Kyndryl Holdings, Inc. — Form 10-Q summary
Reporting period: Quarter and six months ended September 30, 2022. This is fiscal 2023 second quarter, not 2021 Q2. Unless noted otherwise, amounts are in U.S. dollars.
Business context and financial performance
Kyndryl is a global technology infrastructure services provider spun off from IBM on November 3, 2021. The filing compares the current periods with 2021 periods that largely preceded the spin-off; the company cautions that those historical results may not reflect how it would have performed as a standalone business.
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Revenue | $4.179 billion, down 9% reported; up 1% in constant currency | $8.467 billion, down 9% reported; down 1% in constant currency |
| Net loss | $281 million, versus $690 million | $531 million, versus $1.079 billion |
| Adjusted EBITDA (non-GAAP) | $428 million, down 15% from $501 million | $919 million, down 14% from $1.072 billion |
| Basic and diluted loss per share | $1.24, versus $3.08 | $2.35, versus $4.81 |
| Operating cash flow | Not separately provided for the quarter | $491 million provided, versus $397 million used |
Margins, cash flow and financial position
- Cost of services was 86.5% of revenue for the quarter and 86.1% for the six-month period, compared with 88.9% and 88.2%, respectively. Management attributed the improvement mainly to prior structural actions and lower costs under post-separation IBM agreements. Adjusted EBITDA margin was approximately 10.2% for the quarter and 10.9% for six months, down from approximately 10.9% and 11.5%.
- Six-month investing cash outflow was $516 million, including $466 million of capital expenditures. Financing cash outflow was $69 million. Cash, cash equivalents and restricted cash declined $253 million to $1.901 billion; foreign exchange reduced cash by $160 million.
- At September 30, 2022, cash and cash equivalents were $1.888 billion; working capital was $385 million, down from $1.035 billion at March 31. Total assets were $11.629 billion, liabilities $9.882 billion and equity $1.746 billion.
- Debt totaled $3.217 billion including finance lease obligations, with $97 million of short-term debt and $3.101 billion of long-term debt. The company also has a $3.15 billion revolving credit facility, with no material recorded expense for the facility in the periods presented. Management said cash and the revolving facility should cover anticipated needs for at least 12 months.
Changes versus the prior comparable periods
- Reported revenue fell 9% in both the quarter and six-month period, but currency was a major factor: management cited a 10-point currency impact for the quarter and an 8-point impact for six months.
- Strategic Markets revenue grew 2% in both periods, while U.S., Japan and Principal Markets revenue declined. Strategic Markets adjusted EBITDA fell 37% for the quarter and 33% for six months, partly because IBM software costs began to be allocated after the spin-off.
- Net losses narrowed, mainly reflecting lower tax expense, transaction-related costs and cost of services as a percentage of revenue. Transaction-related costs fell to $68 million from $270 million for the quarter and to $171 million from $443 million for six months.
- Operating cash flow improved year over year, while the prior-year financing inflow included $1.334 billion of net transfers from IBM that did not recur after separation.
- Total signings were $2.5 billion for the quarter and $5.4 billion for six months, down 14% and 18%, respectively. Management cited currency effects and, for the six-month comparison, two large prior-year signings totaling $0.9 billion.
Outlook, risks and unusual items
- The filing provides no specific numerical revenue or earnings guidance. Management described continued demand for IT services alongside slower economic growth, geopolitical tensions, inflation and increased risk of economic slowdowns in some regions.
- Remaining performance obligations were $39.8 billion at September 30; approximately 57% is expected to be recognized over the next two years. This is subject to contract changes, termination, currency movements and other estimates.
- Management warned that certain noncancellable software, hardware and cloud commitments may exceed business needs over the next four to six years; unavoidable excess payments could be charged to cost of services.
- IBM-related litigation creates a potentially material but indeterminate exposure: a trial court awarded BMC $717 million in direct damages and $717 million in punitive damages against IBM, plus interest. IBM appealed, and it may seek indemnification from Kyndryl. Kyndryl said any obligation cannot yet be determined and may take years to resolve. Kyndryl and IBM also have contractual disputes in arbitration.
- Currency was a significant headwind, and the company reported $478 million of six-month other comprehensive loss, primarily from foreign currency translation. U.S. deferred tax asset valuation allowances also increased. The company disclosed an immaterial correction to prior-period accrued contract costs and related results.
Important facts for investors to verify
- Whether constant-currency growth translates into sustained reported revenue growth, and how signings convert into revenue.
- Drivers of declining adjusted EBITDA, particularly software cost allocations and performance in Strategic Markets.
- Cash generation, capital spending, receivables-sale activity and the company’s reliance on the revolving credit facility; six-month receivables-sale proceeds were $1.3 billion.
- The status and possible financial consequences of the BMC matter, related indemnification claims and IBM arbitration disputes.
- Potential excess supplier commitments, foreign-exchange exposure and recoverability of deferred tax assets.