Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Signings were up 14% in the quarter in constant currency, indicating strong demand.
- Pretax earnings increased significantly year over year, showing financial improvement.
- Kyndryl consult revenues grew 14% year over year in constant currency, highlighting growth in advisory services.
- The company is on track to generate nearly $1 billion in hyperscaler-related revenue this year.
- Kyndryl bridge has provided customers with productivity benefits totaling nearly $3 billion annually.
Negative Points
- Revenue declined 8% year over year in constant currency, primarily due to exiting low-margin revenue streams.
- Currency headwinds impacted reported revenue by $100 million year over year.
- Adjusted free cash flow was negative $116 million in the first quarter, reflecting seasonal cash usage.
- The company incurred workforce rebalancing charges and increased IBM software costs.
- Revenue outlook for fiscal 2025 is still expected to decline by 2% to 4% in constant currency.
Q & A Highlights
Q: Can you provide insights on the trend of signings, particularly the mix of renewals versus new work or new logos? Are there any signs of delays in converting the backlog?
A: Martin Schroeter, CEO: We are seeing consistent, solid growth in Kyndryl Consult, with signings reflecting a mix towards advisory services. The manage and run side remains substantial, but consulting demand is strong. This is our third consecutive quarter of total signings growth, and we feel confident about our trajectory towards revenue growth in Q4. Despite reducing low-margin elements, we are expanding scope in labor elements, indicating the value we bring to clients.
Q: What is your appetite for larger acquisitions given your transformation progress?
A: Martin Schroeter, CEO: We do not need to make large acquisitions to achieve our financial targets. Our focus is on delivering financial performance and maintaining investment grade. We prefer small tuck-in acquisitions that support customer needs, like our recent acquisition of SkyTap, which aligns with our strategy and financial objectives.
Q: What gives you confidence in achieving margin targets, and what are the components driving this?
A: Martin Schroeter, CEO: Our margin profile is supported by consistent value capture in our backlog, with signings reflecting high single-digit pretax margins. We are seeing growth in consulting and hyperscaler-related revenue, and our execution on strategic initiatives is driving margin expansion. Our gross profit book-to-bill ratio above one indicates growth in expected future profit from committed contracts.
Q: Could you elaborate on the drivers of the 49% growth in Kyndryl Consult bookings and its sustainability?
A: Martin Schroeter, CEO: The growth in Kyndryl Consult is driven by our expertise in running and transforming IT estates, investments in capabilities and skills, and innovation through Kyndryl Bridge. Our consult services are high-value, supporting customers' strategies with strong business cases, and we see continued demand for these services.
Q: How would Kyndryl benefit from potential interest rate reductions in North America?
A: Martin Schroeter, CEO: A lower interest rate environment would benefit our financial model, particularly with the yen's recovery. For customers, it would mean increased investments in IT infrastructure, data architecture, and regulatory compliance, areas where we play a critical role. We help customers optimize costs now and will support their reinvestment in future growth.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
