Kyndryl Holdings Inc

NYSE:KD

Earnings Call Analysis

Kyndryl Reports Solid Q1 Performance

Kyndryl's Q1 results show resilience with $4.2 billion in revenue, just a 1% dip in constant currency. Importantly, Kyndryl Consult grew by 20% year-over-year, comprising 14% of the total revenue. Adjusted EBITDA climbed by 25% to $612 million with a margin of 14.6%. Meanwhile, adjusted pretax income improved radically by $97 million year-over-year, totaling $47 million. Encouraged by these results, Kyndryl raised its fiscal year 2024 outlook, showcasing confidence in their growth strategy which emphasizes intellectual property, alliances, and its leadership in technology services like AI and cloud security. Despite a negative free cash flow of $106 million due to timing, forecasts for the full year remain positive. With $1.5 billion in cash and about $5 billion in liquidity, the firm is well-positioned financially. As new contracts align with strategic margin goals, Kyndryl expects a shift to high single-digit pretax margins, transforming its financial profile.

Turning a New Leaf: Kyndryl's Promising Kickoff to Fiscal 2024

Kyndryl has made substantial progress with a positive start to fiscal 2024, successfully leaving annual losses in the past and projecting profitability for the present fiscal year and beyond. The company remains committed to achieving revenue growth by calendar 2025 and expects revenues to dip marginally compared to the current fiscal year, maintaining the vast majority of their focus accounts. In line with this progress, adjusted pretax margins are targeted to hit the high single digits over the medium term.

Kyndryl's Year of Acceleration: Fiscal 2024

The company is witnessing a year of growth and transformation, with improvements in several key areas including new alliance signings, benefits from Advanced Delivery, rapid growth in Kyndryl Consult, and technology leadership exemplified by Kyndryl Bridge. One focal point of Kyndryl's value proposition is the anticipated upswing in revenue, made possible by the majority of their future revenue hinging on contracts signed post-separation from IBM. The company is the largest provider of IT infrastructure services worldwide and continues to innovate, aiming for Kyndryl Consult to comprise 20% of revenue—a significant increase from the initial 15% target.

Liberating Resources to Propel Growth

Kyndryl has strategically reallocated more than 6,500 delivery professionals to generate around $375 million in annual revenues. This initiative is part of the company's focus on three key areas—accounts, alliances, and advanced delivery, collectively known as the '3As.' These internal efficiencies and increased profitability of focus accounts by over $300 million reinforce the company's pathway to sustainable, profitable growth.

Expanding Customer Relationships and Services

The company has expanded its service offerings with existing customers, including a decade-long partnership with a banking customer to implement Kyndryl Consult and AI into core banking services. By integrating additional services such as mainframe modernization and cloud-based work, Kyndryl not only fosters digital transformation for its clients but also eliminates third-party purchases that impact its profitability.

Harnessing AI and Innovation for Enhanced Value

Kyndryl is leveraging AI and its Kyndryl Bridge platform to offer better service efficacy and create sustainable technology estates for its clients. With a goal of onboarding 1,000 enterprise customers by the end of the year on Kyndryl Bridge, the company expects to save these customers over $1 billion annually. Additionally, Kyndryl is diving into the cybersecurity services market, aiming to expand its $2 billion security and resiliency practice into the larger $50 billion market.

Raising the Bar: Uplifted Profit Outlook for Fiscal 2024

Building on a strong first quarter, Kyndryl projects an increase in adjusted EBITDA margin to about 14%, marking a 240 basis point rise from the previous fiscal year, with adjusted pretax income expected to be at least $100 million. The margin headwinds from software cost increases are being tackled through a mixture of initiatives, including real estate consolidation, workforce rebalancing, growth in advisory services, and pricing strategies. The company anticipates a year-over-year revenue decline of 6% to 8%, but also predicts a positive adjusted free cash flow for the fiscal year. Capital expenditures are projected to be roughly $750 million, with expectations that reported GAAP earnings will gradually come closer to adjusted earnings in subsequent years.

Strategic Realignment of Customer Relationships

Kyndryl is actively transforming its client portfolio, intending to remove low or negative margin aspects from ongoing partnerships. This initiative is part of a broader strategy focused on addressing customer relationships with substandard margins—termed the 'Accounts' initiative—which has the potential to add $800 million or more to annual pretax earnings. By March 2027, more than 80% of focus accounts are expected to have been addressed, significantly improving margins and contributing to the change in the overall business mix.

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, ladies and gentlemen. Welcome to Kyndryl's First Fiscal Quarter 2024 Earnings Conference Call. [Operator Instructions]. Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Lori Chaitman, Head of Investor Relations. Please go ahead.

[Lori Chaitman, Global Head, IR]

Good morning, everyone, and welcome to Kyndryl's earnings call for the first fiscal quarter ended June 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 risk factors that may cause our actual results to differ materially from those expressed or implied, and these statements speak only to our expectations as of today.

For more details on these risks, please see the Risk Factors section of our annual report on Form 10-K for the year ended March 31, 2023. Kyndryl does not update forward-looking statements and disclaims any obligation to do so. 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 like to now turn the call over to Martin. Martin?

[Martin Schroeter, Chairman & CEO]

Thank you, Lori, and thanks to each of you for joining us. On today's call, I'll update you on the substantial progress we're making as a company and the meaningful implications of that progress. David will then review our recent financial results, our updated and improved fiscal 2024 outlook and how we're changing the margin profile of our focus accounts.

We are off to a very strong start in fiscal 2024. Our first quarter results exceeded our expectations and positioned us well for the year as a whole. Our 3A initiatives, Alliances, Advanced Delivery and Accounts were at the core of our success. Kyndryl Consult, Kyndryl Bridge and our efficiency efforts also helped drive our results. We extended and expanded customer relationships in ways that will be mutually beneficial, and we're raising our earnings outlook for fiscal 2024. In short, we're moving even faster than before to deliver progress, and we'll talk more about our achievements on the 3As and our updated full year outlook. But before we do that, there are 3 declarative statements I want to make.

First, annual losses are now behind us. We expect to make money this year and each year going forward as measured by our adjusted pretax income. Second, we remain committed to delivering revenue growth in calendar 2025 and in fiscal 2026. That means that our revenue will bottom out in calendar 2024 or fiscal 2025. And we expect that bottom will be within a few percentage points of our revenues this fiscal year as we retain the substantial majority of our focus accounts and their revenue.

And third, as a result of our execution and accelerated pace of our transformation, we'll deliver the profit goals we've previously shared on the timelines we've previously shared, and our medium-term target is for adjusted pretax margins to be in the high single digits. This year, our fiscal 2024 will be a year of acceleration for Kyndryl. We're already seeing that in our first quarter results and our operating trends. We're accelerating our transformation with new Alliance signings and revenue, with benefits from Advanced Delivery, with a massive improvement in our focus accounts, with rapid growth in Kyndryl Consult, with our technology leadership through Kyndryl Bridge, with our cost savings through our internal rationalization and transformation and, of course, the culture change we're driving through the Kyndryl Way.

These are powerful dynamics for our near-term and medium-term value creation. Stepping back a bit, as I think about Kyndryl, I believe our leadership in the markets we serve and the way we're building toward future growth are creating a compelling value proposition that is not yet well appreciated across the investment community. We've previously highlighted a number of the key components of our value proposition, and I want to clearly connect the dots as to how these elements of our business model are building value for us.

First, we're the world's largest provider of IT infrastructure services to double the size of the next largest players. Our scale and our industry leadership foster innovative solutioning and service excellence because of our unique position on the industry learning curve and the mission-critical nature of what we do. We've been delivering double-digit revenue growth in Kyndryl Consult, the higher-margin, higher value-add advisory portion of our business despite the macro environment.

And over the medium term, we now expect Kyndryl Consult to grow to 20% of our revenue, 1/3 more than our previous target of 15% and by delivering and accelerating customer business outcomes that are informed by our extensive operational experience, Kyndryl Consult will support our future revenue growth and margin expansion. We are aggressively fixing our focus accounts. With these customers, as we discussed last quarter, we're adding profitable scope, removing unprofitable scope, driving efficiencies largely through automation which enhances service quality, and we're adjusting pricing when appropriate and only rarely are we exiting relationships.

We're approaching an inflection point in our business mix with fiscal 2025 being a year when roughly half of our revenue will come from post-spin signings and fiscal 2026 being the first year when our revenues and earnings will be primarily determined by contracts that Kyndryl signed. The 3As, the anticipated upswing in our revenue trajectory and the tipping point of controlling our own destiny through our revenues coming mostly from post-spin signings are what will propel us from modestly positive adjusted pretax earnings this year to high single-digit margins in the medium term.

And our cash flow is expected to grow in conjunction with our adjusted pretax income with strong conversion of adjusted net income to cash. Together, these elements of our business model form, I believe, a compelling value proposition. And I want to emphasize how enthusiastic we as a management team are about the margin trajectory that we've laid out and are already delivering on. Our 3A initiatives are major proof points. In fact, they're driving momentum throughout our business and fostering additional progress each quarter.

As a reminder, 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. We made excellent progress toward our goals in the first quarter, putting us well on track to deliver or exceed our fiscal 2024 milestones for each of these initiatives. Through our Alliances, we're building the portion of our customer relationships that include cloud-based content.

In the first quarter, we recognized more than $80 million in hyperscaler related revenue, putting our run rate ahead of our $300 million full year target. We've also continued to increase our hyperscaler certifications to more than 37,000, which is 70% higher than a year ago. Our growth stems from joint enablement activities with our partners, co-marketing to enterprise customers and incremental training programs, all of which help us deliver higher value solutions that address customers' most pressing needs.

Our Advanced Delivery initiative is transforming the way we deliver our services with automation tools and resources. To date, we've been able to free up more than 6,500 delivery professionals to address new revenue opportunities and to backfill attrition. This is worth roughly $375 million a year to us, representing a $75 million increase in our annual run rate this past quarter. And we continue to see significant automation opportunities across our delivery operations as we improve service levels, reduce our costs and incorporate more technology, including Kyndryl Bridge 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. We're a trusted partner for our customers and that trust is what brings our customers to the table. In the first quarter, we've increased the annual profitability of our focus accounts to more than $300 million, which is a $90 million increase from our run rate just 3 months ago.

More generally, we view successful execution of our 3As as the clearest and fastest path towards achieving sustainable, profitable growth. In each quarter, there are additional customer examples that demonstrate our team's successful execution of our 3As. The underlying theme among them is that the combination of our Alliances and our expanded capabilities, including Kyndryl Consult, Bridge and Vital is resonating with our customers and providing Kyndryl with new revenue streams and higher value opportunities.

Here are a few of my favorites from the first quarter with one banking customer who we've been working with for over a decade, we recently expanded beyond our managed services to include Kyndryl Consult and will help the bank build and deploy AI into its core banking services. Second, in conjunction with the contract renewal with one of our largest customers, we expanded our scope of work to include Kyndryl consult and AWS cloud migration and management. And with one of our larger focus accounts that was undergoing a digital transformation and becoming increasingly unprofitable for us, we're adding consult, we're adding mainframe modernization and cloud-based work and we're accelerating our customers' digital transformation while removing third-party purchases that were uneconomic for us and fixing the margins associated with the account.

Innovation. Innovation that is practical and useful is what's allowing Kyndryl to show up differently for our customers. Kyndryl Bridge is an open integration services platform powered by AI and machine learning that we offer to our customers to accelerate automation, drive efficiencies, enhance security and resiliency and create a more sustainable technology estate. We have more than 500 enterprise customers operating on Kyndryl Bridge with more than 1,000 expected by the end of the year. And we recently announced that we're helping these customers both reduce risk and save more than $1 billion annually through their early adoption of Kyndryl Bridge.

Now we view artificial intelligence as a multifaceted opportunity for us as we both apply AI in our operations and enable our customers to use AI in their business. AI is already driving enhanced operating performance in applications like Kyndryl Bridge and it's beginning to generate revenue growth opportunities as customers need additional help with data architecture and to implement AI at scale and it's going to allow us as an organization to operate more efficiently.

We're not going to make AI our fourth A, but we clearly see it as an accelerator of our advanced delivery initiative, a component of our Alliances' growth and a source of future cost savings opportunities. In fact, this week, we'll announce that we're working with Microsoft to help our customers accelerate the responsible adoption of generative AI solutions in their enterprises. And in another area where innovation is critical, we've recently announced that we significantly expanded the end-to-end cybersecurity services we offer, enabling enterprise customers to detect, respond to and recover from cyber attacks.

We're opening next-generation security operations hubs in key geographies around the world, which will enable Kyndryl's already $2 billion security and resiliency practice to expand our presence into this nearly $50 billion market. By offering security operations as a unified modular platform, we enable customers to retain existing security investments while augmenting their infrastructure with new services.

To sum up, we are highly enthusiastic about our recent results and the path in front of us. And we're confident we have the right strategy in place to drive progress. We have the right leadership, talent, know-how and alliances to execute our business transformation. In our fiscal 2023 and first quarter 2024 results, including our execution against the 3As, gives us strong positive momentum.

Looking ahead, we'll use our intellectual property, our alliances and our scale to further expand our capabilities to differentiate ourselves in the markets we serve and to strengthen our leadership position. We're engaging with customers and IT decisions further up the technology stack, including discussions about how to enable AI in their businesses. Our unmatched expertise in mainframe modernization and hybrid IT environments allows us to provide thought leadership with Kyndryl Consult, deliver innovation with Kyndryl Bridge and meet our customers' objectives for robust application of new technologies. We're capitalizing on growth opportunities across our practices and particularly in cloud, security, network and apps and data and AI.

In short, we're engaging with customers where they want us to be at the center of a collaborative relationship in which technology drives business outcomes in a reliable, secure way. This is allowing us to access incremental market opportunities to grow our share of wallet with existing customers to win new customers and to transform Kyndryl. Now with that, I'll hand over to David to take you through our results and our outlook.

[David Wyshner, CFO]

Thanks, Martin, and hello, everyone. Today, I'd like to discuss our quarterly results, our balance sheet and liquidity, how we're raising our outlook for fiscal year 2024 and the progress we're making on our focus accounts. Our first quarter results reflect strong operational execution and remarkable progress on our key initiatives.

In the quarter, revenue totaled $4.2 billion, a 1% decline in constant currency. Demand for our services has remained resilient, and we continue to gain momentum in higher-margin advisory services. And while our Q1 signings were down 5% year-over-year in constant currency, through July 31, our year-to-date signings are up 9%. Kyndryl Consult revenues grew 20% year-over-year in constant currency and represented 14% of total revenue in the quarter, the highest percentage ever.

This performance reflects how our post-spin opportunities for growth in Kyndryl Consult services are outweighing the macro issues pressuring some other firms. Our adjusted EBITDA grew 25% year-over-year to $612 million. Our adjusted EBITDA margin was 14.6%, a year-over-year increase of 310 basis points. Adjusted pretax income was $47 million, a $97 million improvement in profit compared to the prior year quarter. Our continued and substantial progress on our 3As is what's driving our results and more than offset the year-over-year software cost increases we faced.

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, apps, 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 we laid out in May as I'll discuss momentarily.

Turning to our cash flow and balance sheet. Our adjusted free cash flow was negative $106 million in the quarter, entirely due to timing effects. Our gross capital expenditures were $100 million, and we received $6 million of proceeds from asset dispositions. The negative adjusted free cash flow in Q1 does not change our expectation that full year adjusted free cash flow will be positive.

In fact, our cash flow seasonality in Q1 stems from annual incentive payments that were accrued throughout the prior fiscal year, but paid out in the June quarter as well as payments for software licenses that were made in Q1 but will be amortized in future periods. As a result, the seasonal items that caused our Q1 adjusted free cash flow to be negative will reverse over the course of the year. We provided a bridge from our adjusted pretax income to our free cash flow.

And based on feedback from some investors, we've also provided a bridge from our adjusted EBITDA to our free cash flow in the appendix. Our financial position remains strong. Our cash balance at March 31 was $1.5 billion. Our cash balance combined with available debt capacity under committed borrowing facilities gave us nearly $5 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. There's no change in our approach to capital allocation. Our top priorities continue to be to maintain strong liquidity, remain investment grade and reinvest in our business. Our full year adjusted free cash flow will help fund spin-related cash outlays, including required systems migrations and workforce rebalancing costs.

Over time, Kyndryl's leadership position in IT infrastructure services, combined with benefits from our 3A initiatives should allow us to significantly expand our margins and our free cash flow and ultimately be in a position to consider regularly returning capital to shareholders, all while remaining investment grade.

In executing our accounts initiative, we're paying close attention to the margins on signings for both our focus accounts and our blueprint accounts. Immediately following the spin, we were signing business with an expected gross margin of roughly 20% and a pretax margin in the mid-single digits. These signings themselves represented higher margins than the roughly breakeven pre-spin deals that were generating the bulk of our revenues.

And over the last 12 months, 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 in the high-single digits for pretax profit. The June quarter was a continuation of that favorable trend. Importantly, what this means is that in the 6 full quarters we've been independent, we've been signing agreements that fully support the medium-term margins we're aiming for.

In fact, if our P&L reflected only our recently signed deals, we'd be operating at mid- to high single-digit adjusted pretax margins. But because of the prevalence in multiyear contracts in our business, most of our revenue is still coming from lower-margin, pre-spin legacy signings. As a result, you can't currently see in our overall results the full benefit of the higher margins at which we're now pricing contracts. But that will change with time as our business mix increasingly shifts towards more post-spin contracts. In fact, next year, our fiscal 2025, about half of our revenue will be coming from contracts signed post spin.

Now we'll move up to 2/3 in fiscal 2026. And in the fiscal year ending in March 2027, more than 85% of our revenue will be from post-spin signings. And when most of our revenue reflects our post-spin efforts, we anticipate that our pretax margins will move into the high single digits. We're eager for the higher-margin flywheel that we started to turn to gain momentum.

As Martin mentioned, we continue to progress on our 3As initiatives. Our momentum supports our continued expectation that our Alliances initiative will drive signings, revenue and over time, roughly $200 million in annual pretax income. Our Advanced Delivery initiative will drive cost savings equating over time 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 among our global practices, which is incremental to the benefits coming from our 3A initiatives, and we see opportunities to control expenses throughout our business, including through the workforce actions we've taken.

We expect that these efforts over time will contribute roughly $400 million in annual pretax income. 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 a strong first fiscal quarter to build on, we're raising our profit outlook for this fiscal year. We expect to expand our margins largely due to the 3A initiatives and actions we've taken to drive efficiency. We're raising our adjusted EBITDA margin outlook significantly to roughly 14%. This represents an increase of 240 basis points versus fiscal 2023. We now expect our adjusted pretax income to be at least $100 million, which implies a more than 190 basis point increase compared to last year. The actions we're taking and the progress we're making would have an even larger impact, but for the 125 basis points of margin headwinds that are associated with the $200 million IBM software cost increase we face.

We expect our focus accounts to contribute at least $200 million more profit this year than last, and we expect our Advanced Delivery initiative to generate at least $200 million of incremental savings this year. Real estate consolidation, workforce rebalancing, growth in Kyndryl Consult, our pricing strategies and other actions are all contributing to our margin growth. Our outlook for revenue continues to be a year-over-year decline of 6% to 8% in constant currency, which translates to $15.8 billion to $16.2 billion based on recent exchange rates.

To be clear, the year-over-year revenue decline we're projecting is primarily due to the soft backlog of fiscal 2024 revenue we were born with plus intentional near-term actions we are taking to transform our business. These changes typically involve removing selected low or negative margin scope from ongoing customer relationships. For the September quarter, on a year-over-year basis, we expect revenues to decline in the low to mid-single digits in constant currency and for adjusted pretax income to be slightly positive. This will represent a year-over-year improvement in adjusted pretax margin of at least 250 basis points.

As I mentioned, we expect adjusted free cash flow to be positive this fiscal year. We project roughly $750 million of net capital expenditures and about $850 million of depreciation expense. We also expect about $300 million of cash outlays for separation-related work, primarily systems migrations and for workforce rebalancing actions. 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. As Martin highlighted, we remain committed to returning to revenue growth by calendar 2025 and over the medium term, delivering significant margin expansion and 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.

As we've discussed previously, our aggregate results obscure the fact that within Kyndryl, we started with a strong nearly $10 billion business, which we refer to as a blueprint for how we want to operate. This blueprint consists of accounts that represent about 60% of our revenue, generate average gross margins north of 20% and reflect our ability to get paid appropriately for the mission-critical services we provide.

Our other roughly $8 billion of focused accounts revenue was generating virtually no gross margin and after SG&A expenses was losing money. Our accounts initiative is all about the opportunity to make our focus accounts look more like the majority blueprint of our business by addressing elements of our customer relationships that generate substandard margins. Our $800 million target for the Accounts initiative relies on us closing only about half of the gross margin gap between our focus accounts and our blueprint accounts. That's why our Accounts initiative is a major priority and a major opportunity for us.

We're making tremendous progress toward this opportunity, and that progress has accelerated over the last 6 months. In fiscal 2024, we expect to have remedied the margins on roughly 40% of our focused accounts revenue. And as we've said, most of the progress we're making comes in the form of significantly increasing our margins as part of our ongoing customer relationships, including situations where our margins were quite negative.

Only rarely are we exiting a customer relationship, although that remains something we're willing to do if necessary. When we look out over the next few years, we expect more than 80% of our focus accounts to have been addressed by March 2027 consistent with our expectation that our Accounts initiative will ultimately contribute $800 million or more to our annual pretax earnings.

In short, as I look at focused accounts, Advanced Delivery, our technology alliances and our actions to drive efficiency, I'm incredibly enthusiastic about our progress and our prospects. Martin, back to you.

[Martin Schroeter, Chairman & CEO]

Thank you, David. Let me reiterate. Annual losses are behind us. We remain committed to delivering revenue growth in calendar 2025. And as a result, we will deliver the profit goals we've previously shared on the timelines we've previously shared. As an independent company, we're solidifying our position as a cost-effective, gold standard provider of essential IT services that combine multiple technologies, and we're executing fervently on the strategies and initiatives that will drive longer-term progress, future growth and stronger earnings in our business.

With that, David and I would be pleased to take your questions.

[Operator]

[Operator Instructions]. And our first question coming from the line of Tien-Tsin Huang with JPMorgan.

[Tien-Tsin Huang, JPMorgan Chase & Co.]

Great. Obviously, great execution here on the margins. I want to ask on Kyndryl Consult, if you don't mind. It seems like it's still battling some of the macro pressure that some of your peers have seen on short-cycle work. So I'm curious what's driving differentiation in your view? And I know there's obviously a different starting point with Consult, but it does seem like it's a pretty consistent pressure point for the peer group. What are you seeing on the ground that's driving the difference?

[Martin Schroeter, Chairman & CEO]

Yes. Thanks, Tien-Tsin. Look, Kyndryl Consult, as we've always said, sits in sort of a unique position in the marketplace given our knowledge of our customers' environments, given the role we play. And quite frankly, in any macro environment things that we do, cyber security, resiliency, helping customers use AI, data architecture required, et cetera, et cetera. All of these things are not as subject, if you will, to macro because our customer base needs to continue to move forward in the macro environment.

So Kyndryl Consult, which again, in our sort of unique spot in the marketplace, we expect -- we continue to expect to have a good long run of double-digit growth, including another good quarter of -- another good year of signings growth. And as we said in the prepared remarks, when we sort of -- when we turn this into a focus for us at Kyndryl, we said it would be 15% of our business. At that time, it was only 10% of our business. And we're now saying it's going to be 20% pretty quickly here. So I think it's -- to answer your question, I think it's the role we play in our customer environments, the capabilities that we're building around where our customers are still continuing to invest and the ecosystem in which we're part of, I'll say that this will see a good long-term tailwind for revenue and for signings growth for us.

[Tien-Tsin Huang, JPMorgan Chase & Co.]

Glad to hear it. Glad to hear it. Just my follow-up question is just on margins, on signings in general. I know Dave, it sounds like the margins you're getting on newer stuff is actually quite good or better. So similar question, I know a lot of peers, including others that have reported this morning, talked about pricing pressure, bill rate pressure, clients in the procurement office are trying to be more mindful on costs. So I was curious, same kind of question, what are you observing in terms of on pricing? Are you turning away some deals? Or is the workflow you're seeing up to your standards in terms of pricing?

[David Wyshner, CFO]

Yes. Thanks, Tien-Tsin. I think we're in a similar position to what Martin was talking about with Consult, where we have opportunities that are unique to us to change the way we're pricing certain contracts, certain elements of what we do. And we really feel a need to be in a different spot with respect to margins and that informs how we approach pricing.

And as a result, I think we've been able to repair focus accounts and move the pricing that we have there, in many cases, up to a market price, and that's how we're enhancing margins and able to get significant price increases on renewals because it's a movement up to market levels. The other thing that I think is really interesting is that when you look at our signings over the last year and the margins on which we've been signing business in the mid-20s for gross margins. That actually means that our gross profit on signings has been in the range of $3 billion during a period of time when our reported gross profit was about $2.6 billion, $2.7 billion.

So what our pricing and our signings are doing for us is actually driving a gross profit book-to-bill of 1.15x. We're putting more gross profit into the hopper than we're reporting. And so I feel really good about the impact that our pricing initiatives and our pricing discipline are having on the way we're building our business.

[Operator]

And our next question coming from the line of James Friedman with Susquehanna.

[James Friedman, Susquehanna Financial Group]

Let me echo the congratulations. A lot of hard work here. I was wondering if you could double click on the Slide 19. I think, David, you commented on it in your prepared remarks, it's the one that breaks out the services and you had some comments on demand. But I was hoping you could elaborate on those. It might be a helpful perspective.

[David Wyshner, CFO]

Sure. This is -- the services that we have, the practices that we go to market with are really important access for the way we operate and look to grow the business. And I think one of the -- a few of the things that are worth mentioning, first, cloud and cloud-related activity is a very significant part of what we do, representing about 1/3 of our revenue.

And with the hyperscaler alliances we have, that's a significant growth opportunity for us. Security and resiliency is a really important area for us as well. We recently put out a release about some of the additional and new things we're doing in that space, and I see that continuing to be a growth opportunity. Applications, data and AI, particularly with everything that's going on with respect to generative AI is going to be a significant growth opportunity for us as well.

And as Martin mentioned on the call, we expect to have an announcement -- a further announcement on that topic this week as well. One of my colleagues likes to point out that, that your AI is only as good as your data. And for us, data architecture, data availability, data protection are going to be a really important part of the discussions that we have with customers as we help them facilitate the use of more AI in their own businesses. So we see that as an opportunity.

Digital workplace continues to be a hot topic in the post-pandemic environment and the hybrid work environment of today. And then as we look at our core enterprise and zCloud business, it's a -- we're in a situation where hybrid environments are going to continue to be a really important dynamic for large enterprises. And as a result, we see that portion of our business and particularly mainframe modernization, as being an important source of revenues and signings for us going forward as well.

[Martin Schroeter, Chairman & CEO]

And one thing to add, Jamie, I think David did a nice job of sort of the pieces. When you step back and think about how we created and built Kyndryl, through discussions, a lot of discussions with our customers, just prior to spin as we were setting ourselves up, the practices that we're building really reflect the Venn diagram of 3 questions that we ask them. One is, where do we provide value to you today? The second one was where are you investing and where are you going to grow?

And then third, where do you give us brand permission to play? And so from our heritage, we obviously we're adding a lot of value already in the core enterprise and zCloud, we were adding a lot of value in digital workplace, et cetera. But the other 4 that we've created and that we're building our capabilities in, we're really the -- where are you investing and where do you give us brand permission. So there is a very strong customer demand element to the way we built and are creating -- or have created our practices that is driving demand for us.

[James Friedman, Susquehanna Financial Group]

And if I could just follow up, Martin, maybe to you. How would you characterize the macro? Because I would -- I think that most companies in service, at least the ones I'm responsible for, they step back so far year-to-date. When I look at your bookings, you're actually up through July, if I'm reading this right. So how would you characterize the macro? Or is it more like Kyndryl is making its own weather and it's not that relevant.

[Martin Schroeter, Chairman & CEO]

Look, the macro -- we still operate within a macro environment is real to our customers, and therefore, it's real to us as well. However, having said that, we do sit in a rather unique position given the role we play in mission-critical. And maybe what you're seeing or I guess one of the ways I think about this is this is the difference between what Kyndryl does, which is mission-critical and what others may do, which maybe is more discretionary.

So no matter what the macro is, I would suggest there's not going to be any recession in cyber security, for instance. I would suggest that every company has figured out that resiliency is what matters in addition to cyber security as well. So every company is trying to figure out how to use AI.

And as David said, well, that for us is a tailwind in our ability to help them with data architecture, data management, et cetera, et cetera, et cetera. So I do think that the macro matters. It certainly may reprioritize what some of our customers do. But the role we play in the world and our unique perspective in mission-critical, I think, suggests that we are not only insulated from it, but we can actually help them with some of their challenges as they try to get through whatever the macro is.

[Lori Chaitman, Global Head, IR]

Jamie. Operator, do we have another question?

[Operator]

[Operator Instructions]. And our next question coming from the line of Divya Goyal with Scotiabank.

[Divya Goyal, Scotiabank]

I just wanted to get some more color on Kyndryl Consult. So Kyndryl Consult, as you mentioned, it's one of the higher-margin streams that you're seeing here. How do you expect to convert the advisory services into execution and how can we ascertain the longevity of these revenues there?

[David Wyshner, CFO]

Thanks, Divya. With respect to Consult, the normal cadence for some of this work is that it gives rise to a discussion of what an enterprise needs to do to achieve a particular business objective or to address a particular challenge that it has. And as a result, it's almost natural for this to give rise -- for Consult assignment to give rise to sort of planning and analysis around an issue to implementation of change and then often a managed services tail associated with it.

So one of the things we really like about the Consult business, well, 2 other things we like, one is that itself, it tends to be a higher margin. The second, it's a creator of the annuity-type revenue streams that are the core part of our business. So it ends up being beneficial both for near term, generating revenues, generating margin but also creating value from a longer-term perspective as well. And that's really one of the key reasons why it's such an area of focus for us.

The third element that Martin mentioned earlier. He said it also changes the position that we're in, the role that we're playing with respect to our customers. It moves us up the technology stack. It has us interacting in some different ways with customers that allows us to add more value and be involved in more strategic conversations. So for all -- these are all reasons why Kyndryl Consult sits at the heart of some of our strategic work because it has so many attributes that are so attractive.

[Martin Schroeter, Chairman & CEO]

Yes. Just one thing I'd add, Divya, I think David said it well. But remember also that with Kyndryl Bridge, what Kyndryl Bridge is providing in terms of insights to our customers, given not only our own IP machine learning AI, but also the data pool we have. Kyndryl Bridge is also acting as a bit of a demand generator for us because it's offering customers insights that they didn't have before.

And then obviously, we're helping them think through how might they address what Bridge is helping them understand, what Bridge is giving them visibility to and what Bridge is sort of helping them to optimize within their own system. So Kyndryl Bridge has proven not just to be a terrific way for us to deliver. And as we said earlier in the month, we have it in 500 accounts, already on its way to 1,000. And it's not only helping us with how we deliver and how we automate, it's giving us great insights, giving our customers great insights in how to run better as well. And that is also a good -- that's also a really strong demand pull for our Consult business.

[Divya Goyal, Scotiabank]

You took my follow-up already. Maybe I'll just add in a quick question here. David, could you help us understand a little bit on the onetime cost and what's the best way for us to sort of model it on a go-forward basis?

[David Wyshner, CFO]

Sure. The 2 most significant costs that we have, call it, below the line this year are spin-related costs related to our systems migration and workforce rebalancing costs tied to the program that we implemented beginning in March and that's been playing out over the last several months to drive efficiency in our operations.

With respect to the spin-related costs, those are going to be done this year. Our systems migrations will be done. We won't have any spin-related costs going forward. So that element disappears. And then with respect to workforce rebalancing, we're really viewing this as a onetime action that we've been implementing here. And so as I mentioned in the prepared remarks, we really see our adjusted results converging more toward our GAAP results over time since we know spin-related costs are going away. And we're not forecasting additional workforce rebalancing costs after the program we're currently executing.

[Lori Chaitman, Global Head, IR]

Operator, I believe that's our questions, correct?

[Operator]

Correct. I see no further questions in the queue at this time. I will now turn the call back over to Mr. Martin Schroeter for any closing remarks.

[Martin Schroeter, Chairman & CEO]

Thank you, operator, and thanks, everyone, for joining us today. Look, I hope you have a sense we have made significant progress in driving our earnings, which, obviously, as we talked a little bit about in our prepared remarks, those earnings will convert into free cash flow over the medium term as we come out of spin-related costs, et cetera, et cetera, et cetera.

So we feel really good about how we're positioned. Hopefully, you get a sense of the energy here at Kyndryl around turning around the business, and we're excited about the opportunity ahead. So thanks again for joining us, and we'll talk to you in 90 days.

[Operator]

Ladies and gentlemen, that does conclude our conference call for today. Thank you for your participation. You may now disconnect.