On Sarah Morgan Stanley. Very pleased to have Kyndryl. We'll be speaking with Harsh Chugh, Interim CFO of the company. Before we get started, I do have a disclosure to read. Please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representative. Maybe as a preamble, I'm sure that you're well-rehearsed in going through this, Harsh, but can you walk us quickly through the SEC matter? What was at issue? And maybe more importantly, what was not at an issue for that SEC matter? Thanks, James. Good morning to all of you. As you know, in matters like this, we are very limited in what we can talk about, but I think it's important to talk about a few things, which is it's a voluntary disclosure request. We are cooperating. Mm-hmm. That's number one. More importantly, the financials are financials for us. Like, there were no restatements. Important to also talk about that we do have material kind of weakness, as we disclosed, and those are around disclosure processes. We do have a remediation plan, and we are working expeditiously, but more importantly, for us and the management team is we are focused on our business kind of driving. Right. Interesting. That's an important point, and it seems like we're getting past that. Let's talk about the business this morning, Harsh. First, I guess probably the most common question that we get from investors and maybe is the key question on Kyndryl is, what's lending you confidence in being able to maintain fiscal year '28 targets despite fiscal year '26 coming in a little bit weaker than you had expected? In particular, what specific parts of the business do you expect to accelerate to bridge the gap? You know, I guess, how much of that, of your fiscal year '28 plan depends on some sort of recovery in the discretionary spending component of IT budgets? Yeah. I think as we talked during the third quarter earnings, and I specifically talked about it, like, while the sales cycles have extended and the complexity of decisions that our customers are making and the environment is very different with the data sovereignty and AI, while it might look like a headwind, but you have to think about the opportunity pool that it's creating for us. Like, we are not what we used to be at the time of spin. We didn't have much relationship with hyperscalers. Kinda we are, from a run rate perspective, this is kinda close to a $2 billion business that we have a relationship with Broadcom in terms of the penetration and the private cloud that we are going after. More importantly, as you look at the types of signing that we are doing. Right post spin, 2026, 2/3 of our signings are post spin. Okay. As you look at 2027, it's gonna be about 80%+, and then as you go into 2028, it's gonna be 90%+. If you go underneath the characteristic of the deals that we are signing, the characteristic is a very disciplined approach, like in the new signing we are doing. It's 25% close to that number in terms of the GP and high single digit PTM margin, kind of that we have been achieving. Right. Right. Right. That kind of creates an opportunity pool of what we have been signing, and it's kinda growing in terms of the new signing. The other market that I would talk about is the last 12 months of the gross GP dollars that we have booked versus what we have actually billed, that's kinda $4 billion that we have booked and $3.3 billion that we actually billed. kinda in terms of the ratio. We are creating the gross profit dollar kinda pool and the disciplined approach of kind of the new content as well as the signings, which is kinda post spin, gives us the confidence kinda where- Right ... we want to get. By the way, two years is a long time. Two years is a long time. Yeah. Yeah. Yeah. Things have changed in terms of a broader relationship in the ecosystem and how we are becoming more relevant across than just being, I would say at the time of spin, more IBM-centric only business. Right. Right. Right. we are now a broader business. Got it. When you think about exactly that and then that broadening, can you talk a little bit about where you expect to see broadening or where you're seeing broadening of opportunity and, you know, how you expect that evolution to continue to develop? Yeah. I think if I take a step back, the world is, and our CIOs and CTOs are going through what I call a change that they have never experienced. Right. I think I will use one simple example, and that you should try it. Ask any CIO, this question: Do you know where your data is? Right in the enterprise? That's a very hard question. On top, you put the regulatory pressure of the regulators asking kinda from a data sovereignty point of view and who owns the data, where is the data residing, what is the IP being used. And that creates what I call the complexity. With the emergence of agentic AI, it's now challenging the CIOs and CTOs to think about what the future-proof of my IT environment should look like. Right. Right. Right. Along with the cybersecurity issues that have always existed, now it kinda gives a bit more edge to the threat actors to kinda have a bit more using agentic AI. They can also use agentic AI. Yeah, for sure. Data sovereignty, agentic AI, and security are kind of changing this paradigm, all coming at a rate and pace that humankind cannot keep pace with. Like, now because many of our customers are in regulated industries, and we have been with them for decades. Right. The understanding we have with their business and we building capability across the broader ecosystem, kind of more relevant with hyperscaler, like which we were not at the time of Spin. Our broadening relationship with Broadcom that's becoming more relevant if you think about VMware from a private cloud- Mm-hmm. Which is reemerging as a new trend. Yep. Being very relevant and still very important partner of ours, which is IBM in terms of the largest estate of mainframe that we manage. Like, so think about the across footprint of ecosystem. Having this relevance in the regulated industry and relevance with the broader ecosystem, it puts us in a very unique position with many of these customers to bring our consulting capabilities. Yep. The modernization capabilities. Yep. That was not as prevalent and relevant kind of four years ago. Right. I think that kind of gives us a business context, apart from the financial context I gave in terms of the signings, which are new signings. Right. With better margins that we're signing. Let's talk about free cash flow, 'cause I wanna come back to margins and some of these other points. Speaking specifically about your fiscal year 2028 free cash flow target, does that depend more or less on working capital assumption changes? How do you think about, you know, the elements that build up to your fiscal year 2028 free cash flow targets? I'm glad you brought this topic. I think there was a conversation on this during our Q3 earnings. If you look at last two years. Mm-hmm. The biggest driver of our free cash flow was what happened to our pre-tax income and the cash taxes. Working capital is kind of not as irrelevant. Over longer term, that's what you should expect. Right. Right. That working capital is not the biggest driver, or much of the driver. Driver. What's important is, as business leaders, we still have to manage our working capital. We still have to think about the cash conversion cycle. Quarter to quarter, it is a variable that you have to manage. It's a business paradigm. You manage kinda what you're doing with your customers from receivable, what you're doing with your supplier base. I think this is kinda what I call a disciplined approach in managing your working capital because you want to manage cash conversion. From a free cash flow perspective, as we look into the future, longer term perspective is that working capital is something that's not relevant from that perspective. Right. Got it. Let's go back and once again, you touched on this just a moment ago, in a couple of times in talking about like the engagements that you're having with your customers and what that development may look like. How should we be tracking and thinking as investors and people outside of the company, how should we be thinking about and tracking forward-looking bookings trajectory and in particular, how those build up to reaching your targets? I think, it's a good question. I would kinda point you to kinda few important metrics. Okay. To think about. One of the key metric is kinda are we booking from a gross profit dollar perspective. Okay. More than what we are billing? Like that's a important key indicator. That's kinda one. From a business perspective is our relevancy in terms of what we bring to our customer. Mm. In terms of the broader ecosystem participation. Right. In the customer base that we are kind of trying to manage is this going to resonate? Like modernization as an example, private cloud is an example, like security as an example, and what agentic AI capabilities we are bringing. Like it might, I mean, might not be as apparent. Our delivery has so much of agentic AI now being built into it. Like so. Right. Right. Right. We are a big consumer. I will kind of also give you as a practitioner, in my previous role as chief operating officer, I was also doing agentic AI in a procurement process. Right. Like, I think, the business relevancy and things that we are doing, in terms of from a financial metric point of view, are we creating kind of better margin deals in our engagements? Let's parse a couple things just so we're clear. You know, when we talk about like improving gross profit bookings relative to revenue or relative to what you're recognizing, just talk a little bit about why we should be tracking gross profit versus, you know, most of the time the quick and easy would be to just track book-to-bill versus revenue. Talk a little bit about why the difference in gross profit matters for you. Yeah. I think if you think about where we were born from, many of our contracts were not profitable. Okay. Like, we had. Right. Account focus. Much of the signing were kind of what we actually inherited. Yep. It was a more disciplined approach as we were going as to what matters to Kyndryl in terms of our capabilities that we're bringing, in terms of what we are presenting to our customer and are we getting a fair share of our profit. Like, when we began, 0% of signing was from what this management delivered on. Last year or this current year, it's 2/3 of our business is coming from the new signing, and by the time we get into 2027, it's gonna be 80%. Is there a disciplined approach of we getting the right content, the right GP margin. We did talk about IBM as potential kind of where customers are making some choices, where they're going with the CapEx versus OpEx. Some of these ecosystem where we might be acting as a bit of reseller, you don't make much margin. Right. Right. Right. Right. Is it that are you earning the right margin on the broader capability you're bringing? Some of the content may be high margin and some content might be low, but on a collective basis, are you bringing the right share of profit? That's why GP dollar is important for us. Got it. Got it. I wanna also touch on something you mentioned a couple times, private cloud. Mm-hmm. Right? Like what is happening with private cloud versus public cloud? I mean, it seemed like over the last few years, I mean, even going back maybe the last decade, is that there was very much this idea that private cloud eventually would be completely subsumed by public cloud. I know in other parts of the market that we watch very closely, for example, financial services, everybody has been waiting for years to move off of private cloud to public cloud. what's happening with private cloud and is the changing technology landscape also adjusting some of the roadmaps that people had in their minds? I'm glad you asked this question. I think the reemergence of private cloud has some basic tenets that I think it's important to kinda compare and contrast. The cloud type experience, private cloud could never provide. From the DevOps perspective and development community perspective. Right ... and the native creation of application, it was a lot easier experience in hyperscaler versus private cloud. I think VMware or Broadcom and some other players are actually bringing certain new technologies, like in terms of VMware, they're going from VCF 7 to VCF 8 to VCF 9. It, it might look a bit more technical- Right They're trying to make the private cloud cloud-like experience with the full integration of virtualization all the way to the PaaS layer. Why it's important, that's kinda one. Is there a bit of less difference in the development and application communities to see there's less difference now? Right. For the developers and the people running it, you might be able to get to more parity of features between public and private cloud. There's still more work to be done. Okay ... kinda to get to that point, but then one of the other biggest driver that's driving this is data sovereignty... Right ... and AI. Let me explain why. Would you actually want to move data closer to AI, or would you wanna move AI closer to data? Let me explain. If you want to run AI- Mm-hmm ... and you have workload, and you're in hyperscaled environment, your data sits with the hyperscaler and you're using. That's right. Whereas in private cloud, You can bring AI closer to your data. Now this is kind of where the reemergence of this AI war and the data sovereignty war and this, war between hyperscaler and private cloud has actually created an impetus... Mm-hmm ...which is also industry-led, kind of, the regulation-led data and AI is creating a new debate that companies didn't worry as much, but now it's becoming real. That's why you see this reemergence. Even in our customer community, we hear that they actually are now starting to think back, kind of bringing some of the workload back into private cloud environment. Interesting. Is that... The logic is an interesting question or point. How much of that is likely to be driven entirely by regulation or legal requirement, like you said, data sovereignty? When you say that, I often think about some of the laws and regulation have been put in places, place in geographies like Europe, versus how much of that is purely strategic decision-making on the part of different parties and saying, "Hey, even if we're not subject to regulation or law, this is still something that we wanna do for our own strategic benefit. Yeah. Again, this is very interesting thesis, and I'll just put myself in the shoes of as a chief operating officer when I was the chair of our own cyber governance at T-Mobile. Okay. Right. Kinda that's kinda one side of me. The other one is kinda building agentic AI in my procurement processes. I used to have my CISO with me talking to the companies who I'm working with to kinda get the domain-specific knowledge in procurement processes. The bigger debate you have to think about is when you have AI models, and when you're taking data closer to the AI model, are you actually sharing some of the knowledge from your data and AI models? Yeah. I was reading an article yesterday in The Wall Street Journal about a guy that just was uploading all his contracts to ChatGPT. I was like, "Well, is that a great idea or not?" Right? Think about it. Now you are a European business and you are, let's say in Germany. Mm-hmm. Are you willing to send your data to a hyperscaled environment. What do they learn from it? That becomes an IP that gets used in some other places. Right. It's a debate that's gonna evolve. The whole governance around agentic AI is what I call. I would quote it as late nineties when we were talking about emergence of cloud. Mm-hmm. They were saying, "Well, is cloud actually secure?" That debate took five or 10 years. Yeah ... before that debate went away. Right. Agentic AI and data sovereignty is what I call is in that early stage of governance. Right. Think about you're gonna have agents or agentic AI coming from different environment. What is the governance principle? Who governs this? how it gets governed? What are the large language models that are embedded in these, and what data elements have been used? Right. Do you see customers proactively saying, like already making decisions on that debate saying, "Hey, you know, we're okay with it, so we'll go ahead with our private cloud migration," or do you have customers conversely already saying, "You know what? We've already decided, so we're gonna re-engage on a private cloud strategy? If I take a step back, and I would say most of the customers we deal with are gonna be in all three environments. Okay. What I mean with they're gonna be in mainframe. Mainframe offers unique platform kinda capability that none other platform offer, like from a security resiliency, and encryption point of view. Private cloud is becoming more relevant because of the regulation and AI, what gets stored where, and it's more the data in your control, more AI in your control and hyperscaler from the DevOps perspective, and they're also kinda far ahead in their own AI capability. Mm-hmm. Most of these companies have investment in all three. The question is what is the right platform choice? Right. Right ... for where you keep system of record to system of engagement, how do you bring this data sovereignty and AI and application. There is bit more governance and maturity that has to evolve from here. I want to be, as Kyndryl, relevant in all spaces. Where customer wallet goes, my wallet share follows that. Right. Interesting conversation there. Let's talk about the budgeting and sales cycle in the current environment. You recently noted some lengthening sales cycle across Kyndryl Consult and hyperscale related revenue. Help us unpack the key drivers behind this elongation, at least from where you sit, and if you've observed any changes of late? It's no different than what I was struggling with as a chief operating officer. Okay. I'm doing agentic AI implementation and procurement processes, and I don't know kinda from a governance point of view what data is being processed, where is that data, what is the implication of agentic AI, and how do I future-proof my environment? Think about most of the discussions we have with our customer, they are more long-term in nature. Right. These are not three-month engagement. They have to- They are thinking about, "How do I future-proof my IT environment? Right. IT architecture. I'm in a regulated industry working with Kyndryl as an important service provider. How should I even think about evolution of these things?" There are platform choices they have to make, hyperscaler versus private cloud versus mainframe, kind of what application goes where, agentic AI- Right ... what disruption it would create in the application environment. These discussions are more because the complexity of how do you future-proof because these are longer-term decisions. Right. Right. Right. You have to create bit of nimbleness in your IT environment so you can move. What is the level of modernization that is feasible? What is the cost model kinda go forward, and how do you keep the flexibility and keep in mind the data sovereignty? How do you meet the regulatory changes that are coming? Like every three months, there is something different. I'll actually even give you an example. We are actually in the middle of closing an acquisition Solvinity that we announced. Just a few months ago it was not a question, but now it's a debate in parliament, in Netherlands Parliament. Mm-hmm. Mm-hmm. Because it's talking about a cloud service provider in Netherlands providing support to the government e-entities. The question in parliament is a U.S. corporation going to have access to that cloud service provider or are they gonna become? Right. Right. what does it mean? Right Kinda three months ago were not as big as they have started to become. Right. Right. Most of the customers are starting to have this conversation. It's the regulatory pressure, the data sovereignty, and AI. Security was always there. Right. It's becoming even more complex for them. The reason I even call it as a tailwind for us, while it might look headwind, the tailwind is because it's bringing us into more and more complex decisions. Mm-hmm ... where I can bring more value because we are already working with these customer in regulated industries because we understand their business. I'm more interested in getting that incremental scope in the discussion rather than getting a deal signed, which may not be also worthwhile for customer because they haven't future-proofed. Right. Right, right. Right. Yeah. They still have to figure out where they're going, et cetera. That's right. Interesting. I could spend a ton of time on this topic and maybe we'll circle back to it. I wanna make sure that we hit a couple of other things. In particular, this once again was a topic that came up in the last call, was the relationship with IBM and that revenue model. You know, how is that evolving, particularly between IBM software and hardware and the services that are tied into the IBM ecosystem? How should we anticipate that changing relationship impacting the financials? I'm glad you're bringing up this question again, and it's so near and dear to me is because at the time of Spin, I was appointed as the IBM relationship exec. Right. I have lived through the evolution of our relationship, and most importantly, this is very important relationship to us. Yes. Our customers rely on an important platform, which is mainframe, and it's very core to critical systems that IBM provides in terms of their IP and capability. It's very important for customers that we provide the certainty of the uptime on those. It's very joint-collaborative engagement in many situations. I think just going back to the spend conversation that you had, like at the time of spend, we had about $4 billion of spend. Right. We also carried 40% of contracts that we had at the time of spend. We were not making those kind of no margin to low margin kind of business. We actually had an account focus initiative. Many of those engagements, we actually work with customers and IBM to make sure that we could restructure the contracts, make sure that the content, the IBM content can go direct with customers. That spend evolved over time. We thought that we were over with this. All the customers, because most of our account focus initiative was significantly done at the start of this year. Right. Right. Right. Customers are continuing to make those choices. Let me explain why they are making choices, because they have to pick what platform they're going to be on longer term. Right. As you and I talked about mainframe versus private cloud versus versus hyperscaler. IBM continues to bring their own new innovation, any acquisition they're doing. Mm-hmm. Mm-hmm. Customers will also make choices on whether they want to do a CapEx base, meaning they wanna sign a big ELA and kinda make a bigger commitment and longer term commitment with IBM, or they might want to kinda get that content through us in an operating services base. We do not see that this is a resold capability of IBM. Right. Right. ... that you can command, significant margin. Like, it's a lower margin kind of business, while it's a high value- Right business for us in terms of the services we provide, and it's high value for IBM, and it's important content. I think it's now about $2 billion of business that we have or spend with IBM. It's a customer decision. They will make those choices. What it can have is the revenue could shift because of customer choices, but it's not gonna have any material impact on our earnings because it's lower margin to begin with. Got it. It's a resold piece of business. Then speaking about IBM, I wanna circle back to a technology related question. You know, in the last week or so, IBM shares moved on concerns that newer AI tools could reduce the need to modernize legacy COBOL workloads. Given your work with IBM, can you walk us through the specific services you provide to IBM related environments today, and how do you see AI changing that demand over time? I guess, you know, we're just trying to conceptualize, like, okay, are these kinds of AI threats to, you know, a lot of this legacy and long time deployed technologies, does that adversely impact you? Does that help you? Just trying to get a better handle there. One thing I would say is, for those, there's an op-ed, Rob Thomas from IBM wrote. I think it's an interesting article, and I ascribe to that article. People should read that. Like, that's kind of one. More importantly, COBOL was kinda one of the discussions that came up in this. COBOL actually is in both distributed and mainframe environment. Yeah. Okay. It exists across multiple environment. It also came from the context of modernization. Modernization is a much bigger conversation. Right. Right. Right. Right. It's not just about reading a code which is written in COBOL. The modernization is a discussion about your data architecture, your application architecture, your process flows, your transaction element, how is it connected with your business. What this can do, some of the tools can read the language and can create documentation for what that code is doing. Right. It has what I call. It has improved the discovery element of what that code is doing. Right. That's just the initial step of a bigger modernization discussion. Yep. What do you wanna keep on mainframe versus what application you want to modernize. The silver lining in all this for us as Kyndryl is it has actually lowered the barrier of entry for Kyndryl because we were not in application space. This has lowered the entry barrier for us because now we can do certain things in understanding the application environment that would have required a lot more resources with application capability. We require a lot less capability now. Right. I think that's the silver lining. It is, it creates better relevancy for us from a modernization perspective because we can also now bring a little bit of more application skill set without the size of the application business that we had. Got it. Let's talk about in the last few minutes here, impact on financials, and kind of how to think about a couple of key things. First, margins. How should we think about the sustainability of margin improvement once the benefits from your strategic initiatives are fully realized, especially if sales cycles remain a bit elongated? Yeah. I would kind of bring back to the same conversation I was having. Think about the gross profit dollars that we are adding. Yeah. Yeah. That's kinda number one, kind of $4 billion last 12 months. What we billed was $3.3 billion. Second, the amount of signing that's post-spin this year was two-thirds, and it's increasing to 80% by next year, and the following year, 90%. Our discipline in making sure that as we are signing new deals, at what margin are we signing? Like, the disciplined approach of getting the right-Mid-20s GP and high single-digit PTI margin. Mm-hmm. Mm-hmm. Number of investments we are making, like in Consult, as they start to scale, kind of those become what I call a contribution to kind of the margin that we all should expect can move upwards. Got it. Got it. Then capital allocation. Talk and remind us about your capital allocation priorities, mainly as it relates to your existing debt profile and how we should think about Where you're targeting on that debt level and what you wanna do with the capital that you are generating. It's an interesting question and we always think about capital allocation as a holistic approach. It's a long-term holistic approach, because number one, we want to keep a strong balance sheet. Mm-hmm. That gives us the financial flexibility. That then allows us to think about are we making the right investment in our business, like Consult, like Kyndryl Bridge. Important for us to also think about tuck-in acquisitions, Solvinity that I talked about. Right. Right. Right. We continue to kind of think about acquisition that becomes an add-on in terms of shaping our business. At the end of last quarter, we had about $350 million of repurchase, buyback authorization still remaining. It'll continue to be kind of a holistic approach, and that's how we think about capital allocation. Harsh, just to wrap up here. You know, you've come from IBM into Kyndryl, managed the relationship, you know, had operational roles. Now you've stepped into the interim CFO role. What's the top one or two things that you think we as investors should be tracking in terms of your path to returning to growth and ultimate acceleration of growth? Yeah. I think it's customer relevancy. Okay. Customer relevancy. If you're relevant in the broader ecosystem, and we are solving the real customer problems, and modernization is a good example, and within modernization is kind of the broader ecosystem, like hyperscaler- Right. Right. Right. To private cloud to kinda mainframe. We have to be relevant across. Customers will make their choices. Those are gonna be driven by what is happening with the business, which market they are in, which country they are in, because regulations will define, is it heavily regulated. As long as we are deeply embedded with them, with these long-term relationship, that's gonna drive, as their wallet shifts, am I gonna shift with their wallet as long as I'm in the broader ecosystem, and I'm able to deliver? I just don't want to be one services only. It's the breadth, depth. Right. Right. Right. ... and then you follow the customer. I think wherever the customer wallet goes, we go with them. Great. We're out of time. Thank you very much, Harsh. I really appreciate you joining us here at the Morgan Stanley TMT Conference. Thank you, James. Fantastic. It was nice meeting you. Thank you. Nice seeing you.