And even though it’s in an experimental phase, the work we do tends to precede the science experiments that have to happen. So we’re at the front end of what customers are thinking about as they start to explore either for their systems, mostly for systems of engagement as they start to explore how to use their data to reach new customers to reach their customers — to reach our customers better. But this has a long, long tail to it, even though we’re at the front end as AI becomes more used in systems of engagement and systems of record which is where our mission-critical work sits. I think we’ve got a very long tail to how our consultants and Kyndryl Consult help customers. So this is a long secular trend that I think is going to drive growth for quite a while for us.
Divya Goyal: That’s very helpful. And just to understand and a quick one here. Kyndryl is a very mission-critical infrastructure services company. Do the global macro — and we’ve talked about this in the past, but how exactly does the global macro conditions impact you? And to what extent could they negatively impact you, given the nature of work you do versus the application services companies that have been indicating slowdown in growth and a weak outlook for fiscal 2024 broadly speaking?
Martin Schroeter: Yes. Look, we are — what I would say is insulated to the macro, but we are — the macro is the world we live in, it’s the world our customers live in as well. So as their world changes, it will put different new pressures on how they run their infrastructure, what they might experience or with the direction they may want to go. So in the short term, we don’t see much of an impact, as we’ve said in the past, we’re fairly well insulated. But over the long term, as customers rethink the world, which leads maybe to industry consolidation, other things, we will experience that. So — but that’s over the long term. And again, you — in any macro environment, our customer bases and all customers are going to always be thinking about how do I take advantage of the innovation I see, how do I move into the world in order to serve my customers.
And we just have to be able to keep up with them with the capabilities that they’re looking for at any given time. But that’s — again, that’s what we’ve been doing is moving — helping them move to the future in whatever macro environment we happen to be in.
Divya Goyal: That’s great, Martin. Thanks a lot for all the info.
Martin Schroeter: Thanks, Divya.
Lori Chaitman: Operator, do we have one more question in the queue.
Operator: Our last question comes from the line of Jamie Friedman with Susquehanna. Your lines now open.
Jamie Friedman: Hi. Good morning. Let me echo the complements good results here. I was wondering, David, if you could help us bridge between Slides 12 and Slide 7. In other words, how to think about the timing related to the gross profit book-to-bill as it waterfalls over to the pretax margin? Any comment on that would be helpful.
David Wyshner: Absolutely. Thanks. And I think Slide 7, the one that shows how our business mix is evolving really does operate as the bridge here. And as a reminder, that’s the slide that shows that this year, only about one-third of our revenue and therefore, one-third of our P&L is really being driven by post-spin signings that have these attractive high single-digit margins associated with them. And we’re still in a situation where two-thirds of our revenue is coming from older pre-spin signings, they really aren’t generating significant profit for us. And in the inflection point that’s really important for us is next year moving to that — the mix of revenues being kind of 50-50 between post-spin and pre-spin in the fiscal year after that, our revenues and our P&L for the first time really sort of being dominated by the post-spin signings and what we expect that to translate into — and I feel we have a good visibility around is the bars that you see on the right side of Page 7 that has the more profitable signings, a more profitable book of business becomes a predominant part of our revenue, that really creates the opportunity for the margin improvement that we’re looking for.
And then by the time we get to fiscal ’27, we’re 85% or so of our revenues are coming from the business that we’ve signed post spin rather than what we inherited. That’s how we deliver high single-digit margins. So this really — the margins at which we’re signing business just become a larger and larger part of our overall business mix. And by the time we get to fiscal ’27 where it’s 85% post spin, that’s how we see ourselves at high single-digit pretax margins in aggregate.
Martin Schroeter: Yes. I think that’s well said. I guess when I think about it as we get into next year, I think we’ve got still the headwind that we had this year, which we obviously have been able to overcome, and that’s the software cost increase that IBM created in the spin. So that’s the headwind. But the tailwinds we see — David said it well, we get more of our post-spin backlog that comes through. We obviously get the full year benefit of everything we were able to execute this year, and we’ll continue to execute next year. So we’ll get the in-period execution benefits from that. And then we also get a tailwind, I think, from lower appreciation as we get into next year. So yes, we have headwinds as we go into it. David described that chart well, I think, but we’ve also got some tailwinds as we get into the year.
Jamie Friedman: And then for my follow-up, maybe for Martin. In terms of the projected revenue growth beginning in calendar 2025, how do you think about the factors that will help you stick that ever-important landing of actually growing at that, in other words, how much of that is impacted — how much of that is under your own control? Is any of that at risk to discretionary or macro? How do you think about that?
Martin Schroeter: Yes. Look, we have, as we’ve said a number of times, we have engineered a decline in our business. And I would say on the other side, where we focused on getting to growth like Kyndryl Consult and their Alliances activity, we’re growing quite well. And as I sit here today, while we have many, many more quarters of signings to get under our belt, as I sit here today, I feel as good as ever that those two growth drivers, along with all the other things we’re building our capabilities around that they get us back to growth in the time frames that we’ve said previously, with, as David said, well, the margin profile as more of that comes through our P&L. So as I sit here today, I still believe that our Alliance activity and our Kyndryl Consult, we’ve proven that we can grow where we want to grow.
And we’ve proven that the customers are willing to and want to expand their work with us and their relationship with us even as we engineer this decline. Now the biggest chunk of that engineered decline is this fiscal year. As we move into next fiscal year, the engineer decline reduces. The OEM content becomes sort of what I’ll call it neutral, right? We’ve taken a ton of it out, it becomes a neutral going forward. We still have more — some more work to do to — on focused accounts, which will have an impact. But the bulk of it is in this fiscal year. And as we move into next year, then will have a reduced impact from that engineer decline and more impact from — more benefit Kyndryl Consult and the Alliances activity as it keeps going. So I feel really good about where we are and what we’ve described now for a bit over two years about getting back to growth in calendar year ’25 and driving the profitability that we’ve been talking about and converting that in a very high rate to cash.
Jamie Friedman: Got it. Thank you.
Martin Schroeter: Thank you. So thanks, also thank everybody, for joining again today. We certainly appreciate the interest in Kyndryl. Look, I got to tell you, I’m very proud of the progress this team has delivered and continues to execute on the strategy that we laid out three As plus, plus. We’re building this business the right way. We have the right strategy that is and can be and is being executed, and we have the right culture. So we, as a business, Kyndryl continues to solidify its leadership position, we continue to strengthen the relationships we have with our customers and our partners. You’d see that spread throughout the financials. And now as we — in our third year, third calendar year as a firm, I remain as excited as ever about the opportunity as we keep serving our customers’ mission-critical needs and keep developing new capabilities to bring them into the future. So thanks, everybody, for joining.
Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect.
