KYNDRYL REPORTS SECOND QUARTER FISCAL 2024 RESULTS AND RAISES ITS FULL-YEAR OUTLOOK
Strong execution on 'three-A's' strategy drives margin expansion
- Revenues for the quarter ended
September 30, 2023 total$4.1 billion , pretax loss is$109 million , and net loss is$142 million
- Adjusted EBITDA is
$574 million , adjusted pretax income is$25 million , and adjusted net loss is$12 million for the quarter endedSeptember 30, 2023
- Raises full-year adjusted earnings outlook
"We're strengthening and transforming our business at an accelerated pace, which is driving faster-than-anticipated margin expansion and creating future growth opportunities for Kyndryl. We're again increasing our adjusted earnings outlook for the year, and we remain on track to return to revenue growth in calendar 2025," said
Results for the Fiscal Second Quarter Ended
For the second quarter,
Adjusted pretax income was
Adjusted EBITDA of
"In our fiscal second quarter, we delivered outstanding growth in adjusted EBITDA and adjusted pretax income, driven by continued progress on our three-A initiatives and transforming how we operate. At the same time, we're positioning
Recent Developments
- Alliances initiative – In the first half of its fiscal year,
Kyndryl recognized$180 million in revenue tied to cloud hyperscaler alliances, progressing well toward the Company's hyperscaler revenue target of more than$300 million for fiscal year 2024.
- Advanced Delivery initiative – To date,
Kyndryl has redeployed more than 7,500 delivery professionals to serve new revenue streams and backfill attrition. This has generated annualized savings of approximately$425 million as of quarter-end. Automation and theKyndryl Bridge platform, powered by AI, are driving this progress, and the Company is therefore raising its fiscal 2024 year-end objective for annualized savings from$450 million to$550 million .
- Accounts initiative –
Kyndryl continued to address elements of contracts with substandard margins, bringing the total impact from this initiative to$400 million of annualized benefits, achieving the Company's$400 million fiscal 2024 year-end goal ahead of schedule. The Company is therefore raising its fiscal 2024 year-end goal for annualized savings to$500 million .
- Strong projected margin on recent signings – In the quarter, projected pretax margins associated with total signings were again in the high-single-digit range, which aligns with levels achieved throughout fiscal 2023 and reflects the Company's focus on margin expansion.
- Double-digit growth in Kyndryl Consult – In the quarter, Kyndryl Consult revenues grew 19% year-over-year and 17% in constant currency and were 14% of total revenue.
- Separation-related costs –
Kyndryl's reported results for the fiscal second quarter reflect$48 million of transaction-related costs, primarily related to systems migrations associated with the Company's spin-off. Separation-related costs are expected to end this year.
Raising Fiscal Year 2024 Outlook
The Company is raising its fiscal 2024 targets primarily because of the benefits from its three-A initiatives, as discussed above, and noted that it continues to expect its fiscal 2024 adjusted free cash flow will be positive.
Earnings Webcast
About
Forward-Looking and Cautionary Statements
This press release contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in this press release, including statements concerning the Company's plans, objectives, goals, beliefs, business strategies, future events, business condition, results of operations, financial position, business outlook and business trends and other non-historical statements, including without limitation the information presented in the "Outlook" section of this press release, are forward-looking statements. Such forward-looking statements often contain words such as "will," "anticipate," "predict," "project," "plan," "forecast," "future," "estimate," "expect," "intend," "target," "may," "should," "would," "could," "outlook," "goal," "objective," "seek," "aim," "believe" and other similar words or expressions or the negative thereof or other variations thereon. Forward-looking statements are based on the Company's current assumptions and beliefs regarding future business and financial performance.
The Company's actual business, financial condition or results of operations may differ materially from those suggested by forward-looking statements as a result of risks and uncertainties which include, among others: risks related to the Company's spin-off from IBM; failure to attract new customers, retain existing customers or sell additional services to customers; technological developments and the Company's response to such developments; failure to meet growth and productivity objectives; competition; impacts of relationships with critical suppliers and partners; inability to attract, retain and/or manage key personnel and other skilled employees; the impact of local legal, economic, political, health and other conditions; a downturn in economic environment and customer spending budgets; damage to the Company's reputation; inability to accurately estimate the cost of services and the timeline for completion of contracts; its implementation of a new enterprise resource planning system and other systems and processes; service delivery issues; the Company's ability to successfully manage acquisitions, alliances and dispositions, including integration challenges, failure to achieve objectives, the assumption of liabilities, and higher debt levels; the impact of our business with government customers; failure of the Company's intellectual property rights to prevent competitive offerings and the failure of the Company to obtain necessary licenses; the impairment of our goodwill or long-lived assets; risks relating to cybersecurity and data privacy; risks relating to non-compliance with legal and regulatory requirements; adverse effects from tax matters and environmental matters; legal proceedings and investigatory risks; the impact of changes in market liquidity conditions and customer credit risk on receivables; the Company's pension plans; the impact of currency fluctuations; and risks related to the Company's common stock and the securities market.
Additional risks and uncertainties include, among others, those risks and uncertainties described in the "Risk Factors" section of the Company's Annual Report on Form 10-K for the fiscal year ended
In this release, certain amounts may not add due to the use of rounded numbers; percentages presented are calculated based on the underlying amounts.
Non-GAAP Financial Measures
In an effort to provide investors with additional information regarding its results, the Company has provided certain metrics that are not calculated based on generally accepted accounting principles (GAAP), such as constant-currency results, adjusted EBITDA, adjusted pretax income, adjusted net income, adjusted EPS, adjusted EBITDA margin, adjusted pretax margin, adjusted net margin and adjusted free cash flow. Such non-GAAP metrics are intended to supplement GAAP metrics, but not to replace them. The Company's non-GAAP metrics may not be comparable to similarly titled metrics used by other companies. Definitions of non-GAAP metrics and reconciliations of non-GAAP metrics for historical periods to GAAP metrics are included in the tables in this release.
A reconciliation of forward-looking non-GAAP financial information is not included in this release because the individual components of such reconciliation are not currently available without unreasonable effort. For the same reason, we are unable to address the probable significance of the unavailable information, which could be material to future results.
Investor Contact:
Lori Chaitman
lori.chaitman@kyndryl.com
Media Contact:
Ed Barbini
edward.barbini@kyndryl.com
Table 1 |
||||||||||||
|
||||||||||||
Three Months Ended |
Six Months Ended |
|||||||||||
|
|
|||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||
Revenues |
$ |
4,073 |
$ |
4,179 |
$ |
8,266 |
$ |
8,467 |
||||
Cost of services |
$ |
3,422 |
$ |
3,613 |
$ |
6,871 |
$ |
7,290 |
||||
Selling, general and administrative expenses |
634 |
706 |
1,353 |
1,400 |
||||||||
Workforce rebalancing charges |
39 |
3 |
97 |
6 |
||||||||
Transaction-related costs |
48 |
68 |
89 |
171 |
||||||||
Interest expense |
31 |
19 |
61 |
38 |
||||||||
Other expense (income) |
8 |
(10) |
13 |
(13) |
||||||||
Total costs and expenses |
$ |
4,182 |
$ |
4,399 |
$ |
8,484 |
$ |
8,892 |
||||
Income (loss) before income taxes |
$ |
(109) |
$ |
(219) |
$ |
(218) |
$ |
(425) |
||||
Provision for income taxes |
33 |
61 |
65 |
107 |
||||||||
Net income (loss) |
$ |
(142) |
$ |
(281) |
$ |
(283) |
$ |
(531) |
||||
Earnings per share data |
||||||||||||
Basic earnings (loss) per share |
$ |
(0.62) |
$ |
(1.24) |
$ |
(1.24) |
$ |
(2.35) |
||||
Diluted earnings (loss) per share |
(0.62) |
(1.24) |
(1.24) |
(2.35) |
||||||||
Weighted-average basic shares outstanding |
229.1 |
226.8 |
228.5 |
226.0 |
||||||||
Weighted-average diluted shares outstanding |
229.1 |
226.8 |
228.5 |
226.0 |
Table 2 |
||||||||||
SEGMENT RESULTS |
||||||||||
Three Months Ended |
Year-over-Year Growth |
|||||||||
As |
Constant |
|||||||||
Segment Results |
2023 |
2022 |
Reported |
Currency |
||||||
Revenue |
||||||||||
|
$ |
1,108 |
$ |
1,149 |
(4 %) |
(4 %) |
||||
|
569 |
614 |
(7 %) |
(3 %) |
||||||
Principal Markets1 |
1,465 |
1,472 |
(0 %) |
(5 %) |
||||||
Strategic Markets1 |
930 |
944 |
(1 %) |
(7 %) |
||||||
Total revenue |
$ |
4,073 |
$ |
4,179 |
(3 %) |
(5 %) |
||||
Adjusted EBITDA2 |
||||||||||
|
$ |
176 |
$ |
167 |
||||||
|
84 |
113 |
||||||||
Principal Markets |
185 |
57 |
||||||||
Strategic Markets |
150 |
111 |
||||||||
Corporate and other3 |
(21) |
(20) |
||||||||
Total adjusted EBITDA |
$ |
574 |
$ |
428 |
||||||
Six Months Ended |
Year-over-Year Growth |
|||||||||
As |
Constant |
|||||||||
Segment Results |
2023 |
2022 |
Reported |
Currency |
||||||
Revenue |
||||||||||
|
$ |
2,272 |
$ |
2,317 |
(2 %) |
(2 %) |
||||
|
1,180 |
1,249 |
(6 %) |
(1 %) |
||||||
Principal Markets1 |
2,949 |
2,988 |
(1 %) |
(3 %) |
||||||
Strategic Markets1 |
1,865 |
1,914 |
(3 %) |
(6 %) |
||||||
Total revenue |
$ |
8,266 |
$ |
8,467 |
(2 %) |
(3 %) |
||||
Adjusted EBITDA2 |
||||||||||
|
$ |
412 |
$ |
367 |
||||||
|
184 |
228 |
||||||||
Principal Markets |
352 |
157 |
||||||||
Strategic Markets |
283 |
207 |
||||||||
Corporate and other3 |
(45) |
(40) |
||||||||
Total adjusted EBITDA |
$ |
1,186 |
$ |
919 |
||||||
|
|
|||||||||
Balance Sheet Data |
2023 |
2023 |
||||||||
Cash and equivalents |
$ |
1,408 |
$ |
1,847 |
||||||
Debt (short-term and long-term) |
3,243 |
3,221 |
__________________________ |
|
1 |
Principal Markets is comprised of Kyndryl's operations in |
2 |
In the three months ended |
3 |
Represents net amounts not allocated to segments. |
Table 3 |
||||||
KYNDRYL HOLDINGS, INC. |
||||||
Six Months Ended |
||||||
2023 |
2022 |
|||||
Cash flows from operating activities: |
||||||
Net income (loss) |
$ |
(283) |
$ |
(531) |
||
Adjustments to reconcile net income (loss) to cash provided by operating activities: |
||||||
Depreciation and amortization |
||||||
Depreciation of property, equipment and capitalized software |
431 |
449 |
||||
Depreciation of right-of-use assets |
173 |
191 |
||||
Amortization of transition costs and prepaid software |
631 |
584 |
||||
Amortization of capitalized contract costs |
281 |
222 |
||||
Amortization of acquisition-related intangible assets |
15 |
25 |
||||
Stock-based compensation |
48 |
54 |
||||
Deferred taxes |
51 |
41 |
||||
Net (gain) loss on asset sales and other |
22 |
21 |
||||
Change in operating assets and liabilities: |
||||||
Deferred costs (excluding amortization) |
(699) |
(738) |
||||
Right-of-use assets and liabilities (excluding depreciation) |
(195) |
(193) |
||||
Workforce rebalancing liabilities |
(18) |
(1) |
||||
Receivables |
(110) |
471 |
||||
Accounts payable |
(494) |
181 |
||||
Taxes |
(55) |
33 |
||||
Other assets and other liabilities |
75 |
(316) |
||||
Net cash provided by (used in) operating activities |
$ |
(127) |
$ |
491 |
||
Cash flows from investing activities: |
||||||
Capital expenditures |
$ |
(275) |
$ |
(466) |
||
Proceeds from disposition of property and equipment |
119 |
10 |
||||
Other investing activities, net |
(53) |
(60) |
||||
Net cash used in investing activities |
$ |
(208) |
$ |
(516) |
||
Cash flows from financing activities: |
||||||
Debt repayments |
$ |
(67) |
$ |
(56) |
||
Common stock repurchases for tax withholdings |
(12) |
(13) |
||||
Other financing activities, net |
(1) |
— |
||||
Net cash provided by (used in) financing activities |
$ |
(80) |
$ |
(69) |
||
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
$ |
(33) |
$ |
(160) |
||
Net change in cash, cash equivalents and restricted cash |
$ |
(448) |
$ |
(253) |
||
Cash, cash equivalents and restricted cash at beginning of period |
$ |
1,860 |
$ |
2,154 |
||
Cash, cash equivalents and restricted cash at end of period |
$ |
1,412 |
$ |
1,901 |
||
Supplemental data |
||||||
Income taxes paid, net of refunds received |
$ |
88 |
$ |
37 |
||
Interest paid on debt |
$ |
59 |
$ |
34 |
||
___________________________________ |
||||||
Net cash provided by (used in) operating activities was |
||||||
Table 4
NON-GAAP METRIC DEFINITIONS AND RECONCILIATIONS
(dollars in millions, except signings)
We report our financial results in accordance with GAAP. We also present certain non-GAAP financial measures to provide useful supplemental information to investors. We provide these non-GAAP financial measures as we believe it enhances investors' visibility to management decisions and their impacts on operational performance; enables better comparison to peer companies; and allows us to provide a long-term strategic view of the business going forward.
Constant-currency information compares results between periods as if exchange rates had remained constant period over period. We define constant-currency revenues as total revenues excluding the impact of foreign exchange rate movements and use it to determine the constant-currency revenue growth on a year-over-year basis. Constant-currency revenues are calculated by translating current period revenues using corresponding prior-period exchange rates.
Adjusted pretax income is defined as pretax income excluding transaction-related costs, charges related to ceasing to use leased / fixed assets, charges related to lease terminations, pension expenses other than pension servicing costs and multi-employer plan costs, stock-based compensation expense, amortization of acquisition-related intangible assets, workforce rebalancing charges, impairment expense, significant litigation costs and currency impacts of highly inflationary countries. Adjusted pretax margin is calculated by dividing adjusted pretax income by revenue.
Adjusted EBITDA is defined as net income (loss) excluding net interest expense, income taxes, depreciation and amortization (excluding depreciation of right-of-use assets and amortization of capitalized contract costs), charges related to ceasing to use leased / fixed assets, charges related to lease terminations, transaction-related costs, pension costs other than pension servicing costs and multi-employer plan costs, stock-based compensation expense, workforce rebalancing charges, impairment expense, significant litigation costs, and foreign currency impacts of highly inflationary countries. Adjusted EBITDA margin is calculated by dividing adjusted EBITDA by revenue.
Adjusted net income is defined as adjusted pretax income less the reported provision for income taxes, minus or plus the tax effect of the non-GAAP adjustments made to calculate adjusted pretax income, and excluding exceptional items impacting the reported provision for income taxes. Adjusted net margin is calculated by dividing adjusted net income by revenue.
Adjusted earnings per share (EPS) is defined as adjusted net income divided by diluted weighted average shares outstanding to reflect shares that are dilutive or anti-dilutive based on the amount of adjusted net income.
Adjusted free cash flow is defined as cash flows from operating activities (GAAP) after adding back transaction-related payments, charges related to lease terminations, workforce rebalancing payments and significant litigation payments, less net capital expenditures. Management uses adjusted free cash flow as a measure to evaluate its operating results, plan strategic investments and assess our ability and need to incur and service debt. We believe adjusted free cash flow is a useful supplemental financial measure to aid investors in assessing our ability to pursue business opportunities and investments and to service our debt. Adjusted free cash flow is a financial measure that is not recognized under
Signings are defined by
Reconciliation of net income (loss) to |
||||||||||||
adjusted pretax income (loss), |
||||||||||||
adjusted EBITDA, adjusted net |
Three Months Ended |
Six Months Ended |
||||||||||
income (loss) and adjusted EPS |
|
|
||||||||||
(in millions, except per share amounts) |
2023 |
2022 |
2023 |
2022 |
||||||||
Net income (loss) (GAAP) |
$ |
(142) |
$ |
(281) |
$ |
(283) |
$ |
(531) |
||||
Provision for income taxes |
33 |
61 |
65 |
107 |
||||||||
Pretax income (loss) (GAAP) |
$ |
(109) |
$ |
(219) |
$ |
(218) |
$ |
(425) |
||||
Workforce rebalancing charges |
39 |
3 |
97 |
6 |
||||||||
Charges related to ceasing to use leased/fixed |
— |
— |
10 |
— |
||||||||
Transaction-related costs |
48 |
68 |
89 |
171 |
||||||||
Stock-based compensation expense |
25 |
28 |
48 |
54 |
||||||||
Amortization of acquisition-related intangible |
7 |
11 |
15 |
25 |
||||||||
Other adjustments1 |
15 |
9 |
31 |
18 |
||||||||
Adjusted pretax income (loss) (non-GAAP) |
$ |
25 |
$ |
(102) |
$ |
72 |
$ |
(152) |
||||
Interest expense |
31 |
19 |
61 |
38 |
||||||||
Depreciation of property, equipment and |
212 |
221 |
422 |
449 |
||||||||
Amortization of transition costs and prepaid |
306 |
291 |
631 |
584 |
||||||||
Adjusted EBITDA (non-GAAP) |
$ |
574 |
$ |
428 |
$ |
1,186 |
$ |
919 |
||||
Operating margin3 |
(1.7) % |
(5.0) % |
(1.7) % |
(4.7) % |
||||||||
Adjusted EBITDA margin |
14.1 % |
10.2 % |
14.4 % |
10.9 % |
||||||||
Adjusted pretax income (loss) (non-GAAP) |
$ |
25 |
$ |
(102) |
$ |
72 |
$ |
(152) |
||||
Provision for income taxes (GAAP) |
(33) |
(61) |
(65) |
(107) |
||||||||
Tax effect of non-GAAP adjustments |
(4) |
(5) |
(19) |
(11) |
||||||||
Adjusted net income (loss) (non-GAAP) |
$ |
(12) |
$ |
(168) |
$ |
(12) |
$ |
(270) |
||||
Diluted weighted average shares outstanding |
229.1 |
226.8 |
228.5 |
226.0 |
||||||||
Diluted earnings (loss) per share (GAAP) |
$ |
(0.62) |
$ |
(1.24) |
$ |
(1.24) |
$ |
(2.35) |
||||
Adjusted diluted earnings (loss) per share (non- |
(0.05) |
(0.74) |
(0.05) |
(1.19) |
___________________________ |
|
1 |
Other adjustments represent pension expenses other than pension servicing costs and multi-employer plan costs, significant litigation costs, and currency impacts of highly inflationary countries. |
2 |
Current-year amounts exclude |
3 |
Operating margin is calculated by dividing net income (loss) less income taxes, interest expense and other expense (income), by revenue. |
Three Months Ended |
Six Months Ended |
|||||||||||
Reconciliation of cash flow from operations |
|
|
||||||||||
to adjusted free cash flow (in millions) |
2023 |
2022 |
2023 |
2022 |
||||||||
Cash flows from operating activities (GAAP) |
$ |
46 |
$ |
387 |
$ |
(127) |
$ |
491 |
||||
Plus: Transaction-related payments |
42 |
70 |
84 |
135 |
||||||||
Plus: Workforce rebalancing payments |
34 |
9 |
113 |
14 |
||||||||
Plus: Significant litigation payments |
10 |
— |
44 |
— |
||||||||
Plus: Payments related to lease terminations |
(2) |
— |
5 |
— |
||||||||
Less: Net capital expenditures |
(61) |
(250) |
(155) |
(456) |
||||||||
Adjusted free cash flow (non-GAAP) |
$ |
69 |
$ |
216 |
$ |
(37) |
$ |
184 |
Three Months Ended |
Six Months Ended |
|||||||||||||||||
|
|
Fiscal Year-to-date |
||||||||||||||||
Signings (in billions) |
2023 |
2022 |
2023 |
2022 |
2023 |
2022 |
||||||||||||
Signings1 |
$ |
2.4 |
$ |
2.5 |
$ |
5.2 |
$ |
5.4 |
$ |
6.0 |
$ |
6.0 |
___________________________ |
|
1 |
Signings for the three months ended |
SOURCE