Kyndryl (KD) Q3 2026 Earnings Call Transcript

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Date

Monday, February 9, 2026 at 8:30 a.m. ET

Call participants

• Chairman and Chief Executive Officer — Martin J. Schroeter
• Interim Chief Financial Officer — Harsh Chug
• Vice President, Investor Relations — Lori C. Chaitman

Takeaways

• Revenue -- $3.9 billion, up 3% year over year on a reported basis, unchanged in constant currency, and three percentage points higher sequentially.
• Kyndryl Consult Revenue Growth -- 20% year-over-year increase in constant currency; Consult contributed 25% of total revenue.
• Contract Signings -- $3.9 billion in the quarter, with eleven contracts above $50 million each; last twelve months’ signings totaled $15.4 billion, maintaining a trailing twelve-month book-to-bill ratio above 1.0.
• Adjusted EBITDA -- $696 million, down 1% year over year due to higher depreciation and amortization.
• Adjusted Pretax Income (PTI) -- $168 million, reflecting 5% year-over-year growth, driven by three A’s initiatives and countered by increased investment, mainly in Consult.
• Free Cash Flow -- $217 million generated in the quarter; net capital expenditures were $210 million, above typical levels as expected.
• Gross Profit Book-to-Bill -- 1.2 over the last twelve months, with $4 billion of projected gross profit added to backlog and $3.3 billion reported in the P&L.
• Hyperscaler-Related Revenue -- $500 million for the quarter, a 58% year-over-year rise; on track for nearly $2 billion by year-end 2026.
• Share Repurchases -- 3.7 million shares bought back this quarter (1.6% of outstanding shares) at $100 million; total program has retired 5% of shares, with $350 million authorization remaining.
• Cash Position and Leverage -- $1.35 billion cash at quarter-end, net leverage of 0.7x adjusted EBITDA, and investment grade ratings from Moody’s, Fitch, and S&P.
• Debt Management -- $700 million debt maturity upcoming in 2026, to be handled with refinancing or cash; drew $1 billion from revolving credit facility to enhance flexibility.
• Adjusted PTI Outlook -- Fiscal 2026 guidance set at $575 million–$600 million; adjusted EBITDA margin expected at approximately 17.5%.
• Free Cash Flow Outlook -- Fiscal 2026 free cash flow projected between $325 million and $375 million after expected $160 million cash tax and working capital usage.
• IBM Relationship Impact -- Evolving customer consumption of IBM innovation caused a 3.5% adverse effect on revenue growth; annualized IBM spend reduced from $4 billion at spin-off to about $2 billion.
• Three A’s Initiatives Benefits -- Cumulative annualized cost savings of $950 million from automation and delivery enhancements, plus $975 million in annualized profit savings from focus accounts remediation.

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Risks

• Quarterly earnings outlook reduced, with management citing longer sales cycles, evolution of the IBM partnership, delayed contribution from Consult investments, and lower-than-expected employee attrition as pressures on near-term performance.
• SEC review initiated regarding company cash management, disclosures, internal controls, and related matters, with the company disclosing, "We do not expect a restatement or other impact on our financials," but the outcome remains unresolved.
• Revenue shortfall concentrated in strategic markets and UK operations, attributed to longer sales cycles and regulatory factors, especially data sovereignty discussions in Europe.
• Guidance for fiscal 2026 free cash flow reduced from $550 million to $325 million–$375 million, primarily attributable to lower adjusted PTI and anticipated working capital headwinds.

Summary

Kyndryl (NYSE:KD) delivered quarterly revenue of $3.9 billion, driven by double-digit Consult growth and strong contract signings, with hyperscaler-related revenue rising 58%. The company announced cumulative annualized cost savings of $950 million from automation and $975 million profit improvement from remediated focus accounts. Management reduced earnings and free cash flow guidance for fiscal 2026, citing extended sales cycles, evolving IBM partnerships, local investment costs, and labor inefficiencies as reasons for the revision. SEC review of cash management and disclosure practices was disclosed, though management does not expect a restatement. Strategic capital allocation priorities remain focused on liquidity, investment grade preservation, business reinvestment, and targeted share repurchases.

• Kyndryl maintains confidence in achieving fiscal 2028 goals, projecting over $1.2 billion in adjusted PTI and more than $1 billion free cash flow, expecting margins to benefit as post-spin signings increasingly dominate the business.
• Management identified "the accelerating pace of new AI capabilities" and regulatory uncertainty around data sovereignty as drivers of more complex and slower enterprise decision processes.
• Gross profit backlog grew at a rate exceeding reported gross profit, with book-to-bill above one for four consecutive years, indicating the accumulation of higher-margin contracts.
• The company's collaboration with IBM continues to weigh on revenue by 3.5 percentage points, while hyperscaler and Consult segments expand their share of total business.
• Reduction in overall employee attrition, particularly in higher-cost local strategic markets, pressured near-term costs and earnings, with management committing to "get our cost base back in line" in coming quarters.

Industry glossary

• Kyndryl Consult: Kyndryl’s consulting business segment providing advisory, transformation, and managed services rooted in IT infrastructure and modernization.
• Hyperscaler: Major cloud infrastructure providers (e.g., Amazon Web Services, Microsoft Azure, Google Cloud) with large-scale, high-capacity computing environments integrated into Kyndryl’s service offerings.
• Kyndryl Bridge: Proprietary operating platform powering automation and service delivery improvements across Kyndryl’s managed service operations.
• AgenTeq AI: Kyndryl’s advanced artificial intelligence framework integrated into service delivery and operations for efficiency and innovation.
• Book-to-Bill Ratio: Metric comparing contract signings (bookings) to recognized revenue in a given period; a ratio above one indicates backlog growth.
• Three A’s Initiatives: Company-wide programs focused on Alliances, Advanced Delivery, and Accounts remediation, aiming to improve margins and operational efficiency.

Full Conference Call Transcript

I'd now like to turn the call over to Kyndryl Holdings, Inc.'s Chairman and Chief Executive Officer, Martin J. Schroeter. Martin?

Martin J. Schroeter: Thank you, Lori, and thanks to each of you for joining us. Today, we announced a few leadership changes and important for this call, Harsh Chug has been appointed interim Chief Financial Officer. He's joining us on today's call and will walk through the quarter in more detail. Harsh is a seasoned leader with extensive experience in our business, finance, and the technology industry. We are fortunate to have his leadership to guide our finance organization as we continue to execute our priorities. With that, let's turn to the third quarter. We delivered margin expansion, higher earnings, and positive free cash flow. Our 3% top-line growth was unchanged in constant currency.

We've been investing to support future growth opportunities, and the base we're building is strengthening our profitability as our mix of post-spin signings convert over time. With $3.9 billion of signings in the quarter, including 11 signed contracts exceeding $50 million each, and $15.4 billion over the last year, our trailing twelve-month revenue book-to-bill ratio remains above 1.0. And we're pleased that disciplined execution has ensured that signed contracts come with solid projected margins. While we made progress in the third quarter, I want to share some thoughts on what is different from the start of our fiscal year that drove our second-half outlook to be below what we were targeting.

For some context, we're in a services business operating mission-critical systems that require multiyear customer commitments. With the accelerating pace of new AI capabilities being introduced, and regulatory uncertainties specifically on data sovereignty, long-term agreements have become more complex and therefore, sales cycles are taking longer. Additionally, the timelines for large enterprise ERP transitions to cloud solutions have extended, which has also contributed to longer sales cycles. These dynamics were particularly noticeable in Kyndryl Consult's third-quarter performance, which remained strong and delivered double-digit revenue growth but came in below our expectations. Second, the way we collaborate with IBM, one of our key alliance partners, is continuing to evolve. I'll speak more about that in a minute.

Before I do, I want to discuss our earnings variance in the quarter. We've made investments to support our growth in Consult. These investments have taken longer than expected to contribute to the top line, due to the lengthening in the sales cycle that I just described. Coupled with an unanticipated decline in overall employee attrition, our labor costs are higher in the near term given the levels of turnover we've assumed. As we've demonstrated over the last four years, we will address our labor efficiencies. Importantly, we've had positive momentum in key aspects of our business, including Consult and alliances.

And we have a strong foothold in the areas where market disruption is occurring, which gives us a running start as more customers are ready to scale AI and implement sovereign solutions. Therefore, we're driving towards our key fiscal 2028 targets and we remain confident in our growth strategy. As I mentioned a moment ago, it's important to put a bit more context to the evolution of our partnership with IBM. At the time of the spin-off, as we've covered many times, the commercial agreement that we inherited essentially put 40% of our revenue in a low to no margin position. We called this our focused accounts initiative.

Over the last four years, we've addressed most of these focus accounts and you can see that reflected in our revenue performance and our significant profitability improvements. As we entered this fiscal year, we believed that by and large our customers who consumed IBM's innovation through our services contracts would continue to do so in a similar manner. What we are seeing is that our customers' consumption models for IBM's innovation are changing. While it doesn't change the scope of our services, or our ability to grow our services content, it does have an impact on the size of our signings and the revenue we receive over time. And as we said, this has a limited impact on our earnings.

So this chart shows our revenue performance in constant currency, and you can clearly see the revenue declines through our focus accounts initiative. And these declines have continued as the evolving IBM content had a 3.5% adverse effect on revenue growth. To give you a sense of the magnitude of this, when we were spun off, the annualized run rate of our spend with IBM was nearly $4 billion. And now it is approximately $2 billion, so it's essentially cut in half. This matters because our customers will decide how to best consume our high-value services and IBM's own innovation. We continue to evolve the joint Kyndryl and IBM value proposition as the pace of modernization and mission-critical environments accelerates.

The goal of the work we do together is to create greater value for our customers, and we believe it is important to understand both views of revenue growth. Now let's shift to our primary growth factors and the actions underway to execute against a clear set of priorities. Let me start with our hyperscaler alliances. At the start of the fiscal year, we expected we would deliver $1.8 billion in hyperscaler-related revenue. And after strong execution in the first half, we expected to exceed our initial target. And we are now on track to realize nearly $2 billion in revenue by the end of 2026.

To step back for a second, the transformation that this business has undergone starting with nearly $4 billion in IBM spend, is now approximately $2 billion while at the same time going from essentially zero in hyper-related revenue to nearly $2 billion and growing is profound. And it demonstrates how we've transformed Kyndryl's underlying capabilities and positioned us to grow profitably and be part of our customers' future with all of our partners. We've also invested heavily in Kyndryl Consult and will continue to do so as it is a key growth driver for us. As I said before, while Consult has performed extremely well, Consult's performance in the third quarter was below our expectations.

Additionally, to address the factors that have impacted our revenue and our earnings, we're leveraging our Kyndryl Bridge operating platform and building even more agentic AI into how we deliver services to our customers to drive quality enhancements and enterprise efficiency. We're consistently expanding our capabilities with a focus on AI, and our AgenTeq AI framework is resonating powerfully with our customers. We'll continue investing in AI innovation labs and in related capabilities and skills to deliver emerging technologies to customers at increasing scale. We're further expanding our presence in private cloud where we're seeing renewed demand driven by AI, data sovereignty, and security requirements. And we'll work with our alliance partners to align with those opportunities.

And at the same time, we will get our cost base back in line. We're operating with a clear strategic mindset, providing innovative and world-class services that are fully aligned with our longer-term goals. We are confident in our strategic direction. We're in a business with trusted customer relationships and long-term contracts that evolve all the time to meet changing market dynamics. The operational adjustments we're making position us well as we move ahead, and as we head into a new fiscal year and drive our business toward our multiyear objectives with the strategy and actions we've just outlined, it's important to recognize the progress we're aiming to deliver and focus on delivering our fiscal 2028 targets.

In fiscal 2025 and with our outlook for fiscal 2026 over this two-year period, we estimate that we will deliver approximately $1.1 billion in adjusted PTI. And less expected cash taxes of $300 million over the same period, our target is to generate $800 million in fiscal 2025 and 2026 combined free cash flow. So today, we have a strong conversion of earnings to free cash flow at the rate we've been targeting. As we continue to recognize more and more revenue from our higher margin post-spin signings, we're confident in our ability to drive toward more than $1.2 billion in adjusted pretax income in fiscal 2028.

And we believe we're well positioned to convert that level of earnings into more than $1 billion in adjusted free cash flow and we still see mid-single-digit growth as we exit fiscal 2028. With that, I'd like to pass the call over to Harsh. Harsh?

Harsh Chug: Thanks, Martin, and hello, everyone. Today, I would like to discuss our third-quarter results and outlook for fiscal 2026. In the quarter, revenue totaled $3.9 billion, up 3% from the prior year quarter on a reported basis and unchanged in constant currency. This represented three points of revenue growth sequentially, but behind what we were expecting. The variances versus our expectations were concentrated in our strategic markets and UK operations, which we are taking actions to address. And despite our efforts to get deals over the finish line, we have continued to experience longer sales cycles. With that said, we continue to deliver strong growth in Kyndryl Consult, which grew 20% year over year in constant currency.

Kyndryl Consult now represents 25% of our total revenue in the quarter. This underscores how we are expanding our role with higher value services. While our Q3 signings decreased 3% year over year, our last twelve months' signings totaled $15.4 billion. As a result, our book-to-bill ratio was above one over the last twelve months. We continue to see strong demand for our modernization services. In fact, we recently announced a five-year contract extension with Hertz to modernize its IT infrastructure. Our adjusted EBITDA decreased 1% year over year, to $696 million. As depreciation and amortization were a larger percent of our cost in last year's third quarter.

Adjusted pretax income grew 5% year over year to $168 million, which reflects incremental benefits from our three A's initiative partially offset by the incremental investments we are making primarily in Kyndryl Consult to drive further growth. Our three A's initiatives continue to be an important source of margin expansion and value creation for us. Through our alliances, we generated $500 million in hyperscaler-related revenue in the third quarter, a 58% increase year over year. This puts us on track to exceed the 50% growth in hyperscaler-related revenue that we were expecting at the beginning of the year. Through advanced delivery, powered by Kyndryl Bridge, we continue to drive automation through our delivery operations.

Kyndryl Bridge incorporates more technology into our offerings, reducing our costs and increasing our already strong service levels. This is worth roughly a cumulative $950 million of savings a year to us. Our accounts initiative continues to remediate elements of contracts we inherited with substandard margins. In the third quarter, the cumulative annualized profit savings from our focus accounts was $975 million. A key takeaway point from this update on the three A's is that we have successfully implemented these initiatives and they have become a core part of our operational discipline. Turning to our cash flow, balance sheet, and share repurchases. We generated free cash flow of $217 million in the third quarter.

Our net CapEx was $210 million, which is above our typical quarterly run rate, but is consistent with our expectation for the quarter. Working capital was a source of cash in the quarter. We have provided a bridge from our adjusted pretax incomes to our free cash flow. In the appendix, we include a bridge from our adjusted EBITDA to our free cash flow. And more information on the free cash flow metric calculation. Under the share repurchase authorization, we announced in late 2024, we bought back 3.7 million shares of our common stock in the quarter, which represents 1.6% of our outstanding shares at a cost of $100 million.

Since the inception of the program, we have repurchased 5% of our outstanding shares. We have approximately $350 million capacity available under our authorized program. Our financial position remains strong. Our cash balance at December 31 was $1.35 billion, and we are rated investment grade by Moody's, Fitch, and S&P. Our debt maturities are well laddered from late 2026 to 2041. We plan to refinance or use cash on hand to fund a near-term debt maturity of $700 million later this calendar year. And we recently drew $1 billion under a revolving credit facility.

We have increased flexibility ahead of our seasonally higher cash outflow in our fiscal first quarter as well as for other general corporate purposes, including tuck-in acquisitions. Our target has been to keep net leverage below one times adjusted EBITDA and we ended the quarter well within our target range at 0.7 times. On capital allocation, our top priorities are to maintain strong liquidity, remain investment grade, and reinvest in our business, including tuck-in acquisitions, and share buybacks. We have remained focused on winning business with healthy margins. And December was a continuation of this trend.

Throughout fiscal 2023, '24, and '25, and now into the first nine months of fiscal 2026, we have signed contracts with projected gross margins in the mid-twenties and projected pretax margins in the high single digits. As our business mix increasingly shifts towards more post-spin contracts, you'll continue to see significant margin expansion in our reported results. We have again included a gross profit book-to-bill chart that illustrates how we have been creating and capturing value in our business. With an average projected gross margin of 26%, on $15.4 billion of signings over the last twelve months, we have added nearly $4 billion of projected gross profit to our backlog.

Over the same period of time, we have reported gross profit of $3.3 billion. This means we have been adding more gross profit to our backlog than our contracted book of business has been producing in our P&L. Having a gross profit book-to-bill ratio above one at 1.2 over the last twelve months demonstrates how we are growing what matters most. The expected future profit from committed contracts. It also highlights the quality of our post-spin signings. And our gross profit book-to-bill ratio having been consistently above one means that we have been consistently growing our gross profit backlog over the last four years.

As we have said previously, our core financial goals are to grow our revenues, expand our margins, increase our earnings, and generate free cash flow. In light of our third-quarter results, our outlook for adjusted pretax income this year is now in the range of $575 million to $600 million. We estimate that adjusted EBITDA margin in fiscal 2026 will be approximately 17.5%. We also continue to see opportunities to drive efficiency in our operations, both through advanced delivery and in SG&A functions.

On the topic of cash flow, with the expected cash tax of roughly $160 million and a net use of cash for working capital, this implies free cash flow in the range of $325 million to $375 million for fiscal 2026. As Martin mentioned, the principal reasons for our revised fiscal 2026 outlook are the longer sales cycle, the expected revenue headwinds from our evolving partnership with IBM, the investments we have made to support future Consult growth, and the fact that it takes time to adjust our hiring to respond to lower attrition. With that, Martin, I'll turn the call back to you.

Martin J. Schroeter: Thanks, Harsh. I want to note that today we disclosed that the filing of our quarterly report will be delayed as described by our filing with the SEC. As we disclosed, following the receipt of a voluntary document request from the SEC, the company, the audit committee of our board of directors, is reviewing our cash management practices, related disclosures, the effectiveness of internal control over financial reporting, and certain other matters. We are cooperating with the SEC. We do not expect a restatement or other impact on our financials. Due to the ongoing nature of these matters, we will not be able to comment further at this time.

Before I open the call up to your questions, I want to thank the tens of thousands around the world who are providing world-class services to our customers every day. Operator, let's move to questions.

Operator: As a reminder, to ask a question, you will need to press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Our first question will be coming from Tien-Tsin Huang of JPMorgan. Your line is open.

Tien-Tsin Huang: Hi. Thanks. Good morning here, Martin and Harsh. I want to ask on the outlook and the revision. I understand you can't speak to the filing here. But on the revision, given how confident you were last quarter and the revision, I'm trying to think about attribution and what really changed. I heard the sales cycles being delayed and, of course, the evolution of the IBM piece. So maybe can you just discuss what surprised you and how broad-based some of these issues were for the company?

Harsh Chug: Hey, Tien-Tsin. Nice to hear your voice again. If you remember during the last quarter as we were guiding, we talked about three factors that we got confidence from. One was the acceleration in the Consult. We were expecting two points of additional growth from that and hyperscaler another additional growth of two points, and then rapid acceleration in the conversion of our sales pipeline. Those were about six points, and I think we fell short on all of them. Not that we didn't have the growth in Consult, but it was 20% on constant currency. It was not what we were hoping for.

And, again, the sales cycle extension had the impact not only on the Consult but also on hyperscaler as well as the acceleration we were expecting. So that adds to about six points and the continued headwind about IBM was another factor. So those are the primary drivers, along with some of the other things, we talked about ERP conversion onto the cloud platform, and those are market dynamics that we have to deal with. And I think, Martin, you would like to add?

Martin J. Schroeter: No. Look, I'd say first, thanks, Tien-Tsin. I would add as you heard, we got revenue back to flat. And as we start to share the difference between the evolving IBM relationship, you can see that without that headwind, we're actually growing the core part that matters so much to us. So the shape of that curve is kind of what we expected. As Harsh said, we were hoping and expecting to accelerate. We got good performance, but we didn't accelerate the way we had expected, and the world is getting more complex. AI is making customers rethink how their infrastructure should run. The sovereignty discussions around the world are top of mind for everybody.

So we just didn't accelerate as we expected we would.

Tien-Tsin Huang: Got it. No. Thank you both for that. And just my quick follow-up, just on the I think you mentioned strategic markets in the UK specifically. What are some of the changes that you might be putting in? What kind of cost might there be to do it or benefit? Just trying to understand how quickly that can be addressed. Thank you.

Martin J. Schroeter: Yeah. Thanks, Tien-Tsin. So a couple of things. You know, we did as we mentioned in our prepared remarks, we did see a pretty dramatic slowdown in attrition. And then on top of all of that, or in addition to that, we have particularly strategic markets and in the UK, we were investing, a lot of that investment is local. It's domestic, which tends to be much more expensive than the center-based hiring that we're doing. So we are addressing those. It doesn't happen immediately, but we will absolutely get the wiring diagram right.

We have been very successful over the last four years in freeing up people through automation and then reskilling those people to put them into roles where somebody has left the firm. And so we know the diagram, the wiring diagram works. And importantly, we also know that to the extent we make progress on this, we get to keep this. It shows up in our profit. So I feel like it's going to take us a quarter to get ourselves back on track here. Harsh, you want to take it?

Harsh Chug: Yeah. I think strategic markets, if we kind of piece that part, like, I think the trend is not the same, meaning LA has done well. I think Martin mentioned data sovereignty is a bigger discussion that is happening in Europe and that is a big component of strategic markets. And that was one of the major factors in our discussions with customers there. So I would say evolution of regulation and data sovereignty has been a big factor. That certainly impacted a lot in Europe within strategic markets.

Lori C. Chaitman: Operator, next question, please.

Operator: Our next question will be coming from James Faucette of Morgan Stanley. Your line is open.

James Faucette: Thank you. I wanted to delve a little bit deeper there on some of those factors. But first, recognizing you can't really say much about what is happening from a review perspective, but I am wondering can you talk about how much some of that review may have impacted, if at all, your forward commentary? Can we start there?

Martin J. Schroeter: Sure. Let me look. As you know, you're an experienced analyst who's, I'm sure, dealt with companies that have been in these kinds of examinations. And the fact is we just can't comment until the examination is complete. So the teams are working expeditiously so we can share more. The teams are working expeditiously so we can share remediation. Having said all of that, I think the key message here is that we are not changing our fiscal 2028 goal. So we still see fiscal 2028 coming together in the time frames we talked about. And as we also said in the disclosures, we don't expect to have a restatement here.

So I would say that until the work is finished, we can't comment more, but our fiscal 2028 goals are something we remain confident in, and we don't expect a restatement. So do you want to dive into some of your other deeper questions?

James Faucette: Sure. No. Yeah. I appreciate that. So I guess following up on Tien-Tsin's questions, you know, and you mentioned appreciate the breakdown of the different pieces. When you look at, like, the extending sales cycles, etcetera, can you just talk about is this across all the different pieces themselves? And is there something that you can, I guess, encapsulate the types of incremental work or changes in work scope that your customers may be looking for that you hope to address as they go through these lengthened evaluation and sales cycles for you?

Harsh Chug: I think it's more promising for us in terms of the types of conversations we are having. And it's largely driven by a lot of industry dynamics. And I will start with AI because it's causing a bit of industry disruption, many industries, and regular customers that we deal with, because they're getting threatened by what I call nontraditional players. So that's kind of one that starts from the business process to the application led to the infrastructure layer, so kind of that type of dynamic. And then data sovereignty and AI, which means is data going to be closer to AI or AI going to be closer to data?

I think that kind of causing it because we are in long-term infrastructure modernization conversation, it becomes more complex for the decision-makers to think about the evolution of the industry, how it impacts. And I think our consult teams are deeply engaged from those modernization discussions. And I think our evolution, as Martin mentioned, not only being relevant from a partnership with IBM, as you mentioned, but relevance with a hyperscaler where we are growing and now our intent to grow deeper in private cloud, it kind of makes us a bit more relevant across.

So I feel very confident that the types of dialogue we are having is much more balanced in terms of what we can bring than what could have been done at the time of spin. So it's the slowing, but the relevance of the types of discussion will make us more relevant to where customers are going than where we would have been previously.

Lori C. Chaitman: Operator, next question, please.

Operator: Our next question will be coming from Ian Zaffino of Oppenheimer and Company. Your line is open.

Ian Zaffino: Thanks. Question will be on the buyback. Since you're doing the buyback here, what's kind of the message you're sending out here? You know, is it, and I guess, the question would be on visibility is, you know, it's been very murky. And so given the murkiness of your visibility over the past, you know, three quarters or so, you know, what gives you confidence in visibility going forward? Thanks.

Harsh Chug: Yeah. I think this is Harsh. Again, the principles around how we think about capital allocation, we have to be nimble. Like, we look at every opportunity that stays in front of us. Like, first, as we mentioned, we need to have a strong balance sheet. Good financial flexibility. We do like to do tuck-in acquisitions. We have debt which is maturing, so we cannot think about how we're going to deploy. And, again, Revolver was a part of it. So we think about capital allocation more holistically. And we have to be ready for whatever opportunity presents. But at the end of the day, we want to grow this business.

So investing in the business will continue to be important, whether it's investment in Kyndryl Bridge, building our own internal capabilities, hiring more resources for Consult, and tuck-in acquisitions. So I think it's going to be a balanced discussion, Martin, for you.

Martin J. Schroeter: And I did want to add one more thing. You know, we've said now for a number of years that over time, the ability for us to convert profit into free cash flow would basically be the difference would basically be cash taxes. And that's what we've delivered, that's what we've been, that's what we've put on the chart in the prepared remarks. You'll see that over the last two years, our combined profit less the last two years of cash taxes is essentially where we're guiding cash flow to this year.

So I think the clarity that we have and this business's ability to generate cash is exactly what we said it would be, and we see that continuing in the future as well.

Lori C. Chaitman: Operator, next question, please.

Operator: Our next question will be coming from James Eric Friedman of Susquehanna. Your line is open.

James Eric Friedman: Hi. I just wanted to ask about the free cash flow and your comments, Harsh. You called out the working capital at $102 million. That looks good. The $217 million in free cash flow seemed fine. So when you look at the difference in your prior free cash flow, which was $550 million versus the $325 million to $375 million. I mean, it doesn't seem like it's the change in operating current assets or working capital. Is it all just the pretax income revision?

Harsh Chug: Yeah. I think there are two components. One is the PTI that has a direct linkage, so it's roughly about $150 million from where we were. And working capital, while it was a benefit in the third quarter, it's going to be a bit behind for us. That's kind of the biggest driver from where I see the fourth quarter land. So I think that's kind of the balancing point, but largely driven because of the PTI change.

James Eric Friedman: Got it. Lori, if I could just sneak in one more. So and you did call that out, Harsh, in your prepared remarks about the fourth quarter. I don't remember. Did you quantify where we should be thinking about working capital for the fourth quarter?

Harsh Chug: We have not quantified, but that's largely the difference between the PTI and what the working capital uses. So I think you're thinking right. Cash tax, we know, and then the remaining is driven by working capital use.

James Eric Friedman: Got it. Thank you. I'll drop back in the queue.

Lori C. Chaitman: Operator, next question, please.

Operator: And our next question will be coming from Jonathan Lee of Guggenheim Partners. Your line is open, Jonathan.

Jonathan Lee: The shortfall in fiscal '26, can you talk about the building blocks in the business that give you confidence in achieving your fiscal 2028 targets?

Martin J. Schroeter: Sure, sure. It's a great question. So I'd say a couple of things, and obviously, I'll ask Harsh if he has anything to add. You know, our fiscal 2028 targets when we set them out a bit over a year, almost a year and a half ago now, were really built on a few elements. One was the fact that our cash flows, which had been heavily burdened by the early cash taxes we were paying. We saw our cash flows growing faster than profit because our cash tax position now was going to be relatively stable while we improved profitability dramatically. So that's what allowed cash to grow faster, quite frankly, that phenomenon still exists.

On the profit side, the primary driver is, I should say two things. One, as we've shared every quarter, every reporting opportunity, what is going into the backlog has consistently been in that high single-digit kind of 9% PTI range. And so for us, the driver of that profitability is not a trend or a building block as much as it is that over the time frames that we're talking about, the substantial majority, more than 90% of our P&L will be determined by those high 9% PTI backlog elements as opposed to the backlog we inherited. And over a year and a half ago, that year.

And when we set that guide out when only half of our P&L was determined by what we put in. So the cash flow growth comes from both the profit growth and from the better cash tax position we're in that remains today. The profitability comes from the shift over time to what we've put in the backlog versus what we inherited. And that continues as well. So and then I should add the revenue component as you saw the outside of the more, outside of the harder to predict IBM content, our revenue is growing and we've taken the IBM content from $4 billion down to $2 billion.

And so its impact in the future should likely diminish from the 3.5 points it has been, while at the same time our hyperscaler business is already up to nearly $2 billion, our consult business continues to grow. So the growth metrics, the growth drivers that we've had would just continue to punch bigger and bigger and bigger in the overall mix. Harsh, you want to add?

Harsh Chug: Yeah. I think, two things. One is you heard on the gross profit book-to-bill, like, that continues to add. We had $4 billion added in the last twelve months versus what you saw is $3.3 billion that was used. And that's kind of one dimension. Like, what we are signing, and more and more of these signings are post-spin. So that kind of gives us the confidence. Number two, the level and relevance of our consulting in having a broader discussion about our engagement, which is across the overall ecosystem that didn't exist, like, two years or three years ago.

So that kind of gives us confidence in the types of conversation because these are customers who we have had for decades. Right? So they trust us. So this is kind of becoming more relevant across the broader ecosystem. So I think those are elements. And the third point I would say is that, like, I think we're likely to be in a better opening position at the start of next year than where we started last year. So that also gives us a better starting point.

Jonathan Lee: Thanks for that. If I could quickly add a follow-up. You know, when you think about some of the bookings softness or rather the elongation of sales cycles, is there any sort of time frame as to when you think you could actually close some of these deals? Would it be within the fiscal year where we seeing push outs until next fiscal? Thanks.

Harsh Chug: Alright. Meaning, there is a timeline to many of these deals. Like, many of these deals are linked with renewals of our customers. Now many of these discussions start a year, two years in advance, and that's kind of the discussion. So there is a timely nature of customers, and the urgency for them to sign. So I don't think it's elongation that it's going to be multiyear elongation. This is we're talking about a couple of quarters now that can still roll into other renewals that might be coming in the future. So I think it comes to what I call more stability in terms of the shift that happens.

But at the same time, as the industry gets disrupted, as AI conversation happens, it's more and more content that we start to have discussions. So I'd rather there is a slip in a deal, I'd rather have more content in my future deal than signing something which is not future-proof. I see it as an opportunity rather than something backwards.

Lori C. Chaitman: Thanks, Harsh. Martin, that was our last question. Would you like to close the call?

Martin J. Schroeter: So look, everybody, thank you for joining us. As we look ahead and work toward our multiyear goals, it is, I think, important to recognize all of the progress we've made to date, how that progress has translated into a much higher value services business, how it positions us to drive profitable growth, deliver higher earnings, and as we said, convert that into free cash flow. We're focused on expanding Kyndryl Bridge and its footprint and its capabilities and continuing to integrate more and more of our AgenTeq AI capabilities into our services as well as into our own operations in the way we run.

We will continue to leverage the momentum that we have in Consult and the hyperscaler-related services as well as our other partners. We will further expand into the private cloud space where there is a pretty substantial, renewed demand due to all the things that are happening in the industry, AI, data sovereignty, security, etcetera. And at the same time, as we said, we will address our cost base. And as fast as we can, and we'll make sure we get that right. So thank you again for joining. We appreciate your time.

Operator: And this concludes today's program. Thank you for participating. You may now disconnect.

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