Kyndryl Holdings, Inc. (KD) Earnings Call Transcript & Summary

Good morning or good afternoon depending on where you are everyone. Thank you for joining the UBS Global TMT Conference today. My name is David Vogt. I'm the U.S. Enterprise Hardware and Networking analyst. And we are pleased to have today from Kyndryl, Martin Schroeter, CEO; and also David Wyshner, CFO; and Jeni Hollander, Investor Relations. Prior to joining Kyndryl as CEO, Martin Schroeter has been in a variety of roles at IBM, including CFO from 2014 to 2017. Prior to joining Kyndryl as CFO, David was the CFO at XPO, a logistics company and global transportation company. And Jeni Hollander has joined from many different roles on the sale side as well as a consulting company called Teneo. Before we get started, I think Martin and David wanted to go over and provide a brief presentation about what Kyndryl is today following a spin-off from IBM and read the safe harbor. So let me just turn it over to Martin and David, and we'll get started.

Good. Thank you very much, David. Look, it's great to be here. Obviously, we would have preferred to be in person, but this will work. This will work well. So we certainly appreciate the opportunity to talk about Kyndryl and to talk about our growth strategy. So as David indicated, I want to spend just a minute on the basics of who we are and what we do. And of course, our discussion today, mine and David's as well will have some forward-looking statements. So we've provided the normal caveats on this slide. I will let you read them. I won't read them to you. We launched Kyndryl on November 4 on the New York Stock Exchange as David said, spin-off from IBM. And we started -- that day, we started day 1 as the #1 player in technology infrastructure services. So maybe -- there we go. Thank you, Robbie. Look, here's a little bit about kind of some facts, some noteworthy statistics, if you will, about Kyndryl. So we help our customers design, manage and modernize the technology systems that, quite frankly, the world depends on every day. And so when you think about our scale, here's some stats just sort of to contextualize that. We operate in 63 countries. We have 459 data centers under our management. We manage the majority of mainframe capacity in the world. As an example, we generate about 9 million automated actions per month, which for us and for our customers means greater efficiency, lower risk and greater quality in the systems that we're running on their behalf. We complete about 4 million backup jobs per day, which translates directly into our customers' minds as both security and resiliency in a very important set of workloads. And we have unmatched intellectual capital and intellectual property with more than 3,000 patents that we currently own, about 800 pending and another 200 submitted. So that gives you sort of a sense of the scale we're dealing with. The next chart that's up now, you can see how we think about our portfolio and what we offer our customers across that portfolio are a set of contemporary services really focused on helping them advance their digital transformations. And we think about the business in terms of cloud, in terms of digital workplace applications, data and AI, network and edge, security and resiliency and then, of course, core enterprise and zCloud. And those 6 practices we engage with our customers in advisory services, in implementation and again, as managed services, largest in the world. And now as an independent company, what we're really focused on is how do we add some higher-value data engineering services, including curation and orchestration across those practices. So separation for us really enables us to participate more fully both in the market we currently serve, but also in an expanded market. And all of these are areas that align with our customers' digital journeys, as I said, like cloud and data and security and automation. And these businesses that we're moving into are projected to not only have growth, but grow faster than what our historical business mix has been. And that opportunity is estimated to be about 415 billion today, growing to 510 billion, but we only play in a market today that's about half of that. So we see growth coming for us as we move into that broader market and as we move into these higher-value services. As an example of that, a week after we spun out, we announced the landmark global strategic alliance with Microsoft, which will essentially allow us to bring state-of-the-art solutions built on the Microsoft Cloud as well as a co-innovation lab and really importantly for us to help get our teams skilled at scale something called Kyndryl University for Microsoft. And that will essentially allow us to break through by the end of this year a 10,000 Microsoft certifications, which is a really important step in getting the teams credentialed in this broader ecosystem. And then we'll add another 2,500 in the first 6 months of next year. So really getting the scale we need to start to turn this business around with the ecosystem that's most relevant for our customers. Since we've announced, we already have 100 joint client customer engagements with Microsoft. And I would say that the activation that we're going through will allow us to have about 55 countries authorized to operate in a Kyndryl Microsoft joint way so we can show up jointly with our new partners. And then a week later, we announced the expansion of our partnership with VMware, which will accelerate our customers' application modernization and cloud initiatives, and that also includes a joint innovation lab. We've also achieved our SAP certification, et cetera, et cetera. So we have more partnerships coming. This is critical for Kyndryl to enter the market ecosystem that exists and the one that's most relevant, as I said, for our customers. And that allows us -- all of this allows us to sustain the critical role that we have in supporting more than 4,000 customers, including about 75% of the Fortune 100, more than half of the Fortune 500. And when you think about our customer base, think about its customers who make 45% of the world's passenger cars, customers who account for about half of the hypermarket retail sales in the world in a given year. Customers who manage nearly half of the world's mobile connections and banking customers who represent over 60% of the assets managed in the world. And so these are big important customers, obviously, to us, but they're important to how the world works. And those relationships are all built on trust. They trust us to run the hearts and lungs of their businesses. And this is, as I gave you some statistics, but also industry leaders like Dow and Michelin and Ernst & Young and Bangalore Airport, BBVA, ABN AMRO CaixaBank, RSA, which we just announced another effort with RSA this morning, NASCO and just to name a few. So we start as the biggest. We start as doing their most important work because they trust us, and they are happy with us. The majority of the contracts that IBM had novated, there is about 3.5% of the backlog still within that process that we're working through. with IBM, obviously. Our NPS scores, our Net Promoter Scores are consistently in the top quartile and our relationships, even though the contract length for a typical managed services firm is can sort of think 3 to 5 years, our relationships on average are more than a decade, and that's lengthening. Those relationships are lengthening. So they're happy with us. And we're able, as we now break out of the ecosystem in which we said, and we have a new mission, we're able obviously to attract new customers as well. And today, we announced also we'll be helping BMW as a new Kyndryl customer to update their IT systems with best-in-class solutions. And this is really built around their manufacturing. So again, what sits at the heart of what BMW does. So just -- I don't want to take up too much of the Q&A time, David. But we also have a great -- we've built a great leadership team and we've built a tremendous Board, a world-class Board to help drive this business, both back to growth to fix it as well as to reinvent it. Our Board is highly experienced very diverse backgrounds in finance and health care, manufacturing, distribution, and we even have a university president with a PhD in theoretical physics -- And I am, boy, just delighted of the great leadership team we've been able to assemble here and it's a really good balance of leaders who our customers know. So we brought them from within this business. leaders from the broader IBM team that wanted to come to Kyndryl. And then obviously, we also have some new talent coming from outside from some of the leading firms around the world like NBCUniversal and GE and State Street and Ernst & Young and others. So each of these leaders, they know what it takes and what it's like to establish something that's lasting and something that's important for customers and something that knows how to build a business that succeeds when our customers are successful. So yes, we have a lot to do on our culture to build a true services kind of culture in this firm, but we will but it's all, again, led by a great team and a great Board. So look, we've got a lot going for us. As I said, we started as the biggest. We started doing the most important and the kind of the hearts and lungs of how the world operates. Our customers like what we do for them. They love what we do for them, but we also have a lot to prove. We recognize that. So hopefully, as we get through this, David, and we'll see what your questions lead us, but hopefully, one of the key takeaways for the participants here is that Kyndryl is different. The mission we have is different. The strategy is different, and we see this business moving back into growth. So let me just kind of leave it there, David, so we can get into the Q&A. But the independence that we get with that new mission really enables for us a freedom of action to go build the world's leading services business and to operate and participate in the ecosystem that's more relevant to our customers. I'll stop it there, and I'll turn it back to you.

So that's a great overview. And I think investors will appreciate that. I mean maybe I just want to start with why Kyndryl. Your name, Martin, clearly familiar with people that know IBM have invested in IBM over the years given your background. You brought in people pre -- outside of IBM -- existing IBM, David comes from a slightly different background from the hospitality and the logistics business. And I think I've done a lot of questions over the last 3 or 4 months. What does the management team see here? I understand Martin's background and his role, but maybe less so David's role kind of lot of tech investors, unfortunately, have not been focused on XPO or Windham or any of the other hospitality companies. So maybe I'll just direct this to David first. If you can kind of just maybe give investors an overview of kind of your background, your experience and how it lends itself to what Kyndryl is sort of trying to accomplish over the next 3 to 5 years?

Sure, David. I think this is a really exciting opportunity. And having been a public company's CFO for the last 15 years and having been involved in a number of spin-off transactions I think there are a lot of ways for us to take advantage of the opportunity here. And what's really attracted me about it is the people, as Martin said, we put together a really phenomenal team that I'm excited to be part of. I think we're all excited about participating in helping the lead during what's a really exciting time for our organization. And I think the company has a tremendous amount of potential going forward. As Martin said, we started off day 1 as the leader in our space, but our addressable market, our mission, what we can go after changes -- has changed dramatically as a result of being independent. And it's not just that we're a public company versus having been wholly owned by a larger entity before. What's changed here is that we were being operated as a captive subsidiary really used to support other elements of the IBM business. And while we'll continue to be closely supportive of folks who have IBM centric infrastructures, we have the ability to support an even wider range of companies and needs going forward. So that combination of tremendous opportunity plus a great team is what I find really exciting about this, and I think it creates a lot of opportunity for us.

And maybe, Martin, a little bit of a different question but along the same lines. IBM over the last 5 years has been hyper focused on Red Hat hybrid cloud. And to be frank, the MIS business, which is now Kyndryl, has been sort of an afterthought as David mentioned, sort of a captive business that's supported the rest of the business. When you think about the opportunity, you touched on partnerships with Microsoft, VMware, SAP certification. How do you think about being -- from being separate from IBM means from a long-term revenue dynamic. We understand that the near term is going to be somewhat depressed given all of the contracts that you have to renegotiate or sign up new contracts. But being separate from IBM, which sort of, at least at my perspective, is underinvested in the business -- How do you think about this over the long term? Because the way we've been talking to investors about this is that this is a long-term opportunity. It's not a 3-, 6-, 9-month turnaround. It's a multiyear process. Just would love to get your thoughts having been in the seat before at IBM to where you are today.

Yes. Yes. Thank you, David. So a couple of comments, I guess, the way I think about it. First -- well, first, you're right, look, the turnaround here is a multiyear turnaround because everything that's powerful about a business like ours, when the backlog is growing and the long, long tail you get of growth over time, it's just as difficult to sort of work your way out of that's why it takes a few years to kind of rebuild the business, rebuild the backlog. The freedom from IBM is really important for a few reasons. But I also want to reinforce your point, which is right, which is IBM just hasn't invested in this business. And they had other options, IBM has an ability to invest, obviously, and they had lots of lots of attractive options. And you said, well, they've invested obviously in Red Hat. They have -- they see a different -- they see sort of a different vision for the firm. And importantly, I think this is sort of what they said when they announced the spin, which is we're not going to invest in this. And if it's not invested in it, we'll just -- it'll keep going down 5%, 6%, 7% a year. So for me, the ability to invest, it does make an enormous difference because it brings an ability to now develop both the capabilities that a services firm needs as well as it gives us an ability to really develop the services delivery platform that is -- sits inside our firm. And maybe it's the best kept secret, maybe it's not. But the fact is that in order to deliver the services you need, you need both the skills and we have deep skills and understanding how the most important workloads our customers have worked today. Again, a very narrow ecosystem primarily focused on IBM, but you need skills and then you need a really leverageable platform that allows you to deliver those skills to reduce your -- the risk of your customers' operations, et cetera. And we have that. So now we have an ability to invest to build the capabilities and to really, really build out this service delivery platform. And then independence means and not only invest, but it also means freedom of action. And freedom of action is -- you can think about it in a few different ways at a really sort of small-scale freedom of action. What independence allows us is to, for instance, take our sales team and really focus them on things that are just important for our business. As an example, before the sales force, because it has a different mission, and played a different role, this sales force was paid on and focused on helping Red Hat, helping IBM Cloud, helping a lot of things that were really important to this business. So just our ability to focus, again, what I'll call small freedom of action, just our ability to focus our sales force can really start to drive pipeline, can really start to drive a set of conversations with customers that allow us to start to turn this business around. On a sort of what I'll call a medium-size freedom of action, I would put the Microsoft partnership. And again, we'll do others, but the VMware partnership. These were places where we would have had a very small relationship, again, because the mission was different. The mission was to help IBM and its strategic elements. And now with a different mission, it's very logical. And in fact, our customers are so encouraged by the fact, not only that we can invest to build capabilities, but now we can participate in the ecosystem that's so relevant to them. And then freedom of action as an independent firm really allows us kind of at a big macro level is to really define and reinvent a business model that is much more tightly aligned with what a services firm would do and much more tightly aligned with helping and succeeding with our customers succeed. So it gives us -- the freedom of action gives us so many things across the continuum, again, really small, very logical, but very tactical along with entering an ecosystem and redefining the business model that this independence really does make the difference for us in terms of getting back to growth.

Well, you were up a great point about skill set capabilities obviously, recognizing that Kyndryl relatively recently spun out public company, how do you think about enhancing your skill set of your existing team versus going out to the market to bring in skills that you may or may not have that are critical to deepen the relationship with your existing customers and obviously any potential new customers? And how does that market look right now? We've heard obviously from a lot of companies that the market is a little bit tight. I just would love to get your perspective on how you're thinking about that sort of skill set opportunity set that you need to sort of build out over the next couple of years?

Yes. I think about it that we start from a real position of strength for a few reasons. One, we have scale. Like I said, we have 90,000 in total. We have about 90,000 people. But at the heart of what Kyndryl is, it's a delivery organization, and more than 60,000 of those people are in delivery. And the reason we start from a position of strength it's not just scale, but these are the people who our customers trust, right? So when our customers say, Martin or David, we trust you to run our most potent -- I mean they don't -- maybe they trust me specifically, but they really trust the people who they see every day running these systems. They trust the 20 or the 100 or the 150 people who are in the middle of what I'll call their hearts and lungs. And so they trust us because we are so deep in what is so critical to them. And this is existential, right? If their core infrastructure doesn't work, they don't work. So I think we start from a position of strength because we have scale. I think we've started from a position of strength because we have trust, and I think we have -- we start from a position of strength because we are the deepest in how this works. Now having said that, we're also realistic about the transition we have to make, the growth we have to put into the firm in order to get our skills on these new platforms so that we can build the accreditations that we need and the experience that we need that's so important to our customers in Microsoft and the other hyperscalers as well. So we will invest quite heavily to do that. And the good news from my perspective and the exciting thing from my perspective is that all of the partner discussions we're having and Microsoft, as I said, we already announced, but others as well. This is a co-investment. So we're going to be able to accelerate what this firm would normally be able to do organically with co-investment from our partners. And every one of these discussions from our side has been around co-investment, skills building, getting credentialing for our team and then using that credentialing to get some experience so we can really accelerate in this ecosystem. So -- so the market is tight. We have -- but it's always been tight, right? These are -- these technical skills have been hard to fought for, for years. I think -- when I think about why people join Kyndryl, I think we also start from a position of strength because all of the things that were true about why people joined Kyndryl are still true and now we have even more. So what was true before? We do the world's most important work. When you talk to Kyndryls about why do they do what they do at the center of that, the very heart of it is the nature of the work that we -- that our customers allow us to do for them. So that's still true today, even after the spin. What do we get to enhance? Well, now we get to enhance that with some investment that they can see and we can point to real career journeys, real career road maps across a range of skills. And then importantly, what's enhanced now is, again, we use our freedom of action to move into a market ecosystem so they know that -- our employees know and those who join us know they're going to be doing the most important work with the people who know the most about it at scale. And you're not only going to get a new set of skills that you can develop over time, but you're going to participate in the ecosystem that the market is demanding. So I think we've got a great, strong start, and I think we've got a great, strong future in how we move our skill base. Realistically, it takes time but how we move our skill base into this new ecosystem.

Right. No, that's great. So I think you've mentioned in the past along those lines that you view Kyndryl like a $19 billion start-up. So is there something different about how you're thinking about retention, recruitment versus maybe the way IBM might have thought in the past. And you mentioned sort of co-investment from partners. Obviously, I would imagine that's not something that was common place when the MIS segment was within the IBM umbrella. So has there been sort of a change in terms of what that you do. But in terms of how you're thinking about philosophically what your company looks like over the next 5 years versus if you have been sort of in your old seeded IBM and kind of running the same old playbook effectively for the last 30, 40 years.

Yes, I'd say a couple of things, and let's start just with -- again, the mission is different. So before when we were part of IBM, and IBM was thinking about how to engage with VMware before Red Hat say or any of our other partners, right? AT&T is a big customer of ours, a big customer of IBM's or Verizon as an example. So when IBM would sit down and think about how do I get something? How do I negotiate they had a long -- they have their list of what was strategically important to the firm. And we -- our skills were just not on that list for all the logical reasons, right? That's sort of the difference in mission really allows us to focus. We really focus now on this marketplace, which means we can focus our investments on our people on the 90,000 Kyndryls they're north of 60,000 who are doing the delivery of mission-critical work. So -- so yes, I think about it differently because the mission is different. So we really get now to focus. And then as a start-up, we have an enormous opportunity now to show up in front of our customers in a much more agile way. So we've really flattened this organization. And we've made it much, much faster and put decision-making down in a place where it's most logical because they know the most about customers and they have the best information and insight. So not only are we much, much more focused with a different mission, but we can really take to heart the idea of moving quickly of being responsive and being agile. And a lot of that comes with the simplicity we get out of really only having 1 business model. We are a services firm. And now we get to behave like one and build an operating model like one and build an organization that supports that whereas before, again, on a different mission, we were a services business, but we were inside a different business model. So it was just orthogonal to how I would think about a services business can best show up. It played a role, but it had a different mission. So again, the different mission really allows us, David, to focus. It allows us to be faster. It allows us to operate differently. And it's quite valuable. And that's true for someone who shows up now in Kyndryl is true because they see the investment that we can make. They see the skill development, they see the ecosystem they see the much, much flatter organization and the ability to move much more agilely. So it's very much a different kind of world.

Great. Now that's helpful. I appreciate it. I would say maybe just switching gears for a little bit, over the last 3, 4 months, while the spin was happening, and we were getting a lot of questions on what does the model look like going forward? And I think at your Investor Day, you laid out sort of a framework over the next several years. And I think just for the benefit of this audience, because I'm not quite sure that everyone unfortunately, had the time or was privy to that presentation. maybe, David, if you can just kind of remind us again how you're thinking about the next 3 years from a revenue perspective? And maybe touch on what the visibility looks like when you enter a particular year and how investors should think about what, sort of, not pre-book but effectively in the sales funnel that you're going to recognize that year, how should we think about the next 2 to 3 years as this business turns around.

Sure. Working backwards through the questions, our business is a backlog-oriented business. So we will typically start the year with 80% to 85% of our revenue under contract for the coming year. Even for the next year out, about 2/3 of our revenue will already be under contract. And looking to the third year out, about half of our revenues would be under contract already. So part and parcel of operating under the medium-term contracts that we typically do for managed services. When we look at our revenue trajectory as part of IBM being operated, as I said, as a captive, we were seeing -- we've been seeing revenue declines in our operations in the mid-single digits. As part of the new freedom that we have to operate differently, to operate across a range of technology ecosystems, we see a significant opportunity to change the revenue trajectory over time. We're looking to get back to revenue stability in about 3 years, call it, late 2024, early 2025 which will make 2025 the first year of year-over-year revenue growth for us. And we're starting to make progress in driving toward that right away. The partnership we announced with Microsoft is a key part of that, the way we are going to go to market, the larger addressable market that's available to us we'll -- we expect to start to make progress there right away. But given the nature of our business, the long selling cycles, the ramp-up times associated within the trajectory that we're coming from, we see it being about 3 years before we're at revenue growth.

Right. And maybe this might not be an answerable question. But longer term, once we get past this revenue stability, you have invested in skill sets, you readdress the go-to-market strategy. Obviously, this is not a hyperscale and tight growth company, but obviously, some of your end markets are cloud services, data security. Is there any way to think about or frame sort of what kind of revenue growth trajectory of this business can be on over, let's say, years 5 through 10. I know crystal balls are not particularly accurate. Is this like a GDP-like business, given the tailwinds in the markets that you currently operate in?

Yes. I think it certainly has the opportunity to be a GDP, GDP-plus sort of business, call it in the low to mid-single digits over a period of time. Because the -- because the infrastructure services stays, broadly speaking, has been growing at about that rate. And I think we can return to being a market grower there, which for technology is typically GDP-plus.

Got it. And then maybe just turning maybe, Martin, back to the TAM. You talked about the $415 billion TAM, 2024, north of $500 billion TAM. When you look at the segments of the market that you really couldn't compete in previously when this was part of IBM, and you talked about intelligent automation, data services, cloud services, security. Are those 4 buckets of faster-growing opportunities within the overall high? Secondly, when I think about traditional opportunities, is that sort of the slower growth piece of the pie and then these sort of ancillary pieces that you think there's an extended TAM on are growing faster than sort of the traditional opportunities.

Yes. So it's a really good question, David. So let me kind of give you my perspective on this. So every customer we talk to, and I'm sure it's same for the investor thesis that are out there. There really -- there are 3 discussions that are set at the kind of the forefront of every customer discussion we have. And that's a journey around cloud. There's a journey around data and AI, and there's a journey around security and resiliency. And so when -- not surprisingly, by the way, the reason we have these 6 practices, I'll talk about all of them at some point, but the reason we have these 6 practices is because this how our customers think about it as well. This is how -- these are the journeys that our customers are on. So I see, for us, the cloud, the data and the AI and the security practices as driving very good growth rates as we move into the market mix of that. And then we have to -- we have an opportunity here because we have brand permission, we have an opportunity to really play a role in network and edge as our customers think about that. Now we've got a lot of work to do to build a set of capabilities. But those 4, cloud, data and AI security network and edge, those 4 practices will drive the most growth for us. Now we're in -- we have a cloud practice today. One thing to note though is we are just -- we are underweight where the growth is relative to the market. So we are not big in managing public clouds. And again, we were part of a mission to help customers move on to the -- and manage the IBM Cloud. And now without that mission, when we have a new mission, we can actually help where the market is much broader, and we can play in that marketplace. So the 4 I talked about, I think, drive the bulk of growth. The digital workplace services business is and can be a good, solid, low single-digit grower. It's an opportunity for us, very powerful for our customers, an opportunity for us to bring innovation, to bring new ways of working for customers, particularly as they -- everybody rethinks how work gets done. So the DWS practices also can grow. And then the 1 that's going to struggle to grow the most is going to be the kind of the traditional core and zCloud business. Because that's where the bulk of the workloads that sit in there are being sort of under consideration to either rethink them, to refactor them, to move them into a different compute model. So again, every customer is on a cloud journey, a data journey, a security journey and again, also in network and edge journey. So those 4 will provide some good growth for us. Core infrastructure, zCloud will not be a big grower. And I do think DWS could be a solid low single-digit grower when we get it into the right shape.

All right. Now that's helpful. And we also get a ton of questions on the complexity of interpreting your numbers versus what they look like from IBM in the Form 10. I know you published a bunch of different presentations and sort of documents, sort of I guess, pro forma adjust for being a new start-up effectively. When we think about this business over the long term, what's the right set of metrics that you think investors need to focus on? Is it, besides revenue growth, is it EBIT margin, EBITDA margin, free cash flow? When you look at the business today, how would you define success in 5 to 10 years from a metrics perspective?

Yes. All of the above. So you mentioned revenue growth and returning to revenue growth and delivering that is going to be very important. We see margin growth as part and parcel of that, it joins right there 1 and 1A with revenue growth. And in terms of particular margins, we're looking for improvement in EBITDA margins, which I think are relevant in our space. And our goal is to move those up from the mid-teens, where they've been, to the high teens and growth in pretax margins as well, which have been slightly positive, but not as positive as they need to be. And the opportunity for us is to move EBITDA margins up to see depreciation expense, a percentage of revenue come down as we become less capital-intensive over time. And as a result, have even greater increases in pretax margin than we have in EBITDA margins. So that second and one was. And yes, third, I think free cash flow will be important for us as well. We look at our normalized free cash flow as being in the $500 million to $600 million range. And the opportunity for us would be to move that up over time as our pretax margin increases.

Great. That's helpful. Maybe just a quick follow-up. So obviously, there were some debate leading into the spin about what the capital structure would look like. I think you guys have started with a pretty conservative capital structure from a debt perspective. And the Board and your team have decided not to pay dividend. Maybe can you just touch on over the next couple of years, the priorities from a cash flow perspective? I know there's been some discussion of maybe reducing debt a little bit further going forward. I just would love to kind of get your updated thoughts on where cash flow is going to be allocated?

Sure. You're right. Our balance sheet, I think, is in a good spot. We have a little over $3 billion of debt, but we also have about $2 billion of cash. So that puts our net debt at around $1.2 billion, which I think is quite manageable for us. We view being investment grade, which we are with both agencies as being a really critical priority for us. It's helpful from a financial standpoint, but it is really important or particularly important from a commercial standpoint. Being able to go to market in a way where our customers and potential customers understand our financial wherewithal or willing -- our ability to invest in innovation in our business and in allowing our customers be really comfortable with that, we view as very important. And as a result, we look at the investment-grade ratings, we consider those, as I said, to be critical to us, we're at the low end of investment-grade, particularly with S&P. And that's why we look at strengthening the balance sheet, moving our ratings up by a notch is a worthwhile goal for us. And then the other issue that we have is that, well, we are a generator of free cash flow. We do expect over the next 12 or 14 months, the substantial majority of our free cash flow is going to be used for post-spin transaction-related costs, including a fair amount of systems migration work that still needs to be done post spin as well as the payout of a broad-based retention program that IBM had put in place. And those are going to use up a fair amount of our cash flow over the next 12 to 14 months. So when we put those objectives and needs together the desire to be investment-grade, in fact, to be a little bit more strongly investment-grade over time, put that together with some onetime cash outlays that we're going to have as a result of the spin. That's really why we've taken the approach that we have for now with respect to not having a dividend.

Got it. And is it fair to say these 12- to 14-month cash flow priorities have been already contemplated by the rating agency? There's no surprise?

That's right. That was all part of the discussion. -- as was the sort of the decision not to be paying a dividend initially.

Got it. That's helpful for investors. And then just maybe one question I get a lot, and it just came in again is when I think about this business, as we think through, let's say, 2024 and we get on a stronger footing, the balance sheet's in an even better position and presumably, you'll get a rating upgrade. So you'll have no dividend, you'll have a very low leverage business growing theoretically. And so what's the use of cash flow in 5 years? Does M&A make sense? Are there pockets of technological innovation or lack of innovation that you need to address? Obviously, as you reinvest in this business over the next couple of years. And some companies have done these bolt-on acquisitions. Should we love to kind of get your thoughts on how you see that being a potential source of technical skill set growth for Kyndryl and potentially revenue growth longer term?

Yes. Yes, David, let me take this one. So I do think M&A plays a role in the firm over time. I actually -- and I agree with the way David said it, which was improving the balance sheet is a worthy goal, but it's not the only goal. I actually think we might have some capacity. We have not had any discussions with the agencies, but I think we might have some capacity in the near term. So I don't think it's a 5-year -- we don't have to wait 5 years, but nothing sort of in the works right now. When I think about where it makes most sense I'd say a few things, one, there is -- again, in our business, with people that sit at the heart of it and people who are delivering skills can always be a logical focus for us if we think about, for instance, really jumping hard into the network and edge business is there are a set of skills that will really accelerate that or if we think about how competitive and the -- our practice can be and the brand permission we have in the security and resiliency space, there may be some skills there to really accelerate that business. And then on the other side, as I mentioned, we have this service delivery platform, which I think is world-class. It needs more investment. It needs more work. Our CTO would say that obviously, it needs some more capability, you would also say that it needs to be better integrated across everything that it can do. And importantly, he would say it needs to be consumed in different ways by our customers. It's a bit monolithic. But notwithstanding that, there are elements of that, that can be supplemented or accelerated by some IP. So yes, their skills are very logical to really jump-start some of these businesses. We didn't spend a lot of time in the -- talking about the practices in depth. But when I think about the advisory business that we have, it's a bit underweight relative to where it should be, quite frankly. And one of the things we're going to do, one of the things that's going to help us get back to growth is build out that advisory business. We have the capabilities. We just need -- we need the people. We just need the people. So across the practices, there are some logical labor components that might fit in here well. There are probably some IP that we could think about over time. Again, your time frames are very logical, but I think we might have capacity to do something sooner. But it is -- again, it is something we're thinking about. Now I would put all of that in the context of we think we have some very logical adjacencies to what we do for our customers but we're not going to try to be something that we're not today. Our customers know why we're there. They trust us, as I said before, to run their hearts and lungs and that's where we can create a lot of value for our shareholders. That's where we can create a lot of value for our customers. We're not going to go out looking for something that doesn't -- that isn't a very logical and where we don't have brand permission from our customer base today.

No, that's helpful. Got it. I think we're about to run out of time. I still want to give you the opportunity. I know you covered a lot at the beginning in your prepared remarks. Is there anything that we didn't touch on that you want to leave investors with as we wrap up today as you guys embark on this new journey?

Yes. Thank you, David. And again, I'm going to go back to the point I made in the beginning. And -- it is -- this business is with a different mission, this business will have different outcomes. And yes, it will take us a little while to get there because of the work we have to do. But I think it's a business that people think they understand. And I think they do, but how we fit into the world and how we get to execute what our customers are asking their help with allows us now to, as I said, to create a different outcome because the mission's different. So there's plenty different. We've got plenty of work to do. We got a lot to prove, as I said, we're ready to prove it and we started in a great spot. We're the biggest. Our customers love us. We've got the best talent. And as I said now we've got a great leadership team, a great board to help us kind of to create a new -- a different outcome with a different mission.

Great. Thank you, Martin. That's well said. David, thank you, and Jeni, thank you. And thank you, everyone, for joining. And if anyone has any follow-up questions, please feel free to reach out to me or anyone on the Kyndryl team and thanks, everyone, and have a great day and great evening.