KD 2022Q1

Good morning and welcome to the Kyndryl Quarter Earnings Conference Call. Currently, all callers have been placed in a listen-only mode, and following management's prepared remarks, the call will be opened for your questions. Please be advised that today's call is being recorded. I will now turn the call over to Lori Chaitman, Global Head of Investor Relations at Kyndryl. Thank you, you may begin.

Good morning, everyone and welcome to Kyndryl's earnings call for the quarter ended March 31, 2022. Before we begin, I'd like to remind everyone that our remarks today will 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. And these 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 December 31, 2021. Kyndryl does not update forward-looking statements and expressly disclaims any obligation to do so. In today's remarks, we will also refer to certain non-GAAP financial measures. Corresponding GAAP measures and a reconciliation of non-GAAP measures to GAAP measures for historical periods are provided in the presentation materials for today’s event, which are available on our website at investors.kyndryl.com. I'm excited to join the Kyndryl team as the new Global Head of Investor Relations. And I look forward to interacting with all of you. With me here today 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 like to now turn the call over to our Chairman and CEO, Martin Schroeter. Martin?

Thank you, Lori and welcome to Kyndryl. We're very happy to have you here. And thanks to each of you for joining us today to hear more about Kyndryl's first full quarter results as an independent company. I'm pleased to update you on the progress we've made in recent months and our strategy as the world's largest IT infrastructure services provider. Before we get into the financials, our thoughts remain with the people of Ukraine and Kyndryl’s 74 Ukraine employees. I stand with those calling for peace and an end to the war in Ukraine. I've been moved by the generous spirit of many of our employees who have given their colleagues support during this difficult time. From a business perspective, we have little exposure to Ukraine and no facilities or subsidiaries in Russia. Our focus remains on the human aspect and our people. We're committed to providing continued support for Kyndryl employees in Ukraine, their families and our customers. Now, turning to the business highlights. On our March 1 year-end earnings call, we outlined our near-term financial objectives and strategy to put us on a path toward profitable revenue growth. We've taken significant steps forward on that path with financial results and signings in the three month period between January and March in line with our expectations and with progress on our strategic goals as well. We ended the quarter with over $2 billion in cash and on a solid financial footing to execute our strategy. And in just a few months we've made meaningful advances on our three major initiatives, our three A's, alliances, advanced delivery and accounts. On today's call, I'll provide more detail on how we are leveraging our expanded alliances with key technology partners, the investments we're making in our delivery capabilities and people through upskilling and automation, and how we're proactively addressing existing accounts with substandard margins. David, will provide more detail on our quarterly financial results, discuss our outlook for the fiscal year that began in April 2022 and reiterate our medium-term goals. As a reminder to many of you and as background for those who are new to the Kyndryl story, prior to our spin-off last November we operated largely as a captive services provider focused on supporting the products and technologies that IBM offered to its customers. In the process, we became trusted experts at designing, managing and modernizing complex mission-critical systems at scale for large organizations. As an independent company, we've rapidly taken action to expand our total addressable market dramatically from about $240 billion to about $415 billion to take advantage of the new opportunities and alliances available to us in the cloud, security, data and automation. And this larger addressable market is expected to grow to about $510 billion by 2024. We have the capabilities to gain share in this growing market with six global practice areas that give us an end-to-end perspective with world-class intellectual property, data and know-how with extensive alliances with other technology leaders with an optimized delivery model, with an incredibly skilled global team of nearly 90,000 Kyndryl's with in-depth knowledge of our customers' industries and with an evolving culture that is restless, empathetic and devoted to customers. We're also well-positioned to benefit from the macro trends that underpin many of our customer interactions, such as their ongoing digital transformation journeys that include the migration of some, but not likely all workloads to the cloud, the explosive growth of data, the integration of legacy and new technologies from multiple vendors and the urgent need for cyber security and resiliency. Our capabilities in these areas differentiate us and give us substantial opportunities for growth. Our starting point is both exciting and under-appreciated. It's far too early for us to declare a victory yet, our strategy is working. I want to highlight that we're making progress and demonstrating that Kyndryl is a unique and different business now that we're independent. Following three straight years of declining signings, we delivered 27% constant currency growth in the quarter compared to pro forma signings in the same period last year. And versus calendar 2021, we expect to generate double-digit constant currency growth in signings in fiscal year 2023, which as you know, began on April 1 of this year. Within our signings growth, activity related to advisory and implementation services was particularly strong, up 50% year-over-year in constant currency when compared to prior year pro forma signings and representing 16% of our total signings. Growing our advisory and implementation services revenue, which tends to be higher margin and a feeder for future Managed Services revenue is an important objective for us. Our growth in this area confirms that our strategy is working as customers are increasingly engaging us as their trusted technology services partner. To capitalize on our expanded and growing addressable market, while at the same time strengthening our overall business performance, we're focused on three major initiatives: Alliances, Advanced Delivery and Accounts. These initiatives have the potential to transform our business and our team is working hard to execute on them. As you know, we've formed global strategic alliances with Amazon Web Services, Google Cloud and Microsoft. Our alliances with the three major cloud hyperscalers are a significant part of our growth strategy because they allow us to expand beyond the boundaries of IBM-centric technologies to participate in the broader multi-vendor ecosystem where our customers want us to operate.

Thanks, Martin. And good morning, good afternoon and good evening everyone. Today, I'd like to discuss our quarterly results, our balance sheet and liquidity and our outlook. For starters, as Martin mentioned, our signings in the quarter were up 27% in constant currency versus prior year pro forma signings, due to benefits from our new technology alliances, as well as greater customer clarity about our business compared to last year. Our signings increase follows our first major post-spin milestones, which were the new technology, training and go-to-market collaborations with each of the three major cloud hyperscalers. Beyond our signings growth, we delivered quarterly results that were consistent with the guidance we shared in March. In the quarter, we generated revenue of $4.4 billion, which represents a 2% decline in constant currency from our pro forma results a year ago. Our results include two points of revenue growth we picked up from pass-through revenues related to IBM. Because most of our revenue in any given quarter is the product of contracts signed over the prior several years. Our revenue decline reflects the continuing effects of having been operated as a captive subsidiary of IBM prior to our spin-off, not the future growth potential of our business.

As a reminder to many of you and as background for those who are new to the Kyndryl story, prior to our spin-off last November we operated largely as a captive services provider focused on supporting the products and technologies that IBM offered to its customers. In the process, we became trusted experts at designing, managing and modernizing complex mission-critical systems at scale for large organizations. As an independent company we've rapidly taken action to expand our total addressable market dramatically from about $240 billion to about $415 billion to take advantage of the new opportunities and alliances available to us in the cloud, security, data and automation. And with that, I'll hand it over to David to take you through our results and our outlook.

Thanks, Martin. I'd like to provide some additional insights into our financial performance and outlook for the next fiscal year. As we've seen from our recent performance, we expect the benefits from our strategic alliances will continue to bolster our revenue generation capabilities over the coming periods.

Before we turn to Q&A let me just quickly summarize why we're so enthusiastic about Kyndryl's future. We're in the early stages of operating independently, shifting to our growth opportunities, seizing our now larger market and bringing incremental and differentiated value to customers. We are the trusted partner with tremendous expertise, experience and scale. As technology continues to evolve our customers will look to Kyndryl to keep them operating efficiently and ahead of the technology curve.

We'll take our first question today from Tien-Tsin Huang with JP Morgan. Your line is open.

Hey, guys. Thank you. Good morning. I like this slide 20. I think both of you talked about this transforming focused account into blueprint accounts. So I'm just curious, just the plan, how do you get that focused account to move up into the higher gross margin categories?

Yes, of course. Thank you, Tien-Tsin. Good morning and thanks for joining us. I’d like to highlight a few points: First, we are starting these discussions from a strong position. Our customers appreciate our services and trust us with critical operations. Consequently, these discussions are highly engaged, and our customers are eager to collaborate with us. It's important to note that the relationships we have with our customers are longstanding; we didn't establish new ones but rather brought our existing connections from when we were part of IBM. The way these discussions are progressing is complex, and what we are primarily observing is a deepening of our relationships.

Our financial position remains strong. Our cash balance at March 31 was over $2.1 billion. This cash, combined with available debt capacity under committed borrowing facilities gave us more than $5 billion of liquidity at quarter end. Our debt maturities are well-laddered from late 2024 to 2041.

Thanks, David. Before we turn to Q&A let me just quickly summarize why we're so enthusiastic about Kyndryl's future. We're in the early stages of operating independently, shifting to our growth opportunities, seizing our now larger market and bringing incremental and differentiated value to customers.

This concludes today's Kyndryl Quarterly Earnings Call and Webcast. You may disconnect your line at this time, and have a wonderful day.