Kyndryl Holdings, Inc. — FY2023 Form 10-K
Period clarification: The supplied filing is the annual report for the fiscal year ended March 31, 2023, not a 2021 Q4 filing. Kyndryl changed its fiscal year-end from December 31 to March 31; the principal comparison is against the unaudited 12 months ended March 31, 2022.
Business context and reporting period
Kyndryl is a global IT infrastructure services provider, offering advisory, implementation and managed services across cloud, enterprise infrastructure, applications and data, digital workplace, security and resiliency, and network services. It reported approximately 90,000 employees and operations in more than 60 countries. The company was spun off from IBM in November 2021; portions of comparative historical results reflect IBM allocations and carve-out accounting, and may not be directly comparable to standalone results.
Financial performance and position
| Metric | FY ended Mar. 31, 2023 | Comparable prior 12 months |
|---|---|---|
| Revenue | $17.026 billion | $18.317 billion |
| Revenue change | (7)% reported; 0% constant currency | — |
| Net loss | $1.374 billion; loss per share $6.06 | $2.039 billion loss |
| Adjusted EBITDA (non-GAAP) | $1.975 billion; approximately 11.6% of revenue | $2.195 billion; approximately 12.0% |
| Cost of services | $14.498 billion; 85.2% of revenue | $16.057 billion; 87.7% |
| Cash from operating activities | $781 million | $398 million |
| Capital expenditures | $865 million | Clear comparable value not provided in the summary table |
| Cash and cash equivalents at period-end | $1.847 billion | $2.134 billion |
| Working capital at period-end | $95 million | $1.035 billion |
Operating cash flow less capital expenditures was approximately negative $84 million. Total assets were $11.464 billion, total liabilities $10.002 billion and total equity $1.462 billion at March 31, 2023. Debt carrying value was approximately $3.0 billion excluding finance leases; balance-sheet debt including finance lease obligations was $3.221 billion, of which $110 million was current. The $3.15 billion revolving facility was undrawn, and the company reported compliance with debt covenants. Management said cash and the revolving facility should cover anticipated needs for at least 12 months.
Revenue was broadly stable in constant currency, but foreign exchange materially reduced reported results. Japan and Principal Markets revenue each fell 13% reported; Strategic Markets fell 1%; U.S. revenue was essentially flat. Kyndryl reported $12.2 billion of signings, down 14% from $14.2 billion; management cited currency and a greater focus on higher-margin, generally shorter contracts.
Material changes versus the prior comparable period
- Net loss improved by $665 million, primarily reflecting lower impairment and transaction-related costs and a lower cost of services as a share of revenue.
- Cost of services improved to 85.2% of revenue from 87.7%, attributed to transformation initiatives and lower post-separation commercial costs with IBM. SG&A increased to 17.1% of revenue from 15.0%, reflecting standalone-company costs, currency effects and site rationalization.
- Adjusted EBITDA declined 10% to $1.975 billion despite the improvement in service-cost ratio. Japan and Strategic Markets adjusted EBITDA fell 23% and 19%, respectively; U.S. fell 8%, while Principal Markets fell 4%.
- Operating cash flow increased to $781 million, but cash declined $287 million to $1.847 billion. Working capital fell by $940 million, principally as accounts receivable and cash decreased.
- The company recorded no goodwill impairment in FY2023, versus $469 million in the prior comparable period. Goodwill was $812 million at year-end.
Outlook, management commentary, risks and unusual items
- Management provided no specific numerical revenue or earnings guidance in the supplied filing text. For FY2024, it planned to accelerate its “three-A” initiatives—Alliances, Advanced Delivery and Accounts—grow Kyndryl Consult, and further optimize costs. Kyndryl Consult represented 12% of FY2023 revenue.
- Management estimated approximately $200 million of FY2024 reductions in payroll, rent and depreciation from workforce and site actions, while cautioning that savings are not guaranteed. The filing describes approximately $135 million of remaining program charges and approximately $260 million of aggregate cash outlay, with about $190 million expected in FY2024. A separate note gives estimated total program charges of approximately $270 million, including charges incurred; investors should reconcile the program estimates in the full filing.
- Significant risks include continued revenue decline or customer losses, competitive pricing and margin pressure, contract cost-estimation and delivery risks, talent retention, currency and macroeconomic volatility, cybersecurity and data privacy, and reliance on technology partners. The company also warns that some inherited, noncancellable software, hardware and cloud commitments may exceed needs over the next four to six years; purchase commitments totaled $2.8 billion across short-, medium- and long-term periods.
- A Texas court entered a $1.434 billion judgment against IBM in the BMC dispute, plus interest; IBM appealed. IBM may seek indemnification from Kyndryl, but any Kyndryl obligation is indeterminate pending appeals, insurance and further assessment. Kyndryl separately disclosed arbitration proceedings with IBM over post-separation contractual disputes. Legal reserves were $74 million at March 31, 2023.
- Income tax expense was $524 million despite a pretax loss of $851 million, producing a negative 61.6% effective tax rate. The filing attributes the expense principally to valuation allowances, foreign-operation taxes and uncertain tax positions; valuation allowances rose to $620 million.
- The auditor issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective. The auditor identified the October 2022 goodwill impairment assessment as a critical audit matter, involving significant valuation assumptions.
Most important facts for investors to verify
- Whether constant-currency revenue stability translates into sustainable reported growth, and whether signings convert into revenue at attractive margins.
- Progress and realized savings from the three-A initiatives and the workforce/site program, including reconciliation of total charges, remaining charges and cash outlays.
- Cash generation after capital expenditures, working-capital needs, receivables-sale proceeds and fees, and the effect of reduced cash balances.
- Debt covenant headroom and refinancing or interest-rate exposure, particularly the variable-rate term loan and November 2024 maturity.
- Potential exposure from the BMC judgment and IBM arbitration, including any indemnity obligation not yet estimable.
- Whether the large valuation allowance, tax attributes and deferred tax assets remain recoverable, and whether excess partner commitments require future charges.