Kyndryl Holdings, Inc. 2027 Q1 Earnings Call

Please go ahead. Good morning, everyone.

Welcome to Kyndryl's earnings call for the first fiscal quarter, June 30th, 2026. Before we begin, I'd like to remind you that our remarks today include forward-looking statements. These statements do not guarantee future performance and speak only as of today. The company assumes no obligation to update its forward-looking statements, except as required by law. Actual outcomes or results may differ materially from those suggested by forward-looking statements as a result of risks and uncertainties. For more information on some of these risks and uncertainties, please see the Risk Factors section of our annual report on Form 10-K for the year ended March 31, 2026. As such, factors may be updated from time to time in the company's subsequent filings with the SEC. Also, in today's remarks, we refer to certain non-GAAP financial metrics.

Definitions and additional information about our calculation of non-GAAP financial metrics, as well as a reconciliation of non-GAAP metrics to GAAP metrics for historical periods, are provided in the presentation materials for today's event, which are available on our website at investors.kyndryl.com. Following up with prepared remarks, we'll hold a Q&A session. I'd now like to turn the call over to Kyndryl's Chairman and Chief Executive Officer, Martin Schroeter.

Martin. Thank you, Lori, and thanks to each of you for joining us.

In the first quarter, we executed on our key priorities and made progress in our targeted growth areas, supported by continued strength in the United States. Signings and revenue grew in Kyndryl Consult. We continued to see positive momentum with hyperscalers. We continue to invest in the areas where we see opportunity, Kyndryl Consult, our alliance partnerships, and our agentic AI capabilities through Kyndryl Bridge and our IP to support and modernize our customers' most complex mission-critical IT estates. At the same time, we took actions to further streamline our operations. While there is more work ahead, our strategic priorities remain clear. We're focused on delivering our fiscal 2027 outlook and our 2028 objectives.

With more revenue expected to come from higher-margin post-spin signings this year and next, the quality of that revenue base gives us confidence in our ability to increase profitability and deliver more than $1.2 billion in adjusted pre-tax income and $1 billion in free cash flow in fiscal 2028. These targets can be achieved on low single-digit constant currency revenue growth. Harsh will provide more detail in a few minutes on our recent financial results and our outlook. Last quarter, we outlined the priorities that support our fiscal 2028 targets. As we highlighted, we entered the fiscal year with a five-point improvement in beginning backlog versus fiscal 2026. Four months into the year, our pipeline consists of more scope expansions and new logos that support future signings growth and better mix of higher-value services.

AI, modernization, and cyber preparedness remain important priorities for enterprises around the world as they balance innovation and transformation with operational stability in an uncertain macro environment. This is driving demand for Kyndryl Consult, with signings exceeding revenue over the last 12 months. These same dynamics are creating opportunities across our alliance ecosystem, with customers' modernization needs accelerating demand in both public and private cloud. We continue to sign deals with average projected pre-tax margins in the high single digits, reflecting our focus on higher-value services and pricing discipline central to our transformation. Through our advanced delivery initiative, we are embedding more automation and AI into our operations, improving productivity, and upskilling our teams for higher-value work. With Kyndryl Bridge, our AI-powered services delivery platform, we're providing our customers with the technology foundation to deploy, govern, and orchestrate AI agents and agentic workflows across complex IT estates.

In parallel, we're taking workforce rebalancing actions to address lower than normal voluntary attrition and our SG&A costs, with savings expected to begin in the back half of this year. We'll continue to share our progress against these signposts as we drive our business toward our multi-year objectives. I want to focus my discussion on total signings performance. While our customers remain thoughtful and deliberate in their IT decision-making, we're seeing demand for AI-led modernization, especially where Kyndryl Consult and our hyperscaler alliances help customers address their mission-critical needs. We're encouraged that over the last six months, our total signings have exceeded our revenue. Deal size and composition are additional proof points that demonstrate how we're executing our strategy. Over the last 12 months, we signed 40 deals in excess of $50 million, of which 10 were signed in the first quarter.

Among these 40 large deals, approximately 30% of their value consists of scope expansion or are new logos, which compares to 15% in fiscal 2025. Strong signings in Kyndryl Consult and momentum in hyperscalers are translating to revenue growth in these targeted areas. Kyndryl Consult revenue grew 14%, and hyperscaler-related revenue streams grew 48% in the last 12 months on a year-over-year basis. Performance in Kyndryl Consult and hyperscalers has partially offset the revenue headwinds from focus accounts over the last few years, and more recently, lengthening sales cycles and customers' decisions to procure hardware and software directly from IBM. Kyndryl Consult's results demonstrate broad demand from enterprises looking to design and scale agentic AI across their business workflows, modernize complex hybrid IT environments, and strengthen cybersecurity and resilience.

To meet that demand, we've been expanding our consulting skills and capabilities, including investments in forward deploy engineers, human systems architects, and AI innovation labs, where we co-create agentic solutions at scale with our Kyndryl Agentic AI Framework. To further address customers' modernization and AI needs, we've been expanding our relationships with our alliance partners. Recently, we expanded our alliance with AWS to help enterprises adopt and scale agentic AI as they modernize and run mission-critical workloads in the cloud. We also expanded our work with Microsoft Azure to help customers design, build, and operate cloud architectures that align with evolving data residency and operational requirements. We continue to strengthen collaborations with partners such as Broadcom and Dell, HP Enterprise and Red Hat, to support customers' modernization efforts in complex private and hybrid cloud environments. AI is accelerating the need for modernization.

Every day, I speak with business and technology leaders in different industries. Nearly every customer conversation comes back to the same long-term themes. First, enterprises are eager to realize the benefits of AI, but many are trying to deploy next-generation technologies on infrastructure, applications, and processes that were not designed for them. As you've heard me say before, it's like trying to run a new 200 mile per hour capable bullet train on tracks built for 30 mile per hour world. Equally challenging, as our Kyndryl People Readiness Report found, there's also a lack of skills, as only 23% of business leaders said their workforce is ready for AI. The need for Kyndryl's expertise and modernization capabilities to continue running their business while transforming it, that run and transform and run approach, is where Kyndryl is differentiated.

Second, AI, cybersecurity, and data residency regulations and mandates are becoming fundamental considerations in how customers plan and invest in IT. Enterprises increasingly want greater control over their data, their AI models, and their digital infrastructure. Kyndryl helps our customers navigate and build technology foundations that can adapt to the evolving regulatory requirements, geopolitical realities, and business needs over the long term. Third, related to the previous theme, cybersecurity and resilience remain top priorities. As agentic AI becomes more powerful, as we've seen with recent frontier models, further embedded into how enterprises operate, our customers need strong guardrails and policies to bolster the governance and security of their critical systems. This is especially important in the highly regulated and mission-critical environments where Kyndryl has deep expertise in governing and securing data across complex hybrid environments and adhering to unique compliance requirements.

Fourth, customers increasingly want open and interconnected platforms for flexibility and choice across public cloud, private cloud, and on-premises environments. As technology ecosystems become even more diverse and interconnected, organizations need agile platforms that integrate seamlessly across environments and applications, enabling interoperability, reducing vendor lock-in, and accelerating innovation. Finally, while most AI investments were initially justified through productivity gains, customers are increasingly looking beyond efficiency toward growth, towards speed, and toward new business outcomes. These are structural and durable trends that leverage our heritage and expertise in mission-critical IT infrastructure, our ecosystem, Kyndryl Bridge, and our differentiated portfolio of agentic AI capabilities. We're helping customers simplify complexity and build technology environments that can adapt as business, regulatory, and technology requirements evolve while improving resilience, security, and operational performance.