KD 2025Q4

Good day, and thank you for standing by. Welcome to the Kyndryl Fourth Quarter 2025 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. 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 fourth quarter and fiscal year ended March 31, 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, 2024. 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. Kyndryl has been an independent company for over three years now, and I am so proud of what our global team continues to accomplish. We've solidified our market leadership position in mission-critical technology services, and we've been executing a powerful and highly effective strategy centered around building our capabilities, skills, partnerships, and innovation to drive sustainable growth. With relentless focus and dedication to our customers, our people have propelled our success and will continue to do so. So on today's call, we'll focus on how we'll accelerate our momentum going forward. But first, I want to share the highlights from fiscal 2025. Simply put, we had another great year. Signings were up 48% in constant currency to more than $18 billion; earnings increased $317 million to $482 million in adjusted pretax income. We generated $446 million in adjusted free cash flow, a 53% increase from last year. And in the fourth quarter, we achieved a significant milestone by returning our top line to positive constant currency growth. Kyndryl Consult continued to deliver above-market growth with revenue increasing more than 25% this year, and Kyndryl Bridge continues to enhance the value we deliver to our customers through actionable insights. Our 3A initiatives have transformed our company, and we once again surpassed our full-year targets for each of them. Among our alliances, hyperscaler-related revenue more than doubled this year to $1.2 billion. We reached $775 million in annualized savings from Advanced Delivery and another $900 million from our accounts initiative. As we enter a new fiscal year for Kyndryl, our 3As have shifted from being initiatives that drove our turnaround to pillars of our profitable growth strategy. In fact, our fiscal 2025 results not only exceeded the earnings cash flow and 3A's projections we laid out at the beginning of the year, they also proved the investment thesis for Kyndryl's evolution that we laid out three years ago. We are leaders in our space. We are important to our customers. We can execute on our strategy that is unique to us. We can grow. We are profitable, and we generate cash. In fiscal 2026, we're expecting another year of substantial earnings and cash flow growth as well as positive constant currency revenue growth. And as I'll discuss in a few minutes, our outlook for this year is consistent with the financial objectives for fiscal 2028 that we laid out at our Investor Day last November. As many of you heard me say before, we are uniquely positioned to address the secular IT trends like cloud migration, increasingly hybrid IT environments, cybersecurity risks, and the adoption of AI. Our approach to designing, optimizing, running, and transforming mission-critical hybrid IT estates is driving increased demand for our services. This is reflected in the strong signings growth we delivered in fiscal 2025, which brought our full-year revenue book to bill to 1.2 and included consult signings growth that was right in line with our aggregate signings growth. We've previously highlighted how our freedom of action as an independent company has unlocked long-term growth opportunities that were unique to Kyndryl, and our signings growth in fiscal 2025 is powerful evidence of that. Moreover, having our revenue book to bill ratio above 1 foreshadows future revenue growth from committed contracts since our signings typically convert into revenue over a three to five-year period. In fact, our signings growth has been significant and broad-based across a range of geographies, vertical markets, and our practices. We secured 55 contracts valued at over $50 million in fiscal 2025, an increase from 40 such contracts in the prior year. These larger deals accounted for nearly $10 billion of total signings and span 22 countries, reflecting the important work we're doing for our blue-chip customers all around the world. Nearly half of these contracts were over $100 million. In the fourth quarter alone, we signed a large deal that will generate $1 billion of revenue for us over the next six years with the financial services firm that we've been serving for a long time. Going forward, we'll be modernizing and transforming the firm's IT estate and implementing AI technology at scale with Kyndryl Bridge. At the same time, we'll continue supporting their core technology, providing security and resiliency, and driving compliance with regulatory requirements. We also displaced an incumbent to win a new logo contract with the European FinTech to build a new hybrid IT infrastructure platform and provide cloud migration, cybersecurity, resiliency, and regulatory compliance services. And with one of our large online retail customers, we signed new scope and extended our contract for the next five years. We're now providing application management services and software engineering development to deliver innovation that complements the modernization work we were already doing supported by Kyndryl Bridge. What's key here is the pattern of leveraging our expanded capabilities, partnerships, strong customer relationships, and great reputation to win more scope and higher value opportunities. In fact, under each of these three new contracts, we're providing hyperscaler-related services. This pattern highlights Kyndryl's position as a trusted advisor for IT services, demonstrating how we can help customers operate in the present and how we can help organizations modernize for the future. Our expanding scope not only strengthens our customers' technology operations, it also drives revenue and earnings growth for us. This share of wallet opportunity is so strategically important to us that I want to drill down for a moment into one more example. Another significant signing this quarter was in the healthcare sector. We've been partnering with this U.S. Healthcare provider for years, and they were ready to invest in more innovation. So together with one of our hyperscaler partners and leveraging insights from Kyndryl Bridge, we're co-developing a comprehensive solution designed to transform and optimize their IT environment. This entails cloud migration, system consolidation, data rationalization, and application modernization, all of which will enhance patient experience and practitioner efficacy. As we design, implement, and manage this new hybrid IT estate, we'll focus on optimization, agility, and ongoing innovation. As a result of the increased scale and scope of services, our annual revenue with this customer will grow by 33% over the next five years. The takeaway here is that Kyndryl, as a deeply trusted scaled services provider with differentiated capabilities across hybrid IT landscapes, can help large enterprises modernize in the cloud. We can do this in ways that present significant growth opportunities for us. Kyndryl Consult has also been a key driver of our signing strength and our return to revenue growth. In fiscal 2025, Consult signings grew 50% in constant currency and accounted for 22% of our total signings. This is our third consecutive year of above-market Kyndryl Consult signings growth, and as I mentioned, we saw that convert into 29% constant currency revenue growth this year. Many of our customer engagements are focused on putting the right workload on the right platform, cloud migration, optimization, addressing tech debt, and more recently application management services. With our expanded capabilities and heritage in mission-critical systems and data management, we're very well positioned to build robust data foundations for the AI-enabled future through project-based consulting engagements. We're also seeing demand in security and resiliency, leveraging our capabilities in data discovery, data integrity, AI assessment, and governance programs. These trends are driving double-digit signings growth across all six of our practices, and they will continue to be meaningful growth opportunities, especially since 95% of our companies are adopting AI, but nearly two-thirds haven't yet implemented an AI governance framework. So because of our strong fiscal 2025 results and expanding capabilities, we're entering our new fiscal year with a lot of momentum, and we're laser-focused on driving profitable growth and delivering value to our customers. The strategy we outlined three years ago continues to resonate, and our competitive advantages are powering multiple avenues for our growth. Increasing scope with existing customers and winning new logos, providing industry-leading managed services, and growing our Kyndryl Consult advisory revenues, and expanding our capabilities through our practices with our strategic alliances and with Kyndryl Bridge. Our position as a vital partner to our customers in both running and transforming their mission-critical technology estates is very powerful, and through our six global practices in Kyndryl Consult, we'll continue to build new capabilities and skills that our customers need to advance their business objectives. Our alliances with hyperscalers and leading technology providers are extensive and continually expanding, and our AI-powered Kyndryl Bridge operating platform distinguishes us from our peers, powers service excellence, and drives efficiency. This combination of leading expertise, strategic alliances, and technological innovation opens new doors with existing customers and attracts new customers, creating incremental growth opportunities for us and ensuring that we remain a critical part of our customers' IT evolution. And this combination is what will fuel our top-line growth in fiscal 2026 and beyond. I want to reiterate the targets we set for fiscal 2028 at our Investor Day in November. 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. To achieve these earnings and cash flow targets, we only need to reach mid-single digit revenue growth that we will progress toward by fiscal 2028. The strong conversion of our earnings to free cash flow will balance our approach to capital allocation by investing in organic growth opportunities and occasional tuck-in acquisitions, and at the same time returning capital to shareholders through our share repurchase program. It should be clear that the fiscal 2026 outlook we published yesterday is consistent with the path we previously laid out for our growth from fiscal 2025 to fiscal 2028. As David will discuss in fiscal 2026, we expect to generate approximately $550 million in adjusted free cash flow. We'll grow our pretax earnings by more than $240 million to at least $725 million and will generate positive constant currency revenue growth. This fiscal year, two-thirds of our P&L will be derived from our higher margin post-spin signings. While we understand that it's a challenging environment in which to provide guidance given the heightened macro uncertainties since our last earnings call, let's remember that there are always reasons for companies to delay investment decisions. But the nature of our business, providing mission-critical services under multi-year contracts means that we are significantly insulated from, although not immune to, macro factors. And enterprise tech debt isn't going away because of potential tariffs or other geoeconomic factors. Our Q4 and fiscal 2025 signings growth is a testament to the unique Kyndryl-specific opportunities available to us. Our technology services are essential and non-discretionary, and we provide efficiency, resiliency, and innovation to our customers. As a result, while we continue to monitor economic and geopolitical developments carefully, our significant insulation from macro factors gives us confidence in the outlook we provided and in our longer-term trajectory. With that, I'd like to pass the call over to David.

Thanks, Martin, and hello, everyone. Today, I'd like to discuss our fourth quarter results, our continued progress on our 3A's initiatives, the solid margins at which we're signing customer contracts, and our outlook for fiscal year 2026, which began on April 1. We're proud of finishing strong in fiscal 2025, and we're enthusiastic about how our market leadership, strategy, and capabilities have positioned Kyndryl for profitable growth in fiscal 2026 and beyond. Our fourth quarter results reflect strong operational execution and continued progress on our key initiatives. In the quarter, revenue totaled $3.8 billion, a 1.3% year-over-year increase in constant currency. Returning a positive constant currency revenue growth is an important milestone for us. Key drivers of our growth were Kyndryl Consult, where our revenues grew 45% in the quarter, and hyperscaler-related work, where our revenues more than doubled. Our $5.5 billion of signings made Q4 our sixth consecutive quarter of signings growth and brought our full-year signings growth to 46%. Our strength continues to be broad-based across our practices and geographic segments, with Kyndryl Consult signings growing at the same rate as our aggregate signings growth. Our fourth quarter adjusted EBITDA was $698 million, and our adjusted EBITDA margin was 18.4%, up 370 points year-over-year. Adjusted pretax income was $185 million, six times what it was a year earlier, and our adjusted pretax margin increased 410 basis points year-over-year. Included in our $185 million of adjusted pretax income was $23 million in workforce rebalancing charges and the contractually committed $50 million year-over-year increase in IBM software costs that we've discussed on prior calls. As a result, our underlying operational momentum is even stronger than the $150 million-plus increase in adjusted pretax income we reported in Q4. Through our alliances, we generated $378 million in hyperscaler-related revenue in the fourth quarter. Our $1.2 billion full-year total was more than double the prior year level and significantly exceeded our target of nearly $1 billion of hyperscaler-related revenue. 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. To date, we've been able to free up more than 13,000 delivery professionals to address new revenue opportunities and backfill attrition. This is now worth a cumulative $775 million a year to us, surpassing our fiscal 2025 target. Our accounts initiative continues to remediate elements of contracts we inherited with substandard margins. In the fourth quarter, we increased the cumulative annualized profit from our focus accounts by $75 million to $900 million. This also topped our target for the year. The concepts underlying the 3A's continue to be an important source of margin expansion and value creation for us and are now integral parts of our operational and go-to-market approach. We're more confident than ever that the benefits from our 3A's initiatives will meet and ultimately exceed the targets we laid out in early 2022 and raised in early 2024. For fiscal year '25 as a whole, we generated $15.1 billion of revenue. Our adjusted EBITDA was $2.5 billion, and our adjusted pretax income was $482 million, representing a $317 million or 192% increase from the prior year. We expanded our adjusted EBITDA margin by 200 basis points and our adjusted pretax margin by 220 basis points year-over-year, increases that represent continued progress on our path to high single-digit adjusted pretax margins. Our financial progress reflects our strategic achievements, leveraging technology alliances, stepping away from empty calorie revenues, fixing focus accounts, growing the consult portion of our business, driving efficiency throughout our operations, and positioning Kyndryl to meet our customers' future IT needs. Our performance in fiscal 2025 gives us strong momentum as we move forward. In fact, we continue to position Kyndryl for future revenue, margin, and profit growth, not only by growing signings this past quarter and year, but also by commanding attractive margins on our signings. Throughout fiscal 2025, just like fiscal 2023 and '24, we signed contracts with projected gross margins in the mid-20s and projected pretax margins in the very high single digits. Therefore, as our business mix increasingly shifts toward more post-spin contracts, you'll see significant margin expansion in our reported results. We've again included a gross profit book-to-bill chart that accentuates how we've been creating and capturing value in our business. With an average projected gross margin of 26% on our $18.2 billion of signings over the last year, we've added over $4.5 billion of projected gross profit to our backlog. Over the same period of time, we've reported gross profit of $3.1 billion. This means we've been adding significantly 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 1.5 over the latest 12 months is a key measure of how we're growing what matters most: the expected future profit from committed contracts. 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 three years. Turning to our cash flow and balance sheet. Our adjusted free cash flow was $446 million for the year, and our net capital expenditures were $522 million. We 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 in late November, we bought back 1.8 million shares of our common stock in the quarter at a cost of $64 million. As of March 31, we have $206 million of repurchase capacity remaining under our share repurchase authorization. Our financial position remains strong. Our cash balance was $1.8 billion. Our cash, combined with available debt capacity under committed borrowing facilities, gave us nearly $5 billion of liquidity at quarter end. Our debt maturities are well-laddered from late 2026 to 2041. We had no borrowings outstanding under our revolving credit facility, and our net debt at quarter end was only $1.4 billion. Our target has been to keep net leverage below one times adjusted EBITDA, and we ended the quarter well within our target range at 0.6 times. We are rated investment-grade by Moody's, Fitch, and S&P. We continue to monitor economic and geopolitical developments. Our direct exposure to U.S. Federal government spending is extremely limited, with less than half of 1% of our revenue coming from U.S. government contracts. Our operations in China represent only about 1% of our revenue and our costs, and our direct exposure to various tariffs that have been proposed is quite limited. On capital allocation, our top priorities are to maintain strong liquidity, remain investment-grade, reinvest in our business, and regularly return capital to shareholders. As we look ahead to fiscal 2026, our core financial goals are to continue to grow our revenues, expand our margins, increase our earnings, and generate free cash flow. Our outlook assumes that revenue will grow 1% in constant currency. Within that, we expect hyperscaler-related revenue to reach $1.8 billion or more, a 50% year-over-year increase. We expect Kyndryl Consult revenue to again grow double digits, and we expect constant currency revenue growth each quarter to be about the full-year rate. We estimate that our adjusted EBITDA margin in fiscal 2026 will be approximately 18%, an increase of roughly 130 basis points versus fiscal '25. Our outlook for adjusted pretax income is at least $725 million. This means growing our adjusted pretax income by at least $243 million and increasing our adjusted pretax margin by at least 150 basis points year-over-year. That means we're calling for a third straight year of the strong roughly two-point margin expansion we delivered in fiscal 2024 and fiscal 2025. Exchange rates are currently expected to have a minimal impact on adjusted EBITDA and adjusted pretax income in fiscal '26 compared to fiscal '25. Also, this should be the last year in which we're talking about IBM software cost increases. Our fiscal 2026 outlook includes the $150 million Kyndryl-specific IBM software cost increase that we've previously discussed. Going forward, we don't expect any outsized cost moves related to our former parent for two reasons. First, beginning in January, it will be the annual inflationary increases that IBM poses on the entire market that determine our pricing. Second, we increasingly have provisions in our customer contracts that protect us. We're excited to be putting this behind us. We continue to see opportunities to drive efficiencies in our operations, both through advanced delivery and in SG&A functions. Looking at the first quarter in particular, we're expecting our adjusted pretax income to be 30% to 50% higher than the $92 million we reported in last year's first quarter. On the topic of cash flow, for the year as a whole, we project roughly $675 million of net capital expenditures in fiscal 2026 and about $675 million of depreciation expense. We expect to pay roughly $175 million in cash taxes, and we're forecasting roughly 100% conversion of adjusted pretax income less cash taxes into free cash flow, implying adjusted free cash flow of approximately $550 million. From a timing perspective, and similar to last year, Q1 will be a significant user of cash due to annual software and incentive payments, and subsequent quarters will be more favorable. The difference between our adjusted free cash flow and GAAP cash from operating activities less net CapEx was only $25 million in the last six months of fiscal 2025, and we expect the adjustments included in our calculation of cash flow to remain modest. Over the medium term, we remain committed to delivering significant margin expansion and generating free cash flow growth. 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, manage our costs, and earn a return on all of our revenues. So in fiscal 2025, we said what we were going to do, and we delivered that and more. This gives us financial momentum as we move into our fiscal 2026. Even more important, though, is the momentum we have as a leading provider of mission-critical technology services, driving thought leadership in our space, growing our Kyndryl Consult presence rapidly, delivering modern hybrid IT solutions to our customers, and operating at the heart of secular trends that will fuel customer demand for our services for the foreseeable future. Over the medium term, we remain committed to delivering significant margin expansion and generating free cash flow growth. So let me end by again thanking the tens of thousands of Kyndryls around the world who are powering our progress. With that, Martin and I would be pleased to take your questions.

Thank you. We will now begin the question and answer session. Martin, are you ready for your first question?

Yes, sir. Thank you, operator.

Hi. Good morning and congratulations on a year well done. So Martin, my first question is for you. I was wondering how you think of the accomplishments in 2025 and your preliminary view of the positioning of the company, mindshare, and technology in 2026. How does that set you up for the midterm cadence that you shared at the Analyst Day?

Yes, good. Well, thank you, Jamie. Thanks for joining, and thanks for the nice comments on the year we just finished. If I think back to three and a half years ago when we laid out, I think, a very clear strategy that was unique to us with very clear signposts on how to follow our progress. I think last year was a reflection of another great step, another great example of execution on a strategy that will continue to carry us into the medium term. Look, the medium-term goals that we laid out, I think, are what we're all focused on, and this year, this fiscal year that we just guided toward is another good step toward that. But over the long term, what we've all been working on and what we've been talking about for three point five years, and I think again it's really becoming evident now is one, the power of this business model given the role we play in our customers' environments, the visibility we have to the future is starting to become evident too. Three and a half years ago, obviously, the world has changed, and three and a half years the world will be different again. But we have been executing and delivering in pretty much exactly what we said we would get done. I think the read-through is that we do kind of control our own destiny here, not that we're not affected by the outside world, but as long as we continue to invest in innovation, as long as we continue to invest in capabilities, then our ability to not only see the future, but to deliver that future to our investors should be quite evident as well over the last few years. And then I point to this team's strong execution. So we're in a great space with a great business model. We have control; we'll continue to invest. This is another big year of investment for us, which means we control our own destiny through the midterm again, and this team has demonstrated an ability to execute. I think we're very well positioned to deliver everything that we've talked about back in November, and the last year and the last quarter were evidence of how we've continued to do that.

And then for my follow-up, I'd be interested in your perspective on where you are with the journey with the focus accounts. Are you closer to the middle or the end at this point? And what have you learned from the kind of restructuring or the conversations at least, from those accounts that got you here, since the separation three and half years ago?

Thank you, Jamie. When we began this journey, we believed that our work is truly important and that we excel at it. By engaging with our customer base, we aimed to redefine our relationships more quickly than we could by simply managing our existing backlog. Our recent performance shows that we’ve successfully demonstrated the quality of our services and the role we play in our customers' environments. Customers have been receptive to the innovative ideas and solutions we’ve proposed to address their future challenges, which has encouraged them to rethink how we collaborate. Over the past three and a half years, the teams have done an outstanding job, highlighting the talent and skills we possess. This indicates our capability to envision the future for our customers and guide them on this journey. It reflects positively on our organization and our commitment to maximizing value. Initially, we projected that our initiative would be worth $800 million in the medium term, and we've surpassed that expectation. While we're nearing the conclusion of this focus on accounts, we still have some work to do, particularly regarding the remaining challenges. However, we've made significant progress, and I estimate we're three-quarters of the way to our revenue goals. Ultimately, this proves the value of our work, that our investments are yielding results, and that our customers appreciate what we do. We are now integral to their future, not just their past.

Yeah. And we are about, I’d say, 75% of the way through, three quarters of the way through on revenue, but we've already achieved 90% of our targeted savings. So we're with $900 million of annualized benefits on the focus accounts. The target that started out at $800 million is now $1 billion. I think we're well positioned to exceed that as we work through the remainder of the accounts and drive not only margin improvement there but also growth in the top line.

Great. Thanks. Operator, if we move to the next question, please.

Thank you. Our next question comes from Tien-Tsin Huang from JPMorgan. Please go ahead.

Thanks. Congrats on the positive revenue growth milestone. Good to see that. I also like Martin some big discussions or going through some of the larger deals you guys won, which brings me to my question around book to bill. Do you think book to bill, given some of the wins that you've had in the pipeline that you can still maintain this book to bill above one for the better part of fiscal '26? And I'm curious, given some of the larger deals, maybe what the duration of the backlog looks like. Is that changing just to think about ACV maybe improving underneath it? Thank you.

Thank you for the kind words about the quarter, Tien-Tsin. A few points to consider. Three and a half years ago, we discussed how Kyndryl could return to growth, emphasizing the need for a book-to-bill ratio above one. As you pointed out, sustaining growth requires maintaining this ratio over the medium term. One year of a strong ratio isn't enough, so we need to keep executing. The capabilities and innovations we've developed are yielding positive results, as seen in our consulting business with significant growth in signings and revenue. From a standing start, we've grown our services related to our alliance activities into a business generating over $1 billion annually, and we expect continued growth in this area. In response to your question, yes, we are confident in our ability to maintain a book-to-bill ratio above one. We encourage everyone to look at this on a 12-month trailing basis since quarterly performances can vary. We are optimistic about the momentum we’re seeing and our potential for sustained growth.

Perfect. And just my follow-up within that was the ACV question, because I think you guided to consult growing in the double digit. I know it's running very hot in '25. So I think that'll give you some short term lift in conversion, but then you have a lot of longer duration deals as well. Can you just talk about ACV and how the year will play out with consult presumably growing a little bit slower and backlog conversion making up for it to get to that positive revenue growth for the year?

Sure. We do expect consult to continue to grow top line double digits in fiscal '26. So it will continue to be a significant contributor to our growth. When we look at signings last year, a couple of points worth mentioning. First, overall, signings grew about 46%; Consult grew 47%, and that means managed services growth was right there as well with very strong growth. We're seeing a good balance in our growth between the two. Consult signings will tend to turn into revenue a little bit faster. Managed services contracts tend to be longer, and we really like what they do for our backlog because it's really committed revenue and committed profitability that we're adding to our unrecorded balance sheet. And in terms of ACV, what we saw was our average signing was probably a few months longer last year. About 75% to 80% of our growth was due to additional activity, and then 20% to 25% of our 46% growth was driven by having a longer duration on average. Really the example that you mentioned highlights that we're very focused on growing ACV and individual accounts, and growing our revenue there. The opportunities that we have to expand scope in our relationships really end up being a big driver of that ACV growth.

Thanks. Operator, next question please.

Thank you. Our next question comes from Ian Zaffino from Oppenheimer. Please go ahead.

Hi, great. Thank you very much. Very good quarter. Wanted to ask on the guide and the revenue growth that you're expecting for the year. I would have expected with signings growth 46% or so that might seem very conservative. So maybe kind of walk us through how you're kind of getting there. I know that there are some legacy signings that are starting to fall off. Maybe the better question is how do we think about revenues, maybe not just this current year, but subsequent years as some of those legacy signings roll off? I would imagine revenues would then accelerate, but I hope we understand that a little bit. Thanks.

Sure. Thank you for the kind comments about the last year and quarter. There are a few key points to highlight. About three and a half years ago, we were focused on demonstrating our growth potential. It's encouraging that we are now at a stage where the conversation has shifted to why we aren't growing even faster. The team has successfully repositioned the business and executed a plan that has brought us to this point, and we're very pleased with our progress. We have a solid book-to-bill ratio from last year, along with contributions from focused accounts and a priority on improving profitability, all of which are reflected in our backlog. It's essential to understand that this year has seen strong profit growth and cash flow, consistent with our medium-term plans that we discussed in November. We are not relying on significant revenue growth to achieve these results. Last year, during our focus on key accounts, we saw a 2% year-over-year improvement in revenue growth, shifting from a decline of 6% to a decline of 4%. This year, we are primarily dependent on one variable, which is a substantial improvement, especially as more of our profit and loss is determined by what we feed into the backlog. What we’ve implemented is shaping our P&L this year, and we have good indicators for growth. We previously indicated that by fiscal '28, we would reach a mid-single-digit growth level, and we remain on track for that. It’s important to note that while a significant portion of our P&L is driven by our efforts, the remainder is influenced by earlier fiscal year signings when we were also focused on account growth. This year will still show the impact of prior year signings, and it's crucial for our investors to recognize that we are looking at another excellent year for profit improvements and cash flow generation, without needing a major rebound in revenue growth to achieve that.

Okay, understood. And then as a follow-up, it seems that you have an incredible amount of visibility, just in the business and the way the state of the contracts work. And like I said earlier, you're coming off this massive acceleration in the business. How are you then thinking about, I guess, capital allocation, and maybe your tolerance or your appetite to get a little bit more aggressive on that side? Thanks.

Yeah, thanks. So it's once again relative to where we started, it's great to be talking about how we're going to be allocating capital. I think we've continued to do two things. We've continued to look for opportunities to invest in our own business. We've done one acquisition, which is working out really, really well. I would say that we continue to look for tuck-in acquisitions that can accelerate our position in the marketplace that can maybe expand capabilities within things we're already doing. First and foremost, we'll look to invest in the business because we see so much opportunity. I'm really pleased that probably a little bit ahead of what everyone expected last November, the Board approved the initiation of a share repurchase program, which we've been doing. We see great value in the stock here. We'll obviously continue to allocate capital to our shareholders as well to return them their money. We see opportunities in both, continue to invest. This is a business model that has great visibility to the future. We have an ability to not only invest, but we have an ability to return capital. We'll continue to do both of those things.

No.

There you go.

Great. Operator, next question please.

Thank you. Our next question comes from Divya Goyal from Scotiabank. Please go ahead.

Good morning, everyone. Thanks a lot for the color you provided. I actually wanted to go back and circle back on the accounts discussion that we had and maybe just get a little bit more clarity on the impact of macro on some of your strategic global accounts. I'm trying to understand what are their key priorities and could they be impacted, given all the global uncertainties out there? I'm also trying to understand what is the percentage of revenue that could be potentially exposed to macro uncertainties if at all? Thank you.

Yes. Thanks, Divya. So a couple of things. Uncertainty seems to be the sort of the most commonly used word in the business press these days. For us, the good news is, we're in the productivity business. We help drive productivity, create opportunities, optimize, consolidate, deconsolidate if that's what our customers are trying to do. This environment tends to be a tailwind for us because our customers need help in preparing their infrastructure for whatever macro environment they're envisioning. That's true not only of macro, which as you know well, are we in this period of uncertainty for two months, three months, or a year; we don't know. But we know that they're always going to be preparing for the future they see. It's also true with regard to technology. Over the last 20 plus years, I think the world has observed that no matter what the business problem is, technology is part of that answer. You're trying to find new customers; if you're trying to create a better employee experience; if you're trying to get yourself ready for a new regulatory environment or if you're trying to prepare for a new view of your own macro environment, technology is a part of that. That tends to be a tailwind for us because they need an infrastructure to execute that strategy, whatever it is that is secure and resilient and fit for purpose. So for us, I would say uncertainty tends to translate, but in all its forms tends to translate to a bit of a tailwind. Your second question is, look, how much of our business is subject to it? We enter a year, as is typical, with 70%, 75% of our year under contract. The revenue that we already have for the year that was represented in the guide is somewhere between 70% and 75% booked. We have to continue to execute on signing deals and converting those to revenue throughout the whole year to deliver the year, but we're very comfortable, we're very confident with the trends we're seeing, the role we play in our customers' environments, and the capabilities and innovation we're bringing that we'll continue to be able to execute that. I'd go to the momentum we see in consult as a good data point. The momentum we see in our hyperscaler alliance activity is another good data point with other things now picking up. The work that we're doing with SAP and RISE is an important addition this year. Most of the substantial majority of our year is this year is under backlog. We see really good demand trends given what we do and the role we play and the capabilities we have to deliver the year.

That's great. Just as a follow-up for doing this discussion here, Martin. I wanted to get a little bit more color quickly on Kyndryl Bridge. Is it fair to assume that Kyndryl Bridge can provide some additional leverage in such uncertain macro conditions when global clients potentially pull back on new implementations or enhancements? Could Kyndryl Bridge actually help the company uncover new opportunities here in the company? Thank you.

Yeah. Thanks, Divya. The short answer is yes. Among the many capabilities that Bridge has around observability and keeping your systems optimized and resilient, one of the things it can do is help uncover unused resources. You can imagine in a big sprawling corporation how many unused public cloud instances are out there because they were used for something and then they need it anymore, but somebody needs to find that and identify it and get it turned off. One of the things that Bridge brings to customers is an ability to uncover unused resources. There's also a whole host of what we call actionable insights that we're delivering to our customers every month to help them optimize and get ahead of problems, each of which is tied to one of their business outcomes. Yes, Bridge becomes not only it's the way we do our work, it also provides a lot of actionable insights to our customers to help them optimize, find savings, to help them get ahead of challenges that they may have so that they can save money. One real cost in anybody's infrastructure is both the planned downtime and unplanned downtime. We've been very public that we believe we saved customers across our portfolio billions of dollars just from the use of Bridge in managing better planned downtime and also avoiding unplanned downtime. So there are real benefits here.

Yeah. I just wanted to add on the call it macro uncertainty point that in the fourth quarter, our consult signings grew 37%. That was obviously a period of time where there was a little bit more uncertainty. The growth we delivered in Consult signings highlights as a proof point how we're insulated from the macro environment, executing on a series of opportunities that are unique and specific to us, allowing us to perform quite differently than the overall market with growth in the 37% range last quarter.

Great. Thank you. Operator, I think we have one more question in the queue.

Thank you. Our next question comes from Tyler DuPont from Bank of America. Please go ahead.

Good morning, Martin and David. Thanks for taking the questions. I want to start just by echoing the congratulations on the quarter. It's nice to see returns positive constant currency growth; definitely moving in the right direction there. I wanted to first ask about growth trends in the Consult business. First, if you could maybe just discuss the go-to-market in Consultants and if that's changed at all in recent quarters, given the solid growth that we've seen and the fact that this component keeps increasing as a percent of total, I think it's now around 25% as of 4Q. How should we anticipate the growth there and any margin dynamics among those contracts compared to the company average worth mentioning?

Yeah. Thanks, Tyler. Thanks for the nice comments. Two things. First on the revenue trajectory, let me start with the mix because while it is certainly what you said is right, 25% of our revenue now. Remember that while the numerator has been growing very, very well and we've been executing well, the numerator being the Consult. The total we've been engineering a decline in because of the focus account activity. That product is obviously grown faster. Now that we're back to growth in total, I would expect that while the numerator will continue to grow quite well, it won't be making the sort of the progress that we've seen when we started three and a half years ago with it under 10% of our overall mix, now improving dramatically 2.5x to 25%, but that progress will slow. Notwithstanding that, we continue to see great momentum in our Consult signings, and obviously, that will convert to revenue as David said earlier tends to be a bit faster than our managed service business. On margin profile, the margins in Consult tend to be a little bit higher, not dramatically, but they're accretive to the overall margin profile. That's part of why with faster growth plus accretive to margins, we are investing heavily this year in our consult business. It's all part of what we guided to profit. While again, we have another big step up in profit year to year, which we're delighted and excited about that includes an acceleration, if you will, of our investments in our consult business. It includes a continuation of our investments in Kyndryl Bridge; it includes continuation of our investments in our partnerships, et cetera, but an acceleration in Consult. Yes, it's growing faster. It will continue to grow faster than the overall. The mix won't move up as much because the total is now growing, and it is accretive at the bottom line.

Understood. That's helpful, Martin. Just on margins, particularly from a bookings lens, again nice to see signings maintain that 9%-ish adjusted PTI margin profile. Given the strength in bookings that you've seen over the past several quarters, have you given any thought to maybe flexing that pricing muscle a bit harder?

Have we given any thought? Look, we want to get paid for the great work we do, and the teams have done a nice job of creating and capturing the value that we're helping our customers create. I think it's a testament, and the data shows the value of what we do, our customers' desire for us to continue to be a big part and invest in their accounts. This is a good spot for us. This is a good spot for us to land. This is a number that we've been talking about for three and a half years. We always said that within the capabilities we have and the investments we're making that we can capture high single-digit PTI margins. I feel great about the margin profile of what we're putting in. I feel great about what it says about how our customers think about us. As long as we continue to invest and I laid out, I gave you a bit more color on investment. As long as we continue to invest to bring new capabilities and to innovate, I think this is a good reflection of how we can get paid for what we're doing. David, do you want to?

Thank you. I would like to again thank everyone for joining us today. This concludes the Kyndryl Fourth Quarter and Fiscal Year 2025 Earnings Conference Call. We look forward to speaking with you again.