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Good morning, and welcome to the Kyndryl Fiscal Second Quarter 2023 Earnings Conference Call. Currently, all callers have been placed in a listen only mode. And following management's prepared remarks, the call will be open for your questions. [Operator Instructions] Please be advised that today's call is being recorded. I will now turn the call over to Lori Chaitman, Global Head of Investor Relations at Kyndryl. You may begin.

Good morning, everyone, and welcome to Kyndryl's earnings call for the quarter ended September 30, 2022, the second quarter of our fiscal year. 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 some of these risks, please see the Risk Factors section of our annual report on Form 10-K for the year ended December 31, 2021. Kyndryl does not update forward-looking statements and disclaims any obligation to do so. In today's remarks, we will 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 now like to turn it over to our Chairman and CEO, Martin Schroeter. Martin?

Thank you, Lori, and thanks to each of you for joining us today. This is an exciting week for Kyndryl, it’s the one year anniversary since we separated from IBM to become the world's largest IT infrastructure services company, designing, managing and modernizing complex mission critical systems at scale for some of the world's largest organizations. Our transformation is well underway. We're executing on our strategy to drive profitable growth and I'm even more enthusiastic about the opportunity today than I was a year ago. We understand that the macro environment is top of mind for many people and we recognize the market uncertainties, currency headwinds and inflation pressure that multinational corporations including Kyndryl are facing today. For Kyndryl, the essential nondiscretionary nature of our business provides our revenue streams with some natural insulation to macro factors. Equally important, our execution on our AAA's initiatives, alliances, advanced delivery and accounts will deliver benefits we need to strengthen our overall business performance independent of the broader economy. On today's call, I'll update you on our strategy and how we're executing on our three days. Then David will share details on our quarterly results, link our recent progress to our financial goals and update our fiscal 2023 outlook to reflect currency headwinds and higher energy costs. As the world's largest IT infrastructure services company building on 30 plus years of mission critical experience, we entered our independence with expert people, long standing customer relationships and a ton of intellectual capital. We serve thousands of customers and operate in over 60 countries. Many of our customers have been working with Kyndryl for decades and we have top tier customer satisfaction scores as measured by Net Promoter Score. With our independence, we doubled the size of our addressable market, formed meaningful alliances with nearly two dozen leading technology companies and have expanded both the scale and scope of our capabilities. We have unmatched expertise in managing hybrid on and off premise complex IT environments and have strengthened our capabilities through our six global practices. The combination of our expertise and our multi-vendor strategy enables us to expand the scope of our customer relationships and accelerate their digital journeys in cloud, security, data and intelligent automation. We launched our AAAs initiatives back in February. These initiatives are critical to our future success and I'm encouraged by the significant progress we've made to date. We are tirelessly executing on our AAAs to drive the progress and earnings contributions we've targeted. As a reminder, we provided targets of $1 billion in signings tied to hyperscaler alliances this fiscal year, $200 million in annualized cost savings from advanced delivery by fiscal year end and $200 million of annualized pretax benefit from our accounts initiative. We're on track to deliver on our fiscal 2023 milestones for each of these initiatives. And keep in mind, our transformation work will not be done after this fiscal year. Over the medium term, these initiatives are expected to generate $1.6 billion in annual benefits, plus another $400 million that we're driving through growth in advisory services, our six practices and expense management. In the first six months of this fiscal year, we generated $425 million of hyperscaler signings putting us on track to achieve our $1 billion annual target for our alliances initiative with a solid pipeline heading into our fiscal year end. Since the beginning of the year, we've continued to have developed our cloud related capabilities with a 63% increase in hyperscaler certifications to now more than 26,000 on top of our existing IBM cloud certifications. Another proof point of how we're leveraging our new alliances is the growth we're experiencing in our advisory services signings, which were up 43% so far this year. We recently branded our advisory services as Kyndryl Consult to reflect the evolution of how we're delivering customer value by reducing business risk and supporting digital transformations. With our advanced delivery initiative, we're investing in intelligent automation, transforming the way we deliver services and increasing our productivity. This program is making our customers' infrastructures more secure and more resilient. To date, we freed up 3,000 delivery professionals to backfill attrition or to be upskilled and redeployed to new opportunities. At the same time, it generated annualized savings of $150 million as of quarter end, on track to achieve or perhaps exceed our $200 million fiscal 2023 year-end objective. In our accounts initiative, we're addressing elements of our business with substandard margins. Our customers have been responding positively and in many cases, we're driving margin growth by expanding the scope of work with higher value services and optimizing our cost base through automation and greater standardization. Our engagements efforts so far have resulted in a meaningful increase in the projected margins associated with these accounts. In the September quarter, we're realizing pretax benefits at a rate of roughly $80 million a year and progressing toward our $200 million year end run rate goal. To make our AAAs more tangible, I want to share a handful of customer success stories that demonstrate our team's execution. There's a theme among these and other examples. It's that the combination of our broader technology ecosystem and our expanded capabilities through our six practices is resonating with customers and providing Kyndryl with margin opportunity. Through our alliances initiative, we're winning assignments in a larger addressable market. For instance, for a long time European based telecommunications services customer we've begun a multi-year project to migrate from private cloud to a hyperscaler, ensuring a secure and resilient hybrid IT environment with a European based media company who's been a customer for more than a decade, we've expanded our scope of work to modernize this digital experience and ensure a seamless migration to Microsoft Azure and a multinational consumer goods company were implementing an automation platform with the hyperscaler. In advanced delivery through automation and standardization, we're seeing more and more opportunity to increase service levels and systems resiliency. For example, we reduced high impact incidents by 90% for a global industrial company. For a European professional services firm, we've nearly doubled the monthly automations to 700,000 that check and protect their systems. And by transforming the way we deliver our services to European manufacturer, we freed up about 16% of that delivery team to drive increased system stability, while also increasing our labor productivity. In accounts, we're expanding our profitability profile. For a European financial services firm, we leveraged our hyperscaler relationships and advanced delivery initiative to shift the scope of work toward higher value services and optimize the cost base. For another large global financial services company, we had the opportunity to expand our scope of work and further optimize our resources to increase productivity. In both cases, these changes are delivering roughly 10 point increases in gross margin. And for a banking software provider, we've been able to renegotiate the terms of our existing contract by leveraging our expanded capabilities, enhance our delivery and cost structure through automation and grow the scope to include data application and AI work. In the process, we're realizing a $3 million annual increase in gross profit with that account. In a nutshell, our AAA's initiatives are favorably impacting how we go to market and the economics associated with our business. As I mentioned, our alliances are an important element of our transformation and execution of our AAA's initiatives. We focused on building relationships that really matter to our customers and have a sizable impact on their business. Together through our practices, we are co-creating, co-investing and co-selling new and enhanced services. It's a win for our alliance partners; it's a win for our customers and obviously, a win for Kyndryl. With Microsoft Azure, we recently announced an exciting new joint mainframe modernization offering that will allow our customers to better access and use data across a hybrid environment. Our financial services and other mainframe reliant customers will be able to capitalize on the AI innovations and scalability of Microsoft Azure, while still counting on the reliability and security of the mainframe platform. We also introduced an integrated hybrid cloud solution with Microsoft and Dell Technologies to help customers accelerate cloud transformation projects. And with Google Cloud, we're delivering managed services for their new dual run offering that provides customers a safer approach to moving legacy mainframe workloads to the cloud. This past quarter, we also added Citrix, Elastic, EY-59 and Teradata to our list of alliance partners. We see Kyndryl operating at the heart of progress, our alliances and our unparalleled ability to integrate great technologies from multiple sources into complex IT stacks are going to allow us to play this role for our customers in today's digital economy. To fully leverage these partnerships, in September we launched Kyndryl Bridge, a new open integration platform that reflects our commitment to transforming how we deliver sophisticated services. Kyndryl Bridge gives our delivery teams more automation and gives our customers more visibility and control into their complex IT estate. Our digital platform integrates existing tools, intellectual property, processes and partnerships into a single operating environment. Over time, Kyndryl Bridge will expand and grow and will move from observability going from how to navigate our services and enhance IT operations to self-service capabilities and even the ability to digitally subscribe to provision and manage services, including services based on partner's technologies. Fundamentally, Kyndryl Bridge offers our customers access to a 24/7 digital Kyndryl that provides greater systems resiliency. And to align with our AAA, it strengthens our advanced delivery efforts and opens the door for us to capture new higher value revenue opportunities that will expand our margins over time. A year into our independence, we're operating and going to market differently with the new mission and value proposition. We've entered a broader technology ecosystem, our business transformation has gained momentum and we're executing on a clearly fine set of key initiatives, our AAAs. We continue to focus on driving our business toward a return to revenue growth in calendar 2025 and significant margin expansion. There is significant value to be created at Kyndryl. Based on what we have seen internally and heard from our customers so far, we have the right strategy in place and are confident in our ability to execute and transform our business. Now with that, I'll hand over to David to take you through our results and our outlook.

Thanks, Martin, and hello, everyone. Today I'd like to discuss our quarterly results, our balance sheet and liquidity, why our AAA's initiatives are so important to us and our outlook. Our financial results for the quarter ended September 30, our fiscal second quarter reflect progress on our top line growth efforts as well as external factors such as currency movements and higher energy costs. In the quarter, we generated revenue of $4.2 billion, which represents a 2% increase in constant currency from our pro forma results a year ago. If you exclude two points of pass through revenue from our former parent, our Q2 revenues were consistent with the prior year quarters, demonstrating the progress we're making to strengthen our revenue trajectory. An important component of this progress is the sequential revenue growth we've been driving in our advisory services, which today are approximately 11% of our revenue and 19% of our total signings. These signings translate into revenue at a faster pace given that there are more in year project based work compared to our long term managed services activities. Adjusted EBITDA in the quarter was $428 million, this represents an adjusted EBITDA margin of 10.2%. The year over year decline in our adjusted EBITDA margin compared to pro forma 2021 results was primarily due to a number of exogenous and spin related items. Exogenous factors impacted margins by more than 4 points year over year, and includes some software licenses being treated as a subscription rather than an amortized expense and asset sale gain and accrual reversal in last year's September quarter, a dilutive impact from IBM related pass throughs and revenue timing, higher energy costs and currency. Adjusted pretax loss was $102 million, which is roughly one margin point softer than our March quarter and June quarter results and down year over year primarily due to $69 million in currency headwinds. Here's why. We have dollar denominated costs throughout our global operations as well as international earnings. And our earnings hedges and various contractual protections have not fully offset the effects of this year's unprecedented dollar strengthening. Energy cost moves, which in Europe are being measured in multiples of last year rather than percentage increases aren't helping either. As a result, our constant currency revenue growth, cost reduction efforts and AAA's progress are being overshadowed by external factors. This is occurring even though demand for our structure services has remained resilient amid increased global macro uncertainty. Among our geographic segments, we delivered year over year constant currency pro forma revenue growth in three out of four segments. And our strongest margins were again in Japan and the United States. Changes in how various IBM related costs are hitting each of our segments under our new commercial agreement with IBM, complicate year over year margin comparisons by segment. We address our customers' needs not only through our geographic operating segments, but also through our six global practices, cloud, applications data and AI, security and resiliency, network and edge, digital workplace and core enterprise. Our business mix is evolving to reflect demand with most of our signings again coming from cloud, apps data and AI, security and other growth areas. The Kyndryl Consult, our advisory services revenue growth I mentioned has been particularly strong in our cloud apps data and AI and security practices. In short, if it weren't for currency movements and higher energy costs this quarter, we'd be reporting year over year revenue growth and pretax margins within a point of breakeven. On a reported basis, however, currency and energy cost impacts are superseding the operational progress we're making. And while the risk of a global recession has clearly increased, we continue to see broad based demand for digital transformation and infrastructure services. Turning to our cash flow and balance sheet. We generated adjusted free cash flow of $216 million in the quarter. We provided a bridge from our adjusted pretax loss to our free cash flow so far this year. Our gross capital expenditures in the quarter were $253 million and we received $3 million of proceeds from asset dispositions. Our CapEx has been somewhat frontloaded this fiscal year. Working capital and other contributed to cash flow in the quarter as we begin to step up our management of both receivables and payables globally. Our financial position remains strong. Our cash balance at September 30 was $1.9 billion, this is above the June 30 level despite of $49 million decline in the dollar value of our international cash and our use of cash for transaction related payments. Our cash balance combined with available debt capacity under committed borrowing facilities gave us $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 $1.3 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, two of whom recently reiterated our ratings. On the topic of capital allocation, our top priorities are to maintain strong liquidity, remain investment grade and reinvest in our business. As we've said before, we view being investment grade as a commercial imperative given the importance of this to our customers, many of whom operate in regulated industries. We expect to use most of the free cash flow we will generate this year to fund spin related cash outlays, including required systems migrations. As Martin mentioned, we continue to progress on our AAA’s initiatives. Our momentum supports our 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. We're also driving growth in Kyndryl Consult and among our global practices, which is incremental to the benefits coming from our AAA initiatives. And we see opportunities to control expenses throughout our business. We expect that these efforts over time will contribute roughly $400 million in annual pretax income. As a result, the magnitude of the earnings growth opportunity we're tackling is tremendous relative to our current margins. Progress on our AAAs will therefore be a central source of value creation for Kyndryl. Our game plan is to continue to serve our customers seamlessly and to deliver solid results even as we go through the three year process of transforming our business, preparing to return to sustained top line growth and positioning Kyndryl for stronger margins and higher returns on invested capital. As you could see in our second quarter results, currency movements and energy costs are impacting not only our reported revenues, but also our margins. We've expanded and updated our outlook to reflect these trends. Because of the size of the currency effects we've seen this year, we provided our revenue growth, adjusted EBITDA and adjusted pretax income outlook on a constant currency basis. In constant currency, we've increased our revenue growth projection by three points compared to when we started the year and our outlook for adjusted pretax margin is down a half point from the start of the year, solely due to higher energy costs. On a reported basis, currency is impacting our top line by more than nine points year over year and we're now projecting revenue of $16.3 billion to $16.5 billion this fiscal year. Currency movements have impacted our projected adjusted pretax margin by nearly 140 basis points since our initial guidance and nearly 200 basis points year over year. Higher energy costs are having a further 40 basis point impact. As a result, we've reduced our outlook for actual currency adjusted pretax margin by two points to minus 2% to minus 1%. I want to emphasize that the changes in our updated actual currency outlook are entirely due to currency movements and higher energy costs. The dramatic strengthening of the US dollar has been a significant challenge since we not only have foreign earnings, but also have dollar based costs throughout our operations. What may get somewhat lost in all of that is excluding currency impacts and higher energy costs we'd be on track to achieve our initial guidance. In addition, we continue to believe that demand for IT infrastructure services is largely insulated from broader economic trends. Our initiatives are delivering the benefits we anticipated and we're investing in our business to drive innovation and future growth. One comment on signings. As our business mix is shifting toward advisory services and as we increasingly focus on annual gross margins, signings aren't operating as a particularly good proxy for our progress. As a result, we've decided not to provide signings guidance going forward. Nevertheless, I want you to know that we're enthusiastic about our pipeline and that our internal forecast for revenue signings this fiscal year calls for growth versus calendar 2021. And more importantly, because of the margins at which we're signing business, our signings so far this year are delivering meaningful growth in expected gross margin and annual gross profit. From a cash flow perspective, we continue to target about $750 million of gross capital expenditures and $700 million of net capital expenditures compared to about $900 million of depreciation expense. Over the medium term, we remain committed to returning to revenue growth by calendar 2025, delivering significant margin expansion and driving free cash flow growth. We also expect to mitigate the effects of recent currency movements over time even if exchange rates don't revert back toward historical norms. 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 partnerships and with the meaningful initiatives we're implementing this year. And for any investors who are new to the Kyndryl story, I want to again highlight a slide we first published in May. It's the slide that provides a breakdown between our margin challenged focus accounts and the rest of our business. In particular, our aggregate results mask the fact that within Kyndryl we started with a strong $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. This source of value is underappreciated because our other roughly $8 billion of focused accounts revenue generates virtually no gross margin and after SG&A expenses is losing money. Our accounts initiative is all about the opportunity to make our focus accounts look more like the majority blueprint of our business over time by addressing elements of our customer relationships that generate substandard margins. Over time, if we close even half of the gross margin gap between our focus accounts and our blueprint accounts we will generate the $800 million in incremental earnings that we've targeted from these accounts. That's why our accounts initiative is a major priority and a major opportunity for us. We're paying close attention to the margins on signings for both our focus accounts and our blueprint accounts. Since the beginning of the year, the overall expected gross margin on our signings has been in the low to mid-20s and the pretax margin has been in the mid to high single digits. The September quarter was a continuation of that trend. What that means is that, if our P&L for the next few quarters reflected only our recently signed deals, we'd be operating at mid to high single digit adjusted pretax margins, not the now slightly negative margin generated largely by our pre-spin legacy signings. Because of the prevalence of multi-year contracts in our business, most of our revenue is still coming from pre-spin signings. As a result, you can't immediately see the benefits of the higher margins at which we're now pricing contracts, but that will change with time. I'm optimistic about our prospects, especially in light of the broad technological expertise we can bring to bear on behalf of our customers and especially as our business mix increasingly tilts toward more post spin contracts. In closing, as an independent company we're solidifying our position as a cost effective gold standard provider of essential IT services. Other than the impacts of currency movements and higher energy costs, we're delivering on the fiscal 2023 earnings targets we laid out in May and we're executing on the strategies and initiatives that will drive longer term progress, future growth and stronger earnings in our business. With that, Martin and I would be pleased to take your questions.

Thank you. [Operator Instructions] We'll take our first question from Tien-Tsin Huang with JP Morgan. Your line is open. Please go ahead.

Hi, good morning. Thanks for taking my question. Just wanted to -- maybe if you wouldn't mind rehash or break down the three point increase in the constant currency revenue outlook that'd be great. Thanks.

Sure. Good morning, Tien-Tsin, and thanks for the question. What we're seeing is a number of things positively impacting our revenue. First and foremost is Kyndryl Consult revenues being higher than we expected. And as we mentioned, those are growing at double digits in revenues and the signings have been well north of that. So that's been a positive for us. Another positive is actually coming from our focus account initiative. We had assumed in our initial projections that we would have some revenue loss associated with revising the relationships and working with -- and working on the focus accounts. And so far that hasn't really materialized. It's been less common play for us to run with the focus accounts rather than expanding scope and improving margins that way. We've also picked up a little bit of incremental pass through and OEM resale revenue compared to our projections. And so that's probably about a quarter of the pickup that we had. And then the last piece that's impacting us is that, we are getting some inflation adjustment revenues. So as you know, we've got provisions in various contracts that adjust based on wage inflation or other factors and that's created some additional revenue for us as well. But in the scheme of things, that probably works against us, because we don't fully -- we don't have full offsets for inflation as we look across our entire contract base, but we are seeing a partial offset, some mitigation through those provisions in our contracts. That's really what's driving it. And I would say we're particularly excited about the Kyndryl Consult growth that we're seeing across our geographies.

Yes. Perfect. That's great to hear. So maybe as my follow-up I'll ask on Kyndryl Consult. It's -- as you called out strong bookings there as well, performing a little bit better double digit growth, et cetera, how would you characterize your investments to want to grow that? I mean, should we think about that as tip of the spear type of work that can drive more follow on business for broader Kyndryl? Is there more expansion potentially in other geographies, for example? Just trying to better understand where the strategic fit is and one growing that business?

Yes, sure. Thanks, Tien-Tsin. It's Martin. Thanks for -- like David said, thanks for joining and these are great questions. So look, we do think of Kyndryl Consult as a lead into fueling our managed services businesses as we've -- as you know and we've spent time on this. We are underweight in the advisory portion of our business at only about 10% relative to the opportunity we see in the marketplace. And then opportunity is very much global. It's one that we think will play quite well everywhere. So our focus here and we've been clear we think we can grow this advisory business Kyndryl Consult to be probably half as big again within our own revenue stream in the medium term. And it is a terrific pathway for us to also to supporting that managed business. So it's gone very well. We have been able to expand the relationships we have with our customers. They do trust us to run their most important systems. And so therefore, the obvious opportunity for us is to help them more broadly as we build out our practices. And this is one -- I would also say it's one where -- this was an under -- sort of an under tapped, under leveraged opportunity pre spin, because the business was very focused on building the managed side as opposed to the advisory side. So this is a very natural fit for us. It's global to answer your where and it has -- so it's part of our return to growth, but also has very appealing margin characteristics. So it's a very logical play for us.

That's great. Thanks and good results in there for sure in the areas you can control. Thanks.

Thanks, Tien-Tsin. Operator, next question please.

We'll go next to Millie Wu with Evercore ISI. Your line is open. Please go ahead.

Hi. Thanks for taking the question. This is Millie Wu on for David Togut from Evercore. So first question about the management, given the change in macroeconomic environment, what are you seeing in terms of changes in demand for KDs service lines? And in particular, which segments do you expect to be more resilient than others?

Yes, good. Millie, thank you for the question. Thanks for joining. Look, for us a couple of things to keep in mind. As we noted in our prepared remarks, the essential sort of non-discretionary nature of what we do insulates our revenue streams from big swings in demand. And then -- and I think it’s important then also to add to that the position we're in creates I think a set of idiosyncratic, both opportunities and -- I’ll call it idiosyncratic tailwinds and idiosyncratic headwinds for us. On the tailwind side, look, as I just mentioned Tien-Tsin and David talked about as well, demand for our Kyndryl Consult, our advisory business is very strong, very solid revenue opportunities. And that converts much more rapidly into revenue than a typical longer term managed deal. So demand is strong for our advisory business. And as we move in and really build out these relationships with our new alliance partners, you can see, we're well positioned to sign $1 billion this year against those hyperscalers alone. So really -- but I think both of those, our position in the marketplace plus our relatively new alliance partner says that the opportunity that we have and the demand we see on the tailwind side is probably idiosyncratic to us. On the headwind side and you can see it in a number places. On the headwind side, advisory constructs tend to be shorter tenure than managed services constructs. So while we see what David noted in his prepared remarks, we see good annual contract value growth in revenue and gross profits for our advisory business. We also know that they're shorter tenors, so they don't produce the same kind of a signings number that a managed services would. But we're focused on that ACV. We're focused on making sure we're going to -- we can maintain gross profit dollar growth here. And then -- and I think by the way that's also idiosyncratic to us given where we are. And then finally another headwind is, as we focus on our focus accounts we are very focused on the GP dollar opportunity we see and many of these focus accounts have a kind of a common feature and that's the amount of hardware and software that is being delivered through us. And so we're seeing a number of opportunities where we get an opportunity to improve our margins, actually improve our gross profit by allowing the owner of that hardware and software, mostly IBM obviously, but we have a few others as well. Allowing the owner of that hardware and software to go direct to the customer so it comes out of our contract, we don't have the commercials of the pass through. Some of those are negative for us, so we improve margins in a really straightforward way. So on the headwind side, the way we're focused on gross profit, which is good for us, it's good for the hardware and software provider as well, allows us to really drive gross profit dollar growth, but it is -- it could be a headwind to revenue, it could be a headwind to the signings number. So from my perspective, the demand profile we see has been very consistent with what we've experienced the whole first year. Some of that is, I think, is because of what we do, but then we have these idiosyncratic opportunities to not only improve our revenue position in the future, but also to really make strides in gross profit as well.

Thank you so much.

[indiscernible] Do you have another question or operator we can move to the next question. Thank you. Operator?

We'll take our next question from Jamie Friedman with Susquehanna. Your line is open. Please go ahead.

Hi. Good results here, guys. Just wanted to ask, first of all, Martin, it's roughly one year anniversary of the company as a separate public entity. So if you could share with us what's surprised you over the last year? What has delighted you? What's frustrated you? Any perspective on the one year journey would be great.

Yes. Well, thank you and thank you for your comment about the results we feel as well. We feel like we're making great progress here and we've got a very clear I think strategy on how we get revenue back to growth, how we improve gross profit. So we feel good about the progress. Look, this has been -- this has been a wonderful journey of a very important business to how the world works. The Kyndryl’s around the world have remained energized about where we're going and have been completely focused on continuing to deliver every day to customers, because we know that this journey and all the things that we will execute in the future rely on us continuing to deliver every day for the customers. So I've been amazed by the depth of our technical talent. I've been amazed at how quickly our teams are reskilling and how they want to move into the future technologies with our customer. We've all been, I think, been -- I wouldn't say pleasantly surprised, we've all been encouraged by all the customers on the journey with us. It's been a terrific year of progress in keeping the customers -- keeping our customer base with us. And at the end of the day, I guess my one reflection, my one comment I'd add on my observations. This is as much a culture journey for this company as anything else. And yes, the alliances that we've built are really important and the new announcements we've made around bringing innovation to the market like Kyndryl Bridge and new design capabilities like Kyndryl Vital and obviously creating additional value with Kyndryl Consult. Those are all really important, but we are also in the midst of a very important culture journey and we're also in the midst of a very important transformation for how we run our business. So while, as you know, tomorrow is the one year anniversary, so we are not only one year old, but we're also halfway through our transition to service agreement period with IBM. We have two years to get off those TSA. So there is a ton going on on how we bring innovation to customers. There's a ton going on on how we built skills to help integrate other technologies with our customers. All that's quite exciting, but we're also going through here a substantial cultural transformation and a substantial transformation on how we work. And that is -- that's a heavy lift. That's a lot to get done. And the teams are doing a wonderful job as we reshape almost not everything, but almost everything about how we operate. So this has been a wonderful journey. Hopefully that gives you a sense of how excited we are. Hopefully that gives you a sense of how much progress we feel like we're making and then we've got a very clear path to turning around this business.

Yes. That’s encouraging. And if I could just follow-up about the Japan market. I know you could probably spend a whole session on it, but it's one that I'm less familiar with, although Accenture talked about it a lot. So, I think your growth there was really exceptional. It's a big market for you. What at a high level is different there than, say, elsewhere? Any context on Japan would be helpful, because I'm not sure most of us on this call are that familiar with that end market.

Yes. Look, I mean, I'll ask David if he has anything to add to my answer, but I guess the thing to note about the Japanese market is, it is a market that has evolved more rapidly than others into a services led kind of a market. And one of the reasons we are -- one of the reasons it's our second biggest country and one of the reasons that we do so well there is because we built terrific services capabilities for the biggest companies, the banking systems, the manufacturers, et cetera, et cetera. So for us, given the nature of the work we do, for us it's a business that where we have a wonderful reputation of being able to do mission critical with the companies that really matter and that drive their economy and it's an economy that is very services oriented and likes to consume things on a services basis. So this is a good long term opportunity for us because I think that services orientation that we see in Japan continues to evolve and continues to get stronger. So it gives us an opportunity to really do what we do well, which is both integrate others technologies where -- in a place where they don't want to consume it as a product, they really do want to consume it as a service, it gives us a chance to integrate and it gives us a chance to bring them some innovation as they evolve, as they rethink their business model. So it's big because of the nature of the work we do, it's big because of the role we play and it's big because it's evolved more rapidly as the services led consumption model.

Thank you.

Thanks Jamie for your question. Operator, can we take the next question please?

We'll go next to Divya Goyal with Scotiabank. Your line is open. Please go ahead.

Good morning, guys. Nice quarter there. I just wanted to get some color -- sorry about my sore throat there, but I just wanted to get some color on, say, the macroeconomic headwinds overall. From a debt standpoint, I know David mentioned that the maturities are out there, long out there, but from an interest standpoint how does that affect your EBITDA margin -- sorry, EPS -- your net margins basically is what I want to understand.

Sure. I would say our interest costs are essentially fixed and we're not seeing impacts from higher interest rates in our numbers. And I think it would be a -- it will still be a couple of years before we need to refinance any of the debt that we have outstanding. So macro in terms of interest rates really isn't having an impact on us. Where we are seeing macro impacts is, as we mentioned, will be in the area of currency, particularly because we have both earnings translation as well as dollar denominated costs in various parts of our business. We're seeing macro or exogenous impacts from higher energy costs. And that's primarily true in the US and in Europe and in certain parts of Europe, in particular, where electricity costs for data centers are up very significantly. And then third is, as Martin mentioned, the macro effects in terms of demand for our services, we're really not seeing significant impacts there. There continues to be good demand for services, we think our business is resilient and fairly insulated. And we feel the general customer demand remains strong and we can benefit from the idiosyncratic opportunities that are available to us as an independent company to be able to grow even in an environment that -- where there's a lot going on from a macro standpoint.

Thank you, Divya.

That's helpful color. If I can add one more question there. I just wanted to understand from a growth standpoint with your hyperscalers and, like, the other relationships broadly beyond IBM. Are you focused mostly on internal sales growth initiatives? Or would you consider M&A at all in, say, the future years as your avenues for growth?

Yes, it's a good question. It's Martin. And look, at this point we have a real focus on getting our teams reskilled, that's working really, really well. We also have, obviously, as we make this place -- as we get this place humming, of course, we'd have an opportunity we think to add to that. But at this point, we stay focused on executing the place we've called. And keep in mind that among the big bets we're making is a bet on our existing customer base and really staying focused on those relationships. And so, we have the skills we need that allows us to grow pretty fast in this area. You can see that from the signings growth and you can see that from the stronger revenue performance here. And so we're still focused on executing what we have in front of us. But of course, over time there may be something that can help us accelerate that. But for now, we're focused on executing the play we've got.

Excellent, Martin. Thanks, guys.

Thanks, Divya. Operator, I think we have one last question.

We do. We will go to Bill Cunningham with Deutsche Bank. Your line is open. Please go ahead.

Hi, good morning. Can we talk about employee retention. If you could remind me just quickly how you guys measure employee retention and how you're doing on that?

Sure. So, our employee retention has been what I'd say at a global level slightly under -- slightly under what we see in the industry, right? But now the retention and -- well, I should say the other way. Our retention is slightly above industry. The losses are slightly below industry, sorry about that. So it's a very local – it tends to be a very local discussion. There is no one global labor market. So when we look at, for instance, our labor pool in India, our retention rate is above -- slightly above market there. But then you get into discussion very quickly of what's happening in Bangalore and Hyderabad and Delhi and Mumbai. And again, in each of those places we're doing well in terms of retaining talent and we're doing well in terms of attracting talent. So when we look at the selectivity that we can have, I give tremendous credit to not only the marketing team for creating a brand that has really gotten people excited. But I give a lot of credit to our alliances team who has moved us into this much broader ecosystem. I give a lot of credit to our local leadership that's created a lot of energy and obviously the nature of the work we do is a big appeal. So, while our retention rates are slightly above -- slightly better than what we see in the industry even as you start to deconstruct it into what's happening locally. We're also able to attract and be very selective on our hiring. And then finally, I mean, I used India as an example, but similarly what we see where we have big delivery centers in Eastern Europe and in other parts of the world. Similarly, our retention rates are quite good. And again, slightly better than market and our ability to attract talent is very high and we can be very selective. In fact, now that we've built the brand I'd say that our independence is a massive tailwind for us to attract talent. For a number of reasons, one, the ability to play in a broader ecosystem is really -- it's meaningful to people, it's meaningful to how they think about building their careers and their skills. So that's a huge tailwind. The nature of the work, as I said, we do is always been very important. So that continues, but our conversion, our shift toward focusing on investing and focusing on being not just integrators, but innovators is also a pretty substantial talent pool. So we built the brand to a spot where we are now well known, people know what Kyndryl is. They know what Kyndryl does and so we've overcome that sort of those early challenges of coming away from the IBM brand. And now everything we're doing is a tailwind to attracting talent and we've had very good success in bringing people on.

Okay. That's helpful. And just a real quick follow-up, if I may. I appreciate -- certainly appreciate the very consistent message that you guys have had in terms of credit ratings, liquidity, making that a priority. But I guess I'd ask the question, open market debt purchases, is that something that you guys have done the work on? And possibly talk to the board about? Thank you.

This is David. We have done the work on that and looked at that. And as we look at the things we do feel the debts certainly attractively priced. But our focus right now is on maintaining liquidity in this environment and making sure we're well positioned from that perspective going forward. So it's not something that at this point we're planning to pursue, but it's a sort of thing we definitely look at.

Okay, terrific. Appreciate the time guys. Thanks.

Thank you, Bill. Let me turn the call back to Martin.

Thank you, Laurie. Thanks everyone for joining us today. Look, since the last time we had a call plus or minus 90 days ago. I'd say really good progress that we see on the AAAs and positions us well for what we said we get done this year. You saw us in the last 90 days announce really three exciting announcements that are going to be a big part of our future around Kyndryl Bridge, Kyndryl Vital and Kyndryl Consult, all three exciting. And then we also know that now IBM has gotten its shares back into the market, so that overhang is gone. And we're looking forward to a big second half of our fiscal year as we continue to execute and stay focused on our customer base, stay focused on building the skills that our customers are asking us to have for them and delivering every day, so we maintain their trust. So it's been an exciting 90 days and we look forward to talking to you in another 90. Thanks everyone.

Great. Thanks Martin. Operator, I'll pass the call back to you.