KD 2026Q2

Good day, and thank you for standing by. Welcome to the Kyndryl Second Quarter 2026 Earnings Conference Call. 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 for 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 in driving operational efficiency and business growth. Kyndryl is a trusted services partner that not 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, healthcare 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 customer's 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 customer's 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, two-thirds 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.

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. Thank you for joining this morning and for your kind words. I want to highlight a few points. We are actively investing in our business through capital expenditures, and we will keep doing so. Additionally, we are enhancing our capabilities, as demonstrated by our pending acquisition of Solvinity in the Netherlands. Furthermore, we are experiencing significant cash flow growth, which allows us to return capital to our shareholders. Last year, we initiated a $300 million share repurchase, and this year, the Board approved an increased amount of $400 million for share buybacks. Looking ahead, we will continue to invest in the business, pursue opportunities for tuck-in acquisitions, and return capital to our 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 already. 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 healthcare providers and government agencies as well on deploying agents now because they're really 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?

Thank you for joining us. When I reflect on the two acquisitions we've made thus far, they share some common traits. Primarily, they align closely with our current operations as the world's largest infrastructure services provider. Our acquisition from a couple of years ago focused on transitioning power architecture to Microsoft's cloud, fitting squarely into our business model and providing the necessary technology and intellectual property to expedite our clients' migration to the cloud. Solvinity, our most recent acquisition, is structured around managed private cloud services. Globally, we observe that many organizations are concerned about sensitive workloads, regulatory requirements, and cloud sovereignty. This acquisition enhances our ability to advise, implement, and manage cloud solutions for our customers, both private and hybrid, while also taking a significant step into the Sovereign Cloud market in Europe. These acquisitions consistently align with our existing operations, either by accelerating what we already do or allowing us to enter specific market segments. The purchase price was EUR 100 million, which you will see in the report later today, and we expect to finalize the deal towards the end of our fiscal year or in the first half of the next calendar year. Our focus remains on mission-critical infrastructure services. Regarding capital allocation, the two data points we've provided on share repurchases indicate a developing pattern. While we are committed to our stock's value, our share repurchase last year was $300 million, reflecting the cash flow from our business. This year, we plan to increase that to $400 million, also based on cash flow. As we grow, we see opportunities to further increase this, but we will adopt a trailing approach to maintain flexibility and uphold our strong balance sheet.

That's correct, Martin. Regarding capital expenditures, we anticipate these to be about 4% to 5% of our revenues over time. The majority of this will support our customers' infrastructure and IT needs, approximately 3 to 4 points out of the 4 to 5. The remaining point relates to our corporate needs, considering we have over 70,000 employees globally. This is how we arrive at the 4% to 5% of revenue figure. When we calculate our free cash flow, it's done after accounting for our capital expenditures. Therefore, these expenditures are funded before we assess the free cash flow available for other uses. As Martin mentioned, we see the opportunity to engage in both share repurchases and small acquisitions. It’s not an either/or situation for us, as demonstrated by our announcements yesterday and today regarding the increase in share repurchase authorization and the 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 movements in those sales cycles?

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 and new customers, there’s a tendency to be cautious due to the mission-critical nature of what we do, and there’s a need to ensure everything is right because these projects must succeed. This applies whether it's a new customer or just expanding existing scope. We obviously have renewals underway, but in the majority of cases, there’s new content being introduced. We provided an example in our prepared remarks this morning that illustrates how we grow within our accounts. So I don’t see any difference in decision-making from our customers, but I do notice that due to our growth and the new capabilities we are introducing, there’s a consistent level of care because these mission-critical relationships need to be flawless at all times.

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

I appreciate the discussion about the second half of the year, and Martin, you mentioned that it's expected to be demonstrably stronger. However, considering the $100 million in revenue that's below expectations and the deal slippage we experienced in September, doesn't this create a greater risk for the second half compared to your initial projections at the beginning of the year? Or is this risk being mitigated by the additional consultant resources you referred to in your prepared remarks?

Thank you, Tien-Tsin. As we look ahead, we know that we are entering the second half with a backlog that is in a stronger position and that we have completed a divestiture from last year. This gives us a better starting point compared to the first half. We are confident about this. Additionally, we anticipate that the demand in our consulting business and our investments in capacity will result in accelerated performance in the second half, fairly evenly distributed across the third and fourth quarters. Our hyperscaler-related business is gaining real momentum, driven by our customers' cloud growth, which we expect to continue. Furthermore, we have a stronger pipeline now, with more immediate opportunities due to the structure of the deals. While timing can vary and we can predict the year a deal will close better than the specific quarter, we know we don’t need to finalize every deal to be successful. Renewals and scope expansions can shift from quarter to quarter, but they are unlikely to shift from year to year. Overall, the second half begins on a stronger note than the first, our investments in demand will enhance our capacity to meet that demand, the hyperscaler-related businesses are showing significant momentum, and the deals we are pursuing have a greater likelihood of near-term realization. So I'm optimistic about our start to 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 begin with the verticals and then provide an example. We have seen the strongest performance in retail, travel, and technology, media, and telecommunications. Financial services has been decent in terms of activity levels. Not surprisingly, due to the current market uncertainty, industrials and the public sector have experienced somewhat lower activity compared to our other verticals. Regarding examples, we have discussed a financial services firm where we're actively engaged in multiple initiatives. First, we are broadening our operations into a new geography for a multinational client. Second, we are taking on additional responsibilities, particularly managing historical or legacy aspects of the infrastructure that we have supported for many years. Now, as an independent company, we are able to explore opportunities beyond that, with hyperscaler-related activities being a top priority, alongside enhancing our cybersecurity offerings. We are also increasing our network-related operations for our clients. Our approach emphasizes being an end-to-end solution provider, which is highly valued by our customers who rely on mission-critical IT services. This reduces potential gaps in service and increases efficiency, quicker problem resolution, and accountability. Our strength lies in our ability to integrate all these capabilities in one place, leading to excellent outcomes for our customers. We've noticed very high customer satisfaction and even better service level achievements as we broaden our service range. We believe that expanding the scope of our customer relationships is mutually beneficial. It's essential for us to grow our revenues and enables us to deliver improved quality and a wider range of services to our clients, assisting them in achieving their business goals. Thank you for joining us today. Our strategy is generating results and creating new growth opportunities. We are making steady progress in our consulting and hyperscaler initiatives, as well as in modernization and AI efforts. We are taking a disciplined approach and are focused on the long term. We are confident in our capacity to reach our financial goals, which include driving revenue growth, expanding margins, increasing earnings, generating strong free cash flow, and delivering lasting value to our customers, shareholders, and Kyndryls globally. Thank you again for being here.

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