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 ended September 30, 2023

• Raises full-year adjusted earnings outlook

Kyndryl Holdings, Inc., the world's largest IT infrastructure services provider, today released financial results for the quarter ended September 30, 2023, the second quarter of its 2024 fiscal year. 

"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 Kyndryl Chairman and Chief Executive Officer Martin Schroeter.  "Our customers are increasingly relying on us to provide the mission-critical expertise and technology necessary to harness today's secular IT trends."

Results for the Fiscal Second Quarter Ended September 30, 2023

For the second quarter, Kyndryl reported revenues of $4.1 billion, a year-over-year decline of 3% and 5% in constant currency.  The year-over-year revenue decline reflects the Company's decision to reduce inherited zero-margin and low-margin third-party content in customer contracts. The Company reported a pretax loss of $109 million and a net loss of $142 million, or ($0.62) per diluted share, in the quarter, compared to a net loss of $281 million, or ($1.24) per diluted share, in the prior-year period.  The net loss in the quarter included $87 million of transaction-related costs and workforce rebalancing charges.  Cash flow from operations was $46 million.

Adjusted pretax income was $25 million, an increase of $127 million compared to an adjusted pretax loss of $102 million in the prior-year period.  Currency movements had a positive year-over-year impact of approximately $9 million on adjusted pretax income.  Adjusted net loss in the quarter was $12 million, or ($0.05) per diluted share.

Adjusted EBITDA of $574 million increased 34% compared to $428 million in the prior-year period, primarily driven by contributions from the Company's Alliances, Advanced Delivery and Accounts initiatives, partially offset by a software cost increase of $50 million.  Adjusted free cash flow was $69 million.

"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 Kyndryl for future success by signing new contracts and renewals with meaningfully higher margins than our pre-spin, legacy contracts," said Kyndryl Chief Financial Officer David Wyshner.

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 the Kyndryl 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

Kyndryl is raising its fiscal 2024 adjusted pretax income outlook, which it now expects to be at least $140 million, compared to its prior outlook of at least $100 million.  The Company is also raising its fiscal 2024 adjusted EBITDA margin outlook, now expecting it to be approximately 14.5%, compared to its prior outlook of approximately 14%.

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.  Kyndryl is narrowing its outlook for constant-currency revenue growth to (6%) to (7%), which represents the stronger end of its prior estimate of (6%) to (8%).