Kyndryl Holdings, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended December 31, 2023 (Kyndryl fiscal 2024 third quarter), not 2022 Q3. Financial amounts are in millions of dollars unless noted.
Business context and reporting period
Kyndryl provides IT infrastructure services to enterprise customers worldwide. This unaudited filing compares the three and nine months ended December 31, 2023 with the corresponding 2022 periods. Management says revenue declined in part because the company exited or reduced low-margin and unprofitable customer work.
Key financial metrics
| Metric | Quarter ended Dec. 31, 2023 | Quarter ended Dec. 31, 2022 | Nine months ended Dec. 31, 2023 | Nine months ended Dec. 31, 2022 |
|---|---|---|---|---|
| Revenue | $3,936 | $4,303 | $12,202 | $12,771 |
| Net income (loss) | $(12) | $(106) | $(295) | $(637) |
| Diluted loss per share | $(0.05) | $(0.47) | $(1.29) | $(2.81) |
| Adjusted EBITDA, non-GAAP | $615 | $580 | $1,801 | $1,499 |
| Cash from operating activities | Not provided for quarter | Not provided for quarter | $309 | $769 |
Quarterly revenue fell 9% year over year (10% in constant currency); nine-month revenue fell 4% (5% in constant currency). Adjusted EBITDA rose 6% for the quarter and 20% for the nine-month period. Cost of services was 80.9% of quarterly revenue versus 83.6% a year earlier, and 82.4% for the nine months versus 85.2%. These ratios indicate improved service-cost margin; adjusted EBITDA was approximately 15.6% of quarterly revenue versus 13.5% and 14.8% for the nine months versus 11.7%, respectively.
Operating cash flow for the nine months was $309, down from $769. Capital expenditures were $449, compared with $711; operating cash flow less capital expenditures was therefore a $140 cash outflow, versus $58 of positive cash flow in the prior-year period. Cash, cash equivalents and restricted cash totaled $1,691 at December 31, 2023, down $169 since the start of the fiscal year. The filing attributes lower operating cash flow primarily to timing of receivable collections and vendor payments.
At December 31, 2023, total assets were $10,969, total liabilities $9,676 and total equity $1,293. Cash and cash equivalents were $1,688. Current assets of $4,851 were below current liabilities of $5,152, leaving negative working capital of $301. Current and long-term debt on the balance sheet totaled $3,257, including finance leases; the $500 floating-rate term loan due November 2024 was classified as current. The company reported no borrowings under its $3.15 billion revolving credit facility and compliance with its debt covenants.
Material changes versus prior comparable periods
- Revenue declined across all four segments in the quarter: United States 18%, Japan 4%, Principal Markets 2% and Strategic Markets 9%. For the nine months, the respective declines were 8%, 5%, 1% and 5%.
- Quarterly net loss improved by $94; nine-month net loss improved by $342. Management cited operating efficiencies, improved margins and an agreement to collect previously reserved receivables from former parent IBM.
- Quarterly segment adjusted EBITDA increased to $615 from $580. Principal Markets increased substantially, while U.S. adjusted EBITDA declined to $194 from $271. Nine-month adjusted EBITDA rose to $1,801 from $1,499.
- Nine-month interest expense increased to $92 from $65. Workforce rebalancing charges increased to $115 from $16, while transaction-related costs fell to $12 from $218.
- Signings increased 15% to $3.7 billion for the quarter and 3% to $8.9 billion for the nine months. Remaining performance obligations were $34.5 billion at quarter-end; approximately 59% is expected to be recognized over the next two years.
Outlook, commentary, risks and unusual items
- Management said existing cash and the revolving credit facility are expected to cover anticipated cash needs for at least the next 12 months. Kyndryl intends to refinance the $500 term loan before its November 2024 maturity, subject to market conditions.
- The workforce and site-rationalization program is expected to total approximately $300 in charges. The company had incurred $275 through December 31, 2023 and expects approximately $25 of additional charges, primarily workforce rebalancing. Management estimates about $300 of fiscal 2024 reductions in payroll, rent and depreciation, but cautions that savings are not guaranteed. Approximately $170 of program cash outlays had been paid through quarter-end.
- The quarter included a benefit from an agreement with IBM to collect previously reserved receivables, recorded in transaction-related costs (benefits). IBM ceased to be a related party in August 2022; the filing reports no related-party revenue or service costs for the 2023 periods.
- The quarterly tax provision was $65 despite pretax income of $53, producing a 122.6% effective tax rate. The nine-month period had a $131 tax expense despite a pretax loss of $165. Management cites foreign taxes, uncertain tax positions and valuation allowances on deferred tax assets.
- Potentially material contingencies include a possible IBM indemnity claim tied to BMC’s judgment against IBM, which IBM is appealing; Kyndryl says any obligation is indeterminate. Kyndryl and IBM also have arbitration proceedings over post-separation contractual disputes, some of which may conclude as early as the first half of calendar 2024.
- Management cited macroeconomic and geopolitical uncertainty, customer spending, competition, supplier and partner relationships, service delivery and contract cost estimates, cybersecurity and data privacy, currency movements, legal proceedings and possible indemnification obligations among the risks. No material change to previously disclosed risk factors was reported. Disclosure controls were assessed as effective; a new ERP system was implemented during the nine-month period and related controls were updated.
Most important facts for investors to verify
- Whether revenue declines from exiting low-margin work stabilize, particularly in the United States and Strategic Markets, and whether signings convert into revenue as expected.
- Whether improved adjusted EBITDA and cost ratios translate into durable GAAP profitability and operating cash flow, given the decline in nine-month cash from operations.
- The refinancing terms and timing for the $500 term loan due November 2024, and the company’s ability to manage negative working capital.
- Actual cash savings and remaining charges from the restructuring program, compared with management’s estimates.
- Developments in the IBM receivable collection, IBM arbitration matters and potential BMC-related indemnity exposure.
- The assumptions behind deferred tax asset valuation allowances and the unusually high quarterly tax rate.