Business Overview and History

Kyndryl Holdings, Inc. (NYSE: KD) is the world's largest IT infrastructure services provider, serving thousands of enterprise customers in over 100 countries. The company designs, builds, manages, and modernizes the complex, mission-critical information systems that businesses and organizations worldwide depend on every day.

Kyndryl's journey as an independent company began in September 2021 when it was formed as a wholly-owned subsidiary of IBM to hold the operations of the infrastructure services unit of IBM's Global Technology Services segment. The spin-off from IBM was completed on November 3, 2021, when IBM distributed shares of Kyndryl's common stock to IBM stockholders. This marked the beginning of Kyndryl's life as an independent, publicly-traded company.

In preparation for the separation, Kyndryl entered into several agreements with IBM to govern their relationship post-spin-off. The company's stock began trading independently on November 4, 2021, solidifying its position as the world's leading IT infrastructure services provider.

The early days of independence were not without challenges for Kyndryl. The company faced difficulties integrating its operations and separating from IBM's infrastructure. A significant hurdle was the large-scale migration of Kyndryl's internal operating systems to a new enterprise resource planning system. This transition led to deficiencies in the company's information technology general controls, although these issues did not result in any misstatements in the financial reports. To address these challenges, Kyndryl implemented a comprehensive remediation plan.

Despite these initial integration hurdles, Kyndryl has continued to leverage its extensive expertise in running and transforming IT estates for its global customer base. The company's long history in the industry, coupled with its newfound independence, has positioned it to adapt and evolve in the rapidly changing IT services landscape.

Financial Snapshot

In the fiscal year ended March 31, 2024, Kyndryl reported total revenue of $16.05 billion, a decline of 5.8% from the previous year. This decrease was primarily due to the company's strategic decision to exit low-margin revenue streams as part of its broader transformation efforts. Despite the top-line challenge, Kyndryl made significant progress in improving its profitability, with adjusted EBITDA reaching $1.14 billion, up from $617 million in the prior year.

The company's net income, however, remained in negative territory, with a loss of $340 million reported for the fiscal year. This was largely attributable to one-time charges related to workforce rebalancing and the spin-off from IBM. Kyndryl's adjusted pretax income, which excludes these unusual items, stood at $172 million, a significant improvement from the prior year's loss of $851 million.

For the most recent quarter (Q1 2025), Kyndryl reported revenue of $3.74 billion, down 11% year-over-year. The revenue decline was largely attributable to the company's efforts to reduce low-margin components of its customer relationships, as well as currency effects. Net income for the quarter was $11 million, an improvement of $152 million versus the prior-year period.

Financials

Kyndryl's financial position remains strong, with a cash balance of $1.55 billion as of March 31, 2024, and total debt of $4.14 billion. The company's net debt to adjusted EBITDA ratio stood at 1.5x, well within its target range. Kyndryl's capital expenditures for the fiscal year amounted to $651 million, while free cash flow was negative $197 million, reflecting the company's ongoing investments in its transformation.

For the most recent quarter (Q1 2025), operating cash flow was negative $48 million, and free cash flow was negative $170 million. The company's debt-to-equity ratio stands at 4.13, with a current ratio of 1.03 and a quick ratio of 0.78.

Liquidity

Kyndryl's liquidity position remains robust, with the company maintaining a strong cash balance and access to credit facilities. This financial flexibility allows Kyndryl to continue investing in its strategic initiatives while navigating potential economic uncertainties. The company has a $3.15 billion revolving credit agreement entered into in October 2021, which remained undrawn as of June 30, 2024. Kyndryl is in compliance with its debt covenants.

Segment Performance

Kyndryl operates through four reportable segments:

1. United States: This segment comprises Kyndryl's operations in the United States. For Q1 2025, revenue was $986 million, a 15% decrease compared to the prior-year period. The revenue decline was largely attributable to Kyndryl's efforts to reduce certain low-margin revenues and the expiration of certain low- and negative-margin contracts entered into before the spin-off from IBM. Adjusted EBITDA for this segment decreased by $103 million from the prior-year quarter.

2. Japan: For Q1 2025, Japan revenue was $569 million, a decrease of 7% compared to the prior-year quarter, driven by an unfavorable currency exchange rate impact of 13 percentage points. Adjusted EBITDA for this segment decreased by $17 million from the prior-year quarter.

3. Principal Markets: This segment represents the aggregation of Kyndryl's operations in Canada, France, Germany, India, Italy, Spain Portugal, and the United Kingdom Ireland. For Q1 2025, revenue was $1.31 billion, a decrease of 5% compared to the prior-year quarter. Adjusted EBITDA for this segment increased by $90 million from the prior-year quarter.

4. Strategic Markets: This segment comprises Kyndryl's operations in all other countries. For Q1 2025, revenue was $869 million, a decrease of 15% compared to the prior-year quarter. Adjusted EBITDA for this segment decreased by $29 million from the prior-year quarter.

Navigating Transformation and Driving Growth

Under the leadership of CEO Martin Schroeter, Kyndryl has embarked on a strategic transformation to position the company for long-term growth and success. The cornerstone of this transformation is the company's "3A's" initiative, which focuses on three key areas: Alliances, Advanced Delivery, and Accounts.

Alliances: Kyndryl has forged strategic partnerships with leading technology providers, such as Microsoft, Google, AWS, and, most recently, SAP. These alliances allow the company to offer its customers a comprehensive suite of IT services and solutions, leveraging the capabilities of its partners. In the first quarter of fiscal 2025, Kyndryl's hyperscaler-related revenue grew by 27% year-over-year, highlighting the traction of this strategic focus.

Advanced Delivery: The company's investment in its proprietary Kyndryl Bridge platform is a key component of its Advanced Delivery initiative. Kyndryl Bridge provides customers with unprecedented visibility and control over their IT infrastructure, enabling data-driven insights and automated operations. This has resulted in productivity benefits totaling nearly $3 billion per year for Kyndryl's clients.

Accounts: Kyndryl has been actively managing its customer portfolio, focusing on higher-margin opportunities and exiting low-profit or no-profit revenue streams. This strategic approach has helped the company improve its overall profitability, with the cumulative annualized profit from its "focused accounts" reaching $725 million in the first quarter of fiscal 2025.

These strategic initiatives, combined with Kyndryl's deep expertise in running and transforming mission-critical IT systems, have positioned the company as a trusted partner for enterprises navigating the complex and rapidly evolving technology landscape.

Kyndryl Consult: A Competitive Advantage

One of the key drivers of Kyndryl's success is its Kyndryl Consult business, which provides advisory and consulting services to its customers. Kyndryl Consult has been consistently growing at a double-digit pace, accounting for 17% of the company's revenue in the first quarter of fiscal 2025.

Kyndryl's Consult business is differentiated by its unique combination of deep technical expertise and industry knowledge. The company's global team of consultants, data architects, and engineers have decades of experience working with some of the world's most complex technology environments. This allows Kyndryl to provide actionable insights and impactful business outcomes for its customers, helping them optimize their hybrid IT systems, address technical debt, embrace emerging technologies like AI and generative AI, enhance security and resiliency, and modernize their operations.

The Kyndryl Consult service line is not only a high-margin revenue stream but also a key driver of the company's managed services business, as many IT modernization projects lead to ongoing operational support contracts.

Addressing Cybersecurity and Regulatory Challenges

Kyndryl's expertise in mission-critical IT infrastructure has become increasingly valuable as enterprises navigate growing cybersecurity threats and evolving regulatory requirements, particularly in the European Union.

The company's global network of security operations hubs and end-to-end security services help customers protect, detect, and address cyber threats. Additionally, Kyndryl's deep understanding of its customers' technology environments and its ability to bridge the gap between business and IT priorities position the company as a trusted partner in addressing complex regulatory compliance challenges.

For example, Kyndryl's Consult team has been instrumental in helping customers prepare for the EU's Digital Operational Resilience Act (DORA), which imposes stringent requirements on financial institutions' IT infrastructure and cybersecurity practices.

Outlook and Future Prospects

Kyndryl's management team has provided a positive outlook for the company's future performance. For the fiscal year 2025, the company expects revenue to decline between 2% to 4% in constant currency, an improvement from the 5.8% decline reported in the prior year. This reflects the company's progress in shedding low-margin revenue streams and positioning itself for a return to growth.

Kyndryl has also increased its guidance for adjusted EBITDA margin and adjusted pretax income. The company now expects adjusted EBITDA margin to be at least 16.3% and adjusted pretax income to reach at least $460 million, representing a year-over-year increase of at least $295 million.

For the second quarter of fiscal 2025, Kyndryl expects the year-over-year constant currency revenue decline to be similar to Q1, and adjusted pretax income to be slightly higher than the $25 million reported in the prior year's second quarter, including approximately $40 million of workforce rebalancing charges.

The company projects $700 million of net capital expenditures, a similar amount of depreciation expense, and $150 million in cash taxes for the full fiscal year 2025, translating to roughly $300 million in adjusted free cash flow.

Over the medium term, Kyndryl remains committed to delivering significant margin expansion and generating free cash flow growth, targeting high single-digit adjusted pretax margins by fiscal 2027 and $1 billion or more of adjusted pretax income.

The company's long-term financial targets include delivering high single-digit adjusted pretax margins by fiscal 2027 and generating over $1 billion in adjusted pretax income. Kyndryl's focus on growing its higher-margin Consult and hyperscaler-related businesses, coupled with its continued execution on the "3A's" transformation initiatives, is expected to be the key drivers of this financial progress.

Recent Performance and Business Momentum

Kyndryl has delivered strong performance in recent quarters, with signings up 14% in Q1 2025 in constant currency, and up 7% over the last 12 months. The projected pretax margin on these signings is in the high single digits, indicating improved profitability on new business. Pretax earnings were up significantly year-over-year in the first quarter, and the company remains on track to deliver significant cash flow in fiscal 2025.

Risks and Challenges

While Kyndryl has made significant strides in its transformation, the company faces several risks and challenges that investors should be aware of:

1. Competitive Landscape: Kyndryl operates in a highly competitive IT services industry, with large global players and specialized providers vying for market share. 2. Talent Acquisition and Retention: The company's ability to attract and retain top talent in the technology and consulting fields is crucial to its success. 3. Execution Risks: Kyndryl's transformation initiatives and integration of new technologies and platforms carry inherent execution risks. 4. Macroeconomic Conditions: Adverse economic conditions, such as a potential recession, could impact the demand for Kyndryl's services and affect its financial performance. 5. Regulatory and Compliance Challenges: Evolving data privacy and security regulations, particularly in the European Union, could increase Kyndryl's operational costs and compliance requirements.

Conclusion

Kyndryl has embarked on a transformative journey as an independent company, leveraging its deep expertise in mission-critical IT infrastructure to navigate the rapidly evolving technology landscape. The company's strategic initiatives, including its focus on Alliances, Advanced Delivery, and Accounts, have positioned it as a trusted partner for enterprises seeking to optimize their IT operations and drive digital transformation.

Kyndryl's Consult business, with its unique blend of technical and industry knowledge, has been a standout performer, driving both high-margin revenue and ongoing managed services opportunities. As the company continues to execute on its transformation plan and capitalize on emerging trends like cybersecurity and regulatory compliance, Kyndryl is well-positioned to deliver sustained growth and profitability for its shareholders.

The company's improved guidance for fiscal 2025, coupled with its strong performance in recent quarters, demonstrates the progress Kyndryl has made in its transformation journey. With a clear strategy, strong liquidity position, and growing momentum in high-value service areas, Kyndryl is poised to capitalize on the evolving needs of enterprise IT infrastructure and deliver long-term value to its customers and shareholders.