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

So thank you very much for joining us today. I'm very happy to kick off this second of 4 days here at the Morgan Stanley TMT Conference. Very pleased to be joined this morning by Kyndryl to start off our day. Before we get started with Martin and David from Kyndryl, I'm James Faucette. I'm the Senior Research Analyst at Morgan Stanley covering IT services for North America. And I wanted to make sure that I read this important disclosure, so I don't get in trouble. Please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So as I said, we're kicking off this morning with Kyndryl. Very pleased to have here joining me on stage, CEO, Martin Schroeter; and CFO, David Wyshner.

And I think this is a good opportunity, Kyndryl having come out of IBM and people still really becoming familiar with the story and the direction that the team is taking. So maybe I'll start with you, Martin, and give you the opportunity to talk us through the growth trajectory of Kyndryl and talk about the beginnings of the firm for those of investors that may not be completely familiar.

Yes. Thank you -- thank you, James. Nice to be here. Thank you for the opportunity. Thank you for those who are here at 7:15. It's a nice early start to your day. . As James said, well, we were spun out of IBM a bit over 2 years ago. We are $16 billion of revenue in infrastructure services. We have over 4,000 customers and a bit over 80,000 employees. We're the largest in our space, and what we've been able to accomplish since the spin is really centered around 2 things. We've been able to invest, which has allowed us now to build capabilities that aligned with the secular trends and challenges that our customers are either taking -- trying to take advantage of or facing. And we've been able to use our freedom of action to move into the ecosystem that really matters to our client base. And as you would imagine, as a division in IBM, we were very much focused on the IBM mission and very deep in IBM Technologies. And now in the last 2-plus years, we've been able to build some very substantial and important and meaningful relationships, again, with the tech partners that matter to our customers, the Microsofts, the AWSs, the Googles, the Oracles, the SAPs, et cetera. So by gaining our independence by building new capabilities that aligned with the secular trends and by moving into the ecosystem that matters, we are now very much positioned as part of our customers' future as opposed to solidly stuck in their past. Now at the same time, this is a backlog-based business. And so we've been engineering declines in parts of our business that didn't make any sense. And so we've made a ton of progress just this year alone, for instance, if you look at where we've guided, we are in our last quarter of the fiscal year, so we'll finish our fiscal year in March. We've been able to take out $1 billion of revenue and add $360 million of profit in 1 year. So we have a plan that puts the business back to revenue growth in calendar '25. We have a plan that delivers about $1 billion of profit in the next few years. So I feel as though in many ways, the independence has fueled obviously what has been -- has always been a very important business to how customers run, a very important business to how the world works. It's fueled its ability and given it's now it's a chance to really come into its own. And I think we're well along that track.

So I think, as we've spent time going over your materials and speaking, et cetera, I know that you've actively focused on your 3As initiatives. Could you talk about how you've been able to raise margins within those focus accounts? Because I think you alluded to one of the outcomes of that of the increased profit. And how are you approaching a lot of these conversations, especially as we come up on renewal or even mid-contract, I mean it seems like there's probably ongoing conversations not just at the time to revisit a contract that's about to expire?

Yes, yes. So again, maybe some context because, as you said, well, not everybody is familiar with the story. We have a set of relationships that we inherited from IBM, we call focus accounts. And they exist for -- they exist because the relationships that IBM created had never really contemplated a separate division or an independent company. And they now reflect -- once we were spun-out, they reflect a commercial construct that IBM put in place that essentially we could spend more time on it. But at the end of the day, we had about 40% of our business had 0 GP, which means we lost money, right? So now to the how, how do we deal with that? We should also understand, again, we run hearts and lungs. We run mission critical. And our customers love what we do. They really like our level of service. It's very high quality. As you would imagine, the service-level attainment that one needs to achieve in this space is off the chart, is important. So we invested in our delivery abilities. We've improved even further from when we were spun-out and made sure that our customers are feeling the benefit of automation and all the things that get them more comfortable and because of the role we play, because of the trust we've built up, we have an opportunity to now engage them where basically we don't make any money, and we need to put it into a better long-term economic model. By the way, it's important for them as well to have their trusted mission-critical service provider, be sustainable over the long term. So they have an incentive to sit down with us and to try to figure it out. And as you said, it doesn't usually wait until you get to the end, it happens long before that. So in our focused accounts, we're seeing patterns develop that really sort of, I would categorize them as in most instances, we're adding more content. So we're adding -- we're bringing our new capabilities. As I said, we now have much more meaningful partnerships with the other players. So we show up with our partners, and we can expand the relationship we have very common pattern. In other patterns, we are taking out the content, if you will, that is proving the most economically challenging. So for instance, the commercial construct that IBM created for us to buy mainframes and buy software licenses puts us in a real bind in a lot of customers. And so we have an opportunity for our customers to go to IBM directly and buy the hardware and software, and we can still run all the labor. And what that allows us to do is our labor actually grows and the problematic content, if you will, moves off. And then look, we have not only an ability to add content within the existing relationship, but there's lots of new projects in the world today that customers need help with and -- and as they move into an AI world, and they need data architecture help as they move into new clouds and have a more hybrid infrastructure, you need security help and resiliency help, and so our Kyndryl Consult business has also benefited from the capabilities we have. And again, the secular trends or challenges that our customers are faced with. So we've made a lot of progress. I think by the end of this year, we're about halfway through that list of customers. We've retained nearly all of them because, again, as long as we're running their business and delivering a great service and we're bringing innovation, there's really not a lot of motivation to find a different services provider. So look, we'll keep working on this. There's a long tail to some of these [indiscernible], but we'll keep making progress. And it is, for us, the single largest part of the profit improvement that we put on the table over the medium term. We think in total, this is worth about $800 million in the next few years. And we'll -- again, we'll make great progress. I think we'll keep solving the same way we have same patterns, expanding relationships, labor, get content out and keep the customer base.

So Martin, you said a couple of interesting things here to start off our conversation or at least that I found interesting was not only the reduction in revenue, but the increase in profit, but also that as you were first being spun out from IBM that will you say like 40% of the revenue had gross profit associated with that, like how far are we? And is it just as simple of saying, "Hey, we've got to add some gross profit to this revenue or we can't maintain the relationship? And so lose $1 billion in that revenue. And then the others lifted up. And has it been as simple as that process and then we start -- then we start trying to sell incremental services or kind of what are you -- how are you thinking about that?

Yes. So a few data points because this is a really important question. I'm glad we got into this. So again, we're a backlog-based business, right? So the -- when we were spun-out, the first year, and this is true of every year, but you know, we know about 80% of the revenue that's going to come out of the backlog for the next 12 months. So when we finished March 31, we'll know about 80% of the next fiscal year's revenue base. We'll know about 2/3 of the following year, we'll know about half of the year after that. That's important because now that we're spun-out 2.5 years ago, everything we're putting into the backlog post spin, what I would call the post [ spin ] signings, they've gone in and we're very clear and transparent with our investor base. We showed them the margin profile of everything that's gone in, right, not a subset, not like, oh, look at the really good ones, but don't look at the bad. Everything that's gone into the backlog since in the post-spin time frame, has been at a margin profile that supports our medium-term goal of getting to that $1 billion, that's sort of high single-digit profitability. So for us, this is a pre-spin coming out. It plays a smaller and smaller role in our P&L. Post-spin coming in, it plays a larger and larger role and where we are in the movie as we get to next year, is when we start next year, again, we'll know 80%. But only about 50% of next year's revenue will be pre-spin and therefore, obviously, 50% will be post-spin. So it's not like it's inevitable. There's a lot of work to make all this happen. But in a backlog-based business, it just takes a while for the P&L to reflect sort of the our ability to execute, it takes a little while to reflect our ability to create value for our customers and value for our shareholders. And so that's where we are in the movie now. So old stuff, not supportive of the margin profile, reducing and wait every month, every quarter every year, and the new stuff, all of which is going in at margins that are supportive of that will play an increasing powerful role.

And I think one of the compelling things that you've also talked about here to start is looking to add additional services or even putting consulting on the front end, et cetera. How big of a factor is that playing in that change in composition of backlog right now? Is it moving the needle yet or is this still at early stages?

It is -- and maybe one way to think about it, when we talk about our engineered decline in revenue this year, it's really 2 things. The backlog that we inherited had a few points of decline built into it. It's okay, again, it's a backlog-based business. We are then, as I mentioned earlier, on focused accounts, we're engineering some content out, right? We're keeping the customers, we're keeping the relationship or engineering some content out. That's about another 3 points. And then this business, because it was focused on revenue at -- without really a good handle on what was the profitability, this business was passing through, if you will, OEM content. So if there was a deal with a customer, they would figure out how much Cisco are you going to buy? How much [indiscernible] you are going to buy, and we'll just move all that through. And that we're also engineering to -- because there's no value to us, there's no value to our owners. So that's another 3 points. So the engineered decline is backlog, focus accounts and OEM, that's more than $1 billion that's coming out. And then our capabilities that we've built our focus on Kyndryl Consult is adding about 2 to 3 points back into that. That's why the net decline is about $1 billion, but there are 2 dynamics here. And so as we focus more on Kyndyl consult as it becomes a bigger and bigger part not only obviously helps the margin profile, but those tend to have a shorter duration. So we realize the revenue a bit more rapidly than we do in the longer run contracts. So all these dynamics, again, it's a -- it's not a simple business, but it's also not trying to understand a particle accelerator. It is a backlog-based business. So the things we're doing to engineer the decline are mitigated, not fully offset, but they're mitigated by the -- where we're trying to grow. And where we are growing. And again, as we go through time, those 2 things will play and punch differently at different ways.

Got it. Got it. Got it. So it does. And I just have to say I'm glad I don't have to spend time trying to understand particle accelerators. So I want to talk about end markets. Can you give us a breakdown roughly of kind of how you think about your end market vertical exposures and what's happening? Because it seems like what we're hearing from at least others generally in the services space, there seems to be a fair amount of variance among like the activity levels and new engagement levels across industries. But I don't know if that's something you're seeing and how you would characterize that?

I think there are 2 points of difference for our business than maybe what others are experiencing. Macros, obviously, it's important. It's important to our customers. And we're not immune, but we are fairly well insulated from macro, right? We run -- again, we run infrastructure. We run hearts and lungs and no matter what your macro environment is, you really don't have an opportunity to run your infrastructure for only 6 days because things are slowing down. It just doesn't work that way, right? So we are, again, insulated from some macro. And then on -- so that's sort of a business positioning. But even, I think, unique to us is where we are in our transformation. Look, we were only spun out 2-plus years ago. We've only created a lot of the capabilities that we have and the new partnerships that we have recently. So we have a lot of catching up to do. And when customers -- when they think about their biggest problems and they think about how important it is to have an infrastructure that can support their future, they go obviously to the people, the engineers who know this, and that's why -- that's part of why Kyndryl Consult does so well, because we hadn't been doing it. We were very under mixed in our consultant advisory business when we were spun-out. For a lot of firms, consult advisory is as much as 40% of their business, right? And we were at 10% when we started, right? For a lot of customers and a lot of others in the industry are engaged with the hyperscalers on sort of systems of engagement, how do I reach a customer at? We're on systems of record, right? So not only do we have a lot of catching up to do in terms of the mix, but it's also targeted at things that, again, need to be addressed before you can go try new science experiments, before you can think about -- if you're a customer before you can think about moving in new places. So we sit at the very beginning. And again, the work we do is work that has to happen if you're going to position yourself for the future. So again, I think our business -- where we sit in the infrastructure world is a little bit different from most others because of how much mission critical we have and the catching up we have to do because we finally now showed up with the right partners, we finally showed up with the right capabilities. It's a good, long demand pull for us, I think, for quite a while.

And the growth in Kyndryl Consult is really valuable to us -- it was around 10 -- as Martin alluded to, it was around 10% of our business at the time of our spin. It's now 15%. It's on its way to 20%. We think we may even be able to get beyond that. And the increased consult component in our relationships is great because it tends to be higher margin for us. It's higher value add. And ideally, it gives rise to advisory relationships that give -- that are followed up by implementation assignments that often then have a managed services component that continues on after that. And so the chain reaction -- not to go back to particle accelerators, associated with growing consult becomes really valuable for returning the business to growth as well.

So I want to ask you then in like you guys have delivered a message that's pretty clear that a lot of your business or at least a substantial portion of your business is being driven by relationships with hyperscalers like AWS, Microsoft and Google. Can you talk us through how you're positioning yourself relative to your peers and capturing that hyperscaler-driven revenue upside? And what's that relationship -- working relationship, excuse me, would look like?

Yes, yes. So a few things. Each of these relationships when we started with the hyperscalers was built on kind of 3 things. And they each evolved, which I'll talk about, but they were built on an investment in skills, their investment and our skills. They were built on joint go-to-market. So we show up with Microsoft or AWS or Google in front of a customer, which customers love. They would much rather have their chosen cloud partner or partners with their service providers and they're built on co-innovation. So we're building things together for customers as well. That's where they started each of them. Since then, we've expanded them into Gen AI, for instance, helping Microsoft with co-piloting, getting it deployed and getting the data ready, et cetera, et cetera, et cetera. So they started in a very good place, and they're evolving into, again, being part of our customers' future. It's important to know, and I mentioned earlier that we're getting out of OEM. So this is not -- the revenue that we're driving in our hyperscaler alliances is our labor, high-value revenue around the services we're providing as our customers consume the cloud commitments they've made to each of their hyperscalers. So it's not that we're moving Azure revenue through Kyndryl. This is very much about our high-value security, our high-value resiliency services, our high-value data and AI services built with their -- so our customers can consume their hyperscaler commitments. And think about us as -- or I'll say, the unique thing we do is we run and transform. And as I said earlier, run always has to happen, right? Kyndryl don't really have the choice. And what we've been able to do with capabilities is add now transform so that customers, our customers who maybe have not been comfortable transforming while the run was happening, now they can -- we can help them with their hyperscaler partner do the run and transform. So as an example, we have an industrial firm, Schneider Electric, where they were interested in moving to AWS, right? But we were doing the run and the run has to keep happening. But we did it seamlessly. We moved a lot more of their stuff on to AWS. We gave them AI Ops and tools so that they can understand their environments and optimize them and now they get the benefit of all the innovation that sits on AWS while the run never stopped. And run and transform is hard. It's -- it requires both a great engineering culture, and it requires an innovation culture. And we have -- we're great engineers. And now with the innovation we're bringing, it allows them, it allows our customer base to take advantage of that. Again, run has to happen, transform you'd like to happen, but you need the right talent, the right skills, the right partners, et cetera, et cetera, et cetera. And we have many, many instances where we're -- again, now that we're in this space, the run has to happen and the transform can happen and whether that's Microsoft, AWS, Google, that's what our customer base is looking at.

Got it. I want to make sure I'm monopolizing questions here, but if anybody has anything that they'd like to ask, just raise your hand and we'll get you a microphone. So on that point, when you think about those partnerships in that run versus transform, et cetera, how should we think about your -- what you think your optimal revenue mix looks like in terms of proportion that's tied to hyperscaler? I know that this can evolve over time, particularly as the transform matures. But like right now, at least in your forecasting horizon, what do you want that mix to look like in terms of incremental engagements to look like between run and transform, et cetera?

Yes. So while we're very focused on building Kyndryl Consult, we think we can create a lot of value. We are not building a consulting business, right? We are always going to be a run. And yes, we certainly can create a lot of value and our customers want our help with the transform piece, but we're not going to be a consulting business. And as David said, we started the 10%, we get to 20%, we could -- but we're really focused on the size of what that business can be, not so much the mix because as I said earlier, we're still in the phase of engineering the denominator down a bit, right? So the mix can get an outsized benefit, but we haven't gotten back to growth yet. And so for the 2 growth factors that we've been working on and investing and have been very successful Kyndryl Consult can continue to grow in good double-digit growth. It has been and can continue to do that. And even after we get to -- get the whole firm back to growth in calendar '25, I would still expect that because of the skills we have, the demand that we see and the challenges that our customers face, I would expect that we can keep growing that without the denominator shrinking then obviously, the mix is going to really change. And then on the hyperscaler alliances side, again, this is our high-value labor, helping our customers consume their cloud commitments, we started this year, we said -- well, when we started the relationships, we said in the first year, we'll sign at least $1 billion and we signed a billion two, which was fabulous. And then we -- the second year, this year, we said, well, the signings are important, and we'll keep growing signings, but what's more important is how we convert it to revenue. And we said, we'll convert at least $300 million of that to revenue this year. We finished $300 million in the first 9 months. So we said we'll take it up to at least $400 million. And so for me, on that kind of trajectory with Kyndryl Consult growing and with the hyperscaler alliances growing, that will be a $1 billion business pretty quickly here. So those 2 growth vectors are a part of what gets us the growth back in calendar '25. Now importantly, again, we're engineering a big decline this year, the backlog dynamics this year we're getting out of OEM. The backlog dynamics as we get into calendar '25 look different, it's not as profound. The OEM issue that we're dealing with this year, that's done this year. That's no longer either a headwind or a tailwind. And so -- and then we'll keep working on focused accounts, and we have a million assumptions about what a customer might do. We'll just say that could represent a little bit of a longer-term headwind. But with Kyndryl Consult growing and with the alliance activity growing and now outweighing all of those, it no longer -- those growth factors no longer just mitigate a decline, but decline is reduced and they now start to drive us back to growth. And all of that happens, I think, as we said, we say -- we think all that happens and kind of comes together in a calendar '25 year.

So on that point in that moving from bookings to revenue, you're exceeding your target a little bit as you said there. Like is there something structural that's changing in terms of that time to conversion? Or did it just happen to be that this particular timing allowed for that? Or just trying to think through like the nature of the bookings and revenue that we mentioned.

Again, with our strategy of addressing the underperforming, if you will, revenue streams. We've been really focused on gross profit book-to-bill as opposed to revenue book-to-bill. Revenue book-to-bill at some point will be important because it will be an indication of, obviously, future revenue growth. But as we sit here today, and we're engineering a decline and engineering a profit improvement, we're really focused on gross profit dollar book-to-bill. And we share -- again, we shared with our investors every quarter and that gross profit dollar book-to-bill has been growing, which, again, is terrific execution by the teams, and it also shows the dynamic as the old -- the pre-spin backlog reduces its weight, post-spin comes in, we're getting paid for all the great value we're creating. And again, that shows up in the margin profile of what's going in. So for us, at this stage, the gross profit dollar book-to-bill indicates as it has since we spun out, future dollar growth in profitability. So we talk about margin improvement, but the margin improvement is not just the numerator shrinking more slowly than the denominator, the numerator is actually growing in dollars and the denominator as we said before, were engineering a decline. So the margin improvement on this year's guidance alone is a few points of profit, which is in a year is a tremendous turnaround, again, for a backlog-based business.

Absolutely. And so you mentioned right then that like your OEM or the hardware relationships, et cetera, like that will -- were basically going to be neutral. It won't be a drag or I guess, it could have been a tailwind, but that will be completely...

Once it's fixed, we're not going to unfix it.

Yes, yes, yes. So my question, though, is like as you look at returning to overall revenue growth in calendar '25, which is predominantly fiscal year '26 for you?

Yes.

How many -- how much more headwind will you still be going through in fiscal year '26? And then when do we get rid of those headwinds entirely?

Yes. So this year is the biggest decline, right? And we'll trough at some point next year. But again, we guided to down 7 to 9, which was the dynamics I said, right? You had 10-plus down and then a few up. So this is the big decline year-on-year. We'll tough next year. But when we do, as I mentioned earlier, the backlog dynamic is less of an impact than it is this year, that reduces. The OEM impact is 0, so that goes away. The focused account impact, even if it's the same size may or may not be -- even if it's the same size, it's only a few points. And again, the things that are growing, like consult and the alliance activity now punch above their weight that they did this year. So we trough next year. Our guide right now is at the midpoint, call it, $16 billion of revenue right at the rates that existed at the time at the currency exchange rates that existed at the time. We'll trough in next year sometime in the 15s something. So we'll engineer this in a way that the business will be -- and we haven't provided guidance next year, but it's a few points, right, in total, but we're also -- again, we have a situation or a dynamic next year where -- this year was -- as we expected, as we told everybody, this year would be first half down 2% to 3%. Second half down 10%, right? And that's what the down 9%. So when we get to next year, the first half is actually the harder compare. Second half is an easier compare. And Will, when we come out in May, we'll talk about what that dynamic looks like. But the trough next year will only be a few points from where we finish the full year.

Got it. Got it. Got it. And then when you think about that, and it seems like, especially with that backlog-driven business, the type of engagements that you're having with the customers, how critical you are to their run. It seems like the plan is like pretty forecastable, I guess, like you can like at least put it together and it makes sense and that kind of thing. But where are the most likely sources of variance on that for better and for worse vis-a-vis the plan you put together?

Yes, yes. So look, and you've said it well, that your ability to see out in the horizon is quite high. You can't see everything, but you can see out in the horizon. And that has a benefit to us, it has a benefit to our owners because with the ability to see, once we get that backlog fixed, we'll have an ability to think much more clearly about better cash profile when we build back our profitability. It's the kind of business, the characteristics of this business or the kind of business that can think about its investments over a nice long cycle, right, because longer cycle investments can provide higher returns. It's a kind of business that can think about returning capital to shareholders, et cetera. So all those things are true. The sources of variance within that, though, you do even though whether or not we sign a deal on March 31 or April 1, has like 0 impact, you do have to get things signed and you do that over time, right? So that's part of why I say that while revenue book-to-bill, not really a focus today, it will be -- have to deliver consistently in order to keep the size of the business going. It's also the reason that in our -- in the senior team's comp plans, it signing shows up because on a quarter, maybe it doesn't matter, but on a on a longer term, it does matter. It's important for us as a company to be focused on it. As I said, the variance, if you will, around macro, not such a big impact. It really is -- and again, we know -- again, April 1, we'll know 80% of what's going to come in. So -- but we're still working on that 20%, right? And you -- if we got 200% done of what we thought we could get done in a year, the 20, maybe it becomes 25, but it's not going to become 40. This is not a -- it's not a product business, right? So you don't -- if you sell twice as many as something, you do twice as well. That's not the way it works in that kind of business. But that long -- nice long tail says -- it's got the kind of characteristics that are really powerful for an ability to invest, ability to capture value over the long term and then an ability to distribute capital.

Yes. And when you look at our over performance this year, you can see those trends really develop, down 6% to 7% in constant currency for revenue is very consistent with where we expected to be at the beginning of the year. And if the overperformance in EBITDA and particularly in adjusted pretax income, it is driven by the fact that we also have close to $16 billion of costs and expenses and that's where we're overperforming with our advanced delivery initiative, driving even more cost savings than we had anticipated at the beginning of the year and with the progress on focused accounts being even faster than we'd anticipated. Going back to what Martin was saying earlier, we're halfway through the work that we're doing, half way through the number of focused accounts, but we're more than halfway to our $800 million goal. And that over delivery, which is really showing up in efficiency and margin without impacting -- without being a surprise or a variance on the revenue line is really what's driven the overperformance that we've had this year and putting us in a position to increase our adjusted pretax margin by more than 2 points year-over-year.

Right, right. So you talked about -- and I think you've outlined, given a good outline of where the opportunities are, the role of like increased consulting and how that can grow, et cetera. But I wonder if you can help us understand at least some of the other things that you guys talked about and maybe illustrate for us the relationship between Kyndryl Bridge, Consult and Vital and just go back to that, as David said, that chain reaction among those different functions?

Sure. So one of the things that that we really benefited from on the spin was the IP portfolio that IBM spun-out with us. Now it was in a form that was a bit monolithic. It wasn't easily consumable. Customers weren't really engaged. And it was pointed sort of in a way that at something that customers really couldn't get their head around. So our CTO and the team have refashioned that IP portfolio into Kyndryl Bridge, and they've integrated it, they've sort of deconstructed it so it can be consumed the way CIOs want to, to consume it. And its position now is it is the way we deliver. It's a service delivery platform that allows customers to have full visibility, it allows customers to automate lots of things. Kyndryl Bridge -- as we sit here today, Kyndryl Bridge automates roughly 1 billion things a year for our customers. And by the way, with only at the end of this year, we'll have 1,000 customers on Bridge, and we have over 4,000. So it is our service delivery platform that brings innovation to customers. It also serves as sort of the front end of an advisory tool because as it's monitoring, as it's looking at our customers' infrastructure and helping them optimize and understand and automating things and keeping them up to the standard of industry best practices, et cetera, et cetera, et cetera, it's also pointing us to where we can go engage with a customer and say, "Hey, you manage this piece, we think we can help here." So it also serves as sort of a lead with Kyndryl Consult. So Bridge is the service delivery platform. Kyndryl Consult is sort of how do we execute these things. And Kyndryl Vital sits in the middle of all of that, if you will. It's our design-led approach, our design-led philosophy that allows us to co-create with customers so they wind up with not only the innovation that they want, but they wind up being able to consume it in a way that makes sense for their business model. So they all fit together. There is an innovation delivery services delivery platform called Kyndryl Bridge. There's a design-led methodology and philosophy called Kyndryl Vital, and then there are the people who bring all that together Kyndryl Consult.

Got it. And then just in the last couple of minutes here, you mentioned cash flow and capital allocation. How should we be thinking about capital allocation both in the next couple of years and then ultimately, what you'd like to get to? And an important thing for us is always, where do you see opportunity for or necessity of M&A as part of that capital allocation strategy?

Sure. Sure. So a couple of things. And look, I think we've made tremendous progress this year in engineering and revenue decline and improving profit by $360 million. But at the end of the day, it's also only gets us to at least 160 number on an adjusted basis, right? We've just finished 2 years of heavy, heavy investment to get off of the transition service agreements that IBM put in place. So we now have our own systems. That was a very heavy investment. We finished. We had to pay for the retention programs that IBM put in place in the last couple of years. So there's been some pretty heavy cash strains. We in our adjusted number, we've taken out the transaction-related elements. So I go through all of that because those are behind us, but we're going to make a lot more money. And you -- as you know well, you can talk about adjusted cash flow, but you can't spend the adjusted cash flow, right? So we will make -- again, we'll make progress again next year. We'll make progress the following year to get to a margin level that allows us then to reflect what we know this business can, which is solid profitability, good cash conversion from all that. There's nothing in this business that suggests it's going to get tied up someplace other than just show up in the bank balance. And then as we think about where to allocate that, again, I said it earlier, this is a business that can return capital to shareholders over time. And yes, of course, there could be, there could be some acquisition opportunities as we think about how do we accelerate into a space. But right now, I don't think we need it. I think we can execute with what we have. And I think we've demonstrated that the capabilities we're bringing and where we want to grow, we're growing really, really well. Where we want to engineer the decline, we're being successful. So I don't see M&A as a requirement, but it could be a good supplement to something we're doing either in one of our practices or maybe in Kyndryl Bridge, but not a needed element.

Well, thank you very much. We're out of time. Martin, David, really appreciate you guys helping us kick off the second day and best of luck. Look forward to catching up with you again soon.

Sounds good. Thank you, James. Real pleasure. Appreciated.