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

I think this is on. My name is Tien-tsin Huang, I followed the IT services and payment sector and the -- it's been fun following Kyndryl. The stock's done really well. There's been a lot of hard work that's gone into it. So excited to get an update from the team Martin Schroeter, CEO, Chairman of Kyndryl, David Wyshner, CFO. Thank you both for being with us at another conference.

Thank you, Tien-tsin. It's -- by the way, it's nice of you to say that it's fun following us. It's fun being followed now.

That's true. That's true. Well, yes I hope it's fun but No, we're grateful to get to follow the company, of course. And again, it's been one of the better performers in our group. For those that are maybe newer to the name, Martin and David, does it make sense to maybe -- to go through the strategy, what's worked and what you're getting credit for and what's left to do? And what's left to head before we go into some of the details?

Yes. Yes. Thank you, and good afternoon, everybody. Thank you for spending a little bit of time with us. We're always delighted to talk about Kyndryl. When we were spun out Tien-tsin, we had to, I think, prove a few things. We had to prove that the other really meaningful, important companies in enterprise tech were -- wanted to work with us because of what we did. And I think now that we've built a pretty substantial growth vector around our alliance activity I think we've proven that. I think we've proven that we can get paid for the work we do. And we -- for those who have seen our presentations, we've been very consistent in sharing the margin profile of what we're putting into the backlog. So I think we've proven that we create value and can capture that value from our customers. I think we had to prove that -- we had to prove that the advice we were providing that the skills that we had across not just the capabilities that we inherited, but the capabilities that we were investing in, I think we had to prove that those were value to customers. And I think we did that. And you can see that in our Kyndryl Consult business, which continues to have great momentum. And I think we had to prove that we could invest in this business in a way that would make it really compelling for customers to both stay with us and join us. Now we've been very focused on our customer base. We haven't been so focused on moving outside our customer base yet. But what we've learned enough from deploying our integrated delivery platform called Kyndryl Bridge and over 1,000 customers now we've learned enough to know that the innovation we're bringing to the market is really valuable for our customers and really valuable for us in the way we operate. So we've proven that we can make money. We've proven that we can bring innovation and work in new ways. We've proven that others in the tech space view us as important. And therefore, we're on our path to growth. All of those things have to continue. And while the backlog we inherited continues to diminish in its importance in our P&L. We're only at a point this year where half of our business is coming from what we've done since the spin. But with the proof points behind us now, and the growth vectors showing how rapidly they can grow, I think this is the year that we prove we get back to growth and then we keep growing from here. So the strategy that we defined, which I believe is unique to us. I think only Kyndryl could execute the strategy. The strategy that we've defined really capture those elements. We have a strategy, an element around alliances, which is growing quite well. We have an element around focus accounts, which is engaging with our customers and reimagining how we work together and help each other. And we have a strategy around advanced delivery, which is, again, getting Kyndryl Bridge in, create value for customers, create value for us. So all of that has to continue this year, and all of that is in a great spot as we start the year to continue to execute. Team's done a phenomenal job of executing. Underlying all of that is also all of the culture work we've been doing to create a great services culture. And I hear it from our customers every day that we are showing up differently. We are showing up in a much, much better way. We are the trusted partner to our customers. And now that we're independent, we are that trusted partner who can help them across their infrastructure, and they believe and they know that we can bring the best of technology to them. So always more to do. we've proven enough that I think the trajectory we're on and the things we've been talking about for 2.5 years are -- we're delivering quarter after quarter, year after year.

No, it's great. Like everything you've talked about, the freedom of action and going through the anniversaries of the spin, it's played out very, very well. So hats off to you both for that. If we -- if we think about the results and I think the surprise and the celebration was on the pull forward and the inflection around revenue growth in the fiscal fourth quarter, so walk us on the specifics and the components to get there and to drive that confidence to say, hey, we're going to we're going to break through in the fourth quarter on revenue?

Yes, sure. So let's just go back 2.5 years ago, we said calendar 2025 was when we would return to growth.

Calendar.

Calendar 2025. And really what we did -- 2 weeks ago when we provided guidance as we hit that in the earliest possible time, right? The first calendar quarter of 2025, which is our fourth fiscal quarter. Some of that is because obviously, we've made a ton of progress, a ton of progress in building a consult business that consult business, which is already delivering growth to Kyndryl in total, we'll punch even more strongly in our results this year. And the book-to-bill in that part of the business plus the momentum we see allows us to be confident that as we get through toward the end of this year that, that is a big supporter of growth in, again, our fourth fiscal quarter. Additionally, what we've been able to accomplish in our alliances activity, which, again, is its data services, it's security services, it's resiliency services around helping our customers move on to the hyperscalers. All of that business, which we delivered last year, we went basically from a standing start, i.e., we didn't have anything when we were spun out. That was already $500 million of revenue to us last year, and that this year, we'll get to about $1 billion of revenue, right? So the 2 growth factors that we pointed to already 2.5 years ago was what would enable growth in the calendar 2025. There is enough there already that allows us to put growth at the earliest possible time, which is our fourth fiscal quarter of this year. And then the things that we wanted to get done that the fixes that we wanted to put in place from last year those fixes are essentially behind us. We said we were going to essentially get out of or discontinue the no-profit resale of other people's equipment. And while it was a 3-point headwind to us last year on that engineered decline, we've eliminated. Now it's not either a headwind or a tailwind. It won't be, again, we're not rebuilding something that's just passing other people's revenue through. And similarly, again, the backlog we inherited was a pretty big decline last year. And yes, it's a bit of an impact. But as we get through the year, that continues to diminish. And like I said, when this year already 50% of our revenues are post-spin backlog, that's a profit statement as much as it is a growth statement. And as we get into next year, then obviously, it gets down to 1/3 and keeps diminishing. So the headwinds that we were trying to fix continue to diminish. The tailwinds, the growth vectors that we've created are doing as well as we would have hoped. And so you put all of that together in the fourth quarter, we get back to growth.

Anything to add to that, David?

I think that's right. We're really excited about the prospects that we have and the visibility is good too. Starting the year with 80-plus percent of our revenue coming from our backlog and our signings is really helpful as we model this out. And as Martin said, the growth in consult and how consult signings turn into revenue even faster than our typical managed services signings is a big part of it as well.

Okay. I'll have to ask it again on consult. I know I asked it on the earnings call, but we've had a lot of your IT services peers here at this conference, and they're still talking about weak discretionary spend, low visibility on short-term project consulting type work, yet, you saw acceleration in the quarter. So can you remind us what separates Kyndryl Consult from the peer group? And what's the identity of Kyndryl Consult?

Yes. So I think maybe the way to attack -- let me tell you what -- let me tell you what Kyndryl Consult isn't, and we'll talk a bit about what it is because we hear the same thing, this idea of discretionary being cut back, et cetera, et cetera. Another way to think about discretionary, I think about them as more like science projects, all CIOs do them. Our CIO has science projects going on. Don't tell David, he's [indiscernible]. But every CEO has a science project going on. Another way to think about a science project is that it probably doesn't have a really strong business outcome that's tied to it yet. It will at some point, but it doesn't yet. And our CIO customers tell us the same thing. Look, anything that is not delivering a business outcome with a business case that I can -- that suits the environment, I can't do, right? Very logical. So ours is not science experiments. And additionally, we're not in the low-value sort of staff augmentation space, right? If you have 100 people, you need to do something, and all of a sudden, you only need 80 you're going to get rid of somebody else's 20 first. Those parts we see -- but that's not the space in which we sit. Our Kyndryl consult business is built around and centered around the work we already do on the run side, which is mission-critical. And in the mission-critical world, we have the advantage of with Kyndryl Bridge, we see all of their infrastructure. So when our consultants show up, they say, look, we see this opportunity for you to improve the way this runs. And here's the business case and here's the payback. And if you want to go ahead, we'll get this done. So in mission-critical, you -- in any environment, if somebody showed up with a 6-month or a 9-month or a 3-month payback, you would do it. And by the way, even if the payback were a little bit longer, but it was mission critical and you had to. You're going to do it anyway, right? So because of the where we sit in the space, we're not working on science projects. We're working on mission-critical infrastructure tied to real business outcomes. And then secondly, I think it's important. It's -- what it also is, it's the front end. We sit at the front end of whatever technology they're trying to figure out will fit into their business. So I don't know if everybody knows this, but it turns out GenAI is kind of a thing people are talking about. You may have heard about it. Yes, it's kind of a thing. Well, every -- all of our customers, as they think about GenAI, they're thinking about, okay, I know the business is going to figure out some use cases. I'll let the business figure it out. But me as the CIO, me as the CTO. If I'm going to put this into a run environment, I need to figure out now already, how do I architect my data so I can capture it and use it? How do I create -- how do I maintain the resiliency features that I have today because it's going to be another thing out there. How do I make sure my data is secure. So all of that work has to happen long before you get to actually -- even a science experiment on GenAI, even an idea and how it might work. So -- we sit at the front end of many of these tech trends, GenAI, mainframe modernization, network and edge. I mean we sit at the front of that. So our business is sort of a precursor that CIOs have to undertake in order to be able to respond to their businesses when those technologies are either mature enough or they have the idea or have the use case. So again, mission-critical and business outcome linked which is popular in every macro environment, and we're at the forefront of the technologies that they are really starting to think about and CIOs have to be ready for.

Understood. And I think you've talked about double-digit growth being visible, and I know there's still some room for that to become a bigger part of your business. Can you just describe the visibility, number one? And then secondarily, do you have the resources to deploy to get to where you want to be on the Consult side?

Do you want to go?

Yes. On the first part of that, we've been growing -- signing both revenues and signings in Consult double digits moving Consult as a percentage of what we do up significantly. So at the time of our spin, Consult was around 10% of our revenue -- now it's 15%, the most recent quarter is 16%. It's 20-ish percent of our signings, and we see real opportunity to move it up to be more than 20% or more of our revenue in the not-too-distant future. And obviously, the growth that's implied by that over the next couple of years is quite significant. Do you want talk about the resources or do you want me to?

Sure. Look, we do. We are hiring obviously, as you would expect in a business growing at this rate and pace, but -- but we also have sort of a built-in in our delivery labor pool, right, we're 80,000 people. So we have scale. As we deploy Bridge, Bridge is only in 1,000 customers. They say only. That's a lot, but we have 4,000, right? So there's still a long -- a lot of runway left on Bridge as we deploy Bridge as we turn on the automations we have an opportunity then to take those people and to help deliver the consult side of this as well. So yes, we're hiring, yes, we can get the talent. And yes, we can -- we've created our own labor pools internally as well to help deliver consult. So works fabulously well. We -- the team has done a really nice job of wiring this in a way that allows us to achieve this myriad of outcomes all at the same time, all while delivering great value for customers. And Bridge is -- for our teams, it's like the world's greatest opportunity identifier. It's creating 3 million actionable insights a month. And my opinion, I think David shares my opinion is that we haven't even gotten that really wired well yet. We're not taking advantage of as much of that as we will as we get better at it. We're still kind of new at it. So there's more to do in more customers with more people. There's a long, long growth path ahead of us on this.

Good -- and look, like I said, that's been a positive surprise and how well both Bridge and Consult have done, which is why I want to touch on it upfront. So I think the other question, just in general around cyclicality away from Consult, tell us how protected the business is? Or resilient of the business is in general, especially in the all the economies? I asked this, Martin and David, and I'm sure Lori knows, people ask about Japan and some of the changes that are happening there or maybe some geopolitical risk somewhere else. But it feels like you've been fairly resilient across. Can you describe that what that is?

Yes. The role we play, running mission-critical is one that I think is fairly well insulated from macro. Our customers feel it, which means we have to be able to respond to them in whatever environment they are, but our revenues stay stable within that environment because even if you're a bank and your business, you expect to turn down by 1/7, that doesn't mean you turn your infrastructure off for a day out of the week. It just doesn't work that way, right? So, what we need to do, what's important for us because our revenues are fairly well insulated from whatever the macro environment is, but our teams need to be very responsive to the environment that our customers are in. And that's why it was so important for us to expand our capabilities. That's why it's so important for us to innovate and bring innovation because we have more and more tools to help them with whatever the challenge is. If the challenge is, "hey, in this environment, my 40% of my mainframe team is retiring, which is a big problem in a lot of our customers, I need your help." We can respond to that because we have thousands and thousands of deep mainframe experts who don't look like me. They look like my kids, right, because we have scale. We have an ability to bring insights through bridge to help them when they say, "Hey, I need to save some money. My cloud costs are exploding". Our Kyndryl Bridge consults can help them in a FinOps way can help them manage and optimize their cloud spend. Similarly with how they deploy, how they move on to cloud, similarly with how they're capturing and achieving their carbon goals, for instance. So our investments have enabled us to bring more capabilities and bring more innovation to them so that we can be responsive to their needs even though our revenues stay fairly insulated from that macro represents, for us, a great opportunity to better align with -- again, with their outcomes.

And things like regulatory changes can actually be helpful to us. Their -- changes imposed on businesses, essentially from the outside that they have to respond to. And that's, again, necessary nondiscretionary work that we end up helping with. So in Japan, requirements about where technology activities are happening, create opportunities for us in Europe, DORA and the pressure that's putting on financial institutions there is a source of opportunities for us. I'd say, changes in cybersecurity and the threats associated with cyber create opportunities for us as well. And in the more nondiscretionary, the more mandatory, the more essential it is to respond to a change like that, the more likely it's going to play to our wheelhouse.

Understood. Good. Thanks for going through that. So another topic I want to make sure I hit before we open it up. It's just your -- you made a bet with hyperscalers, of course, and that's paid off really, really well. You've added a lot of certified staff against that. But can you give us a little bit more what you exactly do? Where does the relationship begin? And I know there's still a lot of opportunity there, but what is the partnership exactly?