Good day, and thank you for standing by, and welcome to the Kyndryl Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised today's conference is being recorded. I would now like to hand the conference over to your first speaker of today, Lori Chaitman, Head of Investor Relations.

Good morning, everyone and welcome to Kyndryl's earnings call for the second fiscal quarter ended September 30, 2023. Before we begin, I'd like to remind you that our remarks today will include forward-looking statements. These statements are subject to the risk factors that may cause our actual results to differ materially from those expressed or implied. These forward-looking statements speak only to our expectations as of today and we are under no obligation to update them. For more details on some of these risks, please see the Risk Factors section of our annual report on Form 10-K for the year ended March 31, 2023. In today's remarks, we'll also refer to certain non-GAAP financial measures. Corresponding GAAP measures and a reconciliation of non-GAAP measures to GAAP measures for historical periods are provided in the presentation materials for today's event, which are available on our website at investor.kyndryl.com. With me here today are Kyndryl's Chairman and Chief Executive Officer, Martin Schroeter; and Kyndryl's Chief Financial Officer, David Wyshner. Following our prepared remarks, we will hold a Q&A session. I'd now like to turn the call over to Martin. Martin?

Thank you, Lori and thanks to each of you for joining us. Last week, we marked our second anniversary as an independent company, and we are delivering progress at an accelerated pace. Today, I want to talk about why we've been able to succeed. Of course, our first half performance reflects continued progress and strong execution positioning us really well for the year as a whole, and we're raising our full year earnings outlook. Our 3 AAAs initiatives centered on alliances and advanced delivery in accounts are paving the way for profitable growth. Kyndryl Consult, Kyndryl Bridge and our efficiency efforts are also driving our results. And as an organization, we're delivering strong performance that is evident both in our financial metrics and in our customer satisfaction scores. On today's call, David will review our recent financial results, our raised fiscal 2024 outlook and how we're changing Kyndryl's profile for the better. However, let's not lose sight of why this performance is happening. We are vital to our customers' current and future technology needs. Our capabilities align with the powerful secular trends in IT, and this makes us an indispensable partner for our customers. In other words, our progress is being fueled by the leadership position we have in our industry, our new freedom of action as an independent company and how that perfectly aligns with the larger forces shaping the evolution of IT. We're helping customers navigate these secular trends, and we're already capturing the growth opportunities they present. And because we're at the heart of these trends, enabling our customers' IT futures as well as their current operations performing mission-critical work across a broader technology ecosystem, our business is sustainable and important over the long term. That's why we're seeing growth in alliances with our hyperscaler partners in adoption of Kyndryl Bridge and consult signings and revenue in customer satisfaction, in public cloud management and in areas like apps, data, and AI. So yes, we're fixing focus accounts to improve our margins, but Kyndryl's transformation is about so much more than that. It's about Kyndryl being the leader in providing and enabling our customers to have and leverage the technology they need to win. The results we're presenting today just as they did last quarter and last year are evidence of our strength, market leadership, and ability to fix the challenges we inherited. The margins on the signings we're adding to our backlog, the execution of our 3A initiatives, our success with new partners and our ability to enable our customers to harness secular IT trends are reminders that we were always more than just a turnaround. And that we've always been a market leader, a leader that is well positioned to capture future growth. To appreciate our growth opportunities, it's important to understand how we're building on our heritage and leveraging our expertise to meet customer needs and forge new higher value revenue streams. Our 30-plus year heritage in managing mission-critical IT systems is a very powerful asset, and we're seeing hybrid IT estates migrate toward the cloud as a central theme among large enterprise CIOs. Our recent survey of hundreds of IT and business leaders indicated that while they aim to run nearly 40% of their workloads on a cloud or a distributed platform, the overwhelming majority also view mainframes as essential to their business operations and likely to remain at the core of their tech stack. With that in mind, our new alliances with hyperscalers, combined with our expansive knowledge of legacy technologies give Kyndryl a unique ability to help organizations achieve their IT and business objectives. With Kyndryl Consult, our technology experts advise our customers and co-create with our partners to modernize and optimize hybrid solutions and accelerate business outcomes. With a hybrid infrastructure, businesses can strategically choose where and how to host specific workloads based on their requirements. We're working with customers everywhere to ensure that the right workload runs on the right platform. This leads to improved performance and cost savings. And we've been consistently generating double-digit revenue growth in Kyndryl Consult by delivering thought leadership and mainframe modernization and strong capabilities in automation, cloud migration and management, data optimization and security and resiliency. Additionally, Kyndryl Bridge integrates AI, operational data, and Kyndryl's expertise to give customers visibility across their technology estates, including multi-cloud and hybrid landscapes, with insights to help them understand, predict and act for better business outcomes. We have more tech stack operating data than anyone in the world. And through our ability to leverage AI, we are providing our customers and ourselves an advantage in managing and developing their systems. Kyndryl Bridge uses automation to enable more secure, stable and reliable technology operations for our customers, with the benefit of AI machine learning Kyndryl Bridge is identifying patterns in systems and infrastructure and is now performing 1 billion automations a year for our customers across secure tech stacks. One of the benefits we're seeing from Bridge and its ability to operate as a self-healing architecture is that the frequency of significant incidents is down more than 30% so far this year in those accounts who have transitioned to Bridge. So through our heritage, Kyndryl Consult, and Kyndryl Bridge we are meeting customers where they are in their digital evolution and helping them move forward. Our capabilities and innovation are putting us at the center of collaborative customer relationships in which technology drives business outcomes in a reliable and secure way. This is allowing us to access incremental market opportunities to grow our share of wallet with existing customers and to win new customers, and obviously transform parts of Kyndryl. Beyond enterprises' need to manage and optimize their infrastructures, our market position and our capabilities are allowing us to benefit from the key secular trends in IT, the adoption of artificial intelligence, technology skill shortages, the need to modernize and in many cases, cloud migration, all of which are creating growth opportunities for us. Given our presence across a range of enterprise technologies, AI represents a multifaceted opportunity for us. As I mentioned, AI sits at the center of our Kyndryl Bridge platform and is producing actionable insights for us and our customers every day. As the largest infrastructure services provider in the world, we generate large amounts of data about IT systems. We use this data in Kyndryl Bridge and it gives us the ability to identify application performance patterns under almost any condition so we can prevent incidents from occurring and reduce required maintenance. AI is also a go-to-market opportunity for us as customers seek to incorporate AI into their processes; they know that their AI is only going to be as good as their data. This is creating demand for our expertise in how to architect data to set the foundation for AI and Gen AI applications. We are working with both existing and new alliance partners to help facilitate AI in complex environments and to develop joint capabilities. We see this both as a growth opportunity for us and as a natural extension of the data, network, digital workplace and security services we already offer. In fact, signings in our applications, data and AI practice are up more than 30% this year. A second trend is that many organizations just can't attract and develop the range and scale of skilled IT resources they need particularly in certain disciplines. IT skills are in short supply throughout the world, and in-sourced infrastructure work doesn't benefit from the scale, the know-how, the training, the investment and the innovation that Kyndryl brings to the table as a third-party service provider, including the expansion of our hyperscaler certifications since our spin. Because of our scale and associated ability to home-grow talented resources, the skill shortages in the marketplace are making Kyndryl's value proposition even stronger. We manage today more than 60% of the outsourced mainframe capacity in the world, and we invest in maintaining this world-class team. Our know-how and alliances with leading technology providers also give us unparalleled expertise in enterprise CIOs to need to modernize complex environments. Simply put, nobody can retrofit their IT plane while it's flying like we can. And when we combine these capabilities with customers' needs to enhance security and resiliency and efficiency with their desire for innovation we've become an indispensable business partner. As I mentioned earlier, selective migration of certain workloads to the cloud is a prime example of where large organizations are looking to modernize, innovate, and drive efficiency. Our hyperscaler related signings are up more than 35% so far this year, and our hyperscaler related revenues were up even more. Some of our largest new logo signings have been with customers who want to leverage our hyperscaler alliances and cloud migration expertise. Serving as an operator, an integrator, and an adviser to our customers in their digital business transformations we find ourselves at the nexus of each of these broader market currents. A central theme underlying our strategies and our approach to the market is that we're capturing and building value in our business. As we've shared previously, our gross margin at the time of our spin, the margin that our backlog was producing was in the mid-teens. But we've dramatically changed the projected margins on new business that we're signing and raising these margins more than 50% to 26% over the last 12 months. From a financial perspective, this is a game changer for our business. David will walk you through the math of our gross profit book-to-bill ratio being above 1, but the source of value creation that we're delivering is that even though we're engineering a decline in our revenue this year, we're building absolute profit dollar growth into our backlog. We're adding more to the top of our earnings funnel that is flowing into our P&L this year. As we move further from our spin, more and more of our revenues are coming from higher-margin post-spin signings. This fiscal year, only about 1/3 of our revenue is coming from post-spin signings. Next year, it will be roughly half. By fiscal 2026, it will be approximately 2/3 from our post-spin signings. The inflection point when our P&L is largely determined by our higher-margin post-spin signings will dramatically change our earnings profile again. As we shared last quarter, our forecast implies more than $350 million of adjusted pretax income improvement this year compared to last. The margins at which we're signing contracts and the other actions we're implementing have us on a path to deliver higher earnings each year toward high single-digit adjusted pretax margins. The math associated with that implies a $1 billion or more of adjusted PTI with a high conversion of our net earnings into cash. In short, while we continue to do the important vital work we always have for our customers, we're successfully transforming elements of our business rapidly because of our great people, our new culture, our unique capabilities to meet mission-critical needs, our powerful IT and data and outstanding execution, each of which is aligned with the secular trends in the market. We are pleased with the significant progress we've made so far. We're enthusiastic about our momentum going into the second half of the year and very excited about the path ahead. Now with that, I'll hand over to David to take you through our results and our outlook.

Thanks, Martin, and hello, everyone. Today, I'd like to discuss our quarterly results, the outstanding progress we're making on our 3As, the growth in gross profit that we've been building into our contracted book of business and our updated outlook for fiscal year 2024. We have a lot of good news to share. Our second quarter results reflect strong operational execution and continued progress on our key initiatives. In the quarter, revenue totaled $4.1 billion, a 5% decline in constant currency. The year-over-year decline in revenue was anticipated and primarily driven by our intentional exit from negative and low margin revenue streams within ongoing customer relationships, not by macro factors. We continued to gain momentum in higher-margin advisory services. Kyndryl Consult revenues grew 17% year-over-year in constant currency which highlights how we're growing our share in this higher-margin, higher value-add space. Consult signings grew even faster, increasing 32% year-over-year in constant currency. This performance reflects how the opportunities for growth in Kyndryl Consult services stemming from our new alliances with third-party technology providers are outweighing the macro issues pressuring some other firms. Our Q2 signings were down 3% year-over-year in constant currency. Outside of our core enterprise practice, where we've concentrated on removing pass-through revenue and addressing focus accounts, signings were up in the single digits. Our adjusted EBITDA grew 34% to $574 million. Our adjusted EBITDA margin was 14.1%, a year-over-year increase of 390 basis points. At the risk of being immodest, we view this as remarkable execution. Nearly 4 points of margin expansion is a proof point for our ability to drive meaningful profit growth in our business. Adjusted pretax income was $25 million, a $127 million improvement in profit compared to the prior year quarter. As I'll discuss in a moment, our continued progress on our 3As is the key driver of our earnings growth. We address our customers' needs through our geographic operating segments and also through our 6 global practices: cloud, applications, data and AI, security and resiliency, network and edge, digital workplace, and core enterprise. Our business mix continues to evolve to reflect demand with most of our signings, including Kyndryl Consult signings, coming from cloud, applications, data and AI, security and other growth areas. More generally, as we look back on the quarter, we're thrilled to have delivered results that position us to exceed the full year earnings targets that we've already raised once before. Our strategy is working. Our 3A initiatives are driving continuous improvement throughout our operations and fostering additional progress each quarter. As a reminder, at the start of the year, we provided fiscal 2024 targets of $300 million in revenue tied to hyperscaler alliances, $450 million in cumulative annualized cost savings from advanced delivery by fiscal year-end and $400 million of cumulative annualized pretax benefit from our accounts initiative. Heading into the second half of our fiscal year, we're well on track to exceed our alliances target and are raising our targets for our advanced delivery and accounts initiatives. Through our alliances, we're building a portion of our customer relationships that include cloud-based content. In the second quarter, we recognized more than $100 million in hyperscaler related revenue, putting our run rate ahead of our $300 million full year target. Our hyperscaler certifications totaled more than 37,000, which is more than double what they were 2 years ago and now include even more advanced certifications. Our advanced delivery initiative is transforming the way we deliver our services and Kyndryl Bridge is driving our progress. To date, we've been able to free up more than 7,500 delivery professionals to address new revenue opportunities and backfill attrition. This is worth roughly $425 million a year to us, representing a $50 million increase in our annual run rate this past quarter. We continue to see significant automation opportunities across our delivery operations as we increase service levels, reduce our costs and incorporate more technology into our offerings. Our accounts initiative has been and will continue to be a global effort focused on fixing elements of contracts with substandard margins. In the second quarter, we increased the annual profitability of our focused accounts to $400 million, which was our initial target for year-end. Successful execution of our 3As is our fastest path toward achieving sustainable, profitable growth and the progress our teams have made on these initiatives is incredible. As a result, we're increasing our annualized savings target for both our advanced delivery and accounts initiatives by $100 million. Turning to our cash flow and balance sheet. In the quarter, we generated positive adjusted free cash flow of $69 million. Our gross capital expenditures in the quarter were $175 million, and we received $113 million of proceeds from asset dispositions as a disproportionate amount of our planned FY '24 asset sales occurred in Q2. Our financial position remains strong, and we continue to expect that our full year adjusted free cash flow will be positive. We provided a bridge from our adjusted pretax income to our free cash flow as well as a bridge from our adjusted EBITDA to our free cash flow in the appendix. Our cash balance at September 30 was $1.4 billion. Our cash, combined with available debt capacity under committed borrowing facilities gave us $4.6 billion of liquidity at quarter-end. Our debt maturities are well-laddered from late 2024 to 2041. We had no borrowings outstanding under our revolving credit facility, and our net debt at quarter-end was $1.8 billion. As a result, our net leverage sits well within our target range. We are rated investment grade by Moody's, Fitch, and S&P, and all three agencies recently reaffirmed our ratings. We're thrilled to have exited the transition services agreements with our former parent and to have completed the migration to our fit-for-purpose operating, financial, and HR systems in the two years following our spin. This was a large, complex, and important series of projects delivered on time and on budget that will allow us to adapt our processes and drive operating efficiencies in ways that we couldn't until now. On capital allocation, our top priorities continue to be to maintain strong liquidity, remain investment grade, and reinvest in our business. Our leadership position in IT infrastructure services, combined with benefits from our 3A initiatives is significantly expanding our margins and will drive meaningful free cash flow growth. Over time, we'll be in a position to consider regularly returning capital to shareholders, all while remaining investment grade. As encouraged as I am by the earnings growth we delivered in Q2, I'm even more enthusiastic about how we continue to position Kyndryl for future margin and profit growth. As an independent company, we've combined pricing discipline and collaborative engagement with customers to move our projected margins on all new signings up to the mid-20s for gross profit and in the high single digits for pretax profit. As Martin mentioned, the September quarter was a continuation of that favorable trend and as our business mix increasingly shifts towards more post-spin contracts, you will see significant margin expansion. In our earnings presentation, we've shared a simple analysis that accentuates how we've been creating and capturing value in our business. With an average projected gross margin of 26% and our $12 billion of signings over the last 12 months, we've added over $3 billion of gross profit to our backlog. Over the same period of time, we've reported gross profit of $2.7 billion. This means we've been adding more gross profit to our backlog than our contracted book of business has been throwing off in the form of gross profit reported in our P&L. Having a gross profit book-to-bill ratio above 1x at 1.1x is a measure of how we're growing what matters most: the expected future profit from committed contracts. We continue to make significant progress on our 3As initiatives, and the momentum to date supports our continued expectation that over the medium term, our alliances initiative will drive signings, revenue and roughly $200 million in annual pretax income. Our advanced delivery initiative will drive cost savings equating to roughly $600 million in annual pretax income, and our accounts initiative will drive annual pretax income of $800 million or more. We're also driving growth in Kyndryl Consult and among our global practices which is incremental to the benefits coming from our 3A initiatives. We expect that these efforts will contribute roughly $400 million in annual pretax income over the next few years. In total then, the magnitude of the earnings growth opportunity we're tackling is tremendous relative to our current margins. Progress on our 3As is a central source of value creation for Kyndryl. With another strong quarter to build on, we're again raising our profit outlook for our 2024 fiscal year. We're growing our margins this year, largely due to the 3A initiatives, growth in Kyndryl Consult, and productivity gains. We now expect our fiscal 2024 adjusted EBITDA margin to be roughly 14.5%, a 0.5 point higher than our previous estimate. This represents an increase of roughly 290 basis points versus fiscal 2023, and we're raising our outlook for adjusted pretax income to be at least $140 million versus our prior outlook of at least $100 million. This increase implies more than a 200 basis point margin expansion compared to last year. Importantly, we would have increased our full year outlook for adjusted pretax income by $30 million more were it not for the strengthening of the dollar and weakening of the yen over the last several months. The 3As, workforce rebalancing, real estate consolidation, growth in Kyndryl Consult, our pricing strategies and other actions are all contributing to our margin growth. Our outlook for revenue is a decline of 6% to 7% year-over-year in constant currency, which translates to $15.8 billion to $16 billion based on recent exchange rates. The strength of the U.S. dollar over the last six months has reduced our revenues measured in dollars, but it doesn't impact our constant currency outlook, which we are narrowing to the favorable end of our initial range, driven in part by the strength in our consult signings. The year-over-year revenue decline we're projecting is primarily due to the soft backlog of fiscal 2024 revenue we started with, plus intentional near-term actions we're taking to transform our business. These changes typically involve removing selected low or negative margin scope from ongoing customer relationships. We've accelerated these actions over the last six to nine months. The year-over-year revenue decline in the second half of our fiscal year will be greater than in the first half. For the December quarter, on a year-over-year basis, we expect revenues to decline in the high single digits in constant currency and for the revenue decline to be most pronounced in our U.S. and strategic market segments where our reduction of pass-through elements is most impactful. We expect adjusted pretax income to be positive with adjusted pretax margin up year-over-year in the quarter despite it being our toughest earnings comp this year due to the exaggerated seasonality we had in Q3 last year. As I mentioned, we expect adjusted free cash flow to be positive this fiscal year. We now project roughly $700 million of net capital expenditures in fiscal 2024, which is 7% lower than our initial projection as we push to be less capital intensive. We project about $850 million of depreciation expense. We continue to expect about $300 million of cash outlays for separation-related work, primarily systems migrations and for workforce rebalancing actions that are driving significant cost savings. This will be the last year in which we incur spin-related charges, so we expect our adjusted earnings to move closer to our reported GAAP earnings over time. In fact, next year, our principal adjustments should be only noncash stock-based comp and noncash intangibles amortization. We remain committed to our target of returning to revenue growth by calendar 2025, and over the medium term, delivering significant margin expansion and driving free cash flow growth. We have a solid game plan to drive our strategic progress, and this game plan starts with the steps we've already taken to expand our technology alliances, manage our costs, and earn a return on all of our revenues. To wrap up, our business model centers around providing mission-critical services to large complex organizations that are dependent on technology and pursuing digital evolution. We call this operating at the heart of progress. Operating at the heart of progress is becoming a distinguishing feature of who we are as a corporation, delivering progress on alliances, advanced delivery and unprofitable accounts. Delivering progress with Kyndryl Consult and AI-enabled Kyndryl Bridge, delivering progress through our global migration to new operating financial and HR systems following our spin. Delivering progress in our margins and adjusted earnings as an independent company and delivering progress in our winning culture and in the breadth of solutions we provide to customers. As Martin highlighted, we are symbiotically delivering progress for our customers and for ourselves as the world's leading provider of IT infrastructure services. With that, Martin and I would be happy to take your questions.

Thank you. At this time, we will conduct a question-and-answer session. Please stand by while we compile the Q&A roster. Our first question comes from Divya Goyal from Scotiabank.

Great quarter. David and Martin further to your comments, overall, we can see obviously the company doing the right things, progressing the right way. I wanted to get some color on what are your overall discussions with your clients like, obviously, Kyndryl delivers mission-critical projects and does mission-critical infrastructure work. Given the broader macro and geopolitical concerns out there, how are the clients thinking and how do you see that progressing into early part of 2024 and towards the latter part of 2024? And how does that fit in with Kyndryl's continued progress?

Please go ahead. You're on mute.

Sorry, did you hear my question?

We did hear your question. I think they're on mute bear with us one second.

Can you hear me now?

We can, go ahead.

Great, thank you. So thanks for the question, Divya, and thanks for the nice intro to the question as well. What we experience is driven by the role we play in our customers' environments. We are mission critical. We are the trusted partner as we have been for many of our customers for decades. The nature of the discussion, and you see this in some of our charts, the nature of the discussions that we have with our customers is really about the secular trends that they want to take advantage of and the work that they need to manage. The industry-wide skill shortage is very real for CIOs today. We see the results of that and we see how strongly we are able to drive our consulting performance. The role we can play in helping them navigate what are obviously very complex infrastructures is significant. We see it in helping them with even the basics. When you think about what Kyndryl Bridge helps our customers do, it helps them understand their environments. It helps them keep up with the never-ending best practices that every technology provider is putting out constantly in order to optimize their systems. Our role makes us a bit different from others. I wouldn't say that saving money today is any more important than it has been in the past. Then we can help them prepare to take advantage of the innovation, no matter where they see it, which is part of what creates these hybrid environments that we're so good at helping them manage. We don't see the macro in any of the places in which we operate. The discussions for us are still around the secular trends that they want to take advantage of and prepare themselves for whatever the macro is today or whatever the macro is going to be in a year's time.

Thanks, Martin. Operator next question please.

Our next question comes from David Togut from Evercore.

And good to see the outperformance, especially on advanced delivery and accounts initiatives. Just focusing there, even against your raised targets, you're already at 80% year-to-date of the raised targets for both advanced delivery and accounts with half of the year to go can you flesh out the dynamics around both for the back half of this year? And why wouldn't your targets be even higher given your high attainment so far this year?

Sure, David. Thanks. When you look at our targets for advanced delivery and focus accounts, remember that they're cumulative targets. We started this fiscal year with the progress we made last year, which was around $200 million related to advanced delivery and over $200 million related to the focus accounts. We've increased each of those significantly. As you point out, we're at our full year target for accounts. We're within $25 million of our initial target for advanced delivery. That's really why we raised them each by $100 million. For accounts, that's about $50 million of incremental progress each quarter in the back half of the year, which is consistent with where we ran last year. On the advanced delivery side, our forecast calls for $125 million of further improvement in the back half of the year, which, again, is pretty consistent with where we've been running other than the really strong performance, the overperformance we had in the first half of this fiscal year.

Appreciate that. And just as a follow-up, given the unique dynamics of your large business in Japan, where you're generating revenue in yen and your cost base is in US dollars, is there anything you can do to manage that currency mismatch on revenue and expenses going forward and sort of limit the headwinds to revenue and earnings?

Yes, David, there are things we can do there. Part of it is our starting point where we started with the software contract and the customer contracts. As we go forward, there are things we can do to increase the matching between those. It's provisions that we build into our customer contracts that will help protect us more going forward. Second, when we negotiate the software contracts, we'll look to not have it all be dollar-denominated. That's part of it as well. Then there's hedging we do to mitigate the impact, but that only helps for a limited period of time. Lastly, a broader asset liability matching is important. We started off with our debt all being dollar-denominated, and going forward, I think we'd like to see a mix of our debt that's more aligned with where our assets are. That's an opportunity for us as well. On the advanced delivery and accounts, remember that if we achieve any of the expected benefits from the initiatives, we're not standing down. We're going to keep powering ahead. There are opportunities to overperform on the initial targets we laid out 2 years ago, and we're actively going to look to take advantage of those.

Our next question comes from Tien-Tsin from JPMorgan.

This is Brendan on for Tien-Tsin. Congratulations on the results. Great job. So my question is just about quantification of the revenue related to the tick-up in the revenue midpoint. You outperformed on the accounts initiative to the tune of $100 million per quarter in the first half. The revenue moves up a tick, so I think, obviously, there's Kyndryl Consult outperformance going on there. But could you help us understand the puts and takes on the revenue line? If there's anything we're missing aside from those main drivers of accounts initiative and Kyndryl?

Sure. I think on accounts and advanced delivery, the impact on revenue there ends up being fairly limited. We're making significant progress in the earnings contribution. The revenue raise, the narrowing to the favorable half, reflects Kyndryl Consult as the biggest driver of that. That's an area where we're outperforming. And the outperformance there is probably even a little bit greater than apparent because we've been more aggressive in stepping away from pass-through revenue from OEM type revenue and are nonetheless still able to narrow to the upper half of the range. So we're growing Kyndryl Consult, which tends to be a higher-margin revenue. All of that is helping us really drive more income at a revenue that is consistent but in the upper half of the range.

And I'll jump back in the queue with another question.

Thanks, Brendan. Operator, I believe there's one more question in the queue.

And our last question comes from Jamie Friedman. Jamie, you're live on stage. Please go ahead.

Jamie, you there? Did Brendan rejoin the queue with another question?

He has, I can bring him to stage.

Well, you said he had another question. So we'll give him a moment. Maybe Jamie can work on a technical challenge, and we'll keep moving.

So yes, my question number 2 is on visibility into this gross profit backlog. Love to hear that it's above 1 because that's how you guys are managing the business and that makes sense as a sensible target. I'm curious to think about the lengthiness of some of these deals, what are the variables you consider still being out there in between booking those gross profits and realizing them, whether that's potentially something like wage inflation? How should we think about any variables outstanding there?

Yes. The estimates we provide capture our view today of the things like how much we're going to invest in our teams and all that. The longer the contract, the more conservative we tend to be on the view because we know that we're going to want to maintain the best workforce in this space. We have a series of assumptions around how we have to invest in our workforce and what those price rises are going to be. All of that gets captured. Our 'did versus bid' is very close to what we're showing in our data now for what's going into the backlog. We're realizing what we are assuming. That's one of the reasons we're comfortable sharing the data this way. It represents what we have been realizing. Our execution element is not just all about the assumptions around how we're going to invest in our people and the skills they have to bring; those are important, and we get those right. We have to keep delivering, right? The 80-plus thousand Kyndryl out of the 80-plus thousand, two-thirds of us every day are delivering in front of customers. We're really good at it. That's why our customer satisfaction scores are so high, and that's why customers trust us. The assumptions are robust. Our delivery is phenomenal. The future for us is even more robust with things like Bridge with our ways of working.

I believe Susquehanna is back in the queue.

Yes, please stand by. Jamie, you're on stage, please go ahead.

Okay. Sorry about my technical difficulties there, Lori. So congrats on the good execution. I had 2 questions, maybe 1 for Martin and 1 for David. First, in terms of free cash flow expectations in the second half, could you help us unpack what you're thinking about if there's anything that we need to remember from last year or callouts from the first half? That's one thing. And then, David, I'd be interested in understanding your perspective on which of the new service lines and new signings are the most accretive to the market. I understand everything is probably accretive to margins, but if you could help unpack a couple of these, what you feel are the most strategic or margin accretive, I think that would be insightful.

Sure. The secular trends we see in the marketplace around cloud and hybrid cloud certainly suggest applications data and AI, our cloud practice, our security and resiliency practice, our network and edge practice, our applications and data and AI practice are strong growth prospects. I think that's the market in which they sit, and I see a long-term secular arc that we are part of that will drive those. Digital workplace is a practice for us that is a grower but probably not at the same rate as those other four practices that I mentioned. Over time, while this is probably a market that's declining, I would expect that it could still represent a growth opportunity for us once we get through getting the hardware and the software content as much as possible out of our revenue streams.

Sure. On free cash flow for the full year, we expect our adjusted free cash flow to be positive, with the year-to-date number being slightly negative. Certainly that implies the second half will be stronger, and that's what we would expect, particularly because some of the working capital and cash flow seasonality that we have. You may remember that in the first quarter, we have a disproportionate amount of our software license payments which get amortized over the course of the year, or in some cases over the course of many years. We also have annual incentive payments where all the outflows occur in Q1, and the accrual happens over the course of the year. It’s natural for our seasonality to be skewed towards the last three quarters of the year, and as a result, we expect stronger cash flow in the second half of the year. The other point I'd make is that the composition of our free cash flow will probably flip a little bit. In the first half of the year, we've been underrunning our full year run rate on capital expenditures and working capital has worked against us. Capital expenditures should pick up a little bit. We're targeting to reach about $700 million of net CapEx for the year. That will be a little more of a use of cash, and working capital we expect will be more of a source of cash in the second half of the year as we reach positive overall.

Thank you both for the detailed response. If I could just follow up on Slide 22. This is the one that breaks out the services by revenue. If you wouldn't mind sharing how you think this will look in the future, like at the end of your guidance, and if that’s too specific, qualitatively, which of these are going to get bigger or smaller? What are the reasons for it? I think that would be helpful context.

Sure. The secular trends suggest that our cloud, security, applications data and AI practices all become strong high single-digit to close to double-digit growth. The market is positioning towards these practices, and we see a long-term secular arc driving them. Digital workplace is a grower but not at the same rate as the previous practices. Core enterprise and Z Cloud could be growth opportunities even in a declining market due to our labor component. All practices will continue to drive growth, though the mix will shift towards higher growth areas over time.

I'd just add that the growth in consult will play across the practices. As you know, we've started with consulting around 10% of our revenue; it's grown to 14%. Our target is to move it up to 20%. Again, this plays across the practices and highlights that we expect to grow our share in consult and advisory work.

Thank you. Thanks, Jamie, for your question. Thanks, everyone, for joining us today.

Thank you, Lori. Again, thanks, everybody, for joining. I am really proud of the progress we've made this quarter. The team, as you can tell, is executing very well. Bear in mind that we only had our second birthday last weekend. This is a company that has made a ton of progress and delivered well ahead of what many thought we could achieve in a short period of time. I'd also encourage you to take a look at the corporate citizenship report. Our first report was published last month, just before our second birthday, and it serves as an example of how we're building this business the right way. We're delivering on our business goals, and we're also having an impact on how the world works. As we head into our third year as an independent company, I remain excited about where we're going and how our teams are moving towards our customers’ needs, supporting them on their journeys during these important secular trends and helping them prepare. Thank you again for joining, and we look forward to our next conversation in a few months.

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