Kyndryl Holdings, Inc. — Form 10-Q summary
Reporting period: Quarter and six months ended September 30, 2023 (fiscal 2024 second quarter and first half); statements are unaudited. Although the request metadata says “2022 Q2,” the supplied filing covers 2023 Q2. Dollar amounts are in millions unless stated otherwise.
Business context and results
Kyndryl is an IT infrastructure services provider operating in more than 100 countries. Management attributed revenue declines principally to its deliberate reduction of lower-margin equipment sales and other low-margin customer work. Results are reported across the United States, Japan, Principal Markets and Strategic Markets.
| Metric | Three months ended September 30, 2023 | Six months ended September 30, 2023 |
|---|---|---|
| Revenue | $4,073; down 3% year over year, or 5% in constant currency | $8,266; down 2% year over year, or 3% in constant currency |
| Net loss | $(142), versus $(281) | $(283), versus $(531) |
| Loss per share, basic and diluted | $(0.62), versus $(1.24) | $(1.24), versus $(2.35) |
| Adjusted EBITDA (non-GAAP) | $574, versus $428 | $1,186, versus $919 |
| Operating cash flow | Six-month use of $127, versus cash provided of $491 |
Margins, segments and year-over-year changes
- Cost of services fell to 84.0% of revenue in the quarter from 86.5%, and to 83.1% for the first half from 86.1%. SG&A was 15.6% of quarterly revenue versus 16.9%; first-half SG&A was 16.4% versus 16.5%.
- Adjusted EBITDA improved despite lower revenue, which management attributed to operating efficiencies and higher margins on recent signings. The first-half improvement also reflects lower transaction-related costs; workforce rebalancing charges increased.
- Quarterly segment revenue: United States $1,108 (down 4%); Japan $569 (down 7%); Principal Markets $1,465 (flat); Strategic Markets $930 (down 1%). Japan’s reported decline included adverse currency effects; Principal and Strategic Markets benefited from favorable currency translation.
- Quarterly segment adjusted EBITDA was $176 in the United States, $84 in Japan, $185 in Principal Markets and $150 in Strategic Markets. Japan declined year over year; the other three segments increased. These segment amounts total $596 before corporate and other costs; company adjusted EBITDA was $574.
- Signings were $2.4 billion for the quarter, down 2%, and $5.2 billion for the first half, down 4%. Remaining performance obligations were $34.0 billion; approximately 58% is expected to be recognized within two years and 35% over the following three years.
Financial position, debt and liquidity
- At September 30, 2023, cash and cash equivalents were $1,408, down from $1,847 at March 31, 2023. Working capital was $108, compared with $95; current assets were $4,593 and current liabilities $4,485.
- Total debt on the balance sheet was $3,244, comprising $121 current and $3,123 long-term. The company had no revolver borrowings and reported compliance with debt covenants. The $500 floating-rate term loan matures in November 2024; the revolving facility expires in October 2026 unless extended.
- Management stated that cash and the revolving credit agreement should meet anticipated cash needs for at least the next 12 months. The filing does not provide a specific future cash-flow forecast.
- Investing cash use was $208 for the first half, including $275 of capital expenditures and $119 of proceeds from equipment dispositions. Financing cash use was $80, including $67 of debt repayments. Cash, cash equivalents and restricted cash decreased $448 to $1,412.
- Receivables sales generated gross proceeds of $2.1 billion during the first half, with $28 of associated fees. The proceeds are classified as operating cash flow.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided in the supplied filing. For the workforce-rebalancing and site-rationalization program, management expects approximately $50 million of future charges and estimates about $240 million of cost reductions in fiscal 2024; it cautioned that savings are not guaranteed. Approximately $140 million of the program’s estimated $280 million cash outlay had been paid by September 30; approximately $100 million was expected to be paid in the second half of fiscal 2024.
- The program’s expected total charges were approximately $290 million. Costs incurred to date were $242 million; first-half charges were $107 million, including $97 million of workforce-rebalancing charges and $10 million related to asset and lease actions.
- Potential indemnity exposure to IBM relating to the BMC litigation is indeterminate. The trial judgment against IBM was $717 million in direct damages plus $717 million in punitive damages and interest; IBM appealed, and Kyndryl stated that any indemnity obligation depends on the outcome of appeals, insurance and assessment of its obligations. Kyndryl and IBM are also in arbitration over post-separation contractual disputes.
- Other disclosed risks include economic and customer-spending conditions, competition, contract delivery and cost-estimation risk, supplier relationships, cybersecurity and privacy, legal and tax matters, currency fluctuations, pension obligations and potential asset impairment. The company reported no material change to the risk factors in its fiscal 2023 Form 10-K.
- IBM ceased to be a related party in August 2022. Accordingly, the current periods include no related-party revenue or cost of services, unlike the prior-year periods, which included substantial IBM-related activity.
- The company completed implementation of a new enterprise resource planning system during the quarter, updated affected controls and stated that disclosure controls were effective at period end. It reported no material impairment of nonfinancial assets.
Important facts for investors to verify
- Whether revenue trends and signings stabilize as Kyndryl continues to exit lower-margin work, and how that affects the $34.0 billion RPO.
- Whether operating efficiencies and recent-signing margins translate into sustained GAAP profitability and positive operating cash flow, given the first-half cash use.
- Progress toward the fiscal 2024 cost-saving estimate, remaining restructuring cash payments and any additional charges.
- Liquidity and refinancing plans for the $500 million floating-rate term loan maturing in November 2024, along with sensitivity to interest rates and currency movements.
- Developments in the BMC appeal and IBM arbitration, including any change in potential indemnity exposure.
- The continuing effects of receivables sales on reported operating cash flow, and the conversion timing and assumptions underlying RPO and signings.