Kyndryl Holdings, Inc. (KD) September 8, 2026 Conference Transcript

I'm Brian Keene. I cover the IT services sector here at Citi, and we're excited to kick off the Citi TMT conference with Kindrel. We have Martin Schroeder as the CEO and Chairman, and Ellen Johnson as the CFO. So I'm going to run through my list of questions here, and if anybody's got a question, just feel free to raise your hand, and we can get a mic to you, or I can ask a question for you. So first, Martin, Ellen, thanks for coming. Just thinking kind of big picture here, you know, Kindrel provides the critical IT services to enterprises. In your conversations with CEOs and CIOs, what are the biggest priorities on their tech agenda? And are you guys positioned to remain their partner of choice and deepen their relationship by expanding your scope of service? Wow.

Okay. So first, we do run the systems that run the world. So we run five of the seven largest airlines. We run 50 of the largest insurance companies. We run most of the big banks around the world, et cetera, et cetera, et cetera. So our point of view, my point of view, is going to reflect that big, large company sort of set of priorities. Our customers are increasingly focused on really three things. One is modernizing their infrastructure. Our customers, and just based on the very quick description I gave you, you would guess that our customers are not the born on the cloud crowd. Our customers have evolved their enterprise IT landscape over many of them decades. And so the new technologies that are now available to them, each of which they're keen to pilot and experiment with and then put into scale production, each of them needs to figure out how to modernize that infrastructure. Sometimes it comes from the infrastructure. Sometimes it comes from the application side. And sometimes it comes from a business process. But each of them needs to modernize because the technologies of today, if you use a metaphor, the technologies of today are a bullet train that can travel 200 miles an hour, but the tracks were built for 30 miles an hour. So number one priority, our customer base needs to modernize in order to take advantage of the new technologies. And by the way, the new technologies are the ones that the new entrants are trying. The new technologies are the ones that are going to find their way into the fastest movers. So modernization, top of their list. Second, we live in an increasingly security risk world. So both cybersecurity and more importantly, the resilience that's required. By and large, our customers, I think, would say that a security risk is not the existential threat. It's the resiliency characteristics that you need in order to come back online, in order to continue to provide services for your customers. So at a time of modernization, at a time of heavy investment to bring that infrastructure up to speed, they also need to be aware of an increasing threat environment. So cybersecurity and resiliency stay top of mind. And then third, and this is different in different parts of the world, but our customer base, as again, I gave you a brief description, you would speculate that many of our customers are in regulated industries, certainly which they are. So there is, even if regulated or unregulated, there's an increasingly complex geopolitical environment that they need to navigate. And so when they're thinking about who do they trust and how do they partner with us, they're also thinking about longer term decisions. They're thinking about something that's going to last five or six or seven years. And so in an environment where some of the leading technology firms, some of the new AI firms are making like really game-changing announcements every four or five or six weeks where the regulatory environment is changing rapidly as geopolitics push politicians and others to create new regulatory regimes, our customers have top of mind this whole new set of stakeholders now around how do I get comfortable that I have the right partner that I can stick with? They're going to bring me into the future when I know that in a week or a month or a year, a lot can change again. So the world is getting increasingly complex, and that's why they use their trusted partner for many, many years like Kindrel. That's why we're also signing a lot of new business. That's why we're also signing a lot of new scope with our customers, because we have the expertise, the engineering talent, the innovation that allows them to be comfortable that we can navigate those big priorities, modernization, cybersecurity and resiliency, and an ever-changing geopolitical landscape.

Let me just ask you, on modernization, I feel like we've been working through that for a long, long time. Is there an end road of when we finally get fully through or is this an ongoing process for years?

I think modernization will always be with us, right? Because today's technology is going to be stale in sometimes it's an hour, sometimes it's in a decade, right? And plus, because of, again, the geopolitical world changing, things kind of go in and out of sort of top of mind. So as an example, we are seeing now a bit of a resurgence in private cloud, where, you know, five years ago, six years ago, seven years ago, private cloud had started to not shrink, but public cloud was more important in certain ways. Private cloud's kind of coming back now. Again, in this case, it's because of the geopolitical and the private cloud providers, the people who can build the technology for private clouds have brought a lot of innovation to market. So I don't think the idea of modernization is ever going to go away. I think it's always going to be with us. For us, it means that we have to continuously invest in where the world is going. We have to continually build skills that are relevant for today's times. Our view is that the half-life of skills today is probably 18 to 20 months. That's why we have such a heavy investment in skills and education and constantly creating new credentialing for our employees. And similarly, the idea of modernization is not just a technology idea, but we know our customers, employees, we know the workforce, because our customers tell us the workforce is not ready. So there's a modernization element that's always going to be with the workforces that we help our customers with as well. So I think the short answer is modernization is here forever.

The U.S. segment had 5% revenue growth, I think, for two consecutive quarters. Can you just talk about what is driving that growth and how sustainable it is going forward?

Yeah, sure. So first, I would say arguably the U.S. is probably the most competitive marketplace there is for a few reasons. One, everybody's here. Every competitor is here. Market access is quite good. So everybody is here. Two, every technology is here. Either it's invented here or it's brought here very quickly. And in that environment, it's my litmus test for how competitive are we? What are the value propositions that we're bringing? How deep are our industry skills? And how are we packaging all of Kindrel together in order to deliver a compelling value prop for our customers? And so for us, it's very positive to see that the U.S. has returned to growth, the U.S. has great signings performance, because it tells us that what we're delivering to our customers in that arguably most competitive marketplace, where there aren't as many distractions as there might be in other places, tells us we're doing really, really well. So, you know, we've won some very substantial new logos in the U.S. in certain industries. That was driven by our mission-critical expertise. It's driven by our Kindrel-Agentic framework, which tells our customers how to use Agentic in their systems. It's also driven by some new business process innovation that we're bringing to things like state governments, where we're running a number of DMVs, a number of divisions of motor vehicle. Because they need to modernize the way they engage with the citizenry in order to provide a more positive experience. So for me, the growth in the U.S., the demand we're seeing in the U.S., the scope expansion that we're getting from our existing customers, plus the new logos that we have driven in the U.S. is a great indicator of how competitive we are, the value props we're able to put on the table, and how our teams are making that shift into the agentic world.

And then can you take all that process and that learnings in the U.S. and can you transfer it abroad?

So the short answer is absolutely. So we run a single global delivery platform. So everything we deliver into the U.S. and we do it on a worldwide platform, everything we deliver in the U.S. we can deliver anywhere else as well. Now, when you get outside the U.S., the value props change because the priorities change a little bit. So there's a lot of discussion right now in Europe, as everybody knows, around sovereignty, data sovereignty, AI sovereignty, services sovereignty, and the Europeans are debating and considering how they want to deal with the sovereignty issue. That's part of why I say the US is the most competitive because we just don't have the sovereignty issue here. It really is who has the best value prop for the problem our customers are facing, again, across what I mentioned around modernization, cybersecurity, and resiliency. In Europe, the priorities are a little bit different. Asia, similarly. Some places, sovereignty is kind of top of mind. In some places, they're really just about how do I get a value prop that's compelling? So the short answer, again, for that particular question, we run a single global delivery platform. We can deliver what we deliver in the US anywhere in the world. And we take those value propositions that we've created. They tend to be more industry than geography-based, but we take those value propositions and we do show up in our customers in order to help them modernize. So as an example, we just signed a pretty substantial new relationship with the Bank of Luxembourg, obviously European, obviously regulated. And we will turn the Bank of Luxembourg into the first European agentic bank. That was the structure. I mentioned that one because some of what we've done here in the U.S. is as we start to move up to the application modernization world shows up very strongly also in in the Bank of Luxembourg. So infrastructure modernization is part of what we've been doing for a long time. Application modernization is something that we've been delivering now in the U.S. And now we're bringing some of that to Europe as well with some again, some good wins. As I mentioned, private cloud is not as big here in the U.S., but in Europe, private cloud is big. And so we have a lot of new logo, a lot of scope expansion around building and delivering private cloud environments into that customer base because, again, sovereignty is kind of top of mind for many of them.

So just staying on that, you know, I think you guys were seeing elongated sales cycles in Europe and Asia Pacific. A lot of that was due to geopolitical and some of the sovereignty and issues. Are you still seeing those elongated sales cycles? And then is there a way to get around that, maybe start a renewal process earlier?

So we do typically – so it's still top of mind, right? So sovereignty is still, like I said, top of mind. We start discussing with our customers usually 18 months before they get to the sort of end of the contract term, which is very logical. whether it signs in the fifth quarter before or the fourth or the third, our customers need to get to the right spot. They obviously don't want to be in the last quarter. They would feel kind of exposed if the whole thing were ending in a few months. But they have time. And as I mentioned earlier, because they're going to make a long-term commitment, five, six, seven years, and they know that the world is going to change dramatically, they're being very thoughtful and about who do they want to partner with? And there's a whole new list of stakeholders now in the discussion. I mean, not 20, but you do have additional scrutiny from regulators on what are you signing up to do and with whom for a long period of time. You do have additional challenges to navigate in terms of not only the regulatory environment, but the geopolitical environment, as I mentioned. And we've seen a number of countries head down different paths, particularly in Europe, up on how to deal with geopolitical uncertainty. Some are trying to support local champions and for certain workloads, for certain government kinds of workloads. So you have a whole new set of stakeholders. But we have typically sort of seen elongated sales cycles. I don't expect it to change. I don't see it elongating further, but we did see a slight uptick in how long it took to get things close. Again, because you have new stakeholders, you have long-term commitments, and you have a world that's changing so fast. They just need to be sure that this long-term commitment is not going to be something that they're unhappy with in 12 months' time.

What's driving the strength you guys are seeing in KD Consult and Hybriscalers?

And do you expect both that continue to be key drivers of growth for for kitty going forward yeah yeah so so the short answer is yes so we expect i expect that the momentum we've seen in consult and the momentum we've seen in our hyperscaler related businesses will will continue so let me start with hyperscalers because i think it's a it's indicative of what uh what kind of results you can drive when you're The trusted partner, when you have deep, deep understanding of your customers' environments, and you align and partner with the companies that really matter to the customer base in our industry. So when we were spun out nearly five years ago now, the commercial construct between IBM and Kindrel meant that Kindrel had to buy from IBM about $4 billion worth of stuff every year. That was a construct that IBM created. Last year, we finished with just under $2 billion. So we've been successfully pulling the IBM content out. We still do the services. So the labor-driven elements that sit underneath that, we still have. In fact, they're growing. We run more than half of the world's outsourced mainframes. But the IBM hardware and software content, which we've been focused on, we called it Focus Accounts for four years, the IBM hardware and software content, we found ways to get our customer base to buy that directly from IBM. So we went in that space, we took the four down to two, and it'll continue to shrink in our revenue base. At the same time, the revenue we had from working with AWS and Google and Azure was zero at spin. It was zero. And last year, we finished just over, just call it $2 billion worth of revenue. And we did it because we invested in skills. We have 30,000 credentials now across the hyperscalers. So we invested in skills. We built new capabilities specifically around those clouds, around resiliency, around security, around data management. And then we partnered with them and we built a partnering culture, because this customer base has been asking this business to help them with their most difficult technical challenges, like moving workloads onto the cloud, and then managing in a more diverse and complex environment. They've been asking this business for years to do that. But as part of IBM, we didn't have the freedom of action to partner with those businesses. So the hyperscaler business is not just makes us more relevant to our customers' future, But it also now aligns us with where they're growing. You see the hyperscaler, they're printing growth numbers 30% a quarter, and we're on kind of that same path. Because, again, the work we do around moving workloads to Azure or GCP or AWS means that the resiliency features that they are exposing, the security features that they're exposing as they move into those more complex workloads drives more demand for us. So I see continued good demand in hyperscalers. We saw it in the first quarter. And we've got, I think we've got some pretty good growth for the foreseeable future in hyperscalers. On the Kindrel Consult side, so going back again, going back five years when we were spun out, this business was, again, it has the best engineers who know our customer systems well. Our customer relationships, obviously we have new customers as well, but some of them go decades. So we deeply, deeply understand these complex systems. And these are the systems that have to run. They have to run. So our customer base, this customer base has been asking Kindrel prior, you know, obviously post-spin, but prior, please help us, please advise us. But IBM didn't invest in this business. So we couldn't invest in skills. It couldn't invest in capabilities. It didn't bring the industry knowledge that it needed. And we made a decision very early. And by the way, so the mix of consult within our overall revenue streams was single digit. It was like eight or 9% of our overall revenue streams were consult. And we knew because we had the trusted spot in our customers' environments, we had the relationships, all we needed to do – I mean, I'm going to make it sound easy. It was a lot of work. All we needed to do was invest in skills, bring in some industry talent, and then make ourselves relevant to where our customers were going and help them with their most challenging problems. And that's why just even last fiscal year, we've been running – the mix has improved dramatically in terms of how much of our revenue streams are consult versus manage. But more importantly, even just consult as a thing, it's had a book to build north of one since we started, since we were spun out. And so we see continued growth in consult, because the role we play in helping customers modernize and in helping them move into an agentic world, that capability sits in consult.

So obviously, there's a lot of concern around what AI means for services and the services industry year to date is down a significant number. How is AI, in your eyes, changing the traditional managed services business?

Yeah, it's a great question. And we hear similar, what is AI going to do to us? I will tell you that AI for us is a tailwind for a couple of reasons. First, we have to sort of establish the business model. Our business model is very much an outcome-based business model. We have to deliver outcomes to our customers. We have to deliver uptime. We have to deliver resiliency features, security features, data management features. So we get paid when we deliver those things. Whether we use 100 people or 80 people or 20 people, our customers need a great value proposition. And as we get more efficient, they expect to share in that. But we've been doing that for years. We've been delivering productivity to customers for years. And these new technologies allow us actually to deliver even more productivity, because we're outcome-based, while still sharing in that. That was how, for the last five years, we took profitability from substantially very negative, $500 million on an adjusted basis, even a $500 million loss, roughly, to this year's guide of north of $600 million, right? So we've been able to create great value propositions, grow signings, build our backlog of business. So that means we're delivering great value props all while improving our own profitability because, again, we're an outcome-based business. So AI for us means a couple of things. One, it means we can be more efficient. It means we can get to solutions faster. We can get to understanding faster. As we sit here today, we have about 1,600 agents in our infrastructure. An agent would do something as simple as as soon as there is an issue, collect all the logs, analyze what exactly the state of play was right before it happened, and then share with the engineers as soon as they get on the bridge, here's the data that we have. Here's the data that we've collected, and here's what we think you should go look at. That agent does what 20 people would do five years ago and take them an hour, right? So for us, embedding agentic AI into how we work, we are very much customer zero for our customers. Embedding agentic AI makes us faster. It allows us to deliver better services. It allows us to be more efficient. So there is a cost which flows directly into profit side for us, again, because we're outcome-based. On the demand side, our consult business is getting roughly 15 to 16 million actionable ideas from Kindrel Bridge, which is the way we do what we do. It's our platform to deliver services. And some of them are sort of simple and we can just execute. But some of them require discussion with a customer. Have you thought about this? Have you thought about changing this, optimizing this? We can save you money. So our consultants show up with not only a mastery of their environments, a mastery of their industry, but they show up with actionable ideas that our customers can implement to save money. So it's a bit of a revenue driver for us as well on the demand side. So AI for us in an outcome-based business model is very much a tailwind to top line and to the bottom line.

So the question always is, on that productivity side, on these enterprises, when you're doing these renewals, aren't they asking for bigger price cuts than normal over the last several years? Because they know you guys are benefiting from AI as well. So the big debate is who gets the productivity gains? Is it the enterprise or is it Kindrel?

Yeah, it's both, actually. We have created very compelling value propositions that allow us to deliver new scope that either maybe they hadn't had a service provider provide them, but we can do it more efficiently, or they're taking scope away from others. But you have to have a compelling value proposition, which means you have to be delivering productivity in some form or function to our customers. And then, as I mentioned, we do this in a way so that we're benefiting as well. that's already what's in our data. That's how we've been able to improve our profitability so dramatically. So we're used to sharing in the savings that we're generating and the productivity that we're generating with our customers. That's no different from what we've always been doing. Five years ago, when we started, when we were spun out, our customers said, look, I know you're investing heavily in your platform and you have all of this data. We have more data about how these systems run and what works and what doesn't anybody else they've been asking us for years like well when you learn when you use all this machine learning i need to see some of that in my in my contract and of course we've been sharing that with them for a long time so that's not new that's not new at all for us okay what are your views on the development of the ai native forward developed deployed engineer teams and the potential impact on on it services um look important i think and can help in and help in bringing expertise into into what can AI really do from an AI perspective you know you need to kind of balance people who are deep enough technically to understand the limitations of AI and they also need to be sort of business and and process oriented so they can understand what what good really looks like from a process standpoint and forward deployed engineers can help with that identification, with shortening the pilot times, with heading down the right path as opposed to finding all the wrong ways to do things. But at the end of the day, the impact from forward deployed engineers just means that we get to what we do well faster. We get to running these environments a bit faster. And the faster we can scale, the more, excuse me, the more run business that generates for Kindrel. Because while, again, consult is a big deal for us, our run business is still the bulk of what we do. And running complex systems happens after the forward deployed engineers have figured out, here's where we're going to do, here's where we're going to go. Now you've got to get Kindrel to scale this for you into production. Again, in the production world, you have to transform these systems while they're running. Our run, transform, run approach allows these critical systems to keep doing what they do, right? You can't have a banking system down for a nanosecond. You can't have payment systems down. You can't have airline reservation systems down. You can't have telecom networks that can no longer count or know who's calling whom and what the bill looks like. So these are very complex and getting these to work at scale, getting these to work in production environments is where our unique expertise and our unique ways of working really help.

So I wanted to get to the numbers. I think the Q1 revenue was down 3%. You guys reaffirmed your flat to down 2% outlook for fiscal year 27, and then low single digit growth in fiscal year 28. So you're expecting a stronger second half of fiscal year 27 in both earnings and free cash flow. So can you just talk about this ramp up coming down from 3% back up in the second half of this year? And then you're talking about positive growth in fiscal year 2028. So what are the keys to hitting those targets and how confident that you can see that reversal?

Sure, we are confident. If you look at our backlog and our signings coming into this year, it points to, it gives us confidence that we will generate the revenue in the back half of the year to get to those numbers. If you look at the growth we've had in consults and hyperscalers, we're expecting that to continue. And we said we expect the drag from the IBM to be constant. On the cost side, you saw we took some significant charges in the first quarter on rebalancing our workforce because our attrition rates have been lower than historical. And we're going to see those savings in the back half of the year. And then our cash flow is coming in as we expected with a use in the first half, especially as the funds for the WFR will go out in the second quarter. But in the back half of the year, we expect to generate significant free cash flow as well. So we are confident that we are able to hit the guidance for this year.

And then as we get into positive revenue growth in fiscal 28, is there a lot of bookings that you need to sign in order to hit that? Or should that just be the normalized run rate of the business?

If you look at the backlog that we have in our pipeline now, it gives us confidence that it will continue. And the things that are doing very well, you see the growth in the US. We've hit 5%, two quarters in a row. Again, I think that's a proof point that what we're doing is working and what's resonating, as well as the changes we're making to our cost structure should really bode well for next year because you'll have a full year of those savings.

And then, Martin, you did touch on IBM and that relationship. How does that relationship impact in the top line? And then what does that trajectory look like going forward with IBM?

Look, the relationship with IBM, I think we're still probably their biggest customer. The relationship with IBM continues to evolve. It's quite good. We show up well together with our joint customers. You know, when we look at the progress we've made in pulling out the IBM hardware software content, I view that as a major win for us. Obviously, our customers, we found a way to make it a win for them, and IBM found a way to make it a win for them. And so this is our ability to take the four down to two as a success. In my mind, I think it's certainly been a success from our profitability standpoint, and I think it's been a success from IBM's view and our customers' view. We see, last year, we saw about a three-point headwind from all of that activity. We see another three-point headwind from all of that activity again. But over time, it has to diminish. I don't see, while four went to two, I don't see two going to zero in five years. The fact is that many of our customers like to consume IBM's hardware and their software through a services provider. It depends on how every industry has evolved. it depends a little bit on country. So in Japan, for instance, our Japanese customers like to consume entirely through a services contract. Excuse me, there are big customers in the US who've chosen to consume it through a services contract. But again, over time, just because the numbers change over time, the two will have a smaller and smaller impact as a growth headwind. So our guidance this year of down two to flat included that three-point headwind. So, you know, that's a good indicator, again, with the signings that have gone in. And it's important, I think, to note, you know, you mentioned bookings, bookings, very common frame. We report signings. So the difference being that when we renew something and we get new scope, we report only what's being added to the backlog. To the extent we're renewing something that's already in the backlog, which would be included in a bookings number, we don't report that as new. We only report the signings number, right? So there's a difference there. We're booking more than we're signing. I'll say it that way.

No, we appreciate that as analysts because a lot of people will hide the renewals and they'll be quoting a big bookings number. We don't know duration. We don't know how much of that is renewal versus new.

We think it's more important for people to understand what's actually adding to the backlog as opposed to what's coming out and getting replaced immediately. So the relationship is very good. It will, that impact, that headwind will diminish over time, including just mathematically. And again, with the continued growth vectors of hyperscalers, with the continued growth vector and consult, you can see why even now without that three-point headwind, we already see a little bit of growth this year. And then obviously, as you said, well, we get to growth, a little bit of growth next year as well.

We just hit the two-minute warning, and I got two questions left. So we'll see if we can do it, Mitch. I know you guys just announced a tuck in acquisition, and you have $700 million in debt. You guys also have a share repurchase program, if I'm not mistaken. And so then how do we think about capital allocation and the strategy going forward?

I'll give you my answer, and then we can have a CFO answer as well. Look, I think we've been very consistent in how we allocate capital. First and foremost, because of the role we play in the world, because of the role we play in our customer environments, because of the nature of what we're delivering into regulated environments, we have been very protective of our balance sheet and making sure that our customer base is confident. that we are stable and around for the long term. And recently, each of the agencies has reaffirmed us as investment grade is very important to us. So we finished last quarter with very low leverage. We will continue to focus on our balance sheet. Yes, we have a maturity coming up, which either we'll refinance or we'll just pay down in the cash we have, but we are focused on the balance sheet. Secondly, we're focused on investing in the business. Again, I mentioned earlier a few times our investments in Kindrel Bridge, our investments in Kindrel Consult, our investments in capabilities. That's really important. It's driving growth. So those investments are working and we will continue to make those. Another form of investment is the tuck-in acquisition that we announced. Not yet approved, so we're not through it, but we'll continue to look for those tuck-in acquisitions because it allows us to either maintain or extend our lead in certain places. In this case, it's around healthcare. We've been very successful in healthcare in the U.S. Not surprising given, again, the trust that our customer base has in us, the nature of what we do. So we'll continue to look at Tuckwin acquisitions. And yes, we do have a share repurchase authorization. We've bought back, I think, since we put that in place, about 8% of our shares. But it's always been at the end of protect the balance sheet, keep investing both internally and inorganically. And then with the extent there's excess capital, of course, we're a shareholder-friendly place, so we'll return the capital. Now, Ellen gets a chance, though, to change any of that.

I couldn't agree more. You know, investment greetings, financial flexibility, strong balance sheet, and investing in the business.

All right. We're going to go over time, 60 seconds here. Just the investor base has been rattled in IT services. Obviously, the whole industry is under pressure. What gives you confidence or what confidence should investors take away about Kindrel and kind of the outlook?

Yeah. Look, the nature of what Kindrel does, our investments, we are a very sticky platform. We also have, you know, pretty good visibility to what's coming because we have a pretty big backlog. Every day, we have to deliver. Every day, our teams have to deliver the most important workloads. But this is a very stable long-term business that is not going away. This is, in fact, a business that is going to get a tailwind from AI. And in the world of AI, what really matters is your infrastructure and your data. And there's nobody better on the planet than that world and helping our customers move to that world because we are the largest in infrastructure and we have the data that helps them understand their systems.

Awesome. Martin Allen, thanks for coming.