Kyndryl Holdings, Inc. Q3 FY2025 earnings call

• Strong signings growth for the fifth consecutive quarter, up 31% to $16.3 billion over 12 months. • Adjusted pretax margins increased substantially, and over $170 million of adjusted free cash flow was generated in the quarter. • Hyperscaler related revenue surpassed $300 million in Q3, tracking ahead of the full-year $1 billion target. • 3A initiatives (alliances, accounts, advanced delivery) driving incremental signings, revenue, and earnings. • Leveraging Kyndryl Bridge, an AI-enabled operating platform, to drive insights, automation, optimization, and efficiency. • Formed alliances with leading technology providers to offer hybrid multi-vendor solutions. • High customer satisfaction scores with annual retention in the upper 90s and over 300 new customers added in three years. • Examples of projects across industries like retail, tech, media, telecom, and manufacturing, e.g., modernizing digital platforms for a vehicle rental company, modernizing IT estates for a Spanish telecom firm, and expanding scope with an aerospace and defense company. • Launched the Kyndryl Institute to offer perspectives on major IT challenges.

Kyndryl delivered strong results. Signings grew 31% to $16.3 billion over the last 12 months. Kyndryl Consult revenues were up 26% year-over-year, with signings up 35%. Managed services signings increased 27% in the last 12 months. Hyperscaler related revenue reached $300 million in Q3, on track to exceed $1 billion for the year. Kyndryl Consult is a $3 billion revenue stream with above-average margins.

• Raised fiscal 2025 earnings outlook: adjusted EBITDA margin at least 16.7% and adjusted pretax income at least $475 million. • Expect constant currency revenue growth of approximately 2% in Q4. • Projected adjusted free cash flow for fiscal 2025 is ~$350 million, a $50 million increase from previous outlook. • Mid-term outlook includes tripling adjusted free cash flow by fiscal 2028 to ~$1 billion, more than doubling adjusted pretax income to at least $1.2 billion, and achieving mid-single-digit annual revenue growth.

• Foreign exchange volatility could impact reported revenues. • General market risks related to IT trends, regulatory changes, and competition could affect business outcomes.

Q: Tien-Tsin Huang asked about pipeline and confidence in converting backlog.

A: Martin Schroeter said there's a strong pipeline in fiscal Q4, driven by Consult capabilities, with demand remaining strong due to complexity and customers needing to be ready for future opportunities.

Q: Tien-Tsin Huang followed up on hedging and efficiency given dollar volatility.

A: David Wyshner stated they feel good about hedge efficiency, with hedging programs keeping the impact on the bottom line consistent with initial expectations.

Q: Tyler DuPont asked about growth sources across practices and industries and large deals.

A: David Wyshner said growth is broad-based across practices (five of six practices with signings growth over 20%) and industries, with strong growth in security, resiliency, cloud, apps, data, and AI. There's a ramp in large deals, with 20 year-to-date over $100 million signings vs. 10 in the first nine months last year.

Q: Tyler DuPont asked about tariff implications and client dynamics.

A: Martin Schroeter said no direct impact to Kyndryl, but volatility in tariffs creates a tailwind as customers navigate uncertainty and need technology to help with changing environments.

Q: Divya Goyal asked about Kyndryl's positioning on AI with deep-sea-like models.

A: Martin Schroeter said AI proliferation is a tailwind, but there are many other elements customers need to address, and Kyndryl helps with data architecture, skills, privacy, security, and integration.

Q: Divya Goyal asked about DOGE impact on Kyndryl.

A: Martin Schroeter said focus on productivity is a tailwind, as Kyndryl helps find unused resources and improve efficiency.

Q: Ian Zaffino asked about AI benefits to Kyndryl and Consult growth sources.

A: Martin Schroeter said DeepSeek innovation could be investigated for better resource utilization, and Consult growth is from share gains, winning new business, and expanding with existing accounts. David Wyshner added Consult has grown from 10% of business at spin to 21% of revenues in Q3, driven by ability to provide multi-vendor solutions and objective best solutions.

Q: Jamie Friedman asked about Kyndryl Consult's mind share and IBM relationship transition.

A: Martin Schroeter said Kyndryl Consult is known for mission-critical and run and transform. David Wyshner explained IBM relationship is now vendor-customer, with a declining rebate creating a $200 million annual cost increase, and moving to price times quantity for software, which offers cost optimization opportunities.