Kyndryl Holdings, Inc. — Form 10-Q Summary
Period clarification: The filing covers the three months ended June 30, 2022, Kyndryl’s first quarter of fiscal 2023—not 2021 Q1 as indicated in the request. Amounts are in U.S. dollars; financial statement amounts are generally in millions.
Business context and reporting period
Kyndryl is a global technology infrastructure services provider. IBM spun off Kyndryl on November 3, 2021; accordingly, the June 2021 comparative period reflects pre-separation, carve-out results, while the current period reflects a standalone public company. IBM reduced its ownership from 19.9% to 9.9% in May 2022.
Financial performance
- Revenue: $4.288 billion, down 10% reported year over year and down 3% in constant currency. Management attributed approximately 7 percentage points of the reported decline to foreign exchange.
- Profit and margins: Net loss was $250 million, or $1.11 per diluted share, versus a $389 million loss, or $1.74 per share. Pretax loss improved to $205 million from $313 million. Cost of services was 85.8% of revenue versus 87.6%; selling, general and administrative expense was 16.2% versus 15.0%.
- Adjusted EBITDA: The MD&A reports $491 million, down 14% from $571 million; the corresponding margin was approximately 11.4% versus 12.0%. Segment adjusted EBITDA totaled $511 million before $20 million of corporate and other costs. Adjusted EBITDA is a non-GAAP measure.
- Segment trends: Revenue declined 3% in the United States, 15% in Japan and 18% in Principal Markets; Strategic Markets increased 2%. Constant-currency revenue fell 9% in Principal Markets and rose 1% in Japan and 8% in Strategic Markets. Segment adjusted EBITDA fell in the United States, Japan and Strategic Markets, and rose in Principal Markets.
- Cash flow: Operating cash flow was positive $104 million, compared with negative $161 million. Investing cash use was $218 million, including $213 million for property, equipment and capitalized software. Financing cash use was $41 million. Cash, cash equivalents and restricted cash declined $266 million, including a $111 million adverse currency effect. Operating cash flow less stated capital expenditures was negative $109 million, a simple derived measure.
- Liquidity and debt: Cash and cash equivalents were $1.871 billion at June 30, down from $2.134 billion at March 31. Working capital was $795 million, down from $1.035 billion. Short-term and long-term debt totaled $3.200 billion; the company also had a $3.15 billion revolving credit agreement. Management said existing cash and the revolver were expected to meet anticipated needs for at least 12 months.
- Other financial items: Total assets were $12.304 billion and total liabilities $10.093 billion. A $45 million tax provision was recorded despite the pretax loss; the negative effective tax rate reflected tax expense on a book loss, including valuation allowances on deferred tax assets.
Changes, outlook and risks
- Net loss improved mainly due to lower transaction-related costs and lower cost of services as a percentage of revenue. Transaction-related costs were $103 million versus $173 million; current-period costs included charges for underutilized third-party purchase commitments.
- Management cited benefits from prior structural actions and lower costs under post-separation IBM commercial agreements. SG&A as a percentage of revenue increased, reflecting standalone public-company costs.
- Signings fell 22% to $2.9 billion. Management attributed the decline principally to two large prior-year signings totaling $0.9 billion; signings are estimates and do not assure future revenue. Remaining performance obligations were $43.6 billion, with about 57% expected to be recognized over the following two years.
- No specific revenue or earnings guidance was provided. Management described continued technology-services demand but noted inflation, geopolitical tensions, COVID-19 effects and increased risk of economic slowdowns in some regions.
- Material contingency: IBM may seek indemnification from Kyndryl related to a BMC judgment against IBM totaling $1.434 billion in damages before interest. IBM planned to appeal; Kyndryl said any indemnity obligation was indeterminate pending final proceedings, insurance determinations and assessment of its obligations. Kyndryl and IBM also have contractual disputes in arbitration.
- Other disclosed risks include customer retention and growth, service delivery and contract-cost estimation, suppliers, skilled labor, cybersecurity and privacy, foreign exchange, taxes, pensions, legal proceedings and macroeconomic conditions. The filing reported no material changes to previously disclosed risk factors and no material change in market-risk disclosures.
- A prior-period correction addressed an $87 million over-accrual of contract costs originating largely before the spin-off. Management concluded the correction was not material to prior annual or interim periods, but revised comparative figures; the filing also describes an early adoption of revenue guidance with no material effect.
Most important facts for investors to verify
- Whether revenue and signings stabilize, particularly in Principal Markets, and how much reported performance continues to be affected by currency.
- Whether operating cash flow remains positive without relying materially on receivables sales; $613 million of receivables were sold during the quarter.
- Debt levels, revolver availability and compliance with the credit agreements’ leverage covenant.
- Progress in reducing transaction and standalone costs, and the trajectory of adjusted EBITDA and margins; reconcile reported non-GAAP measures to GAAP results.
- Potential exposure from the BMC matter and IBM arbitration, including any eventual indemnity obligation.
- Customer and supplier dependence on IBM after the separation, including related-party revenue of $205 million and related-party cost of services of $961 million in the quarter.