then managing in a more diverse and complex environment.

They've been asking this business for years to do that, but as part of IBM, we didn't have the freedom of action to partner with those businesses. So the hyperscaler business is not just makes us more relevant to our customers' future, but it also now aligns us with where they're growing. And they -- you see the hyperscaler, they're printing growth numbers 30% a quarter, and we're on kind of that same path because, again, the work we do around moving workloads to Azure or GCP or AWS means that the resiliency features that they are exposing the security features that they're exposing as they move into those more complex workloads drives more demand for us.

So I see continued good demand in hyperscaler. If we saw it in the first quarter, and we've got -- I think we've got some pretty good growth for the foreseeable future in hyperscalers.

On the Kyndryl Consult side, so going back again, going back 5 years when we were spun out, this business was -- again, it has the best engineers who know our customer systems well. Our customer relationships, obviously, we have new customers as well, but some of them go decades. So we deeply, deeply understand these complex systems. And these are the systems that have to run. They have to run. So our customer base, this customer base has been asking Kyndryl prior -- obviously, post spin, but prior, please help us, please advise us, but IBM didn't invest in this business. So we couldn't invest in skills. It couldn't invest in capabilities. It didn't bring the industry knowledge that it needed. And we made a decision very early -- and by the way, so the mix of of Consult within our overall revenue streams was single digit. It was like 8% or 9% of our overall revenue streams were Consult.

And we knew because we had the trusted spot in our customers' environments, we had the relationships, all we needed to do -- I mean, I'm going to make it sound easy. It was a lot of work. All we needed to do was invest in skills, bring in some industry talent and then make ourselves relevant to where our customers were going and help them with their most challenging problems. And that's why, just even last fiscal year, we've been running at -- the mix has improved dramatically in terms of how much of our revenue streams are Consult versus managed. But more importantly, even just Consult as a thing, it's had a book-to-bill north of 1 since we started -- since we were spun out. And so we see continued growth in Consult because the role we play in helping customers modernize, in helping them move into an agentic world, that capability sits in Consult.

So obviously, there's a lot of concern around what AI means for services and the services industry year-to-date is down a significant number. How is AI, in your eyes, changing the traditional managed services business?

Yes, it's a great question. And we hear similar, what is AI going to do to us? I will tell you that AI for us is a tailwind for a couple of reasons. First, we have to sort of establish the business model. Our business model is very much an outcome-based business model. We have to deliver outcomes to our customers. We have to deliver uptime. We have to deliver resiliency features, security features, data management features. So we get paid when we deliver those things. Whether we use 100 people or 80 people or 20 people, our customers need a great value proposition. And as we get more efficient, they expect to share in that. But we've been doing that for years. We've been delivering productivity to customers for years. And these new technologies allow us actually to deliver even more productivity while -- because we're outcome-based, while still sharing in that. That was how, for the last 5 years, we took profitability from substantially very negative, $500 million on an adjusted basis, even a $500 million loss roughly to this year's guide of north of $600 million, right?

So we've been able to create great value propositions, grow signings, build our backlog of business. So that means we're delivering great value perhaps all while improving our own profitability because, again, we're an outcome-based business. So AI for us means a couple of things. One, it means we can be more efficient, means we can get to solutions faster. We can get to understanding faster. As we sit here today, we have about 1,600 agents in our infrastructure. An agent would do something as simple as, as soon as there is an issue, collect all the logs, analyze what exactly the state of play was right before it happened and then share with the engineers as soon as they get on the Bridge, here's the data that we have, here's the data that we've collected, and here's what we think you should go look at. That agent does what 20 people would do 5 years ago and take them an hour, right?

So for us, embedding agentic AI into how we work -- we are very much customer zero for our customers. Embedding agentic AI makes us faster. It allows us to deliver better services. It allows us to be more efficient. So there is a cost which flows directly to profit side for us, again, because we're outcome-based.

On the demand side, our Consult business is getting roughly 15 million to 16 million actionable ideas from Kyndryl Bridge, which is the way we do what we. It's our platform to deliver services. And some of them are sort of simple and we can just execute, but some of them require a discussion with a customer. Have you thought about this? Have you thought about changing this, optimizing this, we can save you money. So our consultants show up with not only a mastery of their environments, a mastery of their industry, but they show up with actionable ideas that our customers can implement to save money. So it's a bit of a revenue driver for us as well on the demand side.

So AI for us, in an outcome-based business model, is very much a tailwind to top line and to the bottom line.

So the question always is, on that productivity side, on these enterprises ask, when you're doing these renewals, aren't they asking for bigger price cuts than normal over the last several years because they know you guys are benefiting from AI as well? So who gets -- the big debate is, who gets the productivity gains? Is it the enterprise? Or is it Kyndryl?

Yes. It's both actually. We have created very compelling value propositions that allow us to deliver new scope that either maybe they hadn't had a service provider provide it, but we can do it more efficiently, where they're taking scope away from others. But as long -- you have to have a compelling value proposition, which means you have to be delivering productivity in some form or function to our customers. And then as I mentioned, we do this in a way so that we're benefiting as well. That's already what's in our data. That's how we've been able to improve our profitability so dramatically.

So we're used to sharing in the savings that we're generating and the productivity that we're generating with our customers. That's no different from what we've always been doing. Five years ago, when we started -- when we were spun out, our customers said, look, I know you have -- you're investing heavily in your platform and you have all of this data. We have more data about how these systems run and what works and what doesn't than anybody else. They've been asking us for years like, well, when you learn, when you use all this machine learning, I need to some of that in my contract. And of course, we've been sharing that with them for a long time. So that's not new at all for us.

Okay. What are your views on the development of the AI-native forward developed -- deployed engineered teams and the potential impact on IT services?

Look, important, I think, and can help in -- and help in bringing expertise into what can AI really do. From an AI perspective, you need to kind of balance people who are deep enough technically to understand the limitations of AI, and they also need to be sort of business and process-oriented so they can understand what good really looks like from a process standpoint. And forward deployed engineers can help with that identification, with shortening the pilot times, with heading down the right path as opposed to finding all the wrong ways to do things. But at the end of the day, the impact from forward deployed engineers just means that we get to what we do well faster. We get to running these environments a bit faster. And the faster we can scale, the more -- excuse me, the more run business that generates for Kyndryl because while, again, Consult is a big deal for us, our run business is still the bulk of what we do when running complex systems happens after the forward-deployed engineers have figured out here's what we're going to do, here's where we're going to go, now you're going to get Kyndryl to scale this for you. And into production, again, in the production world, you have to transform these systems while they're running.

Our run, transform, run approach allows these critical systems to keep doing what they do, right? You can't have a banking system down for a nanosecond. You can't have payment systems down. You can't have airline reservation systems down. You can't have telecom networks that can no longer count or know who's calling whom and what the bill looks like. So these are very complex and getting these to work at scale, getting these to work in production environments is where our unique expertise and our unique ways of working really help.

So I want to get to the numbers. I think the Q1 revenue was down 3%, yet you guys reaffirmed your flat to down 2% outlook for fiscal year '27 and then low single-digit growth in fiscal year '28. So you're expecting a stronger second half of fiscal year '27 in both earnings and free cash flow. So can you just talk about this ramp-up coming down from 3% back up in the second half of this year and then you're talking about positive growth in fiscal year '28. So what are the keys to hitting those targets? And how confident that you can see that reversal?

Sure. We are confident. If you look at our backlog and our signings coming into this year, it points to -- it gives us confidence that we will generate the revenue in the back half of the year to get to those numbers. If you look at the growth we've had in Consult, in hyperscalers, we're expecting that to continue. And we said we expect the drag from the IBM to be constant.

On the cost side, you saw we took some significant charges in the first quarter on rebalancing our workforce because our attrition rates have been lower than historical. And we're going to see those savings in the back half of the year. And then our cash flow is coming in as we expected with a use in the first half, especially as the funds for the WFR will go out in the second quarter. But in the back half of the year, we expect to generate significant free cash flow as well. So we are confident that we are able to hit the guidance for this year.

And then as we get into positive revenue growth in fiscal '28, is that -- is there a lot of bookings that you need to sign in order to hit that? Or should that just be the normalized run rate of the business?

We -- if you look at the backlog that we have in our pipeline now, it gives us confidence that it will continue. And the things that are doing very well, you see the growth in the U.S., we hit 5% 2 quarters in a row. Again, I think that's a proof point that what we're doing is working and what's resonating as well as the changes we're making to our cost structure should really bode well for next year because you have the full year of those savings.

And then, Martin, you did touch on IBM and that relationship. How does that relationship impacting the top line? And then how does that -- what does that trajectory look like going forward with IBM?

Look, the relationship with IBM, I think we're still their -- probably their biggest customer. The relationship with IBM continues to evolve. It's quite good. We show up well together with our joint customers. When we look at the progress we've made in pulling out the IBM hardware, software content, I view that as a major win for us. Obviously, our customers, we found a way to make it a win for them. And IBM found a way to make it a win for them. And so this is -- our ability to take the $4 billion down to $2 billion is a success in my mind, but I think it's certainly been a success from a profitability standpoint. And I think it's been a success from IBM's view and our customers' view.

We see -- last year, we saw about a 3-point headwind from all of that activity. We see another 3-point headwind from all of that activity again. But over time, it has to diminish. I don't see -- well, $4 billion went to $2 billion, I don't see $2 billion going to zero in 5 years. The fact is that many of our customers like to consume IBM hardware and their software through a services provider. It depends on how every industry has evolved. It depends a little bit on country. So in Japan, for instance, the Japanese -- our Japanese customers like to consume entirely through a services contract. They're customers, big customers in the U.S. who've chosen to consume it through a services contract. But again, over time, just because the numbers change over time, the $2 billion will have a smaller and smaller impact on as a growth headwind. So our guidance this year of down $2 billion to flat included that 3-point headwind. So that's a good indicator, again, with the signings that have gone in. And it's important, I think, to note, you mentioned bookings, bookings is very common frame. We report signings. So what -- the difference being that when we renew something and we get new scope, we report only what's being added to the backlog. To the extent we're renewing something that's already in the backlog, which would be included in the bookings number, we don't report that as new. We only report the signings number, right? So there's a difference there. We're booking more than we're signing, I'll say it that way.

No, we appreciate that as analysts because we -- a lot of people will hide the renewals and they'll be quoting a big bookings number. We don't know the duration, we don't know how much of that is renewal versus new so...

We think it's more important for people to understand what's actually adding to the backlog as opposed to what's going -- what's coming out and getting replaced immediately. So the relationship is very good. It will -- that impact, that headwind will diminish over time, including just mathematically. And again, with the continued growth vectors of hyperscalers, with the continued growth vector in Consult, you can see why, even now, with you, without that 3-point headwind, we already see a little bit of growth this year. And then, obviously, as you said, well, we get to growth -- a little bit of growth next year as well.

Right. We just hit the 2-minute warning, and I got 2 questions left. So we'll see if we can do it in each. I know you guys just announced a tuck-in acquisition, and you have $700 million in debt. You guys also have a share repurchase program, if I'm not mistaken. So then how do we think about capital allocation and the strategy going forward?

I'll give you my answer, and then we can have the CFO answer as well. Look, I think we've been very consistent in how we allocate capital. First and foremost, because of the role we play in the world, because of the role we play in our customer environments, because of the nature of what we're delivering into regulated environments, we have been very protective of our balance sheet and making sure that our customer base is confident that we are stable and around for the long term. And recently, each of the agencies has reaffirmed us as investment grade is very important to us.

So we finished last quarter with very low leverage. We will continue to focus on our balance sheet. Yes, we have a maturity coming up, which either we'll refinance or we'll just pay down in the cash we have, but we are focused on the balance sheet. Secondly, we're focused on investing in the business. Again, I mentioned earlier a few times, our investments in Kyndryl Bridge, our investments in Kyndryl Consult, our investments in capabilities, that's really important, is driving growth. So those investments are working, and we will continue to make those.

Another form of investment is the tuck-in acquisition that we announced, not yet approved, so we're not through it, but we'll continue to look for those tuck-in acquisitions because it allows us to either maintain or extend our lead in certain places. In this case, it's around health care. We've been very successful in health care in the U.S,. not surprising given, again, the trust that our customer base has in us, the nature of what we do. So we'll continue to look at tuck-in acquisitions. And yes, we do have a share repurchase authorization. We've bought back, I think, since we put that in place, about 8% of our shares. But it's always been at the end of protect the balance sheet, keep investing both internally and inorganically and then with the extent there is excess capital, of course, we're a shareholder-friendly place, so we'll return the capital.

Now Ellen gets a chance to change any of that.

I couldn't agree more. Investment ratings, financial flexibility, strong balance sheet and investing in the business.

All right. We're going to go over time, 60 seconds here. Just the investor base has been rattled in IT services. Obviously, the whole industry is under pressure. What gives you confidence or what confidence should investors take away about Kyndryl and kind of the outlook?

Yes. Look, the nature of what Kyndryl does, our investments, we are a very sticky platform. We also have pretty good visibility to what's coming because we have a pretty big backlog. Every day, we have to deliver. Every day, our teams have to deliver the most important workloads. But this is a very stable long-term business that is not going away. This is, in fact, a business that is going to be -- going to get a tailwind from AI. And in the world of AI, what really matters is your infrastructure and your data and there's nobody better on the planet than that world and helping our customers move to that world because we are the largest in infrastructure and we have the data that helps them understand their systems.

Awesome. Martin and Ellen, thanks for coming.

Thank you.

Thank you, Bryan.

Good morning, everyone, and welcome to Kyndryl's earnings call for the first fiscal quarter June 30, 2026. The -- before we begin, I'd like to remind you that our remarks today include 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, 2026. And 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 the 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'll hold a Q&A session. I'd now like to turn the call over to Kendall's Chairman and Chief Executive Officer, Martin Shorter. Martin?

Thank you, Lori, and thanks to each of you for joining us. In the first quarter, we executed on our key priorities and made progress in our targeted growth areas, supported by continued strength in the United States. Signings and revenue grew in Kyndryl Consult, and we continue to see positive momentum with hyperscalers. We continue to invest in the areas where we see opportunity, KyndrylConsult, our alliance partnerships and our Agentic AI capabilities through Kyndryl Bridge and our to support and modernize our customers' most complex mission-critical IT estates.

And at the same time, we took actions to further streamline our operations. While there is more work ahead, our strategic priorities remain clear. We're focused on delivering our fiscal 2027 outlook and our 2028 objectives. With more revenue expected to come from higher margin post-spin signings this year and next, the quality of that revenue base gives us confidence in our ability to increase profitability and deliver more than $1.2 billion in adjusted pretax income and $1 billion in free cash flow in fiscal 2028 and these targets can be achieved on low single-digit constant currency revenue growth.

Harsh will provide more detail in a few minutes on our recent financial results and our outlook. Last quarter, we outlined the priorities that support our fiscal 2028 targets. As we highlighted, we entered the fiscal year with a 5-point improvement in beginning backlog versus fiscal 2026. And 4 months into the year, our pipeline consists of more scope expansions and new logos that support future signings growth and better mix of higher-value services.

AI, modernization and cyber preparedness remain important priorities for enterprises around the world as they balance innovation and transformation with operational stability in an uncertain macro environment. This is driving demand for Kyndryl Consult with signings exceeding revenue over the last 12 months.

These same dynamics are creating opportunities across our alliance ecosystem with customers' modernization needs accelerating demand in both public and private cloud. We continue to sign deals with average projected pretax margins in the high single digits reflecting our focus on higher value services and pricing discipline central to our transformation.

Through our advanced delivery initiative, we are embedding more automation and AI into our operations improving productivity and upskilling our teams for higher value work. And with Kyndryl Bridge, our AI-powered services delivery platform we're providing our customers with the technology foundation to deploy, govern and orchestrate AI agents and a genetic workflows across complex IT estates.

In parallel, we're taking workforce rebalancing actions to address lower-than-normal voluntary attrition and our SG&A costs with savings expected to begin in the back half of this year. We'll continue to share our progress against these signposts as we drive our business towards our multiyear objectives.

I want to focus my discussion on total signings performance. While our customers remain thoughtful and deliberate in their IT decision making, we're seeing demand for AI-led modernization, especially where Kyndryl consult and our hyperscaler alliances help customers address their mission-critical needs.

We're encouraged that over the last 6 months, our total findings have exceeded our revenue. Deal size and composition are additional proof points that demonstrate how we're executing our strategy. Over the last 12 months, we signed 40 deals in excess of $50 million, of which 10 were signed in the first quarter.

And among these 40 large deals, approximately 30% of their value consists of scope expansion or our new logos which compares to 15% in fiscal 2025. Strong signings in central consult and momentum in hyperscalers are translating to revenue growth in these targeted areas.

Digital consultant revenue grew 14% and hyperscaler related revenue streams grew 48% in the last 12 months on a year-over-year basis. Performance in Kyndryl hyperscalers has partially offset the revenue headwinds from focus accounts over the last few years and more recently, lengthening sales cycles and customers' decisions to procure hardware and software directly from IBM.

Kyndryl Consult results demonstrate broad demand from enterprises looking to design and scale agentic AI across their business workflows, modernize complex hybrid IT environments and strength in cybersecurity and resilience.

To meet that demand, we've been expanding our consulting skills and capabilities, including investments in forward deploy engineers, human systems architects and AI innovation labs, where we co-create agenetic solutions at scale with our control identic framework.

To further address customers' modernization and AI needs, we've been expanding our relationships with our alliance partners. Recently, we expanded our alliance with AWS to help enterprises adopt and scale agentic AI as they modernize and run mission-critical workloads in the cloud.

We also expanded our work with Microsoft Azure to help customers design, build and operate cloud architectures that align with evolving data residency and operational requirements.

And we continue to strengthen collaborations with partners such as Broadcom and Dell, HP Enterprise and Red Hat to support customers' modernization efforts in complex private and hybrid cloud environments. AI is accelerating the need for modernization.

Every day, I speak with business and technology leaders in different industries and nearly every customer conversation comes back to the same long-term themes. First, enterprises are eager to realize the benefits of AI, but many are trying to deploy next-generation technologies on infrastructure, applications and processes that were not designed for them.

As you've heard me say before, it's like trying to run a new 200-mile per hour capable bullet train on tracks built for 30 oil per hour world. Equally challenging as our Kyndryl readiness report found -- there's also a lack of skills as only 23% of business leaders that their workforce is ready for AI.

The need for Kyndryl expertise and modernization capabilities to continue running their business while transforming it that run and transform and run approach is where Kyndryl is differentiated. Second, AI cybersecurity and data residency regulations and mandates are becoming fundamental considerations in how customers plan and invest in IT.

Enterprises increasingly want greater control over their data, their AI models and their digital infrastructure. And Kyndryl helps our customers navigate and build technology foundations that can adapt to the evolving regulatory requirements, geopolitical realities and business needs over the long term.

Third, and related to the previous theme, cybersecurity and resilience remain top priorities. As agenetic AI becomes more powerful as we've seen with recent frontier models and further embedded into how enterprises operate, our customers need strong guardrails and policies to bolster the governance and security of their critical systems.

This is especially important in the highly regulated a mission-critical environments where Kyndryl has deep expertise in governing securing data across complex hybrid environments and adhering to unique compliance requirements.

Fourth, customers increasingly want open and interconnected platforms for flexibility and choice across public cloud, private cloud and on-premises environments. As technology ecosystems become even more diverse and interconnected organizations need agile platforms that integrate seamlessly across environments and applications, enabling interoperability, reducing vendor lock-in and accelerating innovation.

And finally, while most AI investments were initially justified through productivity gains, customers are increasingly looking beyond efficiency towards growth towards speed and towards new business outcomes. These are structural and durable trends that leverage our heritage and expertise in mission-critical IT infrastructure, our ecosystem, Kyndryl Bridge and our differentiated portfolio of agentic AI capabilities.

We're helping customers simplify complexity and build technology environments that can adapt as business, regulatory and technology requirements evolve while improving resilience security and operational performance.

Now let's talk about 3 tangible examples of how we're helping customers deliver business outcomes across the modernization continuum using an agentic AI approach. First, with a large global payments company that we've been working with for decades, the challenge wasn't deciding to modernize. It was to better understand the complexities and dependencies across decades of mission-critical mainframe applications to modernize effectively, maximize their ROI and drive the agility and scale that the business required.

We expanded our scope to roll out Kyndryl agentic modernization platform with prepackaged AI modernization workflows, which can be scaled to support multiple customer teams globally carrying out modernization work. We deployed our engineers to develop additional AI workflows to meet the customers' unique modernization and tech stack needs.

Next, we expanded our scope with a leading European financial institution to transform its operations and technology while improving efficiency and meeting increasingly complex regulatory requirements. This customer wants to modernize applications, infrastructure and operations at the same time, not a separate initiatives. We're bringing together Kyndryl Bridge and our managed services expertise to implement an AI-native agenetic banking platform.

This end-to-end modernization effort will automate its operations strengthen security and resilience, improve overall decision-making and enhance the customer experience. And then we were recently awarded a new logo with a global technology company to help streamline software engineering and IT operations using the Kyndryl agentic AI framework. This will help them grow while improving security, resilience and speed by combining Kindrel's expertise in Agentic software development, platform engineering and IT operations, we will deliver a scalable, secure and efficient technology foundation that supports their expanding Edge AI global business while reducing deployment complexity and operational risk.

In all 3 examples, our AI-led modernization approach is accelerating transformation time line and improving efficiency, strengthening the resilience of their mission-critical technology environments. We were awarded new scope with each of these customers and now expect to expand into new areas, demonstrating the breadth of our capabilities and importantly, creating opportunities to deepen and expand our long-term strategic relationships with our customers.

We're a trusted adviser and a long-term partner for our customers with differentiated solutions that center on achieving tangible business results with the expectation that higher value signings continue to improve, our focus is clear. drive profitable growth and stronger free cash flow. And with that, I'd like to pass the call over to Harsh to discuss our quarterly results and our fiscal year outlook. Harsh?

Thanks, Martin, and hello, everyone. Today, I will focus my comments on our first quarter results and outlook for fiscal year 2027.

In Q1, we generated $3.6 billion of revenue, down 3% year-over-year on both a reported and constant currency basis. For the second consecutive quarter, we delivered 5% revenue growth in the U.S. as our AI-led modernization approach continues to resonate with our customers.

We exited the period with 12-month signings of $14.2 billion of which $3.9 billion was signed in Q1. As Martin noted, it was encouraging to see Ciming scale momentum as we exited the March quarter and kicked off our new fiscal year.

Our adjusted EBITDA in the quarter was $512 million, and our adjusted pretax loss was $37 million. The year-over-year declines in earnings and margin was primarily driven by $152 million of workforce rebalancing charges incurred in the quarter. These charges had more than a 4-point impact on adjusted pretax income margin in the quarter.

Our 3 initiatives have become central to how we run the business, as the savings from our workforce actions begin to materialize, we expect to see greater operating leverage flow through to the bottom line.

Through our alliances, we generated more than $530 million of hyperscaler related revenue streams in the quarter with $2 billion over the last 12 months. we continue to expect hyperscalers to be a positive contributor to revenue and earnings growth going forward. Through advanced delivery, we are embedding more AI-based technology into our services through Kyndryl Bridge, driving continuous productivity improvements, reducing cost, and further increasing our already strong service levels.

And while the work to address focus accounts through our accounts initiative is largely behind us, the discipline we developed continues to inform how we pursue higher value growth. Through scope expansions, new logos, are expanding consulting and agenting AI capabilities in our broad alliance ecosystem.

I want to provide an update on what we have been sharing on our evolving partnership with IBM. -- largely driven by how customers are consuming IBM innovation. This chart illustrates a 3-point adverse impact on revenue performance in constant currency driven by our focus accounts initiative in earlier years and more recently by this evolving relationship. As we have described before, at the time of the spin-off, approximately 40% of revenue from our inherited commercial agreements were in a low to no margin position.

To give you a sense of the magnitude of this, when we were spun off the annualized run rate of our spend with IBM was nearly $4 billion. Over the past 4 years, we have addressed most of the focus accounts, leading to improved profitability gains. In fact, our spend with IBM over the last 12 months was less than $2 billion, less than half of the spend since we spun off.

During fiscal 2026, especially in second half, customers increasingly procured certain IBM hardware and software directly from IBM, while continuing to rely on Kindra for high-value services. That pattern has continued into fiscal 2027 and is creating a similar headwind to our top line performance over the last 12-month period.

Importantly, these changes do not affect the scope or margin profile of our services or our ability to grow services content over time. However, they do reduce the size of our signings. And consequently, our revenue growth over time. And as we have said, this has limited impact on our earnings. Our outlook for fiscal 2027 continues to be based on the assumption that we'll see similar headwinds throughout the remainder of the year.

Turning to cash flow. As a reminder, our first quarter is a seasonal use of cash driven by working capital timing. This year's free cash flow was $401 million outflow. Compared to the same period a year ago, we had higher payments related to multiyear renewals and annual prepaid offer subscriptions and lower billings and collections. This was partially offset by lower broad-based annual incentive compensation payments. Importantly, working capital dynamics were contemplated in our full year fiscal 2027 outlook.

As we move through the year, we expect meaningfully higher earnings particularly in second half and stronger working capital to drive free cash flow. While quarter-to-quarter dynamics can vary, we continue to target a strong conversion of earnings to free cash flow on a full year basis.

We have provided a bridge from our adjusted pretax income to our free cash flow as well as a bridge from our adjusted EBITDA to our free cash flow in the event base and more information on the free cash flow metric calculation.

Our financial position remains strong. Our cash balance at June 30 was $2.1 billion. Our debt maturities are well laddered from late 2026 to 2041. And -- we plan to refinance or use cash on hand to fund our near-term debt maturity of $700 million. Our net leverage ratio exiting the quarter was 0.8x and and our investment-grade rating was recently reaffirmed by Fitch, Moody's and S&P.

Under the share repurchase authorization, we bought 5 million of shares of common stock at a cost of $64 million in the first quarter. Since the inception of the program, we have repurchased 8% of our outstanding shares. On capital allocation, -- our top priorities are to maintain an investment-grade balance sheet and financial flexibility.

We have remained focused on winning business with healthy margins, which takes significant discipline as enterprises prolonged decision-making. Over the last 4 years, we have signed contracts with projected gross margin in the mid-20s and projected pretax margins in the high single digits.

We have again included a gross profit book-to-bill chart that illustrates how we have been creating and capturing value in our business with an average projected gross margin of 25% on signings over the last 12 months, we have added more gross profit dollars to our backlog than we have reported as gross profit over the same period.

Having a gross profit book-to-bill ratio at or above 1 demonstrates the quality of force in signings and the expected future profit growth from committed contracts. And as Martin highlighted, new scope and new logos continue to increase as a percent of our large deal signings.

Turning to our outlook for fiscal 2027. We continue to expect adjusted pretax income to be in the range of $600 million to $700 million. This pretax income outlook includes approximately $200 million of workforce rebalancing charges and a similar amount of savings associated with these actions to offset the charges. In fiscal 2028, these actions are expected to yield annualized savings in the range of $400 million to $500 million.

Looking at the second quarter, we expect adjusted pretax income to be relatively in line with the $123 million we reported last year, which includes more workforce rebalancing charges compared to the prior year. The progress we are making on our workforce actions are on track to what we have previously outlined. For the full year, we continue to expect our free cash flow in the range of $400 million to $500 million. We continue to expect revenue to be flat to down 2% in constant currency with year-over-year trends projected to improve each quarter. Within that, we expect Kindra consult and our alliances related revenue streams will continue to grow. -- while at the same time, as I discussed earlier, we are assuming that our evolving relationship with IBM will be a similar headwind to what we have been experiencing. Taking into consideration the pace of signings over the last 15 months and what we expect to sign in the second quarter, we expect our second half 2027 revenue to be stronger than the first half. Let me now pass the call back to Martin. Martin?

Thank you, Harsh. To wrap up, we are executing against a clear strategy in a market where customers need trusted partners to modernize mission-critical environments, adopt AI and navigate increasing complexity. We're seeing momentum in the areas that matter most central consult, hyperscalers, Alliant load growth and AI-led modernization. Our differentiated capabilities, including Kendall Bridge and Agentic-AI, are helping customers deliver tangible business outcomes while creating opportunities to expand our relationships. At the same time, we continue to improve the quality of our signings, embed automation into our operations and drive greater efficiency across the business. Taken together, these actions give us confidence in our ability to deliver on our fiscal 2027 and our fiscal 2020 targets. Operator, let's now move on to questions. .

[Operator Instructions] Thank you, Martin. [Operator Instructions] At this time, we'll conduct the question-and-answer session. [Operator Instructions] Our first question comes from the line of Jonathan Lee with Guggenheim Securities. Jonathan, your line is open.

Can you help us think through what's contemplated in the fiscal 2017 outlook across the key moving pieces, specifically the assumed consult growth pace, the level of science conversion assumed and any embedded assumptions around sales cycle duration? -- where do you see the biggest sources of upside and downside relative to be flat to down to constant currency revenue all range?

Sure. Thank you, and thanks for the time this morning. A couple of comments. I'll ask Harsh obviously, if he wants to add anything to my answer. So first, let's start where you did, which is on consult at the beginning of the year when we provided our guidance -- revenue guidance, we said consult would be kind of high single, low double digit.

And I think we've just printed at 10%, so we feel very good about the start we had to stay within that range and have Consulteliver what we've embedded in our initial guidance. Additionally, we feel really good about the signings in the first quarter. As everybody knows, we have to keep the signings machine going and the 50% growth in consultant in the first quarter says our assumption for the year, it looks quite good.

I would add to that, by the way, that in addition to the first quarter where we had good consult growth, I'd also say that we had a good July in signing. So I think we feel like we're on track to to deliver what we said for the year. Now let's recognize that while the 50% growth, for instance, in signings in consultant in the first quarter is certainly a help. We also have a tough compare in the second quarter with consults. Again, it doesn't affect the year. We're still confident in the year.

On sales cycles, look, given what we do and the role we play in our customers' environments, our customers are making long-term decisions. And so that hasn't changed. At the same time, we run mission-critical. We run their hearts and lungs. So there's a big component of trust in how our customers make decisions and that hasn't changed. At the same time, the world is getting more complex.

And since we had our last earnings call, for instance, mise was announced. And that's certainly captured the attention of the enterprise tech world. So our customers are making long-term decisions on mission-critical elements and the complexity of technology and what they're thinking through is still ever present. Is there -- in certain instances, is there a new dynamic, like sovereignty, for instance, in Europe, Sure, that's a discussion that leads into the overall sales cycle. But I wouldn't say that we're seeing dramatically different sales cycles. Again, relative to the role we play in the world on long-term commitments role of trust in running mission-critical and the complexity of technology. Harsh, anything to add?

Yes. A couple of things I would add. We continue to see momentum in a hyperscaler kind of that we have continued to see. And I think the higher value elements that we have in our signings. Once again, the new scope and new logo, continued at a pace of 30%, as Martin mentioned in his prepared remarks compared to 2025 fiscal which shows like 15%. And we do see a good mix of pipeline for new scope and new logo as we look forward as well. .

Our next question will be from Kevin Krishnaratne with Scotiabank.

Good strength, continued strength in the U.S., but I want to switch to the principal markets and maybe Europe was down 8% constant currency, 7% last quarter. I mean I think that's expected EBIT to last quarter about some of the headwinds on AI sovereignty and buying decisions. But just curious, is that ahead or below your expectations? And how do you see trends out of Europe evolving into Q2, Q3?

Yes. So a couple of things. It is all consistent with what we've assumed as we started the year and still supports our guidance for the full year. And the trends, as I just talked about, that we see in terms of deal closings and cycle times are not a lot different again, does Europe sometimes have a sovereignty discussion.

It does sometimes, but by and large, it's the complexity of the environment that our customers are dealing with. It's the choices they have. And they know that while they need to commit over the long term to kind to run their infrastructure mission-critical -- they also know that in 3 months, somebody can make an announcement that changes the world of AI again.

And so it's all of these things that I think come to a head a little bit more so in Europe than here in the U.S. Obviously, the world changes here in the U.S. as well, but the sovereignty issue is not at all an issue here in the U.S. So -- so no, the short answer is all consistent with what we assumed for our guidance. We're not seeing any trends, if you will, that would suggest the deal cycles are getting longer. It's just a world in which we live, and it's the role we play in our customers. Arch, anything you'd add?

Yes. I think it's consistent with what we had talked about. If you remember in the last couple of quarters, we had talked about U.K. as well as the European segment of strategic markets like that has been kind of what we have continued to see. So because as we were anticipating and not impacting our view for what we see the full year. Thanks. Operator, next question, please.

Our next question will be from Tianjin Huang with JPMorgan.

Terrific. Martin -- just thinking about the -- just thinking about the workforce in general. So you've got robust signings, you've got some savings on the way from the workforce rebalancing.

I'm curious if you can just comment on resourcing or head count and just your line of sight there and reskilling and lining up the workforce to deliver on the AI led monetization and the value added services work that you're focusing on, do you feel good about the pathway there. I would expect you'll probably see some increase in revenue per head or PTI per head. But just again, just look a little more detail there.

Yes. Sure. Thanks, Tien-tsin. A couple of comments. And again, I'll invite Harsh if he wants to add anything. Our use of AI, which we've talked about for a number of years already, starting with the machine learning we use from the bridge data that we have in order to automate things now moving into an a genic world.

And for us, we have 1,800 or so agents in the infrastructure, helping us get to solutions faster, helping us reduce impact events, helping us reduce error is helping us automate things. So it's very real for us. And it is something that allows us to free up people and reposition them in higher-value roles, still with a customer base that trust them.

And so we've been very successful in doing that. I think we've deployed in the tens of thousands of redeployed and tens of thousands of people since we started this process. And I expect that to continue. There is a chance that Agente can accelerate some of that, but we're just assuming that we can continue to free people up and redeploy them.

And remember, our business model is 1 that's paid on outcomes. So we have to deliver uptime. We have to deliver resiliency features. We have to deliver security features. I think what we've proven to ourselves, to our customers and to our investors is that as we as we -- as long as we continue to deliver on those outcomes and again, a genetic and automation actually improves quality, improves the way we deliver. -- we get to keep a piece of the savings we can generate as we manage those contracts.

And I think our customers see the benefit and efficiency. They see the benefit and quality. And I think that is part of how we've generated about $1 billion in cumulative savings since we were spun out using, again, machine data, Kendra bridge and our ability to automate in our advanced delivery initiative, all while our -- all while our Net Promoter Scores on the run part of our business, which is what our customers are really looking at continues to improve.

We're in world-class territory on NPS. We're in world-class territory on quality of service. So look, the use of AI, the use now of the Gentex is very real for us. It's how our advanced delivery Part of our strategy has generated a lot of value. And our model is 1 again that allows us to continue down this path and continue to redeploy Harsh, anything you'd add?

Yes. I would say kind of some of the deals that you heard Martin talk about, I think it's important to talk about the value that we bring through the forward deployed engineers that we bring as well as the identification that we're bringing.

That's kind of helping us win against some of our competition because some of the insights that we have on the existing environment is unique from our point of view, that's kind of giving us an edge in some of the new scope new logo that we've won.

But also we know how to kind of manage our bench like in terms of reskilling and redeployment kind of we have a great success rate in redeployment. We started to have great success in reskilling our resources. And then we now, as we talked about exiting kind of last year into this year, importance of workforce management that we're doing, which allows us to manage the cost of something that's kind of stranded, right?

So that's kind of allowing us to kind of think about this as a more holistic way that we are approaching it. And you cannot miss a gendification as an important element of that.

[Operator Instructions] It looks like our next question will be with Bradley Clark from BMO Capital Markets.

I want to hone in on some of the new logos that we highlighted on the call and typically 1 in the presentation. But more broadly, like in this competitive environment, how it can roll like approaching new logos?

And what -- what do you think your advantages why as you win new customers, particularly in the consultant business? And then if you could also comment on any pricing dynamics that candle experience in approaching new logos for some of these services versus what you're seeing more in renewals with your existing customers?

Yes, sure. Thank you. Thanks for joining, and thanks for the question. Look, we've had -- and we've talked about this already at our Investor Day a couple of years ago. We've added hundreds and hundreds of new customers. And that shouldn't -- I mean, it certainly doesn't surprise us. We win for a number of reasons.

And the most recent wins are tied to our our leadership with the Kindragentic framework, which allows -- provides the architecture and the delivery framework so that our customers, we can really industrialize both not both, but the design and the integration and then the operations of their infrastructure.

So the Kindred Agentic framework is highly unique, highly differentiated in the marketplace. -- supported by Bridge. Bridge is the control plane, if you will, that connects the tools and the workflows and the telemetry and the automation across the enterprise. It provides us with real-time data and provides our customers with 16 million, 17 million, 18 million insights a month on how their infrastructure is running, and it also provides us with over 200 million automations a month.

And then all of that supported by our expertise and our engineering talent in the form of Kendra consult -- and some of that we've had, but we've also been very active and very aggressive in investing in Kendra consult to get industry expertise and industry points of view to get the talent that we need in order to help the kind identic framework and bridge land in the right spot, and that expertise has proven to be hugely valuable and is why you see the great consult signings growth that we've delivered over the last number of years and the continued revenue growth.

These are very complex, as you would imagine, infrastructures. And it's not that when AI comes along or when a genetic AI comes along that our customers are adding a model or a new application. I mean these are models and agents and workflows and applications that need data and they need to sit on an infrastructure in somebody, and this is why our customers call us, somebody needs to integrate and orchestrate and govern and operate that in a world that is highly complex and at scale.

And so what -- the expertise we've built, the investments we've made not only in our people, but in Bridge and our incinegentic framework is highly differentiated in the marketplace, and that's why we see a good long-term growth arc for Kendra.

Thanks, are Operator, I believe you have 1 more question in the queue, and then Martin is going to close this out with some remarks. .

Thank you, Laurie. Our next question is with Fencer Anson from Susquehanna.

There's been a lot of talk over the years about mainframe modernization and Cobalt modernization. Can you just talk to the opportunity you see there? How it might affect your business? And any impact to the relationship with IBM?

Yes, sure. So look, mainframe modernization is a thing. It's real. It's something we're experts in have more scale than anybody else in mainframe and mainframe services. And that scale allows us to -- it allows us to invest and create career paths for that next generation of mainframe talent.

So we have 800,000 deep mainframe experts, but those 8,000 or 9,000 look more like my kids instead of me because we've invested and partnered with universities to build curriculum, et cetera, et cetera, et cetera. So our scale gives us and ability to invest there in what is a very common and important set of dialogues with our customers. modernization, mainframe being 1 of those, but modernization in general is the sort of the top of the list on what customers are thinking about. You heard some of this in her prepared remarks.

Modernization in order to use the new technologies that are coming out like AI in order to stay ahead of the bad guys and become more secure and resilient and in order to keep up with an ever-changing regulatory environment. So modernization of which, again, mainframe is 1 where we have more scale than anybody.

We, I think, run more than half the world's outsourced mainframes. So we're really good at this, and it is driving a lot of interest from customers because again, I've used this metaphor before, AI and Gen AI and a genetic AI represents a nice shiny new bullet train that can go 200 miles an hour, but most customers are still running on tracks that were built for 30 miles an hour.

So -- so that is sort of a way to capture this idea of modernization. As for the relationship with the look, our relationship with IBM, it's quite good. It continues to evolve. We spent the first few years working very cooperatively and closely with IBM and our customers to execute our focus account initiative. -- we're largely through that, not entirely. Some of these have long tails, but we've worked very well with IBM and our customer base in order to execute that.

And even today, we're lined up with IBM to help customers get to the right answer. By the way, that right answer is quite often a mainframe. And quite often, by the way, we have to modernize in a way that allows customers to continue to deliver the services.

So Modernization is real, mainframe is 1 of those flavors. We have the scale and the investments and the capabilities that nobody else has to do this -- and it's been a -- the partnership with IBM has been good, and I expect it will continue to be quite good because our customers -- they need IBM's technology just like they need access to public clouds and all the other complexity we manage.

Yes. I think the other thing that I would add is kind of eventually, customers will decide depending on their business needs, kind of what business modernization they need and where the IT environment for them will go it's important that we are bringing all the capabilities and high-value services to follow their wallet share, which is important to us, which means largely the whole ecosystem, we have to be relevant all the ecosystem players.

In some cases, mainframe, including private cloud would remain relevant for them. So they have to exist, especially the customers that we deal with they exist in all such environment, and they will evolve around cloud, public cloud, they'll evolve around SaaS-based application. They will evolve around private cloud and mainframe. So there is a relevance that we have to bring across. And modernization for us means we're playing across all the spectrum.

Thanks, Harsh. Operator, I think that was the last in the queue. So before we close, a couple of notes. One, I do want to thank Harsh for stepping into the CFO role and leading our finance organization and being a critical leader here in Kyndryl for the past 6 months.

And of course, before that, he was our first COO -- and after a distinguished career, Harsh has made the decision to retire. Now he will continue as an executive adviser here to me and to the leadership team. And from the very beginning, from the start of Kyndryl, Harsh has been a trusted partner. He's been an exceptional leader who always puts the success of our customers, the success of the kinds around the world and quite frankly, the success of Tendril first.

So Harsh, thank you for your leadership. I have nothing but gratitude and thanks for you. Now as we announced in July, we're pleased to welcome Ellen Johnson as our incoming CFO. Allen, highly experienced in driving financial discipline, operational excellence and she is a great addition to strengthen our leadership team.

Ellen officially starts in the role tomorrow, August 6. And I know she's looking forward to meeting with our investors, our analysts in the coming weeks and months. So welcome, Alan. Thank you.

And again, every day, we deliver the world-class services our customers and the world relies on -- our focus this year is to drive progress across the targeted growth areas of our business, including Kyndryl Consult, the work we do around the hyperscalers our modernization efforts has come up a number of times.

And obviously, the role of AI in how our customers deploy it and also how we use it to streamline the way we operate. We've got a great team around the world that's focused on delivering every day. We are and have been confident in our ability to deliver the year and to deliver our multiyear objective. So thanks, everyone, for joining us.

Thank you for participating in today's call. You may now disconnect.

All right. We're going to get started. Thanks, everyone, for joining. My name is Tien-Tsin Huang. I'm the IT services analyst here at JPMorgan. And really happy and grateful to have Martin Schroeter here, CEO at Kyndryl, to join us and have a fireside chat. I've taken a lot of questions from the investment community, Martin, and we'll go through them over the next 30 minutes or so. But thank you for being here. It means a lot to me.

Thank you, Tien-Tsin. Delighted to be here. I appreciate it.

I know how busy you are and a lot of demands on your time. So I'll be efficient, but thinking about how to start the conversation, Martin, I know you're always on the road, you're meeting with clients, you're talking to CEOs, CIOs, boards, what have you. You guys touch a lot of IT estate across large enterprises. So what are you hearing from those counterparts that I mentioned? What's been changing? How are you changing the strategy to address what you're hearing on the ground?

Yes, it's a great question. Good afternoon, everybody, and thank you for joining us here in person, Brendan, nice to see you. I guess there are some, what I'll call kind of long arc themes that are evident in nearly every customer conversation. A little bit different. And as you said well, we run a lot of workload -- regulated workloads, right? We're mission-critical. So the way we feel things is a little bit different than some others.

But let me go through sort of what I see as the kind of consistent themes with our customer base. First and foremost, both cybersecurity and resiliency remain top of mind. And even today with AI starting to have a bigger and bigger impact on how the world works, that is not going to change the focus on cybersecurity and resiliency other than to say it's going to go up another notch again, right? So the idea of securing yourself, but more importantly, the idea that you can be resilient, which regulators have now taken up in different parts of the world, European banking, for instance. So cybersecurity resiliency, a long arc theme where we play already and is going to continue.

The second I would put into the sort of the context of all of the new innovation that's coming out. We'll just throw AI as the sort of one of those things. But AI and all of the technologies around it, they really lead to a discussion around modernization. AI -- one way to think about AI metaphorically is that there is this now the shiny new -- the shiny new bullet train that can go 200 miles an hour, but most companies still have tracks that were built for the 30-mile an hour era. And to modernize, to get ready to use that AI takes a lot of work. And so our customer base is keen, keen, keen to figure out how to modernize, recognizing that these are not systems that you can take offline and modernize them and then bring them back up, right? This is very much a run, transform, run world, which is what we do very, very well. So security resiliency is still top of mind, modernization is still top of mind.

And then we get into what is ever increasingly difficult, there's the sort of the geopolitics. And the reason it's important, particularly in what we do is, for instance, in many parts of the world, the idea of sovereignty is top of mind. You cannot have a discussion with a company in Europe, most parts of Asia, South America, Latin America without talking about sovereignty. And sometimes it's data sovereignty, sometimes it's AI sovereignty. So the idea of sovereignty is making the world more complex again. And at the end of the day, sovereignty for our customer base is really about control and how do I make sure I understand my -- the status of my systems today? And how do I make sure that I'm building something that will survive that -- whatever the geopolitics are of the day.

So for us, again, it translates to a more complex IT estate, a more hybridized estate. And we're seeing, in fact, an increased interest in private clouds because of -- just because of the sovereignty issue alone. So we have all of these sort of, I'll call them, again, long arc trends. They're not going to change. Cybersecurity and resiliency is going to be important for a long, long time, forever, I mean, we could probably say forever. We know that there are always going to be systems that need to be modernized. Yes, today, it's driven by AI. It's driven by new data technologies. And we don't know the geopolitics. But again, given the role we play in the world, when our -- our customers are looking to modernize, they also want to be able to modernize for something that's going to give them comfort for the next 4, 5, 6 years and adaptability that they need.

So I would put those 3 as the big sort of themes. In any given region, it could be a little bit different. It may be weighted a little bit differently, but those are the big 3 themes that you cannot meet with a customer without being ready to talk about.

Good. No, that's a good summary. I think on the call, I think I just chatted down as you were calling it out, Martin, just you described some of these extended decision cycles due to some of these same things, sovereignty. I think you also talked about AI choices and some of the regulatory complexity, which you could argue maybe as part of the whole geopolitical piece. So we talked about this a little bit before we started, right, Martin. How much of this is just the new normal? And I know we've been waiting for inflections and pivots and changes in discretionary spend. But how do you see the change that could trigger up or down spend?

Yes. I think that the things that I identified on both on the call, and again, I'll put sovereignty back on the table, this is now the new reality because every company operates within a legal framework driven by the country that they're in. That country is responsible to a citizenry, et cetera. You know this as well as anybody. So again, given the role we play in what we do, I think this is the new norm of decision-making. How do I make sure we sign contracts 5, 6, 7 years. So how do I make sure that I have the flexibility I need with a partner who I really need who can lead me into that new world. So I would say, to use your shorthand, I would say that is the new normal. How do I really think about where I want to be for the next 4, 5 or 6 years.

There are always in the minds of our customer base, all customers, all enterprise IT runs on a business case and a lot of those business cases are driven either by productivity or growth. And so that tends to be more fed by macro. So is that the new normal? Well, this macro will change again. But right now, people, I think, are feeling like I really need to be in AI, I really need to figure out for my company, which means I need to make investments in modernization, but that can also change again in the future, right? As the promise of AI starts to be realized in more and more places, I think we'll see that shift.

As we sit here today, 99% -- I'd like to say all, but I won't use this superlative. Nearly every business case that we help our customers build on AI is productivity driven. And to give you an example, we agentified, I'm not sure if that's a verb yet or not, but we introduced agentic AI into one of our banking customers, KYC, know your customer onboarding process. And we will save them 30%, 40%. We'll make it a lot faster for them, but that's how they did their business case. They also believe very strongly, though, that they were able -- because they were able to take the time in their KYC process to onboard a customer from, call it, 25 days to about 25 minutes. They believe that, yes, they've built their business case on productivity, but that will lead to more growth. And I think as we prove to our customers, as our customers prove to themselves that it's not just about productivity, that there will be more and more of a growth component coming to AI.

But AI, again, has to be that technology works, but you have to get your employees ready for it as well. You have to get new ways of working. So again, I go through all of that because while there are things that are part of the new normal, sovereignty as an example, new technologies are always going to be coming in. There are some that are driven by macro. And we'll have to see how AI starts to prove itself in real use cases as it makes the shift from being, again, nearly entirely productivity driven to being growth oriented as well.

Okay. Yes. Well, the models are improving. You gave a good example. You also did mention that April was a good sales month with a couple of deals closing. And so that was promising. I don't know what -- was there a moment maybe where things got more clarity and you saw activity happen in April. I'm just curious how you should -- we should interpret that?

Yes. Look, I think -- I'll tell you how I interpret it, right? And so a couple of things. We did see a number of deals move a little to the right as we came out of the last quarter out of the end of the fiscal year. Not a surprise. Again, because of the nature of what we do, because of the many, many, many constituencies involved, regulators, employees, management, CIO, et cetera, because you have to bring all these together at a certain time, it's never a surprise to us if a decision gets moved by -- sometimes it's by hours, sometimes it's by weeks. And in April, we happened to close a bunch of deals, and we actually got more again closed that will close for the year. So we did have a very good start to the signings year.

As you and I have talked over the years, we've always been focused after we went through our focus account process, and we were very focused on engineering a decline and getting certain content out. we've been focused now on making sure that the signings number exceeds revenue over time so that we can get back to a consistent level of growth. And again, I feel pretty good about where we are now and what we've already gotten done in the quarter.

And I look at our pipeline and our pipeline is already better than it was last year at this time. It's a pretty good mix of new content in existing customers and entirely new customers as well. So a good start to what is -- every year is an important year, but a good start to a very important year for us.

Good. And I know you and Lori and team and Harsh have always said, right, don't spend too much time focusing on signings. And of course, the quality of the signings do matter. Now that you've been through some of the cycle and you mentioned the pipeline is good, is it safe to say the quality is what you're looking for, whether it's book-to-bill or gross profit book-to-bill short term, long term?

So a few things. So the short answer is yes. I'm pleased with where the pipeline sits, and I'm pleased with it for a number of reasons. We have, I think, been very focused, and you know this, we've been very focused on improving the fundamental profitability of Kyndryl, and I think we've made a lot of progress. Additionally, I think the agentic world and our own experience with agentic suggests that we have really 2 things going for us within our business model. One is that because we're really kind of an outcome-based services business, right? We have to deliver uptime. We have to deliver resiliency features. We have to deliver security features. We've proven over the last 4.5 years now as we automate things that, yes, we have to deliver some savings to our customers. They're looking for productivity, but we also get to keep some of that ourselves.

And what I think is exciting for us in this more outcome-based business model is that agentic can help that quite a bit. We have, as we sit here now, 1,370 agents in the infrastructure. This is not the agents that our staff build to help them perform their jobs. These are agents in the infrastructure, making us more productive. making us able to automate things, allowing us to deliver higher quality services. And again, as we introduce more and more agents, yes, we're going to deliver a value prop to our customers that's really meaningful. I mentioned the bank example, but we also have proven that we get to keep that as well, some of that as well.

So when I look at the pipeline, I'm excited about the content in it because it is becoming increasingly making more and more use of our own agents. It's making more and more use of our own automation, which, again, we've proven we get to keep a piece of. And then it has a bit of a mix to it that I'm really pleased with. One is, as we've invested in more and more capabilities, we've been able to expand the scope with our existing customers. So as you said well, a few minutes ago, certain signings mean a lot to growth and certain signings could just mean you've renewed something and that's not going to change the trajectory. It's good you got it renewed. You didn't lose it, but you're not changing the trajectory. It's always been important for us as we've reoriented to growth to focus on expanding those relationships and expanding the future revenue growth opportunities for us.

In a place like the U.S. where sovereignty is not at all an issue, right? So we never slow a discussion down about sovereignty in the U.S. We got the U.S. back to growth already last quarter, and they've got a good growth profile ahead of them. So some of that's driven by new content within our existing customer base and some of it is driven by new customers who -- they are now more and more increasingly comfortable with us as a services provider. Many of them would have either had a little bit of experience with us in -- with one of our hyperscaler partners or more likely, they've had a little bit of experience with us in the consult side, but now that can turn into a much more robust, bigger, more substantial managed relationship.

So pipeline is bigger. It's got a good mix. It's becoming increasingly -- it's going to increasingly take use of our own agentic, which allows us not only to deliver a great value prop, but we get to keep some of that as well.

So is that the answer to the phasing of the year when we think about first quarter being the trough and second half having some acceleration? Is that the answer to the phasing?

Yes, it's some of it. Some of it is certainly driven by the pipeline. We've also made a decision to take a bunch of cost out of our business. So from a profit perspective, the first quarter absolutely will be the trough, and that will then start to pay back already second quarter and obviously, second half and then give us a big lift into next year. And from a revenue standpoint, the short answer is yes. Our timing of looking at deals when they were signed and what our pipeline looks like says second half will be the stronger half relative -- well, within the year, first half, a little bit slower, second half, a bit stronger.

Good. Okay. So we'll get into some more of the details, but I think when people were submitting questions for me to ask, the IBM piece did come up quite a bit. I know that's a part of the story and the visibility. So just remind us there with the commercial dynamics. I know that's putting pressure on revenue and signings, but it's not impacting profits. That's very, very clear to us. But just tell us about the visibility. And I know you've called out a 3-point headwind in the charts. How do you see that -- those lines behaving, let's say, in the next 2 to 3 years?

Yes. So we did all your data -- and you always get your data right.

You should [indiscernible].

So we did expect that by now, if you had asked us a few years ago, what's the long-term impact? And again, focus accounts, our goal was to remove a lot of the hardware and software content from IBM and have them go direct. And again, hugely successful. It's a part of what's allowed us to improve the profitability. And we would have expected now that customers would make sort of a consistent set of decisions, which would -- basically, we would have thought it would have eliminated the headwind. But our experience last year was that now it's much more complex than just that. And it doesn't take a lot of -- it doesn't take a big number of customers. Two or 3 customers say, instead of getting my mainframe and my software through you, even though I understand why it might be more appealing, I'm just going to buy direct. I want a relationship with the owner of the IP.

Again, for -- as you said, well, yes, it's a signings and a revenue headwind, but no impact to profit because we have no ability to mark up their mainframes. We have no ability to mark up their software. So we would have thought it would be behind us. It's not behind us as we enter this year, given the choices that customers made last year, we'd see another 3-point headwind. Look, over time, it has to start to diminish because when we were first spun out, our hardware and software bill to IBM was about $4 billion. And last year, it was under $2 billion, just under $2 billion, right? So we've taken a lot out. There are probably a few more customers, I would assume this year who are going to say, make a similar decision. I'm going to go buy my hardware software directly from IBM. Again, we're completely cool with it.

But it will, over time, diminish. But it does, as you said, well, it just -- it makes the story a little bit more complex, I think, than what some people would like, which is, well, just what's the headline growth rate and what's the growth rate. And for us, we printed last year down 3% and the IBM piece was about a 3.5 point headwind. So one of the things that really matter to us, we had some growth for the full year. And this year, we guided to down 2% to flat and with, again, a similar 3-point headwind. So we're kind of guiding to up 1% to up 3% kind of again, outside the content. But we'll have to see again how customers start to make that choice.

So other than us estimating the IBM impact and the length of time, other than that, I'd say that the rest of the business is kind of performing the way we would have thought it was already a number of years ago. So we're kind of on track with where we thought we would be.

Yes. Okay. No, it's a good lesson. We'll focus on it more ex the IBM piece. And like I said, the profit story is different than the revenue in the signing story. Okay. No, thanks for going through that. So let's -- time is going quickly.

Consult. Let's talk about consult. That was a double-digit grower for you in fiscal '26. You exited at a lesser rate. What's assumed in the '27 outlook? Is it hard to replenish growth in consult?

The way we built our guidance, let me start there. We do need consult to continue to grow, but we can actually deliver the revenue of the minus 2% to flat, again, with the IBM headwind. We can do that if consult is growing sort of double -- low double digit to even high single digit. We still make it, right? So we didn't want to overly rely. Yes, we're, of course, if you ask the consulting, what are their growth targets, they're far in excess of anything I've just imagined. But we also had some uncertainty around all the things we talked about, what does macro really look like? And what does the sovereignty discussion really look like?

So we don't need it to grow at the same rate it has been growing. And look, it's much bigger, obviously, than it was when we started. So the dollar amount that it lends is a similar dollar amount even though the growth rate starts to slow. But we see and we hear from our customers an incredible demand profile around, again, the things we do. The idea of modernization, given the challenges our customers have is very real, very top of mind, very front and center for them.

And in each of the examples I've used like the banking example and agentifying, and we have similar examples in government where we've done this with the government of UAE. We just announced a deal with a state government here where we're going to modify their DMV system. Each of those has a consult component to it and then a run component to it. So consult is still a very important growth vector for us. And we're -- our guidance is not built on it growing like 20%, 30%, 40%, 50%. It really just has to continue to perform on a consistent basis, and we see the pipeline for it. So we're pretty comfortable. Right now, we're pretty comfortable with what we see in order to deliver the guidance.

Good. And then on the managed services front and the underlying assumption there, should we assume any kind of lockstep?

So the managed services component, we see, I'd say, 2 things. One, it is where the IBM impact sits, right? So -- and since it's 75% roughly of the business, it has outsized impact on it, right? But outside of that, we've said now for 4.5 years since we were spun, we said that over time, because of the shape of the backlog we inherited, we're going to go have to rebuild that backlog. And we're starting to get to the point now where Managed Services is starting -- it's stable, right? Not back -- we don't need to get back to growth yet, but it's stabilizing.

And over time, it is a growth opportunity. I think the work we do around managing more than half the world's outsourced mainframes and managed mainframes, that's ultimately going to be a growth vector for us low single-digit growth, but it can be a growth vector for us. So I see the managed business is stabilizing and starting to come back. And over time, this will be a growth part of the business as well.

Okay. Good. So hyperscalers, I think, has been a big driver. Obviously, you gave a lot of great statistics around that. But the penetration rate is higher, Martin. So I'm trying to think about what's the next leg of growth on the hyperscaler side? Are you doing something differently to spur growth or to amplify growth?

There is still a lot for us to get done here, right? So again, if I step back and I look at the sort of the big picture, IBM was $4 billion of our spend, down under $2 billion now. Hyperscalers were basically 0 when we were spun out because we didn't have relationships with them. And very quickly, I think the team did a phenomenal job of building what is essentially a nearly $2 billion business, right? So we've sort of crossed that. It's not a vitally important sort of statistic. They're not related necessarily, except by what it tells us about what our customers think about us, which is, I believe, we've repositioned the business now to very much be part of our customers' future as opposed to just part of their past.

And so we see future growth with hyperscalers really coming in 2 ways. One is we have a lot more customers that we have to pay penetrate still here. And most -- every one of our customers has picked a hyperscaler, sometimes 2. Many of them have commitments that they need help with how to consume that over time. So we still have a lot more to penetrate within our customer base.

And then importantly, because we have -- just so it's clear, we're not taking the consumption of the hyperscalers content and moving that. That's not what we're counting as hyperscaler business. We're talking about the services we've built around the hyperscalers that our customers need in order to run workloads on a hyperscale or cloud. So we have security services and resiliency services and data services that's really what makes up that nearly $2 billion of revenue. And because those are the platforms on which they're growing, those are growing workloads for us as well. So not only are we sort of still underrepresented across our customer base for that content, but they are attached to the growth vectors that our customers are on. That's where their incremental dollar is going. And that's why the message that we've been clear about is that, that's why we feel like we've repositioned to very much be about their future, not just about their past.

Yes. No, I like that phrasing. It's helpful to think about it because -- yes, let's come back to it. Thinking about hyperscaler, more room for penetration. You also talked about private cloud. And the sovereignty piece makes a lot of sense on why you're seeing more private cloud. But what are you advising your clients there with respect to private cloud hyperscalers, obviously, it's consequences in terms of growth and how you staff. But what does that dynamic look for you?

So what we're seeing in our customer base is an increased interest in private cloud. Sovereignty is part of the driver. Some of it is around just wanting to make sure that they can answer a regulator's question as you move certain workloads onto a cloud, the key -- the key question from any regulator is going to be a little reductive, but the questions the regulators ask are, where is your data right now, like exactly where is your data right now? And who can see it? Who has access to your data?

And as workloads have moved, particularly systems of engagement workloads have moved on to public clouds, that's a little bit easier to get your head around. It's a little bit easier to answer those questions. And some of those workloads aren't regulated like, let's say, a banking system or an insurance business. So what private cloud allows you to do is not just take advantage of the innovation cycle and delivery of the cloud, but it also allows you to put more regulated kinds of workloads because you have the control and you can answer the questions.

And then on top of all of that, you can be more confident that in 3 years' time or 4 years' time or 5 years' time that whatever the geopolitical environment is, your private cloud will probably be okay. So it's multifaceted. But we do see an increased interest again in private cloud because it's around control. And you still get many, many, many of the innovation delivery features that you would expect out of a public cloud. And keep in mind, from a cloud perspective, the public clouds are delivering a lot of innovation. AI is a good example. But for customers to really consume it, it takes a lot of work, right? So you probably can't keep up at too fast a pace with all the innovation that's being delivered. And therefore, a private cloud can suit your cycle time for innovation as well. So yes, increased interest in private cloud.

Yes. So from an economic standpoint, implications to Kyndryl?

Look, for us, anything -- complexity is our friend here, right? We really get paid -- we get paid for 2 things. We get paid because our customers trust us, and we get paid because we can help them manage their complexity. And so to the extent that any of our customers decide that for certain workloads, we can see why we want to put them on to a public cloud, take advantage of that. And for other workloads, we want to build a new private cloud, take advantage of that. Anything that adds to that complexity says they need Kyndryl more. So all of these things tend to be a tailwind for us.

Okay. Good. Let's -- less than 7 minutes left. So let's do workforce rebalancing then, just to make sure we hit that. I know that you mentioned that you're dealing with lower involuntary attrition, and that was a part of it. So the question I have is just that versus seeking efficiency. What was the motivating factor to arrive at the level of workforce rebalancing you announced?

So it's not one thing, it's multiple things, right? So we did -- and we talked about this already coming out of the third quarter, our attrition rates dropped dramatically. I won't think it was just us. I think it was more of an industry-wide event. And attrition for us has been our friend. We've been very, very successful in our advanced delivery initiatives to free up people and to reskill them and then put them back in into the business. But in order to put them back in, you need a seat. And when attrition is your friend and you -- and people are moving and turning over, you have plenty of seats from which to choose. When attrition dropped, now there were no open seats, right?

So look, it's part of it then is, well, we do have -- we do sort of have control of our own destiny. And we don't need this level of delivery resource given how successful we've been at automation. So we'll just make an investment, and we'll reduce our labor costs. Within the year, it's kind of neutral-ish at the bottom line, but next year it will deliver a big benefit to us. And then -- so that's part of it.

Secondly, I'd say that we're always looking for ways to be more efficient. When we were born -- when we were spun out 4.5 years ago, it was a very heavy staff place, and we've been successful in reducing what it costs to run the place. Early on, when we were on the IBM systems before we came out through the TFAs, we made the decision to go all cloud, no mainframes. So we've taken big steps to improve how we operate, but there's always new ways to operate. There's always new ways to be more efficient. And so part of this is also us operating more efficiently. So some of it's driven by attrition or lack of attrition and our ability to find new ways to deliver and very successfully implementing advanced delivery initiatives and some of it is just by our desire, need and our ability to cost less to run the place.

Staying with the workforce then, Martin, just I know it's -- I'm not looking for you to preannounce anything, and I know it's always a difficult subject to talk about publicly. But just your thoughts on workforce longer term in general and not even just AI, but everything we've talked about, there's so much change that's happening. And I know retraining and recertifying is a big part of the playbook. But is your thinking around the workforce and where you want to be changed at all since last -- I guess, last year that you were here when I ask you the same question?

Look, it's -- we have a year now under our belts of understanding how, for instance, agentic can be used, right, in our own. And I mentioned we have 1,370 agents, unique proprietary agents in the infrastructure. And as you know, they spin themselves up and they spin themselves down, so we could have 10,000 agents working. But those 10,000 agents are helping our teams collect the data, interpret the data, compare the data with all the data we have. So over time, everything that leads up to making a decision could change. But that's the most inefficient part of what we were doing anyway, the decision-making doesn't change. We still have a person over the top to make sure that as we adjust an infrastructure, as we learn about what's happening, that decision-making stays the same. It's still a person who has to make decisions.

Now do we automate things? Yes. We automate things after we're very comfortable that our engineering experts on a particular customer in a particular industry, in a particular workload are very comfortable letting the machine do some of this. But it's only the stuff that leads up to the decision that's changing and that's making our teams far more efficient.

I'll give you an example. One of our agents -- whatever our agents is -- and many of our agents are focused on root cause analysis, but one of our agents is very focused on when a problem occurs in the infrastructure, this agent, instead of having our engineers who used to have to do this, by the way, I should say, and this -- I'm sure it happens in JPMorgan the same way. If there's an incident in the infrastructure, everybody gets on the bridge and the half of the team that represents the infrastructure says the applications are the problem and the half that represent the applications say the infrastructure is a problem. That's every bridge call I've ever been on forever.

That has gone away now because we actually have agents who are out now collecting all the logs from the relevant systems because they monitor everything. They're comparing those logs to what we've seen in other instances. So you get to root cause instead of in 30 minutes or 45 minutes or an hour, you get to root cause much, much quicker. But the engineers that sit on top of all this are still the ones saying, okay, now that we have all this data, can we really focus on what the problem is, what's the course of action. So it is making us more efficient, but it's making us more efficient in the lead up to the decision. The decision still needs the deep engineering expertise, the knowledge of the systems, the playbooks, the ways of working, all of that is still sitting within our teams.

And I would say our teams feel like they're getting better supported now by the AI because they actually have data faster and they can make progress faster. That, for us, allows our customers to think about, can I move a little bit faster because I can get things -- I can fix problems faster, right? So it's sort of reinforcing to for our customers to know that our agents can help our experts get them going faster, get to the bottom of it, so they're willing to try a few more. They can try some new innovations. They can lean in a little bit on AI or some other new innovation.

Good. So we have, what, 45 seconds left or so. Always trying to think of a good closing question. I was debating a bunch of different ones. But we talked about a lot of different things. So the sector has been under a lot of pressure, a lot of questions around geopolitical, AI, everything you've talked about. You're managing estates, it's much more stable.

So what do you think what could change investor sentiment in your mind that you're excited about sort of giving us some data points to reveal and say, hey, things are actually moving in the direction that you planned?

Yes. The more time I spend with our customers, the clear it is to me the role we play in getting them ready for the future and modernizing them is a very important role. They can't do it without us, and we are in the trust business. So they do trust us to run their infrastructure for them, and they are increasingly trusting us to take them into the future and not just run their past. And again, I see that in the pipeline. I hear that from our customer base. We just signed just now a couple of weeks ago, I think we signed a very big relationship with the Bank of Luxembourg. They put out a press release, we put out a press release.

But I think it's emblematic of the way the important companies in industries like banking and insurance and all the companies that really make the world work, it's emblematic of how they think about what we can bring to the table and who should they partner with for all the complexity they're faced with. So I go through all of that because I think in the agentic world, in the AI world, it's moving toward us. It's not moving away from us. In the AI world, in the agentic world, it's about your infrastructure, right? Can the tracks support the speed of the train. It's about data. And that's what we do. That's what we've done for a long, long time. And again, we are the ones who help the -- who bring the stake to the sizzle, right? If today's sizzle is AI, we're the ones who are going to make that work.

Good. That's a good way to end the conversation. Martin, thank you for the time.

Thank you, Tien-Tsin.

Good day, and thank you for standing by. Welcome to the Kyndryl Fourth Fiscal 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.

Good morning, everyone, and welcome to Kyndryl's earnings call for the fourth fiscal quarter and year-end March 31, 2026. Before we begin, I'd like to remind you that our remarks today include 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, and our quarterly report on Form 10-Q for the quarter ended December 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 investor.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. In our fiscal year 2026, we delivered adjusted pretax income growth and margin expansion and generated over $400 million in free cash flow. This performance comes against the backdrop of an environment that has continued to extend sales cycles and weigh on our revenue and signings performance. Customers are telling us that they are eager to embrace innovative solutions and modernization strategies, yet they are increasingly thoughtful and deliberate in their IT decision-making driven by the dynamic of sovereignty, AI and cyber preparedness, aiming to balance transformation with operational stability in today's complex environment. .

Considering these dynamics, we continue to invest in Kyndryl Consult, our alliance partnerships and our agent AI capabilities, all while supporting and modernizing our customers' most complex mission-critical IT environments. Our strategic focus remains unchanged. We're focused on growing our revenues and earnings and generating cash to reinvest in our business. The successful execution and continuation of our advanced delivery initiative, the increasing use of AI across our own operations and the new workforce rebalancing actions gives us confidence that we're progressing toward our multiyear objectives.

Both Harsh and I will discuss this in more detail.

We will deliver sustainable profitable growth by increasing high-value consult engagements, deepening capabilities with our alliance partners and delivering innovative AI-led modernization services. As more post-spin signings convert into revenue in fiscal '27 and '28, these growth investments paired with our own use of innovation to drive productivity position us to achieve higher profitability going forward.

On today's call, I'll highlight the underlying growth drivers that are strengthening our operations and the targeted actions we're taking in fiscal '27 to advance us towards our fiscal '28 goals. Let me start with Kyndryl Consult. In fiscal 2016, Kyndryl Consult again delivered double-digit revenue growth, our third consecutive year of strong performance. We've invested heavily in Kyndryl Consult, including developing and hiring forward-deployed engineers and human systems architects and our AI innovation labs, where we co-create a Agentic solutions at scale with customers.

We exited the year with Kyndryl Consult signings exceeding revenue, positioning us well for another year of strong consult revenue growth. This demonstrates how enterprises are turning to Kyndryl for our high-value services across agenetic AI, IT modernization, public and private cloud and cybersecurity to help them modernize its sale, strengthen resilience and unlock greater business value.

Turning to our hyperscaler related revenue streams, we exceeded our initial target and realized nearly $2 billion in revenue in fiscal '26. The Keep in mind, this revenue source was essentially 0 four years ago and has consistently grown year after year. This underscores the significant progress we've made in strengthening our core capabilities and establishing ourselves as a vital partner for our customers and alliances. We've been deepening our relationships with hyperscalers and most recently, developing new capabilities in areas such as data severity and agenetic modernization.

Across the broader alliance ecosystem, Kyndryl continues to build strong momentum by translating innovation into secure, scalable and repeatable outcomes for customers. Additionally, we have continued to strengthen our collaborations with other important alliance partners beyond hyperscalers as private cloud becomes an important growth vector, including the likes of Broadcom, Dell, HP Enterprise and many others. For fiscal 2017, we expect another year of strong growth from Kyndryl Consult and hyperscaler related revenue streams. Over the last few years, our success with Kyndryl Consult and hyperscalers has helped offset the headwinds we've been facing from our own accounts initiative and more recently from customers' decisions to procure hardware and software directly from IBM.

You can also see from the chart on the right that 80% of our revenue in fiscal '27 is expected to be derived from cost spin higher margin signings supporting our multiyear objective of expanding projected pretax margins on post-spin signings into the high single digits. In fact, in fiscal 2016, we signed 38 deals in excess of $50 million of which more than 30% consisted of new scope or were new logos. Given the multiyear nature of our customer relationships, I'm encouraged that we've signed more than 125 large deals over the last 3 years.

Importantly, the investments we've made in consult, alliances and agentic AI capabilities have well positioned us in today's market where enterprises are turning to Kyndryl for their modernization needs. This reflects our ability to win large complex deals despite a more challenging environment, including longer sales cycles. With our heritage and mission-critical expertise and IP combined with AI-powered Kyndryl Bridge platform, and our differentiated solutions centered around the Kyndryl Agentic AI framework, Agentic Service Management and Digital Trust, we are seeing results in modernizing our own operations and in helping our customers continuously modernize their IT infrastructure and applications to scale AI to unlock business value and to enhance resiliency and address AI-enabled cyber threats every customer conversation right now is focused on agentic AI and what it means in the context of their business, returns on investment, implications for cybersecurity, their workforce and efficiency and in regulated environments, compliance.

As customers embrace the agentic era, expectations of IT organizations to reinvent themselves have changed. And when you consider additional factors such as increasing tech and operational costs, modernization is no longer optional. It is a requirement. And at the same time, customers need a different approach to modernization as most traditional approaches are labor-intensive, slow, often encounter business disruptions and miss the expected ROI, which is why most customers lack confidence in their ability to execute modernization effectively.

Our Kyndryl Readiness report found that nearly half of organizations struggle to generate meaningful returns on AI because their IT environments, their infrastructure applications and business processes, simply were not built for it. It's like trying to run a shiny new 200-mile an hour bullet train on tracks built for 30 miles an hour. Our customers are challenged in moving from AI experiments to industrialized scale. In this rapidly evolving technological environment, Kyndryl becomes even more essential to our customers, helping them to prepare, navigate complexities and scale. Within our own delivery operations, we're using AI agents embedded in the Kyndryl Bridge platform to drive greater productivity and outcomes. For example, we're seeing incidents being resolved 70% to 90% faster, which means less disruption and more consistent service.

Basin root cause analysis cycles approximately 75% faster, helping prevent the same issue from happening again. And we're seeing that the dependency on people's time reduced by 50% to 70% freeing up our people and our expertise for higher-value work that delivers transformation for customers and growth for Kyndryl.

So let's now turn to how we're working with customers to deliver business outcomes across the modernization continuum using an agentic AI approach. Importantly, these aren't one-off engagements. They create clear paths for us to further develop and expand our long-term strategic partnerships with customers from infrastructure and applications into higher-value transformation work. We're working with a large European bank to build a joint competency center to establish a vendor-agnostic hybrid cloud design while complying with data sovereignty requirements and providing control over their AI adoption. They need flexibility and control across public and private cloud with a single simple view across their entire estate. We're leveraging our deep platform engineering expertise and genetic modernization capabilities to rapidly deploy their shared cloud platform. By co-creating this future state together, we're also expanding our scope into the application layer.

Next, with the global insurance company, the starting point was a decades-old mainframe environment running millions of lines of mission-critical code supported by a shrinking pool of in-house expertise. Such products have traditionally failed because of the system complexity, limited documentation and skill shortages. We use AI agents to rapidly understand the current functionality and rewrite the system to a modern cloud native architecture. The business outcomes we're delivering include an agentic digital twin to retain institutional knowledge in a 50% faster data center exit. This has positioned us to replicate and apply our modernization approach to other mission-critical systems in other countries where they operate. And then with U.S. state government agencies in this case, the DMV, we have a repeatable solution underpinned by Agentic AI to rapidly implement scalable and resilient digital platform services.

The benefits of our approach includes self-service for government employees and enhanced citizen experiences by reducing wait times and improving self-service. Importantly, we're deploying the solution across multiple states and countries as a standardized, repeatable offering. In all 3 examples, we were awarded New Scope and now expect to expand into new areas. Customers are selecting Kyndryl for our decades of mission-critical engineering expertise and our unique approach to AI-led modernization services. We're a trusted adviser and a long-term partner for our customers with differentiated solutions that center on achieving tangible business results.

With that, I'd like to pass the call over to Harsh to discuss our fiscal year results and outlook and then I'll close with a more detailed discussion on our multiyear objectives. Harsh?

Thanks, Martin, and hello, everyone. Today, I will focus my comments on our year-end results and our outlook for fiscal 2017. For fiscal year 2026, we generated $15.1 billion of revenue, flat from the prior year on a reported basis and down 3% in constant currency. We exited fiscal 2026 with total signings of $13.5 billion. As previously discussed, both revenue and signings were impacted by extended sales cycles, particularly in the U.K. and strategic markets and the evolution of our relationship with IBM.

Our adjusted EBITDA in fiscal 2026 was $2.7 billion, and our adjusted pretax income was $581 million. Adjusted EBITDA margin increased 100 basis points and our adjusted pretax margin increased 60 basis points year-over-year, reflective of a mix shift in the business as more post-spin signings flow to the P&L.

Our 3 initiatives continue to be an important source of margin expansion and value creation for us. Through our Alliances, we generated $1.9 billion in hyperscaler related revenue in fiscal 2026, up 59% versus last year and exceeded the 50% growth in hyperscaler related revenue that we were expecting at the beginning of the year. Through advanced delivery, we continue to drive efficiency by incorporating more AI-based technology into our services enabled through Kyndryl Bridge to further reduce our costs and increase our already strong service levels.

To date, this is worth roughly cumulative $1 billion of savings a year to us. Our accounts initiative continues to address elements of contracts we inherited with substandard margins. We exited fiscal 2026 with $1 billion cumulative annualized profit savings from our focus accounts. A key takeaway point from this update on the 3 A's as is that we have successfully implemented these initiatives and they have become a core part of our operational discipline.

I want to provide an update on what we shared last quarter on our evolving partnership with IBM, largely driven by how customers are consuming IBM innovation. This chart illustrates more than a 3-point adverse impact on revenue performance in constant currency since the spin-off, driven by our focused accounts initiative in our early years and more recently by this evolving relationship. As we have described before, at the time of spin-off approximately 40% of our revenue from our inherited commercial agreements were in low to no margin position. Back then, our annualized run rate of spend with IBM was nearly $4 billion. Over the past 4 years, we have addressed most of the focus accounts, leading to improved profitability gains.

In fact, by the end of this fiscal year, our annualized run rate of spend with IBM was less than $2 billion, half of where it was when we were spun off. Over the past year, especially in the second half of our fiscal 2026, customers started changing how they consume our high-value services and IBM innovation. While these changes do not affect the scope or margin of our services and our ability to grow our services content, they do have an impact on the size of our signings and consequentially, our revenue over time.

And as we have said, this has a limited impact on our earnings. In fiscal 2027, we are expecting similar headwinds to continue.

Turning to our cash flow. Our free cash flow was $406 million for the year, relatively in line with fiscal 2025, and approximately $50 million higher than the midpoint of our $325 million to $375 million guidance we provided on our February earnings call. This performance was driven by stronger cash collections and lower net CapEx in the fourth quarter. For the full year, working capital and other was a use of approximately $250 million of cash, largely related to broad-based incentive compensation payments that occurred in fiscal first quarter coupled with lower compensation accruals in the current year based on our performance.

Net CapEx of $543 million was up $20 million from last year, yet it was below what we anticipated, largely due to changing customers' consumption behaviors where they are buying direct from IBM. In the appendix, we include a bridge from our adjusted EBITDA to our free cash flow and more information on the free cash flow metric calculation. Today, we have a strong conversion of earnings to free cash flow at the rate we have been targeting. You can see on this slide that over the last 2 fiscal years, we delivered more than $1 billion in adjusted PTI unless cash taxes of $300 million over the same 2-year period, we generated over $800 million in free cash flow.

We expect the same rate of earnings conversion to free cash flow going forward. While quarter-to-quarter dynamics can vary, over time, this is our view on earnings to free cash flow conversion. Our financial position remains strong. Our cash balance at March 31 was $2.6 billion. Our cash is up $1.3 billion from the period ending December 31, which includes $300 million from operations and the $1 billion we drew under our revolving credit facility. Our debt maturities are well laddered from late 2026 to 2041. We plan to refinance or use cash on hand to fund our near-term debt maturity of $700 million later this calendar year. and our pending acquisition of Solvinity, which is now expected to close in the first half of fiscal 2027 for EUR 100 million. Our net leverage ratio has been and continues to be well within our target range of 1x adjusted EBITDA.

We exited this fiscal year at 0.5x and which is an improvement from 0.7x at the end of our fiscal 2024 via rated investment grade by the rating agencies. Under the share repurchase authorization, we bought back 11.6 million shares of common stock at a cost of $304 million in fiscal 2026, of which 3.3 million was purchased in the fourth quarter at a cost of $49 million. Since the inception of the program, we have repurchased 6% of our outstanding shares. As of March 31, we have approximately $300 million capacity available under our current authorization. On capital allocation, our top priorities are to maintain a strong balance sheet and financial flexibility.

We have remained focused on winning business with healthy margins, which takes significant discipline as enterprises prolong decision-making. Over the last 4 years, we have signed contracts with projected gross margins in the mid-20s and projected pretax margins in the high single digits. We have again included a gross profit book-to-bill chart that illustrates how we have been creating and capturing value in our business.

with an average projected gross margin of 26% on signings over the last 3 years, we have added more gross profit dollars to our backlog than we have reported as gross profit over the same period. Having a gross profit book-to-bill ratio at or above 1 over the last 3 years demonstrates the quality of our post-spin signings and the expected future profit growth from committed contracts. And as Martin has highlighted, new scope and new logos continue to increase as a percent of our large deal signings.

Turning to our outlook for fiscal 2027. Our outlook for adjusted pretax income is in the range of $600 million to $700 million. This pretax income outlook includes approximately $200 million of charges associated with the workforce rebalancing actions, which we expect to incur substantially in the first quarter of fiscal 2027. The savings from these actions will be primarily in the second half and will largely offset the charges. The impact on adjusted pretax income will largely be neutral on a full year basis. These actions are expected to yield annualized savings in the range of $400 million to $500 million in fiscal 2028.

I with the expectation that most of the charges will take place in the first quarter, we expect our first quarter adjusted pretax income to be a low point in earnings for the year with meaningful profit improvement expected for the remaining 9 months of the year. We expect our adjusted pretax income less cash taxes, which are estimated to be approximately $200 million to convert to free cash flow in the range of $400 million to $500 million.

From a timing perspective and similar to last year, the first half of the year, particularly our first quarter will be a significant user of cash largely due to annual software payments and incentive-based compensation payments and subsequent quarters will be more favorable. Our fiscal 2027 outlook assumes that revenue will be flat to down 2% in constant currency. Within that, we expect internal consult and our alliances related revenue streams will continue to grow. While at the same time, as I discussed earlier, we are assuming that our evolving relationship with IBM will be a similar headwind to what we have been experiencing. Taking into consideration the pace of signings in fiscal 2026 and what is expected to sign in the first half of 2027, we expect second half revenue to be stronger than first half. Let me now pass the call back to Martin to discuss our path towards our multiyear objectives.

Thank you, Harsh. As we think about where we exited fiscal '26 and our areas of focus in fiscal '27, I want to spend a few minutes outlining why I'm confident in our ability to achieve our fiscal '28 targets. We're entering fiscal '27 with a 5-point improvement in our beginning backlog for the year compared to fiscal '26. In addition, our pipeline includes scope expansions and new logos to support future signings growth and a better mix of higher-value services.

In fact, Kyndryl Consult signings exceeded revenue this fiscal year, and we're driving both final consult capacity and productivity. We've delivered strong growth in hyperscaler related revenue streams and with our customers' modernization needs accelerating and renewed demand in private cloud, we expect continued momentum across our alliance partners. We've been signing deals with projected pretax margins in the high single digits, and that pricing discipline will continue. We've transformed our business through the advanced delivery initiative heavily embedding automation and AI into our operations and upskilling our teams for higher value work.

We're infusing a genetic AI into delivery of services through Kyndryl Bridge to address lower voluntary attrition rates and improve our SG&A efficiencies, we're taking workforce rebalancing actions to yield meaningful savings. We're confident in our strategic direction and our financial position remains strong. We believe our focus on higher-value services, coupled with the actions we're taking to streamline our own operations, positions us to navigate the evolving ways our customers consume IBM's innovation while keeping us on track toward our multiyear objectives.

In fiscal '28, we continue to target more than $1.2 billion in adjusted pretax income and more than $1 billion in free cash flow, and these targets can be achieved on low single-digit constant currency revenue growth in fiscal '28. Before I open the call up to your questions, I want to briefly address the material weaknesses we disclosed last quarter. As a reminder, these issues did not impact our previously issued financial statements. We continue to make progress in addressing the identify weaknesses, and we expect to have the design, implementation and testing of controls completed when we file our fiscal '27 Form 10-K next year.

We remain focused on strengthening our control environment and our processes and further updates will be disclosed in our fiscal '26 Form 10-K filed at the end of the month. Importantly, I want to thank Kyndryls around the world who are providing world-class services to our customers every day. Operator, let's move on to questions.

[Operator Instructions]

Our first question comes from Kevin Kranti at Scotia Bank.

Can you hear me? .

We can. .

Great. Thanks for all the detail on the drivers for '27 on the revenue. I'm wondering if you can talk about the macro and the buying decisions, maybe what you're seeing from a geographic perspective, you did mention there's still some issues in the U.K. and strategic markets. And I'm just wondering if you can talk about what would get you closer to that sort of flat growth for the year versus the negative 2% decline?

Great. Let me start, I'll ask Harsh to comment as well. A couple of things I think are important as we think about the pace of signings, customer behaviors, et cetera, et cetera. First, First is what we do, right? So we are mission-critical, which means that there are lots of stakeholders, regulators and many decisions, Boards of our customers are involved. And we typically sign deals that are 4, 5 or 6 years long. So our customers understand that the environment in which they operate is likely to change over those times. And so the nature of what we do that causes that provides an ability for them to be really thoughtful about how they want to commit.

Secondly, they have choices, more choices than ever. They have the choice of the platforms they want to use. They have the choices around AI and how they want to deploy it and all the new capabilities that are coming out. They have for our customer base. Anyway, there's a substantial amount of tech debt and they need to make choices about that. And then finally, they each operate in an environment that is always concerned about security and resiliency. It's always concerned about the regulatory environment and then increasingly, the discussion around sovereignty, not here in the U.S., but sovereignty is a big deal, data sovereignty, cloud sovereignty, et cetera, et cetera, et cetera.

So the environment and the complexity and the nature of what we do says that our customers have to be thoughtful given the longer-term commitments they make. With all of that in mind, we do see good demand trends. Our pipeline as we enter this year is bigger than it was last year. The momentum we have in the capacity we're building in Consult, our ability to help them -- our customers with their most complex challenges around public and private clouds, et cetera, et cetera, et cetera, has a lot of momentum.

The sovereignty discussion, though, is an important one, again, not in the U.S., but in Europe, I'll go to Europe for a second. And that just -- it creates a need for more time. Customers have to be comfortable that they're going to know the sovereignty answer for more than 6 months. This is again, these are longer-term commitments. So the nature of what we do, the choices customers have and the environment in which they operate, tend to elongate sales cycles. But deals do get closed. In fact, we had a great April, because some of the deals that we had expected to close in March just took a little bit longer. And again, it was all of the stakeholders that are involved. And we had a press release as did our customer a few days ago earlier this week in Luxembourg is a great example where we have -- we obviously have to spend time with the regulators with the Board, et cetera, et cetera. We got the deal does so we had a great April.

So I don't expect as we go through this year, that the environment is going to be any different. In fact, I think it's going to get more complex. I think sovereignty is going to become a bigger issue over time. I think the regulatory environment is always changing. I'll let Harsh talk a little bit about sort of the profile of what he sees and your question around what does it take to be 0 versus minus 2%. I would just remind again that we still see the same size impact from IBM and the IBM content this year, so our down 2% to flat is outside of the IBM content is up a bit more than 1% and were up 3%, depending on where we land. And that's, again, a demonstration of our capabilities, our work with our alliance partners, our consult momentum, et cetera, et cetera. Harsh, you want to?

Yes. I think it's important to talk about a few things. And Kevin, if you open under the cover slide, this is after 3 years for the first time we had in fourth quarter growth in U.S. And we do see continuation of that like. So now you connect back with the same modernization discussion is happening with most of the customers like. So you can clearly see the connection back with sovereignty. The delays that we see in those decision-making is more prominent in Europe versus in U.S. and that is kind of giving us a bit more confidence on how we get to where we need to get to kind of after 3 years. And that I see as build-out of confidence. And then you say, how do you range between 0 and 2 is kind of what is the rate and pace of closure because we still have a starting backlog and there is still in year revenue that you have to build and that is going to be a function of the rate and pace of whether it's the large deal versus more consultative and smaller deals kind of that has a different revenue yield.

So you can be on 2 different sides of the pole depending on rate and pace and the type of transaction with a good mix we are starting. So that kind of gives us kind of from signings to the rate and pace of that signing and how you hear from that signing kind of gets you the range with the 2 sites, 1 U.S. kind of with the strength in Europe with the softening of there are kind of 1 moving faster the other 1 kind of with the delays that we are seeing that creates the range of possibilities.

Operator next question, please.

Yes. Our next question comes from James Faucette at Morgan Stanley.

I wanted to just touch on how you're thinking or how -- where you're seeing customers prioritize spend and maybe how that's changed versus a year ago. And in particular, I've been intrigued by a lot of the technology evaluation that companies seem to be doing in where they want to push data and how they want to structure it for AI applications. whether that be in the cloud or maybe even running on-prem for longer, et cetera. So just love to get an update on where you're seeing customers prioritize their spend right now and how you're moving to address that.

So let me kind of talk about this security, governance, evolution of AI, data sovereignty is kind of driving many of these discussions. And the emergence of private cloud, which was what I would call a couple of years ago was not as prevalent, has become very prevalent. And I think data and where you keep data and how you run AI and where you use what model is becoming important. And I think private cloud has some evolution from that perspective compared to hyperscale as to kind of what type of models you can use and where and who's investing.

So that certainly is putting most of our customers in kind of what I call dichotomy as to where I keep because these are longer-term decisions but many of our customers are also in regulated industries. So they have important mainstream estate. So they're also saying, how do I provide micro services from a mainframe because I don't want to lose the capability and capacity it has, so how do I modernize the platform, how do I modernize my core banking application if you're a bank.

So it's kind of -- we are seeing most of the banks where you would have seen especially in the regulated industries kind of 2 states award, kind of mainframe and hyperscaler. Now you have an added complexity of now because of data sovereignty now they have to kind of think about that too because that's becoming more and more important. How do I keep more control of my estate, my data and AI. And do I bring AI models into my estate? Or do I take my data into hyperscaler so that is kind of the evolution you're seeing and then some of it is going to be driven by the business process transformation they have to think about, which is Agentic AI. How do they use Agentic AI, and that kind of brings all their processes and portion.

So it's a complex environment. Like it's a very complex environment and it puts us in right in the middle of those conversations because we have been with these customers for decades and who knows their process and environment better than us like. So that is an opportunity for us.

Yes. No, I think, Harsh, you're right. I think the key word in every -- in all of our customers' minds is modernization, it takes a slightly different form based on their starting point. again, I'll go to Bank of Luxembourg, where we're going to help them improve their customers' experience with Agentic. So they want to be a leading European agentic bank. I think that's driving a lot of investment dollars in our customer base. Whether that's a dwell, private cloud, public cloud, it will be a mix. And then obviously, because of the role they play in the world, and particularly in Luxembourg, they're always looking to improve operational resilience, not only at the regulatory standards, obviously, but even to make sure they have the great customer experience. So modernization is the word of the day. Where they start depends on their tech debt, but a agentic AI, modernization, resilience, they're all big investment themes here. .

Operator, next question please.

Our next question comes from Jamie Friedman at Susquehanna.

I appreciate all the additional disclosures here. This is really good, especially Page 14, we kind of sum it up the signposts. I wanted to ask Martin, in terms of the evolving IBM relationship, the 3-point unfavorable impact. And I got your comments about how that's going to impact fiscal '27. But if you think about how that is performing relative to the original guide out to 2028, I just don't remember if it was or if you said, was that already embedded in the assumption? Or is this evolving different than what you might have thought?

Yes. Thanks, Jamie. So no, it is different from what we thought not only back in Investor Day, 2.5 years ago, it's also different from what we thought when we started last year. That's why we started to spend more time explaining it. And so the investment community can understand it. So we had assumed as we got through the focused account period that we would -- or that our customers would continue to consume IBM's technology in the way they had in the past. It was not an unreasonable assumption at the time. And for a number of reasons, now they have -- customers have obviously choices. They have an ability to create a relationship. Some customers just like to have a direct relationship. .

And so no, it has evolved differently from what we expected. But it's really only -- not really -- it is only on the revenue side. We have 0 ability to mark up IBM's content within our deals. So it really just comes down for us to customers choice on how they want to consume that technology. And obviously, it would affect our sign of our -- the size of our signings, it would affect the size of the backlog, it will affect the revenue performance. but without any ability to mark up their content, it doesn't have any impact on our profit. So it is different is the short answer to your question.

Operator lets move to the next question please.

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

I'm just curious with the sales cycle staying totally long here. What do you think is the catalyst to get sales cycles to normalize and get to a better place or even improve? I know you're talking to clients all the time. Is it something related to the frontier models getting better and more clarity around agent deployment, things like that? I'm just trying to better understand what we should be watching for, for that to heal?

Yes. Yes. Look, I'm not sure that on any individual customer basis that the environment is going to return, let's say, or resume something that existed in the past. Again, given the nature of what we do, the choices our customers have and the environments in which they operate, I think everything, every bit of technology evolution continues to add complexity. So at the individual customer level, I think it's -- we're not going from where we are today back to some faster sales cycle. For us, the key -- and I can ask Harsh to comment as well. For us the key and Harsh said it in his remarks, for us the key is to make sure we're moving into new customers to make sure we have new content in all of our deals so that that bigger pipeline yields in the time frames that we need.

So I don't think we're -- like I said, I don't think we're going back on an individual customer basis for making -- to making decisions faster. But I do think, for us, our focus on expanding our footprint in our customer base as well as chasing and signing new customers is critical for our business model.

Yes. The other thing that I would add is kind of this is a year where we, for the first time, seeing a very high level of new scope in our pipeline. And I'll kind of use 1 example that Martin kind of mentioned in his prepared remarks, the European bank.

One of the first things we had to do with them was to kind of help them think about vendor-agnostic, private cloud environment as they're thinking about how they're going to have more control on the data, and they're kind of moving some of that away from hyperscalers, like because they are thinking about their own destiny in a different way. And then we are working in a joint collaboration, creating a center where we're going to jointly kind of work on this.

But now the second thing that happens is because of the regulation in that European market, they have to get their services, which kind of their transactional system, core banking sits on mainframe, it's on older application environment. which they have never been able to expose and they have to instantaneously provide those services to other banks, other ecosystem. Now we are helping them through Agentic AI understand the cobalt environment. How you're going to convert. What documentation exists is not even known. So now we are kind of taking a step up -- so it's important that we continue to maintain a strong hold with the customer, help them evolve not only from an infrastructure point of view, but now evolving into their application environment.

Like this is kind of where, what I call faster, smaller kind of land and expand model through the new scope, like that's kind of -- that's going to be the next stage of our evolution than just big deals, renewals, which sometimes can longer. Like you just enter a customer but never leave, right? -- follow their wallet.

SP-6 Yes. That's helpful.

Operator, I believe we have 1 more question in the queue.

Yes. Our last question comes from [ Jonathan Lee, Agugahan Partners ].

I want to build off of Jamie's question from earlier, your earnings materials points to your $1 billion free cash flow target for fiscal '28. And we heard you highlight the $1.2 billion target for adjusted pretax income but if we heard you correctly, you called out low single-digit revenue growth for fiscal '28, which sounds like a downtick versus your mid-single-digit fiscal '28 target from the Analyst Day.

Can you unpack what's happening with the downtick there? Is that an IBM dynamic? And given the longer decision cycles and complexity as well as sub 1x book-to-bill you saw this year, how should we think about the path to that fiscal '28 revenue growth?

So a couple of things. One, again, as I mentioned with Jamie's question, when we set out the triple double single, we did have a view about what the IBM content was going to be, and we assumed it was going to be kind of neutral and that doesn't look like it's going to be neutral, right? We know last year was more than 3 points this year similar size. Over time, that will diminish. It's not going to be 3 points or more than 3 points forever. .

In the time frames for 20 -- we'll see. We have to see how do we partner with them, what choices do customers make this year all throughout '27, and we'll then have a better view of whether our initial assumption about it being neutral will hold in the '28 itself. It has not held as I said, for the first couple of years here. But again, the reason that the triple double single holds up is because it has no impact on our profit. Harsh, do you want to add?

Yes, Yes, I think if you look at pipeline where we are starting and the scope of work we are doing, meaning if you look at 2 years back, the modernization, data sovereignty was not a big question, like, so you have to kind of think about what does it mean from sales cycle extension and kind of our penetration. So we have to think about business and how we use Agentic to be a bit more differently relevant and if you look at the last 4 years, last 4 years of gross profit book-to-bill has been kind of above 1, right? So that's kind of one I look at my consult, like my consolidated book-to-bill over the last 3 years have consistently been double digits kind of more than 1.1.

So that's kind of another one. And when I look at my consult pipeline, which is around the new scope, that also gives me the confidence that over the last 3 years, we have signed more than what I have booked, so that kind of continues to give me the confidence with the pipeline, with the bookings I have and the relevancy of type of discussion I'm having because these are higher-margin services, not just linked with an OEM, like -- so that's kind of gives me path kind of both from the revenue that we have to manage kind of with the IBM relationship, but the larger relevance with the customer and the wallet that we have to follow.

Thank you, Harsh. I think based on the operator saying that was the last question, I do want to thank everybody for joining us today. As you've heard, our focus this year is to drive progress across all of our targeted growth areas, Kyndryl Consult, the hyperscaler work we do, our focus on modernization and our customers' focus on modernizing in AI and obviously, we're going to execute the actions that Harsh went into detail around to streamline how we operate.

We've got a very focused team. We are confident that we can deliver. We're confident in our ability to deliver on our multiyear objectives. And again, you see that in our prepared materials. And all at the same time, what we do continue to do what we do every day, which is deliver the world's best infrastructure services to our customers. Thanks for joining.

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

[ James Faucette here ] at Morgan Stanley. Very pleased to have Kyndryl. We'll be speaking with Harsh Chugh, Interim CFO of the company. But before we get started, I do have a disclosure to read. Please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representative.

So maybe as a preamble, I'm sure that you're well rehearsed in going through this, Harsh. But can you walk us quickly through the SEC matter? What was that issue? And maybe more importantly, what was not an issue for that SEC matter?

Thanks, James, and good morning to all of you. And as you know, in matters like this, it's -- we are very limited in what we can talk about. But I think it's important to talk about a few things, which is -- it's a voluntary disclosure request. We are cooperating. That's number one.

And more importantly, the financials are financials for us, like there were no restatements. Important to also talk about that we do have material kind of weakness as we disclosed. And those are around disclosure processes. We do have a remediation plan, and we are working expeditiously. But more importantly for us and the management team is we are focused on our business.

Right. Interesting. And that's an important point, and it seems like we're getting past that. So let's talk about the business this morning, Harsh. First, I guess probably the most common question that we get from investors and maybe is the key question on Kyndryl is, what's lending you confidence in being able to maintain fiscal year '28 targets despite fiscal year '26 coming in a little bit weaker than you had expected? And in particular, what specific parts of the business do you expect to accelerate to bridge the gap? And I guess, how much of that -- of your fiscal year '28 plan depends on some sort of recovery in the discretionary spending component of IT budgets?

Yes. And I think as we talked during the third quarter earnings -- and I specifically talked about it. Like while the sales cycles have extended and the complexity of decisions that our customers are making in the environment is very different with the data sovereignty and AI. But I -- while it might look like a headwind, but you have to think about the opportunity pool that it's creating for us. Like we are not what we used to be at the time of spin. We didn't have much relationship with hyperscalers. Kind of we are -- from a run rate perspective, this is kind of close to a $2 billion business that we have a relationship with Broadcom in terms of the penetration in the private cloud that we are going after.

But more importantly, as you look at the types of signing that we are doing. And post-spin, 2026, 2/3 of our signings are post-spin. And as you look at 2027, it's going to be about 80-plus percent. And then as you go into 2028, it's going to be 90-plus percent. If you go underneath the characteristic of the deals that we are signing, the characteristic is a very disciplined approach, like in the new signing we are doing. It's 25%, close to that number in terms of the GP and high single-digit PTI margin, kind of that we have been [ hitting ]. And so that kind of creates an opportunity pool of what we have been signing, and it's kind of growing in terms of the new signing.

The other market that I would talk about is the last 12 months of the gross GP dollars that we have booked versus what we have actually built, that's kind of $4 billion that we have booked and $3.3 billion that we actually built, so kind of in terms of the ratio. So we are creating the gross profit dollar kind of pool and the disciplined approach of kind of the new content as well as the signings, which is kind of post-spin, gives us the confidence kind of where we want to get.

And by the way, 2 years is a long time. Two years is a long time. And things have changed in terms of our broader relationship in the ecosystem and kind of how we are becoming more relevant across than just being, I would say, at the time of spin, kind of more IBM-centric only business, a broader business.

Got it. So when you think about exactly that and then that broadening, can you talk a little bit about where you expect to see broadening or where you're seeing broadening of opportunity and how you expect that evolution to continue to develop?

Yes. I think if I take a step back, the world is -- and our CIOs and CTOs are going through what I call a change that they have never experienced. And I think I will use one simple example, and that you should try it. Ask any CIO this question, "Do you know where your data is within the enterprise?" That's a very hard question. And on top, you put the regulatory pressure of the regulators asking kind of from a data sovereignty point of view and who owns the data, where is the data residing, what is the IP being used? And that creates what I call the complexity.

And with the emergence of agentic AI, it's not challenging the CIOs and CTOs to think about what the future proof of my IT environment should look like. Along with the cybersecurity issues that have always existed, now it kind of gives a bit more edge to the threat actors to kind of have a bit more using agentic AI. They can also use agentic AI. So data sovereignty, agentic AI and security are kind of changing this paradigm, all coming at a rate and pace that humankind cannot keep pace with. So now because many of our customers are in regulated industries.

And we have been with them for decades. So the understanding we have with their business. And we're building capability across the broader ecosystem. Kind of more relevant with hyperscalers, like which we were not at the time of spin. Our broadening relationship with Broadcom that's becoming more relevant if you think about VMware from a private cloud, which is reemerging as a new trend. And being very relevant and still very important partner of ours, which is IBM in terms of the largest estate of mainframe that we manage.

So think about the across footprint of ecosystem. Having this relevance in the regulated industry and relevance with the broader ecosystem, it puts us in a very unique position with many of these customers to bring our consulting capabilities, the modernization capabilities, that was not as prevalent and relevant kind of 4 years ago. So I think that kind of gives us a business context apart from the financial context I gave in terms of the signings, which are new signings with better margins that we are signing.

And -- so let's talk about free cash flow because I want to come back to margins and some of these other points. But speaking specifically about your fiscal year '28 free cash flow target, does that depend more or less on working capital assumption changes? Or how do you think about the elements that build up to your fiscal year '28 free cash flow targets?

I'm glad you brought this topic. I think there was a conversation on this during our Q3 earnings. If you look at last 2 years, the biggest driver of our free cash flow was what happened to our pretax income and the cash taxes. Working capital is kind of not as a relevant element. Over the longer term, that's what you should expect. Working capital is not the biggest driver or much of the driver.

What's important is as business leaders, we still have to manage our working capital. We still have to think about the cash conversion cycle. So quarter-to-quarter, it is a variable that you have to manage. It's a business paradigm. You manage kind of what you're doing with your customers from receivable, what you're doing with your supplier base. So I think this is kind of what I call a disciplined approach in managing your working capital because you want to manage cash conversion. But from a free cash flow perspective, as we look into the future, longer-term perspective is that working capital is something that's not relevant from that perspective.

Right, right. Got it. Got it. So let's go back. And once again, you touched on this just a moment ago, but a couple of times in talking about like the engagements that you're having with your customers and what that development may look like. But how should we be tracking and thinking -- as investors and people outside of the company, how should we be thinking about and tracking forward-looking bookings trajectory and in particular, how those build up to reaching your targets?

Yes. I think it's a good question. I would kind of point you to kind of a few important metrics to think about. And one of the key metric is kind of are we booking from a gross profit dollar perspective more than what we're billing, right? That's an important key indicator. That's kind of one.

From a business perspective is our relevancy in terms of what we bring to our customers in terms of the broader ecosystem participation. And in the customer base that we are kind of trying to manage, is this going to resonate? Like modernization as an example. Private cloud is an example, like security as an example. And what agentic AI capabilities we are bringing. Like it might not be as apparent. Our delivery has so much of agentic AI now being built into it. So we are a big consumer.

And I will kind of also give you, as a practitioner -- I was -- in my previous role as Chief Operating Officer, I was also doing agentic AI in our procurement process, right? So I think the business relevancy and things that we are doing in terms of -- from a financial metric point of view, are we creating kind of better margin deals in our engagements.

So let's -- I want to parse a couple of things, just so we're clear. When we talk about like improving gross profit bookings relative to revenue or relative to what you're recognizing, just talk a little bit about why we should be tracking gross profit versus most of the time, the quick and easy would be to just track book-to-bill versus revenue. So talk a little bit about why the difference in gross profit matters for you.

Yes. I think if you think about where we were born from, many of our contracts were not profitable, right? So we had account focus. And much of the signing were kind of what we actually inherited. Now it was a more disciplined approach as we were going as to what matters to Kyndryl in terms of our capabilities that we're bringing, in terms of what we are presenting to our customer and what -- and are we getting a fair share of our profit, right. When we began, 0% of signing was from what this management delivered on. Now last year -- or this current year, it's 2/3 of our business is coming from the new signing. And by the time we get into 2027, it's going to be 80%. So is there a disciplined approach of we're getting the right content, the right GP margin.

We did talk about IBM as potential kind of where customers are making some choices, where they're going with the CapEx versus OpEx. And some of these ecosystem where we might be acting as a bit of reseller, you don't make much margin. But are you earning the right margin on the broader capability you're bringing? And some of the content may be high margin, and some content might be low. But on a collective basis, are you bringing the right share of profit? And that's why GP dollar is important for us.

Got it. Got it. So I want to also touch on something you mentioned a couple of times. Private cloud, right? Like what is happening with private cloud versus public cloud? I mean it seemed like over the last few years, I mean, even going back maybe the last decade is that there was very much this idea that private cloud eventually would be completely subsumed by public cloud. I know in other parts of the market that we watch very closely, for example, financial services, everybody has been waiting for years to move off of private cloud to public cloud. So what's happening with private cloud? And is the changing technology landscape also adjusting some of the road maps that people had in their minds?

I'm glad you asked this question. I think the reemergence of private cloud has some basic tenets that I think it's important to kind of compare and contrast. The cloud-type experience private cloud could never provide, so from the DevOps perspective and development community perspective and the native creation of application, it was a lot easier experience in hyperscaler versus private cloud.

I think VMware or Broadcom and some other players are actually bringing certain new technologies. Like in terms of VMware, they're going from VCF 7 to VCF 8 to VCF 9. It might look a bit more technical, but they're trying to make the private cloud cloud-like experience with the full integration of virtualization all the way to the PaaS layer. Why it's important? That's kind of one. Is there a bit of less difference in the development and application communities to see there's less difference.

Right. So for the developers and the people running it, they may be -- you might be able to get to more parity of features between public and private cloud?

There's still more work to be done to get to that point. But then one of the other biggest driver that's driving this is data sovereignty and AI. And let me explain why. Would you actually want to move data closer to AI? Or would you want to move AI closer to data?

And let me explain. If you want to run AI and you have workload and you're in hyperscale environment, your data sits with the hyperscaler and you. Whereas in private cloud, you can bring AI closer to your data. So now this is kind of where the reemergence of this AI war and the data sovereignty war. And this war between hyperscaler and private cloud has actually created an impetus, which is also industry-led, kind of the regulation-led data and AI is creating a new debate that companies didn't worry as much, but now it's becoming real. So that's why you see this reemergence. Even in our customer community, we hear that they actually are now starting to think back, kind of bringing some of the workload back into private cloud environment.

Interesting. Is that -- so like the logic -- and it's an interesting question or point. How much of that is likely to be driven entirely by regulation or legal requirement, like you said, data sovereignty? When you say that, I often think about some of the laws and regulations have been put in place in geographies like Europe versus how much of that is purely strategic decision-making on the part of different parties and saying, "Hey, even if we're not subject to regulation or law, this is still something that we want to do for our own strategic benefit."

Yes. Again, this is a very interesting thesis, and I'll just put myself in the shoes of -- as the Chief Operating Officer when I had -- I was the Chair of our own cyber governance at Kyndryl. That's kind of one side of me. The other one is kind of building agentic AI in my procurement processes. I used to have my CISO with me, talking to the companies who I'm working with to kind of get the domain-specific knowledge in procurement processes. The bigger debate you have to think about is when you have AI models and when you're taking data closer to the AI model, are you actually sharing some of the knowledge from your data and AI models, kind of?

Yes. I was reading an article yesterday in The Wall Street Journal about a guy that just was uploading all his contracts to ChatGPT. And I was like, well, is that a great idea or not, right?

So think about it. Now you are a European business. and you are, let's say, in Germany. Are you willing to send your data to a hyperscale environment? And what do they learn from it, and that becomes an IP that gets used in some other places. It's a debate that's going to evolve. The whole governance around agentic AI is what I call -- I would quote it as late '90s when we were talking about emergence of cloud. And they were saying, "Well, is cloud actually secure?" That debate took 5 or 10 years before that debate went away.

Agentic AI and data sovereignty is what I call is in that early stage of governance. Think about you're going to have agents -- sorry, agentic AI coming from different environment. What is the governance principle? Who governs this? And how it gets governed? What are the large language models that are embedded in these and what data elements have been used?

Right. And do you see customers proactively saying -- like already making decisions on that debate saying, "Hey, we're okay with it, so we'll go ahead with our public cloud migration,"? Or do you have customers conversely already saying, "You know what, we've already decided so we're going to reengage on a private cloud strategy,"?

If I take a step back, and I would say most of the customers we deal with are going to be in all 3 environments. What I mean with they're going to be in mainframe. Mainframe offers unique platform kind of capability that none other platform offer, like from a security resiliency and encryption point of view.

Private cloud is becoming more relevant because of the regulation and AI, what gets stored where. It's more the data in your control, more AI in your control and hyperscaler from the DevOps perspective, and they're also kind of far ahead in their own AI capability.

So most of these companies have investment in all 3. The question is what is the right platform choice for way you keep system of record to system of engagement and how do you bring this data sovereignty and AI and application. There is a bit more governance and maturity that has to evolve from here. But I want to be, as Kyndryl, be relevant in all spaces. So where customer wallet goes, my wallet share follows.

Right, right, right. So interesting conversation there. Let's talk about the budgeting and sales cycle in the current environment. You recently noted some lengthening sales cycle across Kyndryl Consult and hyperscale-related revenue. Help us unpack the key drivers behind this elongation, at least from where you sit, and if you've observed any changes of late?

It's no different than what I was struggling with as the Chief Operating Officer. I'm doing agentic AI implementation and procurement processes. And I don't know kind of from a governance point of view, what data is being processed, where is that data? What is the implication of agentic AI? And how do I future-proof my environment?

So think about most of the discussions we have with our customer, they are more long term in nature. These are not a 3-month engagement.

So they are thinking about how do I future-proof my IT environment, IT architecture? And I'm in a regulated industry, working with Kyndryl as an important service provider. How should I even think about evolution of these things? There are platform choices they have to make, hyperscaler versus private cloud versus mainframe. Kind of what application goes where, agentic AI, what disruption it would create in the application environment.

So these discussions are more because the complexity of how do you future-proof because these are longer-term decisions. So you have to be -- you have to create a bit of nimbleness in your IT environment so you can move. What is the level of modernization that is feasible? What is the cost model kind of go forward? And how do you keep the flexibility and keep in mind the data sovereignty, how do you meet the regulatory changes that are coming? Like it's not -- like every 3 months, there is something different.

And I'll actually even give you an example. We are actually in the middle of closing an acquisition, Solvinity, that we announced. Just a few months ago, it was not a question, but now it's a debate in Parliament -- in Netherlands Parliament. Because it's talking about a cloud service provider in Netherlands providing support to the government entities, the question in Parliament is, is a U.S. corporation going to have access to that cloud service provider or they're going to become -- so what does it mean, right? Like -- so those questions were not -- kind of 3 months ago, were not as big as they were starting to be. So most of the customers are starting to have this conversation.

So it's the regulatory pressure, the data sovereignty and AI. Security was always there, becoming even more complex for them. So the reason I even call it as a tailwind for us, while it might look headwind, the tailwind is, because it's bringing us into more and more complex decisions where I can bring more value because we are already working with these customers in regulated industries because we understand their business. So I'm more interested in getting that incremental scope in the discussion rather than getting a deal signed, which may not be also worthwhile for customers because they haven't future-proofed.

Right, right. Yes, they still have to figure out where they're going, et cetera. Interesting. So I could spend a ton of time on this topic, and maybe we'll circle back to it. But I want to make sure that we hit a couple of other things. And in particular, this once again was a topic that came up in the last call was the relationship with IBM and that revenue model. How is that evolving, particularly between IBM software and hardware and the services that are tied into the IBM ecosystem? And how should we anticipate that changing relationship impacting the financials?

I'm glad you're bringing up this question again. And it's so near and dear to me because at the time of spin, I was appointed as the IBM relationship [indiscernible]. So I have lived through the evolution of our relationship. And most importantly, this is a very important relationship to us. our customers rely on an important platform, which is mainframe, and it's very core to critical systems that IBM provides in terms of their IP and capability. It's very important for customers that we provide the certainty of the uptime on those.

So it's very, very joint collaborative engagement in many situations. But I think when -- just going back to the spend conversation that you had. Like at the time of spin, we had about $4 billion of spend. But we also carried -- 40% of contracts that we had at the time of spin, we were not making those kind of no margin to low-margin kind of business. So we actually had an account focus initiative. So many of those engagements, we actually work with customers and IBM to make sure that we could restructure the contracts, make sure that the content, the IBM content can go direct with customers. So that spend evolved over time.

I thought we were -- we thought that we were over with this, kind of all the customers because most of our account focus initiative was significantly done at this time. But customers are continuing to make those choices. And let me explain why they are making choices because they have to pick what platform they're going to be on longer term. As you and I talked about mainframe versus private cloud versus hyperscaler.

IBM continues to bring their own new innovation, any acquisition they are doing. Customers will also make choices on whether they want to do a CapEx base, meaning they want to sign a big ELA and kind of make a bigger commitment and longer-term commitment with IBM. Or they might want to kind of get that content through us in an operating services base. We do not see that this is a resold capability of IBM that you can command significant margin. Like it's a lower margin kind of business, while it's a high-value business for us in terms of the services we provide and it's high value for IBM and its important content.

So I think it's now about $2 billion of business that we have or spent with IBM. It's a customer decision. They will make those choices. What it can have is the revenue could shift because of customer choices, but it's not going to have any material impact on our earnings because it's lower margin to begin with. It's a resold piece of business.

And then speaking about IBM, I want to circle back to a technology-related question. In the last week or so, IBM shares moved on concerns that newer AI tools could reduce the need to modernize legacy COBOL workloads. And given your work with IBM, can you walk us through the specific services you provide to IBM-related environments today? And how do you see AI changing that demand over time? And I guess we're just trying to conceptualize like, okay, are these kinds of AI threats to a lot of this legacy and long time deployed technologies, does that adversely impact you? Does that help you? Just trying to get a better handle there.

One thing I would say is for those -- there is an op-ed Rob Thomas from IBM wrote. I think it's an interesting article, and I ascribe to that article, people should read that, like that's kind of one. But more importantly, COBOL was kind of one of the discussions that came up in this. COBOL actually is in both distributed and mainframe environment. It exists across multiple environments.

It also came from the context of modernization. Modernization is a much bigger conversation. It's not just about reading a code which is written in COBOL. The modernization is a discussion about your data architecture, your application architecture, your process flows, your transaction element, how is it connected with your business. What this can do, some of the tools can read the language and can create documentation for what that code is doing. It has what I call -- it has improved the discovery element of what that code is doing. But that's just the initial step of a bigger modernization discussion, which would be what do you want to keep on mainframe versus what application you want to modernize.

The silver lining in all this for us as Kyndryl is it has actually lowered the barrier of entry for Kyndryl because we were not in application space. But this has lowered the entry barrier for us because now we can do certain things. And understanding the application environment, that would have required a lot more resources with application capability. We require a lot less capability now. So I think that's the silver lining. So it is -- it creates better relevancy for us from a modernization perspective because we can also now bring a little bit of more application skill set without the size of the application business that we had.

Got it. So let's talk about in the last few minutes here, impact on financials and kind of how to think about a couple of key things. First, margins. How should we think about the sustainability of margin improvement once the benefits from your strategic initiatives are fully realized, especially if sales cycles remain a bit elongated?

Yes. I would kind of bring back to the same conversation I was having. Think about the gross profit dollars that we are guiding. That's kind of number one, kind of $4 billion in the last 12 months. What we built was $3.3 billion.

Second, the amount of signing that's post-spin. This year was 2/3, and it's increasing to 80% by next year, and the following year, 90%. And our discipline in making sure that as we are signing new deals, at what margin are we signing, right? The disciplined approach of getting the right mid-20s GP and high single-digit PTI margin. And number of investments we are making like in Consult, as they start to scale, kind of those become what I call a contribution to kind of the margin that we all should expect kind of move upwards.

Got it. Got it. And then capital allocation. Talk and remind us about your capital allocation priorities, mainly as it relates to your existing debt profile. And how we should think about the -- where you're targeting on that debt level and what you want to do with the capital that you are generating?

It's an interesting question, and we always think about capital allocation as a holistic approach. And it's a long-term holistic approach because, number one, we want to keep a strong balance sheet. That gives us the financial flexibility. That then allows us to think about are we making the right investment in a business like Consult, like Kyndryl Bridge.

Important for us to also think about tuck-in acquisitions, Solvinity that I talked about. And we continue to kind of think about acquisition that becomes an add-on in terms of shaping our business. And then at the end of last quarter, we had about $350 million of repurchase, buyback authorization still remaining. It will continue to be kind of a holistic approach, and that's how we think about capital allocation.

So Harsh, just to wrap up here. You've come from IBM into Kyndryl, managed relationship, had operational roles. Now you've stepped into the interim CFO role. What's the top 1 or 2 things that you think we, as investors, should be tracking in terms of your path to returning to growth and ultimate acceleration of growth?

Yes. I think it's customer relevancy. Customer relevancy because if you're relevant in the broader ecosystem and we are solving the real customer problems -- and modernization is a good example. And within modernization is kind of the broader ecosystem, like hyperscaler to private cloud to kind of mainframe, we have to be relevant across.

And customers will make their choices. Those are going to be driven by what is happening with the business, which market they are in, which country they are in because regulations will define -- is it heavily regulated? And as long as we are deeply embedded with them, with these long-term relationships, that's going to drive -- as their wallet shifts, am I going to shift with their wallet as long as I'm in the broader ecosystem, and I'm able to deliver. I just don't want to be one services only. It's the breadth. And then you follow the customer. And I think wherever the customer wallet goes, we go with them.

Great. We're out of time. Thank you very much, Harsh. I really appreciate you joining us here at the Morgan Stanley TMT Conference. It was fantastic.

Thank you, James. It was nice meeting you.

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 investor.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 quarter performance, which remained strong and delivered double-digit revenue growth but came in below our expectations. Second, the way we collaborate with IBM, one of our key alliance partners is continuing to evolve. I'll speak more about that in a minute.

Before I do, I want to discuss our earnings variance in the quarter. We've made investments to support our growth in Consult. These investments have taken longer than expected to contribute to the top line due to the lengthening of the sales cycle that I just described. Coupled with an unanticipated decline in overall employee attrition, our labor costs are higher in the near term given the levels of turnover we've assumed as we've demonstrated over the last 4 years, and we'll address our labor efficiencies.

Importantly, we've had positive momentum in key aspects of our business including Consult and Alliances, and we have a strong foothold in the areas where market disruption is occurring, which gives us a running start as more customers are ready to scale AI and implement sovereign solutions. Therefore, we're driving towards our key fiscal '28 targets and we remain confident in our growth strategy.

As I mentioned a moment ago, it's important to put a bit more context to the evolution of our partnership with IBM. At the time of the spin-off, as we've covered many times, the commercial agreement that we inherited essentially put 40% of our revenue in a low to no margin position. We call this our focus accounts initiative. Over the last 4 years, we've addressed most of these focus accounts, and you can see that reflected in our revenue performance and our significant profitability improvements.

As we enter this fiscal year, we believe that by and large, our customers who consumed IBM's innovation through our services contracts would continue to do so in a similar manner. What we are seeing is that our customers' consumption models for IBM's innovation are changing. While it doesn't change the scope of our services or our ability to grow our services content, it does have an impact on the size of our signings and therefore the revenue we receive over time. And as we've said, this has a limited impact on our earnings.

So this chart shows our revenue performance in constant currency, and you can clearly see the revenue declines through our focus accounts initiative. And these declines have continued as the evolving IBM content had a 3.5 point adverse effect on revenue growth. To give you a sense of the magnitude of this, when we were spun off, the annualized run rate of our spend with IBM was nearly $4 billion. And now it is approximately $2 billion, so it's essentially cut in half. This matters because our customers will decide how to best consume our high-value services and IBM's innovation.

We continue to evolve the joint Kyndryl and IBM value proposition as the pace of modernization and mission-critical environments accelerates. The goal of the work we do together is to create greater value for our customers, and we believe it is important to understand both views of revenue growth.

Now let's shift to our primary growth vectors and the actions underway to execute against a clear set of priorities. Let me start with our hyperscaler alliances. At the start of the fiscal year, we expected we would deliver $1.8 billion in hyperscaler-related revenue. And after a strong execution in the first half, we expected to exceed our initial target, and we are now on track to realize nearly $2 billion in revenue by the end of fiscal '26.

To step back for a second, the transformation that this business has undergone starting with nearly $4 billion in IBM spend, which is now approximately $2 billion while, at the same time, going from essentially 0 in hyperscaler-related revenue to nearly $2 billion and growing is profound. And it demonstrates how we've transformed Kyndryl's underlying capabilities and positioned us to grow profitably and be part of our customers' future with all of our partners.

We've also invested heavily in Kyndryl Consult and will continue to do so as it is a key growth driver for us. As I said before, while Consult has performed extremely well, Consult's performance in the third quarter was below our expectations. Additionally, to address the factors that have impacted our revenue and our earnings, we're leveraging our Kyndryl Bridge operating platform and building even more agentic AI into how we deliver services to our customers to drive quality enhancements and enterprise efficiency.

We're consistently expanding our capabilities with a focus on AI, and our Agentic AI Framework is resonating powerfully with our customers. We'll continue investing in AI innovation labs and in related capabilities and skills to deliver emerging technologies to customers at increasing scale. We're further expanding our presence in private cloud, where we're seeing renewed demand driven by AI, data sovereignty and security requirements. And we'll work with our Alliance partners to align with those opportunities.

And at the same time, we will get our cost base back in line. We're operating with a clear strategic mindset, providing innovative and world-class services that are fully aligned with our longer-term goals. We are confident in our strategic direction. We're in a business with trusted customer relationships and long-term contracts that evolve all the time to meet changing market dynamics.

The operational adjustments we're making position us well as we move ahead. And as we head into a new fiscal year and drive our business towards our multiyear objectives with the strategy and actions we've just outlined, it's important to recognize the progress we're aiming to deliver and focus on delivering our fiscal 2028 targets. In fiscal 2025 and with our outlook for fiscal 2026, over this 2-year period, we estimate that we will deliver approximately $1.1 billion in adjusted PTI and less expected cash taxes of $300 million over the same period. Our target is to generate $800 million in fiscal 2025 and 2026 combined free cash flow.

So today, we have a strong conversion of earnings to free cash flow at the rate we've been targeting. As we continue to recognize more and more revenue from our higher-margin post-spin signings, we're confident in our ability to drive towards more than $1.2 billion in adjusted pretax income in fiscal 2028. And we believe we're well positioned to convert that level of earnings into more than $1 billion in adjusted free cash flow, and we still see mid-single-digit growth as we exit fiscal 2028.

With that, I'd like to pass the call over to Harsh. Harsh?

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 in hyperscaler-related revenue that we were expecting at the beginning of the year.

Through Advanced Delivery, powered by Kyndryl Bridge, we continue to drive automation throughout our delivery operations. Kyndryl Bridge incorporates more technology into our offerings, reducing our costs and increasing our already strong service levels. This is worth roughly a cumulative $950 million of savings a year to us.

Our Accounts initiative continues to remediate elements of contracts we inherited with substandard margins. In the third quarter, the cumulative annualized profit savings from our focus accounts was $975 million. A key takeaway point from this update on three-A's is that we have successfully implemented these initiatives, and they have become a core part of our operational discipline.

Turning to our cash flow, balance sheet and share repurchases. We generated free cash flow of $217 million in the third quarter. Our net CapEx was $210 million, which is above our typical quarterly run rate but is consistent with our expectation for the quarter. Working capital was a source of cash in the quarter. We have provided a bridge from our adjusted pretax income to our free cash flow. In the appendix, we include a bridge from our adjusted EBITDA to our free cash flow and more information on the free cash flow metric calculation.

Under the share repurchase authorization we announced in late 2024, we bought back 3.7 million shares of our common stock in the quarter, which represents 1.6% of our outstanding shares at a cost of $100 million. Since the inception of the program, we have repurchased 5% of our outstanding shares. We have approximately $350 million capacity available under our authorized program.

Our financial position remains strong. Our cash balance at December 31 was $1.35 billion, and we are rated investment grade by Moody's, Fitch and S&P. Our debt maturities are well laddered from late 2026 to 2041. We plan to refinance or use cash on hand to fund a near-term debt maturity of $700 million later this calendar year. And we recently drew $1 billion under a revolving credit facility.

We have increased flexibility ahead of our seasonally higher cash outflow in our fiscal first quarter as well as for other general corporate purposes, including tuck-in acquisitions. Our target has been to keep net leverage below 1x adjusted EBITDA, and we ended the quarter well within our target range at 0.7x.

On capital allocation, our top priorities: to maintain strong liquidity, remain investment grade and reinvest in our business, including tuck-in acquisitions and share buybacks. We have remained focused on winning business with healthy margins, and the December quarter was a continuation of this trend. Throughout fiscal 2023, '24 and '25 and now into first 9 months of fiscal 2026, we have signed contracts with projected gross margins in the mid-20s and projected pretax margins in the high single digits. As our business mix increasingly shifts towards more post-spin contracts, you will continue to see significant margin expansion in our reported results.

We have again included a gross profit book-to-bill chart that illustrates how we have been creating and capturing value in our business. With an average projected gross margin of 26% on our $15.4 billion of signings over the last 12 months, we have added nearly $4 billion of projected gross profit to our backlog. Over the same period of time, we have reported gross profit of $3.3 billion. This means we have been adding more gross profit to our backlog than our contracted book of business has been producing in our P&L.

Having a gross profit book-to-bill ratio above 1, at 1.2 over the last 12 months, demonstrates how we are growing what matters most, the expected future profit from committed contracts. It also highlights the quality of our post-spin signings. And our gross profit book-to-bill ratio having been consistently above 1 means that we have been consistently growing our gross profit backlog over the last 4 years.

As we have said previously, our core financial goals are to grow our revenues, expand our margins, increase our earnings and generate free cash flow. In light of our third quarter results, our outlook for adjusted pretax income this year is now in the range of $575 million to $600 million. We estimate that our adjusted EBITDA margin in fiscal 2026 will be approximately 17.5%. We also continue to see opportunities to drive efficiency in our operations both through Advanced Delivery and in SG&A functions.

On the topic of cash flow, with the expected cash tax of roughly $160 million and a net use of cash for working capital, this implies free cash flow in the range of $325 million to $375 million for fiscal 2026. As Martin mentioned, the principal reasons for our revised fiscal 2026 outlook are the longer sales cycle, the expected revenue headwinds from our evolving partnership with IBM, the investments we have made to support future Consult growth and the fact that it takes time to adjust our hiring to respond to lower attrition.

With that, martin, I'll turn the call back to you.

Thanks, Harsh. I want to note that today, we disclosed that the 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 press 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 over 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 just on the outlook and the revision. I understand you can't speak to the following here. But on the revision, given how confident you were last quarter in 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, nice to kind of hear your voice again. 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 and 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 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 with 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 in 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? I'm 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, you want to...

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 market. 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. Let me -- 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 -- I 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 valuation 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 have a 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 you mentioned, about 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.

A question would 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 cannot 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?

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 is linkage like. 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 uses. 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 gives 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 phenomena 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 consulting 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. 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 time line 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 so 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 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.

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 a full year book-to-bill ratio above 1. As a result, we're confident we'll deliver revenue growth in the back half of this year as we're redoubling our efforts to expand our services footprint throughout our customer base.

David will walk you through more details on these points, but I want you to keep in mind the following: we're entering the second half of the year with a larger revenue contribution from our committed backlog, including less of a headwind from having removed hardware and software content. We have incremental growth opportunities from Kyndryl Consult and the Hyperscalers and customer demand is driven by IT modernization, AI and cybersecurity. We're also operating with a clear long-term mindset, all fully aligned with our triple-double-single fiscal year '28 objectives, and we remain on track to achieve them. In fact, they represent the culmination of the strategy we've been executing powerfully over the last 4 years.

With our accounts initiative, we focus on removing unprofitable content and fixing unprofitable relationships. During this process, we kept adding more gross profit to our backlog even as we were shrinking our revenues. We also began investing in Kyndryl Consult capabilities in our alliances, driving scope expansion with existing customers and our ability to add new logos. You've seen the growth in Kyndryl Consult and in Hyperscaler-related revenue streams as a result of these investments, and that momentum is continuing.

We then turned our attention to signings growth, which drove our last 12 months revenue book-to-bill ratio above 1, a level we've maintained for 5 consecutive quarters now. And this has brought us to a spot where over the last 12 months, we're generating constant currency revenue growth aside from the estimated effects of removing hardware and software content. And the next step is for the content removal headwind to dissipate and the consultant Hyperscaler growth to continue so that we're routinely delivering total constant currency revenue growth. It's in this context that we believe the strategy we deployed is working despite the near-term revenue pressures we faced in the first half, and we're well positioned to deliver growth in the second half on our way to our triple-double-single fiscal year '28 objectives.

On today's call, I'll provide a deeper dive into the multiple growth drivers available to us, including infrastructure modernization. I'll also discuss how agentic AI will both be an operational and a go-to-market tailwind for Kyndryl. Before diving into the near-term opportunities, let me first highlight areas where we're already seeing profitable revenue growth. Among signings, our fastest-growing practices have been apps, data and AI and digital workplace. Our strongest geographies have been Canada, Spain, India and Latin America, and the projected pretax margin on our total signings continues to be in the high single digits.

Kyndryl Consult revenue has increased 32% in constant currency over the last 12 months and is now running at an annual pace of $3.4 billion. And our Hyperscaler-related revenues have doubled since last year, and we're tracking above our initial $1.8 billion fiscal 2026 target. Our excellence in service delivery is foundational to our growth strategy. Our innovative and outcome-based approach to managing, modernizing and optimizing complex technology estates drives significant value for our customers and fuel share of wallet growth opportunities. Simply put, customers entrust us with more work because they appreciate the quality of what we already do for them.

We deliver our mission-critical services through Kyndryl Bridge, our AI-powered operating platform. With Kyndryl Bridge, our delivery teams and our customers run on a single open platform for monitoring, managing and securing their IT estate end-to-end with an unprecedented level of real-time observability. Kyndryl Bridge now performs more than 186 million automations and generates 15 million actionable insights each month, making Kyndryl an ever more indispensable enabler of mission-critical services. And we have more than 100 partners integrated on the platform, including Cisco, NVIDIA, Oracle, SAP and ServiceNow, providing real-time observability that spans applications, databases, networks, mainframes and clouds across multiple technology vendors.

As a result, Kyndryl Bridge, combined with our knowledge of our customers' infrastructure, dramatically reduces risk. It enhances security. It sets guardrails and accelerates problem solving. It has solidified our reputation as the gold standard for infrastructure services. It's a key driver of our top-tier customer satisfaction and of how we're able to regularly win new scope during contract renewals. It's also a key driver of the $875 million of annual savings that our advanced delivery initiative is generating.

Our capabilities position Kyndryl the hardest secular trends like AI, cybersecurity risks, cloud migration, modernizing complex hybrid IT environments and industry-wide skill gaps. Our alignment with these trends is allowing us to drive future growth in multiple ways through expanded partnerships with our alliance partners, through scope expansions and new customer wins through mission-critical infrastructure expertise through incremental Kyndryl Consult engagements that leverage our technology-first mindset by uncovering new opportunities with insights from Kyndryl Bridge and our recently launched agentic AI framework and by capitalizing on the widespread enterprise need for infrastructure modernization that spans all 6 of our global practices.

I want to double-click on one of our growth vectors, infrastructure modernization. Our expertise in modernizing mission-critical systems and our deep rooted customer relationships are key drivers behind the double-digit growth we're achieving in Kyndryl Consult and the additional managed services scope we regularly take on. As AI adoption accelerates, large enterprises are under increasing pressure to address tech debt and modernize their mission-critical systems. We hear this from our customers every day, and modernization now extends far beyond just updating front-end applications. Organizations need to transform IT environments to meet the rigorous demand of AI-driven operations, addressing evolving cyber threats, maintaining regulatory compliance and leveraging new technologies.

Our experience and innovative solutions uniquely position us to help customers manage tech debt and deploy AI at scale. We know that nearly half of IT systems are at or near end of life, and all this tech debt represents a substantial opportunity for us, especially since most organizations use third-party providers for modernization. In fact, our annual mainframe modernization survey showed that enterprises that have modernized their mainframe applications or migrated selective workloads to other platforms are realizing a two to threefold return on their investment. This underscores the tangible value of IT modernization and driving operational efficiency and business growth. Kyndryl is a trusted services partner that only runs but also transforms and sustains our customers' most vital IT assets. Relatedly, we're both using AI in our own operations and enabling customers to deploy AI in their businesses.

For starters, our service delivery through Kyndryl Bridge features advanced AI. Leveraging machine learning, Kyndryl Bridge proactively identifies risks before they impact operations. AI-driven recommendations empower our teams to resolve issues in real time, while our intelligent AI agents streamline knowledge discovery and accelerate incident response, building greater efficiency and resilience across the IT environments we manage. Our customers also need help with their own efforts to build and deploy AI agents using open source tools. By combining our infrastructure-first mindset with our deep systems expertise, we've created a dynamic agentic AI framework for our customers. Our framework incorporates a distinctive design process, specialized tools and an innovative engagement methodology that blends agents within complex IT environments to drive business process innovation and productivity.

The Kyndryl ingestion agent uses company documents, procedures and data and goals to develop a comprehensive organizational process map. And with this as context, the framework's agent builder capabilities allow the organization to design, test and launch AI agents to streamline workflows in accordance with relevant security and compliance standards. In other words, we help enterprises turn AI ambition into scalable transformation. And the demand runway is clear as roughly 25% of our signings already contain AI-related content. We're working with insurance companies, banks, manufacturers, health care providers and government agencies to deploy AI agents to streamline processes, deliver real-time analysis and expedite decision-making.

Our agentic framework will help accelerate our customers' AI adoption and drive incremental opportunities for us going forward. To look at one example of how we're driving growth with a long-standing customer in the APAC region, we identified an opportunity to leverage our strong relationship to expand the scope of our work to the customers' operations in the Americas. Building on the trust we've earned through consistent delivery excellence over many years, we successfully displaced an incumbent service provider in the U.S. and won the assignment to manage the customer's mission-critical IT estate globally. Under our new contract, we'll be modernizing our customers' environment to enable global synergies and AI enablement while enhancing security and reliability. This modernization will migrate virtualized workloads to the AWS cloud and the entire tech stack will be supported by automation and observability from our Kyndryl Bridge platform.

And importantly, this expansion will drive an increase in our revenues from this account of more than 25%. Expanding and winning new scope in our accounts is a key factor behind our positive financial trajectory in fiscal 2026 and beyond. As a reminder, by fiscal 2028, which for us begins less than 17 months from now, we expect to deliver more than $1 billion in adjusted free cash flow. We expect to deliver more than $1.2 billion in adjusted pretax income and achieving these earnings and cash flow targets only requires us to reach the mid-single-digit revenue growth that will progress toward by 2028.

With strong conversion of our earnings to free cash flow, we're optimizing our capital allocation by investing in organic growth opportunities, deploying more capital to shareholders through our increased share repurchase program and occasionally pursuing tuck-in acquisitions. In fact, we just announced that we've agreed to acquire a midsized cloud services provider in Europe. Importantly, our fiscal 2026 outlook is consistent with our expected growth trajectory from fiscal 2025 to fiscal 2028. As David will discuss, we'll continue to expect to generate approximately $550 million in free cash flow this year to grow our adjusted pretax earnings by more than 50% and to deliver 1% full year constant currency revenue growth. Keep in mind, 2/3 of our P&L this year will come from our higher-margin post-spin signings, the first time that a significant majority of our revenue is coming from contracts that we signed as independent Kyndryl.

As we've discussed before, the investments we've made in our expanded capabilities and partnerships are opening new doors for us in terms of increased share of wallet and our ability to win new logos. We've won 450 new logos over the last 4 years, and there's more opportunity in the market today, and we have a robust pipeline of deals in the works. As a result, I'm enthusiastic about our ability to pivot to a second half that we expect will be demonstrably stronger than our first.

And with that, I'd like to pass the call over to David. David?

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 solutions to our customers. Through our advanced delivery initiative powered by Kyndryl Bridge, we continue to drive automation throughout our delivery operations, incorporate more technology into our offerings, reduce our costs and increase our already strong service levels. It's a win-win for Kyndryl and our customers. We've been able to free up thousands of delivery professionals, and this is worth roughly a cumulative $875 million a year to us, representing a $50 million increase in our annual run rate this past quarter.

Our accounts initiative continues to remediate elements of contracts we inherited with substandard margins. In the second quarter, we increased the cumulative annualized profit from our focus accounts by $25 million to $950 million. I can't emphasize enough what an important source of sustainable value creation this has been for us. In short, our strategic progress is driving our earnings growth.

Turning to our cash flow and balance sheet. We generated free cash flow of $22 million in the second quarter. Our net capital expenditures were $125 million. Working capital was a use of cash in the quarter, driven by the timing of receivables and vendor payments that we expect to reverse in the back half of the year. We've provided a bridge from our adjusted pretax income to our free cash flow as well as a bridge from our adjusted EBITDA to our free cash flow in the appendix.

Under the share repurchase authorization we announced last November, we bought back 2.9 million shares of our common stock in the quarter, 1.2% of our outstanding shares at a cost of $89 million. And yesterday, we announced a $400 million increase in our share repurchase program. The expansion of our buyback capacity reflects the confidence we have in our earnings trajectory and cash flow growth as well as our commitment to distributing cash to shareholders. Our financial position remains strong. Our cash balance at September 30 was $1.3 billion. Our debt maturities are well laddered from late 2026 to 2041, and we had no borrowings outstanding under our revolving credit facility. Our target has been to keep net leverage below 1x adjusted EBITDA, and we ended the quarter well within our target range at 0.7x. We are rated investment grade by Moody's, Fitch and S&P.

On capital allocation, our top priorities are to maintain strong liquidity, remain investment grade, reinvest in our business, including through tuck-in acquisitions and regularly buy back stock. I remain enthusiastic about how Kyndryl is poised for future profitable growth by maintaining an LTM book-to-bill ratio above 1 and commanding attractive margins on our signings. The September quarter was a continuation of us winning business with healthy margins. Throughout fiscal 2023, '24 and '25 and now into the first half of fiscal 2026, we've signed contracts with projected gross margins in the mid-20s and projected pretax margins in the high single digits. Therefore, as our business mix increasingly shifts towards more post-spin contracts, you'll continue to see a significant margin expansion in our reported results.

We've again included a gross profit book-to-bill chart that illustrates how we've been creating and capturing value in our business. With an average projected gross margin of 26% on our $15.6 billion of signings over the last 12 months, we've added nearly $4 billion of projected gross profit to our backlog. Over the same period of time, we've reported gross profit of $3.2 billion. This means we've been adding more gross profit to our backlog than our contracted book of business has been producing in our P&L. Having a gross profit book-to-bill ratio above 1 at 1.2 over the last 12 months demonstrates how we're growing what matters most, the expected future profit from committed contracts. It also highlights the quality of our post-spin signings.

And with our gross profit book-to-bill ratio having been consistently above 1, that means that we've been consistently growing our gross profit backlog over the last 3 years. As we've said previously, our core financial goals are to grow our revenues, expand our margins, increase our earnings and generate free cash flow. Our outlook for adjusted pretax income this year continues to be at least $725 million. This means growing our adjusted pretax income by at least 50% and increasing our adjusted pretax margin by roughly 150 basis points year-over-year. As a reminder, it also means we're calling for a third straight year of substantial margin expansion, and it keeps us right on track to generate high single-digit adjusted pretax margins in fiscal 2027 and fiscal 2028.

We continue to estimate that our adjusted EBITDA margin in fiscal 2026 will be approximately 18%, an increase of roughly 130 basis points versus fiscal 2025. We also continue to see opportunities to drive efficiencies in our operations, both through advanced delivery and in SG&A functions. In fact, our enterprise services headcount is down 8% from where it was a year ago.

On the topic of cash flow for the year as a whole, we're forecasting roughly 100% conversion of adjusted pretax income less cash taxes into free cash flow. With cash taxes of roughly $175 million, this implies free cash flow of approximately $550 million. Our outlook for constant currency revenue growth in fiscal 2026 continues to be positive 1%, which implies revenue growth of 4% to 5% in the second half. We're redoubling our efforts to drive this growth by aggressively seizing the multiple avenues for growth that Martin described earlier. Our plan for stronger second half growth is straightforward. Revenues from our opening backlog of already signed contracts for the second half are 1 point stronger than our opening backlog was for the first half.

We've anniversaried our divestiture of a small business last year, which helps our second half growth compared to the first half by the better part of a point. We've invested in incremental Kyndryl Consult resources so that Consult revenue, which is now a larger portion of our revenue base, continues to grow well into the double digits, contributing an incremental 2 points of growth. We're growing hyperscaler-related revenue more than we initially planned as we increasingly market solutions to customers hand-in-hand with our alliance partners, producing a 2-point benefit in the second half compared to the first.

And the larger pipeline of deals we have for the second half is adding incremental revenue, both because it's larger and because of our emphasis on building additional scope into our customer relationships. This will also contribute approximately 2 points of incremental growth. A key theme that runs throughout these growth vectors is that enterprises' needs for IT modernization, their desire to invest in AI and their concerns around cybersecurity are all driving incremental demand for our mission-critical expertise and services.

Looking at the third quarter in particular, we expect to deliver positive constant currency revenue growth and for our adjusted pretax income to be 15% to 25% higher than the $160 million we reported in last year's third quarter. In addition, we remain committed to delivering significant margin expansion and generating free cash flow growth over the medium term. We have a solid game plan to drive our strategic progress, and this game plan starts with the steps we've already taken to expand our technology alliances, realize the numerous growth opportunities available to us, manage our costs and earn a return on all of our revenues.

Sometimes investors want to confirm the favorable math that's associated with our forecast to more than double our adjusted pretax income from fiscal 2025 to fiscal 2028, combined with our share repurchase program. And the answer is yes. With our income tax expense projected to be in the 25% range, our forecast implies that we'll generate adjusted earnings in the fiscal year after next of roughly $4 per share.

To wrap up, we're well positioned for success as a leading provider of mission-critical enterprise technology services, driving thought leadership in our space, delivering modern hybrid IT solutions, growing our Kyndryl Consult presence rapidly, achieving top-tier service levels and customer satisfaction scores and operating at the heart of secular trends that will fuel customer demand for our services for the foreseeable future. So let me end by again thanking the tens of thousands of Kyndryl's around the world who are powering our progress.

With that, Martin and I would be pleased to take your questions.

[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 provides great outcomes for our customers.

And what we're seeing is really strong customer satisfaction and even stronger service level achievement as we expand the range of services that we're providing to customers. So we view the strategic thrust is that we have of building additional scope into our customer relationships as a real win-win. It's key to us growing our revenues, but it also helps us provide even better quality and scope and scale of services to our customers in a way that helps them meet their business objectives.

Thank you, operator. I think the queue is empty. So I do want to thank everybody for joining us today. As you can see, our strategy is driving results. It's creating new growth opportunities for us. We are seeing consistent progress across our business in consult and the hyperscaler work that we've spent a fair bit of time on today, but also in modernization and our AI work. We have a disciplined approach. We are certainly managing for the long -- for the long term, and we are confident in our ability to achieve our financial goals including driving revenue growth, expanding margins, increasing earnings and generating strong free cash flow and creating lasting value for our customers and for our shareholders and of course, for the Kyndryls around the world as well. So thank you, everybody, for joining.

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