Kyndryl Holdings, Inc. — Form 10-Q summary
Period clarification: The request metadata says “2021 Q3,” but the supplied filing is for the quarter ended December 31, 2022 (Kyndryl fiscal 2023 third quarter), with nine-month comparisons to December 31, 2021. Dollar amounts are in millions unless stated otherwise.
Business context and reporting period
Kyndryl provides managed infrastructure and technology services to enterprise customers worldwide. The filing compares the three and nine months ended December 31, 2022 with the same periods in 2021. The prior-year comparison includes pre-separation periods when Kyndryl’s results were prepared on a carve-out basis from IBM; IBM ceased to be a related party in August 2022.
Financial performance and position
| Metric | Three months ended Dec. 31, 2022 | Three months ended Dec. 31, 2021 | Nine months ended Dec. 31, 2022 | Nine months ended Dec. 31, 2021 |
|---|---|---|---|---|
| Revenue | $4,303 | $4,556 | $12,771 | $13,886 |
| Net loss | $(106) | $(731) | $(637) | $(1,810) |
| Adjusted EBITDA, non-GAAP | $580 | $587 | $1,499 | $1,659 |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $769 | $209 |
| Capital expenditures | Not separately reported for quarter | Not separately reported for quarter | $711 | $572 |
- GAAP revenue declined 6% for the quarter and 8% for the nine-month period. Constant-currency growth was 3% for the quarter and flat for the nine months.
- Cost of services was 83.6% of quarterly revenue, down from 87.8%; nine-month cost of services was 85.2%, down from 88.1%. SG&A rose to 17.0% of quarterly revenue from 14.1%, and to 16.7% for nine months from 14.9%.
- Quarterly adjusted EBITDA margin was approximately 13.5%, versus 12.9%; nine-month margin was approximately 11.7%, versus 12.0%.
- Nine-month operating cash flow less capital expenditures was approximately $58 million, compared with approximately negative $363 million in the prior-year period. Cash flow included proceeds from sales of receivables.
- At December 31, cash and cash equivalents were $2,002; total debt was $3,200, including $103 of short-term debt and $3,097 of long-term debt. Total debt less cash was approximately $1,198. The company also had a $3,150 revolving credit agreement; the filing does not state a drawn balance.
- Working capital was $360, down from $1,035 at March 31, 2022; current assets were $4,967 and current liabilities $4,607. Total equity was $1,930, down from $2,711.
- Remaining performance obligations were $39.6 billion; approximately 59% was expected to be recognized over the next two years.
Material changes versus prior comparable periods
- Net loss narrowed substantially, mainly reflecting lower transaction-related costs, no repeat of the prior-year $469 goodwill impairment, and improved cost of services as a share of revenue. Nine-month losses also benefited from lower tax expense.
- Currency was a major headwind: management attributed 9 percentage points of quarterly revenue decline and 8 points of nine-month decline to foreign exchange. U.S. revenue grew 6% quarterly; Japan, Principal Markets, and Strategic Markets declined 11%, 12%, and 5%, respectively.
- Quarterly adjusted EBITDA was nearly flat, while nine-month adjusted EBITDA fell 10%. Japan and Principal Markets had lower adjusted EBITDA in both comparisons; Strategic Markets improved quarterly but declined for nine months.
- Nine-month operating cash flow increased to $769 from $209, while capital spending rose to $711 from $572. The prior-year financing cash flow included $3,035 of debt issuance proceeds and $490 of net transfers to IBM.
- Signings declined 27% to $3.2 billion for the quarter and 22% to $8.6 billion for nine months. Management said its focus on higher-margin, typically shorter-duration services reduces contract value, and noted that signings can vary with large contract timing and currency.
Outlook, commentary, risks, and unusual items
- Management said cash and cash equivalents and the revolving credit agreement should be sufficient for anticipated cash needs for at least the next 12 months. The filing provides no specific revenue or earnings guidance.
- Management cited ongoing technology-services demand, while identifying economic slowdowns, geopolitical tensions, inflation, currency movements, and customer spending as uncertainties.
- Receivables-sale arrangements generated gross proceeds of $2.3 billion in the nine months ended December 31, 2022, with $34 million of related fees. These sales are reported as operating cash flows and affect interpretation of cash conversion.
- Principal Markets faced higher energy costs, particularly in Europe. Management also cited independent-company SG&A costs and software agreements shifting from prepaid arrangements to monthly subscriptions.
- A potential IBM indemnity claim relates to the BMC litigation, in which a 2022 trial judgment against IBM awarded $717 million in direct damages and $717 million in punitive damages, plus interest. IBM appealed; Kyndryl’s potential obligation, if any, is indeterminate pending appeals, insurance assessment, and evaluation of indemnity duties.
- Kyndryl and IBM have separate contractual disputes in arbitration. The company said it intends to pursue its interests and defenses.
- Some inherited, noncancellable software, hardware, and cloud commitments may exceed Kyndryl’s needs over the next four to six years; any unmitigated excess could result in future cost-of-services charges. Management reported that overall commitments had declined versus its last annual filing.
- The annual goodwill test found reporting-unit fair values above carrying values by more than 50%; the filing gives different Canada-unit cushions in different sections (53% in the note and 51% in MD&A). No goodwill impairment was recorded in the nine-month period.
- The filing describes an $87 million prior-period accrued-contract-cost over-accrual correction. Management concluded the affected prior periods were not materially misstated and revised prior-period presentations.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the intended period: the supplied filing covers December 31, 2022, not 2021.
- Assess revenue and signings trends by segment, particularly whether constant-currency growth and new business can offset foreign-exchange pressure and declines in several markets.
- Evaluate operating cash flow quality, including the scale, fees, and ongoing availability of receivables sales, against capital expenditures and working-capital needs.
- Review liquidity and debt covenants, including the 3.50-to-1.00 leverage maintenance covenant described for the credit agreements.
- Monitor the BMC-related potential indemnity exposure and the IBM-Kyndryl arbitration; the filing does not quantify Kyndryl’s possible liability.
- Reconcile the disclosed Canada goodwill headroom figures (51% versus 53%) and monitor assumptions underlying future impairment tests.