Kyndryl Holdings, Inc. — Form 10-Q Summary
Period clarification: The request metadata says 2022 Q1, but the filing is for the three months ended June 30, 2023 (Kyndryl fiscal 2024 first quarter), compared primarily with the three months ended June 30, 2022. Dollars are in millions unless noted.
Business context and financial performance
Kyndryl provides IT infrastructure services to enterprise customers worldwide. Revenue was $4,193, down 2% year over year (down 1% in constant currency). Management attributed the decline mainly to reducing low-margin business and currency effects.
| Metric | Three months ended June 30, 2023 | Prior-year period |
|---|---|---|
| Revenue | $4,193 | $4,288 |
| Net loss | $(141) | $(250) |
| Loss per share, basic and diluted | $(0.62) | $(1.11) |
| Adjusted EBITDA, non-GAAP | $612 | $491 |
| Operating cash flow | $(173) | $104 |
| Investing cash flow | $(113) | $(218) |
Cost of services declined 6% to $3,449, or 82.3% of revenue versus 85.8% a year earlier. SG&A increased 4% to $720, equal to 17.2% of revenue versus 16.2%. The pretax loss improved to $109 from $205; income tax expense was $32. The effective tax rate was negative 29.6%, reflecting tax expense despite a pretax loss. Adjusted EBITDA is a non-GAAP measure; the reported $612 includes a $24 corporate and other loss, while segment adjusted EBITDA before that amount was $636.
Balance sheet, liquidity, and debt
At June 30, 2023, cash and cash equivalents were $1,507, total assets $10,986, total liabilities $9,648, and total equity $1,338. Working capital was $62, down from $95 at March 31, 2023; current assets were $4,653 and current liabilities $4,591. Cash, cash equivalents and restricted cash fell by $339 during the quarter to $1,521.
Total debt, including finance lease obligations, was $3,299 before unamortized discounts and issuance costs; the balance sheet reported $134 current and $3,149 long-term debt. The company had no revolver borrowings and reported covenant compliance. Management believes cash and its revolving credit facility will meet anticipated needs for at least the next 12 months. The $500 term loan carries a floating rate and matures in November 2024; the revolving facility expires in October 2026 unless extended. The company transitioned LIBOR-linked contracts to SOFR, effective July 1, 2023.
Material changes and management commentary
- Net loss improved by $109 year over year, primarily due to lower transaction-related costs and operating-efficiency progress, partly offset by higher workforce rebalancing charges.
- Revenue fell in Japan, Principal Markets, and Strategic Markets; U.S. revenue was unchanged. Japan revenue rose 2% in constant currency despite a 4% reported decline.
- Adjusted EBITDA increased 25%. U.S., Principal Markets, and Strategic Markets improved; Japan declined 13%, with currency effects cited as a factor. Management also cited improved efficiencies and higher margins on recent signings.
- Signings were $2.8 billion, down 5% from $2.9 billion; management linked the decline to efforts to reduce certain low-margin revenues. Signings are an estimate, not a standardized measure.
- Remaining performance obligations were $36.7 billion; approximately 60% is expected to be recognized over the subsequent two years, 34% in years three through five, and the balance thereafter.
Outlook, risks, contingencies, and unusual items
No specific revenue or earnings guidance is provided in the supplied filing text. Management expects its workforce rebalancing and site-rationalization program to reduce payroll, rent, and depreciation costs by approximately $200 million in fiscal 2024, but cautions that savings are not guaranteed. The filing states approximately $70 million of future charges remain for this program and estimates total program cash outlay of approximately $260 million; approximately $92 million had been paid through June 30, 2023.
Cash from operations turned negative, which management attributed mainly to payments for license agreements, annual incentives, and workforce rebalancing liabilities, as well as higher prior-year cash collections from receivables. Receivables sale proceeds were $1.2 billion versus $613 million a year earlier, with related fees of $16 million versus $8 million.
A material uncertainty concerns the BMC litigation against IBM: a 2022 trial judgment awarded BMC $1.434 billion plus interest, and IBM appealed. IBM may seek indemnification from Kyndryl, but any potential Kyndryl obligation is indeterminate pending appeals, insurance determinations, and assessment of its obligations. Kyndryl and IBM also have arbitration proceedings concerning post-separation contractual disputes. In July 2023, after quarter-end, Kyndryl extinguished $70 million of finance lease obligations through an equipment sale and assignment, with an immaterial gain.
Other cited risks include customer retention and growth, competition, service delivery and contract-cost estimates, economic and customer-spending conditions, currency, cybersecurity and data privacy, taxes, and potential indemnification or legal exposures. Management reported effective disclosure controls; implementation of the initial phase of a new SAP system changed certain financial processes and controls, which the company says it will continue to monitor.
Important facts for investors to verify
- Whether revenue trends and signings stabilize as Kyndryl continues to exit or reduce low-margin business.
- Whether improved adjusted EBITDA and cost ratios translate into sustained GAAP profitability and positive operating cash flow.
- Progress and actual cash costs of workforce and site actions, and realization of the projected fiscal 2024 savings.
- Cash conversion and dependence on receivables sales, including program availability, fees, and the effect on operating cash flow.
- Debt repayment and refinancing needs, especially the November 2024 term-loan maturity and floating-rate exposure.
- Developments in the BMC appeal, potential IBM indemnification claim, and Kyndryl-IBM arbitration proceedings.
- Execution of the SAP system implementation and continued effectiveness of internal controls.