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Kyndryl (KD) - 2025 Q1 - Earnings Call Transcript
KDKyndryl (KD)2024-08-01 18:38
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Financial Data and Key Metrics Changes - Revenue for Q1 2025 totaled 3.7billion,reflectingan83.7 billion, reflecting an 8% decline in constant currency, primarily due to the intentional exit from low-margin revenue streams [20][21] - Adjusted EBITDA was 556 million, with an adjusted EBITDA margin of 14.9%, an increase of 30 basis points year-over-year [22] - Adjusted pretax income grew 96% to 92million,indicatingstrongoperationalexecution[22][24]−Theupdatedforecastforfiscal2025includesadjustedpretaxincomeofatleast92 million, indicating strong operational execution [22][24] - The updated forecast for fiscal 2025 includes adjusted pretax income of at least 460 million, reflecting a year-over-year increase of at least 295million[16][29]BusinessLineDataandKeyMetricsChanges−KyndrylConsultrevenuesgrew14295 million [16][29] Business Line Data and Key Metrics Changes - Kyndryl Consult revenues grew 14% year-over-year in constant currency, accounting for 17% of total revenue [21][9] - Kyndryl Consult signings increased by 49% in constant currency, indicating strong demand for advisory services [21][9] - Hyperscaler-related revenue reached 210 million in Q1, on track to deliver nearly 1billionfortheyear,doublingthefiscal2024total[23][20]MarketDataandKeyMetricsChanges−Thecompanyisexperiencinggrowingdemandforservicesduetoincreasedcyberregulations,particularlyintheEU[9]−ThestrengthinKyndrylConsultisattributedtothecompany′sexpertiseinrunningandtransformingITestates,whichisresonatingwithcustomers[5][6]CompanyStrategyandDevelopmentDirection−ThecompanyisfocusedondrivinggrowththroughKyndrylConsultandKyndrylBridge,leveragingAIandautomationtoenhanceservicedelivery[4][10]−Thestrategicemphasisisonsheddinglow−margincomponentsofrevenueandexpandingrelationshipswithalliancepartnerslikeMicrosoft,Google,AWS,andSAP[9][15]−Thecompanyaimstopivottogrowthinfiscal2025,withexpectationsofreturningtorevenuegrowthinthefourthquarter[17][29]Management′sCommentsonOperatingEnvironmentandFutureOutlook−Managementexpressedconfidenceinachievinghighsingle−digitadjustedpretaxmarginsbyfiscal2027,supportedbyashifttowardshigher−margincontracts[16][40]−Thecompanyiswell−positionedtohelpcustomersoptimizetheirITenvironmentsandprepareforfutureinvestmentsasmacroeconomicconditionsimprove[56][58]−ManagementhighlightedtheimportanceofbridgingthegapbetweenbusinesslineleadersandITorganizationstofacilitateAIadoption[60][61]OtherImportantInformation−Thecompanyplanstohostitsfirstpost−spinInvestorDayonNovember21,2024,todiscussfuturestrategiesandperformance[18]−Thecompanymaintainsastrongliquiditypositionwithacashbalanceof1 billion for the year, doubling the fiscal 2024 total [23][20] Market Data and Key Metrics Changes - The company is experiencing growing demand for services due to increased cyber regulations, particularly in the EU [9] - The strength in Kyndryl Consult is attributed to the company's expertise in running and transforming IT estates, which is resonating with customers [5][6] Company Strategy and Development Direction - The company is focused on driving growth through Kyndryl Consult and Kyndryl Bridge, leveraging AI and automation to enhance service delivery [4][10] - The strategic emphasis is on shedding low-margin components of revenue and expanding relationships with alliance partners like Microsoft, Google, AWS, and SAP [9][15] - The company aims to pivot to growth in fiscal 2025, with expectations of returning to revenue growth in the fourth quarter [17][29] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in achieving high single-digit adjusted pretax margins by fiscal 2027, supported by a shift towards higher-margin contracts [16][40] - The company is well-positioned to help customers optimize their IT environments and prepare for future investments as macroeconomic conditions improve [56][58] - Management highlighted the importance of bridging the gap between business line leaders and IT organizations to facilitate AI adoption [60][61] Other Important Information - The company plans to host its first post-spin Investor Day on November 21, 2024, to discuss future strategies and performance [18] - The company maintains a strong liquidity position with a cash balance of 1.3 billion and nearly 4.5 billion in total liquidity [27][28] Q&A Session Summary Question: Trends in signings composition - Management noted a consistent growth rate in Kyndryl Consult signings, indicating a shift towards advisory services while still maintaining substantial management run business [32][33] Question: Appetite for larger acquisitions - Management reiterated that acquisitions are not necessary for growth, focusing instead on small tuck-in acquisitions that complement existing expertise [35][36] Question: Confidence in margin growth - Confidence in margin growth is supported by consistent performance in signing contracts with high projected margins and the impact of the 3A's initiatives [38][39] Question: Drivers of Kyndryl Consult growth - Management attributed the 49% growth in Kyndryl Consult bookings to the company's unique expertise in run and transform capabilities, which are essential for customers [48][49] Question: Capital returns timeline - Management clarified that while 1 billion in pretax income is a target, capital returns could begin before reaching that figure, depending on adjusted pretax income levels [54] Question: Impact of interest rate changes - Management indicated that a decrease in interest rates could benefit the company by enabling customers to invest more in IT infrastructure and services [56][57] Question: AI implementation readiness - Management discussed the importance of preparing IT infrastructures for AI, emphasizing the need for collaboration between business and IT leaders [60][61] Question: Kyndryl Consult's outperforming position - Management highlighted the combination of deep engineering knowledge, industry-standard skills, and innovative solutions as key factors in Kyndryl Consult's success [66][67]