KD Financial Analysis

Analysis Date: 2/5/2025

Business Model

Kyndryl generates revenue by providing IT infrastructure services across various practices like Cloud, Security & Resiliency, Network & Edge, Applications, Data & AI, Digital Workplace, and Core Enterprise. They serve clients across industries including Financial Services, Public and Healthcare, Technology, Media & Telecom, Industrials, and Retail, Travel & Logistics.

Revenue Sources

• Cloud Services (34% of revenue)
• Core Enterprise Services (31% of revenue)
• Security & Resiliency Services (14% of revenue)
• Digital Workplace Services (7% of revenue)
• Applications, Data & AI Services (6% of revenue)
• Network & Edge Services (8% of revenue)

Income Statement Analysis

• Revenue decreased by 4.88% year-over-year, reflecting the company's continued progress in reducing inherited no-margin and low-margin third-party content in customer contracts and divestiture of SIS platform. (Con)
• Cost of services decreased by 6.37% year-over-year, indicating improved efficiency or reduced service volume. (Pro)
• Selling, general and administrative expenses decreased by 8.23% year-over-year, showing better cost management. (Pro)
• Workforce rebalancing charges decreased by 10.53% year-over-year, suggesting a reduction in restructuring activities. (Neutral to Pro depending on context)
• Transaction-related costs (benefits) significantly increased (benefit decreased) by 92.21% year-over-year, primarily due to a transaction-related gain of $145 million pretax ($138 million after-tax) related to the divestiture of its Securities Industry Services platform in Canada in Q3 2025. (Pro - one time benefit)
• Interest expense decreased by 22.58% year-over-year, possibly due to debt reduction or favorable interest rate changes. (Pro)
• Other expense (income) shifted from expense to income year-over-year, a positive development. (Pro)
• Income before income taxes significantly increased by 386.79% year-over-year, driven by cost reductions and transaction benefits. (Pro)
• Net income turned positive from a net loss in the previous year, a significant improvement. (Pro)

Balance Sheet Analysis

• Cash and equivalents decreased slightly by 3.35% since March 31, 2024. (Neutral)
• Total debt also slightly decreased by 1.14% since March 31, 2024. (Neutral)

Capital Allocation

Kyndryl initiated a $300 million share repurchase program, reflecting confidence in future growth trajectory. (Earnings Release Page 1). Company repurchased 859,000 shares for $30 million in Q3 2025. (Earnings Release Page 2). Management prioritizes maintaining strong liquidity, investment grade rating, reinvesting in the business, and returning capital to shareholders. (Transcript - David's remarks)

Management Commentary

Signings grew year over year for the fifth consecutive quarter and are up 31% to $1,630,000,000,0.0 over the last twelve months.

Adjusted pretax margins increased substantially compared to last year and we generated more than $170,000,000 of adjusted free cash flow in the quarter.

Hyperscaler related revenue surpassed $300,000,000 in the quarter, tracking ahead of our nearly $1,000,000,000 full year target.

Constant currency revenue growth was sequentially four points stronger than the year over year decline we reported last quarter, consistent with our plans to inflect back toward growth.

Reported revenues were affected by currency movements, creating a two point gap between our reported revenue change and our constant currency revenue change.

Overall Sentiment: Positive. Management expresses confidence in the company's strategy and execution, highlighting strong signings growth, margin expansion, and progress on key initiatives. They are optimistic about achieving revenue growth and meeting financial targets.

Recommendation

Rating: Buy

Reason for Rating: Based on strong Q3 2025 performance, improved profitability, positive cash flow generation, and raised full-year outlook, a 'Buy' recommendation is warranted. The company is demonstrating successful execution of its strategy, particularly in Kyndryl Consult and hyperscaler alliances, leading to significant earnings growth and margin expansion.

Disclaimer: This report is for informational purposes only and not investment advice. The analysis is based on limited information and subject to change. Investing in securities involves risks, including potential loss of principal. Past performance doesn't guarantee future results. Always conduct your own research, understand the risks, and consult a financial professional before making investment decisions.

Generated on: 2/5/2025, 7:45:25 AM