Kyndryl Holdings, Inc. (NYSE:KD) is a leading global provider of mission-critical IT infrastructure services, serving thousands of enterprise customers across over 100 countries. The company has undergone a significant transformation since its spin-off from IBM in November 2021, and its latest financial results demonstrate the progress it has made in executing its strategic initiatives.
Business Overview
Kyndryl is the world's largest IT infrastructure services provider, offering a wide range of services, including cloud migration, data center management, network services, and application management. The company's mission-critical services are essential for the smooth operation of its customers' businesses, which span various industries, including financial services, healthcare, manufacturing, and telecommunications.
Kyndryl's business is organized into four reportable segments: United States, Japan, Principal Markets, and Strategic Markets. The United States segment is the company's largest, accounting for approximately 27% of total revenue in fiscal 2024. The Principal Markets segment, which includes operations in Australia, Canada, France, Germany, Italy, Spain, and the United Kingdom, contributed 36% of total revenue, while the Strategic Markets segment, which encompasses all other countries, generated 22% of revenue. The Japan segment accounted for the remaining 15% of Kyndryl's total revenue.
Geographic Breakdown
Kyndryl's geographic diversification is a key strength, as it allows the company to capitalize on growth opportunities in different regions and mitigate the impact of economic fluctuations in any single market.
In the United States, Kyndryl's revenue declined 8% year-over-year to $3,305 million, primarily due to the company's strategic decision to exit certain low-margin revenue streams. However, the company's adjusted EBITDA margin in the United States improved by 200 basis points, reflecting the success of its cost optimization initiatives.
The Japan segment saw a 5% revenue decline to $1,761 million, largely attributable to unfavorable currency exchange rate movements. Despite the top-line pressure, Kyndryl's adjusted EBITDA margin in Japan remained strong at 15.8%.
In the Principal Markets segment, revenue declined 1% to $4,395 million, but the company's adjusted EBITDA margin expanded by 500 basis points to 12.7%, driven by increased operating efficiencies and higher margins on new business.
The Strategic Markets segment reported a 5% revenue decline to $2,741 million, but the company's adjusted EBITDA margin in this segment improved by 200 basis points to 15.6%, reflecting the success of its cost optimization efforts.
Revenue Breakdown and Trends
Kyndryl's revenue decline in fiscal 2024 was primarily driven by the company's strategic decision to exit certain low-margin and unprofitable revenue streams. This initiative, which is part of the company's "Accounts" strategic pillar, has been a key focus area as Kyndryl works to improve its overall profitability.
The company's Kyndryl Consult business, which provides advisory and implementation services, was a bright spot, growing 16% year-over-year in constant currency to account for 15% of total revenue. This growth reflects the strong demand for Kyndryl's expertise in areas such as cloud migration, data management, and AI/ML implementation.
Kyndryl's revenue from its technology alliances, including partnerships with hyperscaler cloud providers, also saw impressive growth, tripling year-over-year to $500 million. This performance is in line with the company's "Alliances" strategic initiative, which aims to leverage its partnerships to drive revenue growth and expand its service offerings.
Financials
In the fiscal year ended March 31, 2024, Kyndryl reported annual revenue of $17,026 million, a decline of 4% compared to the prior year. Despite the revenue decline, the company's annual net income improved significantly, narrowing the loss to $1,374 million from $1,637 million in the previous year. This improvement was driven by the company's focus on profitability and cost optimization initiatives.
Kyndryl's annual operating cash flow for the fiscal year was $781 million, while its annual free cash flow was negative $84 million. The negative free cash flow was primarily due to increased capital expenditures as the company invested in its technology and infrastructure to support its growth initiatives.
On a quarterly basis, Kyndryl reported revenue of $4,303 million in the fourth quarter of fiscal 2024, a 9% decline compared to the same period in the prior year. However, the company's adjusted EBITDA margin expanded by 350 basis points year-over-year to 14.7%, and its adjusted pretax income improved by $91 million to $30 million.
Kyndryl's performance in the fourth quarter and the full fiscal year was driven by the successful execution of its "3A" strategic initiatives: Alliances, Advanced Delivery, and Accounts. These initiatives have helped the company improve its profitability, streamline its operations, and better serve its customers.
Outlook
For the fiscal year 2025, Kyndryl is forecasting revenue in the range of $15.2 billion to $15.5 billion, representing a decline of 2% to 4% in constant currency. The company expects to return to year-over-year revenue growth in the fourth quarter of fiscal 2025, as it continues to execute on its strategic initiatives and capitalize on the growing demand for its services.
Kyndryl's adjusted EBITDA margin is projected to reach at least 16.2% in fiscal 2025, an increase of 150 basis points compared to the prior year. The company's adjusted pretax income is expected to be at least $435 million, representing a year-over-year increase of more than $270 million.
The company's guidance reflects its confidence in its ability to drive further operational improvements and margin expansion through its "3A" initiatives. Kyndryl expects its alliances with hyperscalers to generate nearly $1 billion in revenue in fiscal 2025, its advanced delivery initiatives to deliver $750 million in annualized savings, and its accounts initiative to contribute $850 million in annualized profit.
Liquidity
Kyndryl's financial position remains strong, with a cash balance of $1.6 billion as of March 31, 2024. The company's net debt to adjusted EBITDA ratio stood at 0.7x, well within its target range. Kyndryl's credit ratings from Moody's, Fitch, and S&P are all investment grade, reflecting the market's confidence in the company's financial stability and creditworthiness.
The company's current ratio, a measure of its short-term liquidity, was 0.94 as of March 31, 2024, indicating a potential challenge in meeting its near-term obligations. Kyndryl's quick ratio, which excludes inventory, was 0.94, further highlighting its liquidity position.
Kyndryl's return on assets (ROA) and return on equity (ROE) ratios were -0.13 and -1.07, respectively, in fiscal 2024, reflecting the company's ongoing transformation efforts and the impact of its strategic initiatives on profitability.
Risks and Challenges
While Kyndryl has made significant progress in its turnaround efforts, the company still faces several risks and challenges that investors should be aware of. These include:
1. Macroeconomic uncertainty: Kyndryl's business is susceptible to broader economic conditions, and a prolonged economic downturn could impact customer spending and demand for the company's services.
2. Competitive landscape: Kyndryl operates in a highly competitive industry, with large global players and nimble regional providers vying for market share. The company's ability to maintain its competitive edge and market leadership is crucial.
3. Talent retention and acquisition: Kyndryl's success is heavily dependent on its ability to attract, retain, and develop top-tier IT talent. Intense competition for skilled professionals could pose a challenge.
4. Integration and execution risks: As Kyndryl continues to execute its strategic initiatives, the company must effectively integrate new technologies, processes, and organizational changes to realize the full benefits of its transformation.
5. Regulatory and compliance risks: Kyndryl's global operations expose the company to a wide range of regulatory and compliance requirements, which it must navigate to avoid potential legal and financial consequences.
Conclusion
Kyndryl's turnaround story is unfolding, and the company's latest financial results demonstrate the progress it has made in executing its strategic initiatives. The company's focus on profitability, cost optimization, and strategic partnerships has helped it navigate the challenges of the past year and position itself for future growth.
While Kyndryl still faces risks and uncertainties, the company's strong market position, diversified geographic footprint, and innovative service offerings position it well to capitalize on the growing demand for mission-critical IT infrastructure services. As Kyndryl continues to execute its strategic plan and deliver on its guidance, investors may find the company's story increasingly compelling.