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

Welcome back to Evercore ISI's eighth Annual Payments and Fintech Innovators Forum. I'm David Togut. I lead the payments processors and IT services research team here at Evercore ISI. Really delighted to kick off our fireside chat with the management of Kyndryl. Joining us from Kyndryl are Chairman and CEO, Martin Schroeter. We also have the IR team here with us, Vice President of Investor Relations, Lori Chaitman; and her colleague, Bobby Grau. Thank you all for joining us here today. We greatly appreciate it.

Thank you, David. Nice to be here.

So let's start with the 3 As: alliances, accounts and advanced delivery, which represent the core of Kyndryl strategy. Where are you most confident of your progress? And where do you see the most room for improvement?

Yes. Look, it is -- it does sit at the heart of what we're getting done in order to get this business back to a growth trajectory and obviously, at the level of profitability that we are confident we can generate. And each of them plays a little bit of a different role in that. And if I just sort of tick through the 3 As, and our alliances activity, which we were late to the game, right, working with the other hyperscalers because we were owned by a company that had its own cloud. But once we became independent within a week, we signed a really important and meaningful relationship with Microsoft, the month later, Google, et cetera, et cetera, et cetera. And we said at the time already because of the role we play in our customers' environments that we think we can sign $1 billion just with those 3 hyperscalers in the first year, and we wound up, as you know, we delivered about $1.2 billion of signings. And then this year, as we moved into the second year, we said "look, we'll now focus on converting that into revenue. We started at -- by saying, we'll get at least $300 million this year from that. We actually got that done in 9 months. So now we said we'd get at least $400 million out of that. But that represents a big part of the growth. And while I don't think I'm unique in the role I have and being impatient, I think it's going really, really well, right? So that's a business that, as we look at the medium term, should be a $1 billion-plus business fairly quickly. Secondly, on advanced delivery, another Look, we've made very good progress. We've always viewed the advanced delivery opportunity at the shorter end of the medium-term time frame, right? If you think 3 to 5 years is medium term, we always felt that we could make progress in advanced delivery the fastest, not that it's entirely in our control, but it is more in our control. And obviously, again, we've made a ton of progress, and that's showing up in the P&L. There's still more to do. And advanced delivery for us is really focused on better service levels, better responsive infrastructure for our customers, and it allows us to do it more efficiently as well. So that's going, I think, very, very well also and consistent sort of with how we've thought about it. And then finally, the third day of focus accounts, not -- it's the least in our control because you have to work with your customers. And let's remember that we're not really exiting any of these relationships. We are recasting and reimagining these relationships with our customers, and that involves bringing new capabilities that involve sometimes taking certain content out. But at the end of the day because our customers really like what we do and they like our delivery and they like our quality and they like the innovation we're bringing, this is really about working with our customers on reimagining what those relationships can look like. And so in that, again, that medium-term time frame, that's always been sort of later, I think, in terms of realizing the full benefit. But each of them -- each of the -- as is moving at a suitable pace, for us to achieve what we set out to achieve in the medium term. So look, I think the teams have done a phenomenal job of executing. I think they were very fast out the gate on the alliance activity and that's gone well. They're very fast out of the gate on improving quality even further with our advanced delivery initiatives, and that's showing up in the focused accounts. Again, going well, it just takes time, and we got to work with our customers who -- again, they like what we're doing. They like they want to figure this out with us.

Just as a follow-up, you noted that you have $1 billion medium-term revenue target for the alliances. What's the next step in the development of your relationships with the hyperscalers? Like what's going to drive the next big amount of revenue growth.

Yes. It's a great question. So look, the initial partnership agreements were built around kind of 3 things. One was a joint go-to-market. So we show up with our partners in our customers' sites to help move workloads to help run workloads in these -- across these hyperscalers. And that's been really powerful. So joint go-to market, joint investment, if you will. They've invested heavily in our skill base. We now -- basically, from a standing start when we were spun when you could count the number of hyperscaler certifications and credentials that we had across all of Kyndryl in the hundreds, if you were lucky, we're north of 35,000 now, and that's been not only our investment but our partners' investment in our skills and in our education. So joint go-to market, joint skills investments. And the third part has always been about co-innovation. And I finished that 1/3 because that is what we're already seeing now is going to be the next step of growth. So it's not just about managing this disparate infrastructure and complex infrastructure. It's also now about, for instance, you would have seen that we announced another deeper partnership with Microsoft and Google and AWS on Gen AI and how we get our customers, our joint customers ready for that. And it's the nature of that co-innovation that I think is going to drive the next level of growth. So this -- again, we've got a lot more to do just on the basics of managing the infrastructure. But then on top of that, we're getting into now in the co-innovation space, we're helping customers do the -- what's sort of what's next next. And that -- what's next next today for many customers is AI and Gen and getting their data ready across these hyperscalers.

You highlighted the accounts initiative earlier. If you could double-click on the accounts initiative in terms of how far along you are in moving from kind of focus accounts at lower margin to the blueprint accounts? And what's the time line to hit the target to get most of these into the blueprint margin category.

Yes, sure. So by the time we get to the end of this fiscal year, we've got a month in a day. It's a leap year, I was reminded yesterday, so we've got a month in the day left in this fiscal year. We'll be -- we'll have about half of the accounts, I'd say, through that process. But as you know, the way that shows up in the P&L takes time, right, because we reimagine our relationship and then goes into the backlog and then it will come out of the backlog over time. So we'll see the benefit play out over the time frames we talked about over the 3- to 5-year period. We're already seeing some of it now. We'll see more again next year and more the year after that, et cetera. So the benefits will keep going for a while. And look, quite frankly, when we set the 800 in order to achieve the $800 million that we put on the table 2 years ago, that was only a piece of what we see in total. So there is more still beyond that as well. So I think we're in a great shape to realize the benefits with more to do. We've already -- we've already sort of solved, if you will, by the end of the fiscal year, we'll have solved half, but that represents more than already half the opportunity to be identified. So there's still additional upside forthcoming.

Are there any themes in terms of where geographically the remaining focus accounts are located or by industry? I mean, how should we think about kind of the other half of that account?

I wouldn't -- look, we have focused accounts everywhere. Every country has some. They're not there's not a theme that now they happen to be -- we have a fair bit in Europe. We have a fair bit in the U.S. The theme behind the focus accounts, though, is more about the -- how much IBM hardware and software is needed in order to deliver because that's the new commercial construct that IBM created. And that's the -- it's not the only, but it is the single largest element in what work we need to address. So the labor component of these is doing very well, right? We're engineering the decline to deal with the economics that were created for us by IBM and their commercial agreement. But I wouldn't say there's either a geographic or an industry theme other than industries that are big users of mainframes, for instance, tend to have more focused accounts, industries that are more distributed workloads, not as many.

Got it. Thank you for that. Just going back to a minute for Gen AI, we talked about the opportunity on the revenue side. But connected to that, how are you using Gen AI in your own business to improve productivity and drive gross margin and EBITDA expansion? .

Yes. It's -- look, it is probably top of mind for most companies today. How do we use it? And then how do we bring it and use it for our customers. So I'll start with sort of the narrower field of Gen AI. And for us, this is an opportunity to help our customers as they think about how do they have to architect their data, right? At the end of the day, Gen AI is really a data challenge. So we're helping our customers to architect their data. We're helping our customers think through the security and the resiliency needs as their data needs to start moving around. All of that shows up in our -- part of our Kyndryl Consult business, and it represents a revenue and obviously a profit opportunity. Within our own -- how Kyndryl runs, we finished now at the end of the second anniversary, we are off all of the IBM transition service agreements, the TSAs. We had a 2-year time frame that they gave us to move all of our systems off. We've taken a massive leap forward in building contemporary fit-for-purpose systems. We've taken our application portfolio from over 1,700 down to a number in the dozens. We use 1 HR system. We use workday as an example for everything. We have SAP, we're a Microsoft shop. So we've simplified our environments. And now is a step of now we have -- we get an opportunity to change how we do work because now we have the right systems to support all that. I go through all of that because that's been the enabler for us now to think about and we probably have 5 or 6 dozen experiments underway on Gen AI. How do we use Gen AI to attack paper in the -- sit in their processes to simplify how things get done. And we'll see. We see pretty -- for a business like ours, right, contract-based business, with some of our contracts, with customers are 800 pages long. So we see great opportunity for the kinds of business we have now that we have our systems in a state where they can support the future as opposed to very much being stuck in the past. So that's sort of the Gen AI as a narrow category. But AI more broadly also shows up in our Kyndryl Bridge platform, right? Kyndryl Bridge is basically, in addition -- I mean, it does a lot of things, but one of the things it does is it's machine learning on the biggest pool of infrastructure data that exists that gives insights to customers about how their systems are running, how to optimize what looks like -- it should be fixed before it becomes a problem. And obviously, it's what we use to automate over 1 billion things a year for our customers. It's what we use to keep our customers, more than 90% up to date, if you will, on best practices, et cetera, et cetera, et cetera. So Gen AI is a small -- right, at this point, a smaller opportunity, but it is AI broadly, machine learning is how we deliver services, how we run today.

So 2 connected questions. The first really is on Kyndryl Consult. And the second is on Kyndryl's position in IT services primarily as a nondiscretionary provider, which makes it somewhat unique in the ecosystem. So perhaps just starting with Kyndryl Consult, which you referenced, 14% of your revenue helped drive accelerated, 13% year-over-year bookings growth. Where are you seeing the biggest demand for Kyndryl Consults revenue or Kindred Consult solutions and then maybe frame how much of this in the nondiscretionary bucket versus what you would consider to be discretionary? .

Yes, sure. So a few things. One of the one of the benefits of having full visibility to our customers' infrastructure and having full visibility to their assets and helping optimize that is also, it's a demand Gen creator for our consult business. And as we sit here today, that is focused on the security and resiliency aspects of their business. So we have a lot of work in security and resiliency and consult. It's around data and architecture opportunities that, again, driving consult. And it's around cloud migration and particularly mainframe modernization. And how does that -- how do we help our customers think through the mainframe modernization path that many of them are on. So I think that's going to shift over time. Again, Gen AI is going to be a bigger part of the discussion. But for the role we play in our customers' environments, mainframe modernization, security and resiliency and data are set top of mind. And I don't think that's going to change dramatically. Gen AI will enter the picture, but those 3 things are what we do, it's what our customers trust us to do, and it's going to drive demand for a long, long -- they're never going to go away. There's never going to be a recession in security. There's never going to be a recession in resiliency, right, because it's such a critical part of how infrastructure has to run.

Got it. Thank you so much for that. So along those lines, how do you plan to expand Kyndryl Consult solution set over the next 12 months?

Yes. Look, we have -- today, I mentioned, mainframe modernization, security resiliency, data, et cetera, plays a big role. But we're also -- we announced a new partnership with HP Enterprise this week around edge computing and how to bring more of that data in and make sure, again, it's resilient and it's been part of a well-run infrastructure. And I think that's going to continue to drive more growth for us as well. And then the ability for us to help customers understand biggest challenge -- one of the biggest challenge CIOs have is just understanding what they have, having a full inventory and what's being used and what's not being used. I think, is going to become as macro starts to affect more and more of their thinking and how do they save money, et cetera, that's the big part of what we can help them with. So macro is going to affect our customers. Our tools, our AI and our IP along with our great engineering talent is going to help them identify where else they can go find money, which may be not optimized today. So again, macro, we're a bit insulated from it, as you said well, but our customers feel it. And therefore, I think the next phase, if you will, the next wave of Kyndryl Consult will also be about productivity about helping customers save money.

You recently raised the fiscal '24 advanced delivery savings target to $550 million. It's still early in the fiscal fourth quarter, but what are the biggest drivers to achieve the $550 million? And how are you progressing towards that?

I mentioned earlier that we're using -- we use Kyndryl Bridge to automate a lot of the work that we were doing for our customers. In fact, I think we'll finish this year at 1 billion automations on behalf of our customers for the year. And that's only with that's only with Bridge running in about 750 customers. We have -- we'll get to 1,000 by the end of this fiscal year. So the path forward from here is not that we need something new to happen. We just need to keep doing what we're doing. And the value that our customers see in Bridge has created a tremendous amount of pull. It takes time, as you would expect, it takes time to get customers to understand the tools. It takes time for our own teams to understand how to use the tools and what do you -- how do you optimize. But importantly, also, you can't just show up and put things into a customer's environment. You've got to -- it takes time to get them comfortable, understand it, et cetera, et cetera, particularly for regulated businesses. So what we've been able to achieve so far, which has driven terrific benefit is the same thing that's going to allow us to get to the next level and the next level. Now as we get back to revenue growth in calendar '25, what it allows us to do is a lot more without having the cost profile to go up as much. So it's been very good about helping us save money, and that's good as we've engineered the revenue decline while we're adding gross profit dollars, but it's also going to be a great tool for us as we get back to revenue growth to allow us to grow revenue, but not have to grow the spend at the same rate. So more leverage for us in the future just on getting back to growth. But it's all the things we're doing today.

Understood. Appreciate that. Now your medium-term target for advanced delivery remains $600 million pretax profit contribution. By the end of '24 -- FY '24, you'll be nearly 90% to that medium-term target. So what are the tailwinds and headwinds to reaching the $600 million target? And why won't you exceed it?

Look, we may very well exceed this, right? As I said, the opportunity for us -- and we are there at the shorter end, as you pointed out, we are at the shorter end of the 3- to 5-year time frame as we kind of expect it to be. But we only have Bridge, as I said, in 1,000 customers by the end of this year. There's still a lot more for us to do there. But at the same time, we are a services business and our engineering talent is a big part of why our customers come to us and stay with us. So it's not endless. It doesn't keep doubling every year, but I do think there's probably more that we can get out of it. But again, it's more about how do we grow faster without having to add to the cost side. How can we grow faster on the base we have. So I think the opportunity is likely to expand over time, but it's going to be more tied to growth for us.

Just on that point, I know a lot of your cost savings have come from upscaling employees with kind of older programming skills. What about offshoring? Are you far enough along in terms of low-cost offshore or nearshore locations?

We are probably a bit more domestic than offshore, than some of others in the marketplace. But at the same time, because of the nature of the infrastructure we're running, that's what our customers want. They want a heavier onshore presence. And that's completely fine with us. We've proven, I think, over the last couple of years that we can still create value. We can still get paid for the great work we're doing. So I don't see the domestic versus offshore mix is being a dramatic driver for us. I do think that now that we've proven that customers are willing to pay for it, it works over the long term for us as well. That doesn't mean that we're not going to always be looking to see where the best skills are because we're always going to move -- we're always going to have the work done in the place that has the best engineering talent. So when we look, for instance at our mainframe skills, we've got a few -- this is a few thousand people who know more about mainframes than anybody those are in pockets around the world. So mainframe is always going to go to those places, Eastern Europe, some in India, et cetera. But I don't know that, that -- it's not an offshore versus domestic discussion, it's really about where the skills for this particular practice and where the skills at scale for this particular practice.

Appreciate it. I'll pause for a minute to see if there are any questions from investors, and we have a mic, so please raise your hand if you have a question.

Martin, thanks for being here. We talked a little bit about the advanced delivery initiative. You're almost at the medium-term target. And you talked about accounts. It's going to take a little bit longer. But it seems like you are a little bit ahead of schedule probably based on like this year's target. And you talked about -- I think you guys said that the account to medium-term target is only half of the margin gap, right, between your focus and your blueprint accounts. And so as you've had these conversations, like how much how much of the focus accounts do you think that you can convert into the blueprint accounts over a longer period of time?

Yes. Look, eventually, every contract ends, right? So eventually, we get through them. I will say that we have the benefit of having these very long deep relationships with customers is obvious. But we have contracts that go out even as we sit here today, that only finish in 2032 as an example, right? So there is a long tail to this. But the bulk of this we do get through in that 5-year period. And again, I think what we're what we're -- what we've proven and what we want to make sure everybody understands this is, one, we can get paid for the work. Customers appreciate the value we bring and they see it. So they're willing to pay for that value. That's one. Two, the relationships remain intact, even if some of the content comes out, almost every customer is reimagining the relationship so that will continue over a long period of time. In fact, we saw in the last quarter, now this will be different in every quarter, but over the last quarter, we had -- I think we had 13 deals greater than $100 million, whereas we hadn't anywhere near that for the full year of the prior year. So the relationships are getting reoriented, the labor component of the focus account revenue can earn a reasonable return, we're proving that. It really is just getting this content out. And this is the big year for the engineered decline, right? We've been talking about why it's coming down so aggressively with a little mitigation from the things that are growing. Next year, some of those phenomena that are driving the big decline go away and obviously, the things that are growing -- keep growing and they punch better. So the even though some of these contracts go a long time, we're kind of fixing. Now to your point, we're making great progress. I'd say it that way. We made and as you would expect, we had to make a lot of assumptions about when and what's it going to look like and all those things. And that's what I think we're really we're pleasantly surprised that we've been able to make progress faster than what our assumptions were. But the assumptions we had hold the customers' willingness to engage, customers' willingness to stay and reimagine these things, customers' willingness to pay for value where they see it. Our ability to compete -- because they benchmark us, right? Everybody benchmarks us to make sure that we're competitive. Our ability to compete, our ability to bring new thinking and innovation, our ability to show up differently for our customer. All of the assumptions are right. It's just that they're coming in at a slightly different rate and pace and a little bit faster. But we do get through them eventually. The great power of a business like this, it is a backlog-based business. So you have very good visibility to what's coming. That's the power, but you got to -- that means you also know that it takes a while to fix, right? The stuff that has to be fixed. So right now, right now, the backlog is -- what I would say, we still have a lot of pre-spin stuff. So the notorious nature of that will turn into a feature because of the ability to predict and see where we're going. Just not there yet.

So closely related to achieving your medium-term pretax contribution target for accounts, shifting your mix of pre- and post-spin signings, more toward the higher margin post-spin bookings, where do you stand today in terms of achieving a 50-50 pre and post-spin signings mix in FY '25 and a 33% ,67% signings mix in FY '26.

Yes. So I think at -- on March 31, when we finished the fiscal year, we will know about 80% of what next year's revenue looks like. And within that, there will be still a slightly bigger mix of old backlog versus new backlog, if you will, pre-spin versus post-spin. Then we sign all through next year, right, to work on that other 20% of what we don't know for next year because you sign and start to convert revenue immediately. And that is what drives the total then for next year to be kind of a 50-50 mix in terms of post spin and pre-spin signing. So we'll know -- again, the beauty of this business is how much you know about the future. The notorious part -- the hard part about this business is that it just takes a while to get things fixed. So we'll know 80% of that 80%, it will be a bit more pre-spin than post-spin, but everything we sign the next year will bring that next year's total to 50-50. And then the following year, again, similar dynamic, we'll know at the beginning of the following year, we'll know 80%. That will be then more post-spin than pre-spin and then plus everything we signed in the following year will go into -- accounts is obviously post-spin. So we'll be at about 2/3 post spin and only 1/3 pre-spin. And then the following year gets the 28 -- so it just keeps declining in our P&L. And so our sharing of the post-spin signings and how that's evolving over time is important for everybody to understand, again, some of the things we've proven about, you can get paid for the work, it's valuable, et cetera, et cetera, et cetera. So the short answer is 50-50 next year, pre-post following your 2/3 post, 1/3 pre and then just keeps diminishing.

Speaking of bookings, can you talk a little bit about your sales engine, especially how you go to market? What are the plans for growing the sales force over the next 12 to 18 months?

Sure. So a couple of things. And it's important to note, I think that the spin out of IBM created, obviously, a lot of opportunity for us to partner with the ecosystem that matters. It created a lot of opportunity for us to build new capabilities, et cetera, et cetera, et cetera. We had freedom of action, right? It also created for us the need to skill dramatically the people who run our relationships because now, whereas IBM would have had the sort of the account leadership role and the relationships with CIOs and others, and we would have been in the infrastructure layer. Our teams have done, I think, a phenomenal job in a very short period of time of upskilling, of creating the relationships at the right levels, at the decision-maker level to really understanding to really understanding what business challenges our customers had, et cetera, et cetera, et cetera. So the first 2 years where we've really focused just on our customers, not focused on trying to bring new ones, we've got new customers as well, but we haven't really spent a lot of time focusing our -- first couple of years have been about getting our talent pool, our culture built to be higher-value consultative-led kind of thinking and showing up differently and bringing innovation, et cetera, et cetera. And I think the teams, like I said, have done a phenomenal job. The next step in this process is -- and we're out hiring consultants as we speak. So the next step in this process is to drive the continued growth and to keep investing in our own capabilities is to keep hiring in the consult space as we keep -- to fulfill the demand, if you will, that we see coming. So look, we've had a lot of culture change to get through, not just in go-to-market, but the teams have done a great job. Next step now is to build out more of that consultative led kind of selling. Being a great engineer is certainly something we have a lot of being a great engineer who knows how to bill that you have to teach that, right? Not necessarily -- you don't just wake up in the morning and say, "Oh, I'm billable, so here's a bill. It takes a little bit long. And so despite the culture change and the time we've spent and invested, we've made great progress, and I think we can now accelerate that both with hiring as well as with continuing to do the things we're doing -- look, the relationships are paying off the new ways of engaging with customers, something we call Kyndryl Vital has really captured the hearts and minds and the attention of our customer base. So I see a long -- a really good long-term benefit to the hard work that we did in the beginning to get the organization ready to engage in a different way with new ideas, independent of any 1 technology provider and to do that in a way that we can turn into real value-creating opportunity for us. But it doesn't just happen. It takes -- you got to make that happen in the organization.

So just pulling this together with your earlier comment on the TSA ending, what is the existing relationship with IBM? I mean, how do you work with IBM kind of day-to-day and perhaps a lot of it's outside of a formal contractual relationship. But presumably, there is still overlap in relationships and some need to dialogue.

Yes. Yes, absolutely. Look, we show up together in quite a few customers still because most of the portfolio was not just a services customer. And so the relationship now and for the long term is always going to be about how do we work together to get to a win-win win with our customer base. And that's -- I think that is going really, really well. The relationship though is down now just to that commercial relationship and how we deal with customers jointly. The ownership that they maintained the spin that's been gone now right after a year, the TSAs, which were the second part of that relationship, that's now finished. We finished that November at the second anniversary. So it's just now -- just the commercial relationship where -- we are -- I think we're probably still their biggest customer because of the nature of the relationship they created. But I think we'll be their biggest customer for a while. I mean we work together in customer environments, but that's kind of what's left. Now as we put in our disclosures, there are a series of things that we're still going through a resolution process on that have either occurred at spin or since spin, but we worked through those things as normal commercial -- normally commercially would expect 2 big companies to do. So I think that -- and I think there are plenty of ways for Kyndryl and IBM to work together to get to good outcomes on both sides. It's what my experience has been. I think we'll find more as we go through time, but they've been -- they're good in customers, right? And they've had a great reputation, I think, with working with customers, and that's what I see, and that's what I hear from our customers as well. So I think it's fine.

Got it. Just shifting to capital allocation. So as of December 31, Kyndryl had a strong balance sheet, $1.7 billion of cash, debt maturities well laddered from late 2024 to 2041. What are your capital allocation priorities? And what financial targets in terms of free cash flow do you need to hit before you begin to repurchase stock and potentially pay a dividend?

Yes. So look, I do think that the nature of this business, the characteristics of a business like ours backlog-based is one that can and will consider how do we return capital to shareholders while still investing in the business. I think that this business has those characteristics, no doubt about it. Two years out of the spin. And as you know, we guided to an at least adjusted $160 million of profit, but that is adjusted, right? We spent the last 2 years spending very heavily to get off the TSAs. For instance, we had to pay for some retention programs IBM put in place. So while we're making money on an adjusted basis, you can't spend adjusted cash. You can only spend unadjusted cash. And next year, we'll have far, far, far fewer adjustments than we had this year because we're now 2 years beyond the spin date, et cetera. So as we keep improving profitability and as we have fewer of the adjustments that needs of the business, I think we get closer to having a discussion about capital return. And like I said, they think the characteristics of this business are one that can both invest and return capital to shareholders. I just don't think we're there yet.

Are there any specific financial milestones we should be looking at in terms of how much free cash flow do you need to generate, what sort of pretax margin or pretax income? What are the thresholds that you're thinking about?

Yes. Look, for us, what is critical to our customer base, what is critical to our long-term -- our customers' ability to stick with us over the long term, is obviously quality of our balance sheet. We're investment grade. We will stay investment grade and when -- I don't think, by the way, that -- as you pointed out well, the balance sheet is quite good, it's not a leverage issue for us, but it is a margin still issue for us. Even -- again, even at an adjusted number, it's only 1% PTI, right? So PTI adjusted. So I think as we continue to execute, get rating agencies comfortable continue to improve the story on an unadjusted or less adjusted basis. Then I think we find ourselves in a spot where the discussion is a very logical one. But again, I just don't think we're at that point yet.

What are the business risks that you're most actively monitoring and have plans to mitigate?

Business risk. Look, we operate -- even though macro is obviously something that we're a bit insulated from. We're not immune, and our customers are impacted by it. So we're always keeping an eye on the on the macroeconomic conditions on behalf of our customers. And then what's important in this business, if you're going to be the infrastructure services provider over the long term, your customers have to -- one, they have to see great delivery. We have great delivery -- touch wood, we have great delivery, but they also need to see innovation, right? And I would say that -- and Gen AI is a good example. The ability to create new innovation, the ability to create new technologies happens very, very fast, probably getting faster. The willingness of our customer base to experiment is very high. So we have to be ready to help. And importantly, we have to be ready to do all the things we do in terms of great delivery if they want to move some of those into a production environment, right? So our need to be in the ecosystem, our need to partner well to co-create, our need to keep our own skills moving and along a career path that is very contemporary. You cannot fall behind our ability to do that is what we've spent a lot of time on to get ourselves positioned well to do that. We didn't -- we weren't born well that way because we were very narrowly focused on the IBM ecosystem. But we are spending a lot of time on building in order to build a great services business. We are spending a lot of time on making sure that we have our career path and skill pass moving at a rate that can keep up with a market that is probably accelerating in terms of innovation. And again, when a customer decides they want to use some innovation, they are not willing in any way, shape or form, to put that in place and reduce resiliency or reduce service levels or reduce the experience their customers have. So we got to keep up. I mean we got to keep up with an ability to deliver that in a world that -- where technology is advancing. So again, we're doing all the right things to make sure we can. I believe that our the depth of our engineering talent and our engineering culture is a huge advantage for us. At the end of the day, we make things work. That's what we do. And we know our customer systems better than ever, but that's a -- it's a constant to be up to speed, latest and greatest skills, make it work at, again, at a tolerance level that says, if it's going into production, it's always got to work, right? A bank's -- core banking system can't decide, I'm going to use Gen AI, and it doesn't have to work all the time. It doesn't work that way, right? Same with health care companies, same with airlines. So I mean, these are all the things we run. So our ability to keep up, maintain is sort of top of mind for us.

Appreciate that. I'll just pause for a minute to see if we have any final questions from investors.

A very compelling story on the progress that the team has made in terms of just upselling with clients and you kind of rising amongst their importance. Has that been that success been recognized by IBM to the point where you're seeing more amenable terms to help you achieve those gross profit targets?

The commercial relationship that IBM created when they spun us out is by and large, exactly the same as it was with a couple of exception. So when they spun us out, we got what the common industry term, best commercial price, right, for those do what we do. And that hasn't changed. Our software discounts haven't changed. In fact, our software discounts the way they've structured it. They get $200 million extra a year. That ends next year, right? So we'll be through that. But the basics of that agreement haven't changed. It's a 3-year agreement, and we have not yet broached with them, nor have they broached with us, redoing the software agreement. That's the bulk of what -- and that hasn't really changed. There's no difference. Now we did renegotiate some elements of the commercial relationship. For instance, we renegotiated the maintenance contract last year already, and we're renegotiating parts of the cloud consumption. So little pieces of it of a change. But by and large, the contract they created is still in place and neither us nor them have kind of approached the other to open it up.

Martin, greatly appreciate your insights, participation in our conference. Thanks, again, to Lori Chaitman, Head of the IR effort; and Bobby Grau, really delighted to have you participate in the conference.

Thank you, David. Appreciate it.

Thanks so much.

Thank you.