Managed services News
Kyndryl Stock Soars After An Adjusted Profit Surprise
Joseph F. Kovar
‘Basically we’ll make money not only this year, but we’ll make money on an operating basis from here on out. We feel very good about our progress on each of the elements that leads us to that high-single-digit profit margin that we’ve been talking to the world about over the medium term. And I think this is a great quarter, a great start. And our strategy, not only is it working, but it’s clear it can work to turn around this company and get to a stable revenue growth and a much more solid competitive level of profitability,’ says Kyndryl Chairman and CEO Martin Schroeter.
An expected adjusted pre-tax profit this year and going forward led Kyndryl investors Monday to drive the company’s stock up more than 13 percent in after-hours trading.
Kyndryl, the New York-based global IT infrastructure services provider spun out from IBM in November of 2021, Monday reported its first fiscal quarter 2024 finances, a report that indicated the company has returned to profitability two years after the spin-out.
Kyndryl, ranked No. 8 on CRN’s 2023 Solution Provider 500, is slated to hold its fiscal first quarter 2024 quarterly financial analyst conference call on Tuesday morning.
However, Kyndryl Chairman and CEO Martin Schroeter told CRN in an exclusive meeting that the company has made a great start on its journey towards profitability.
“Basically we’ll make money not only this year, but we’ll make money on an operating basis from here on out,” Schroeter said. “We feel very good about our progress on each of the elements that leads us to that high single-digit profit margin that we’ve been talking to the world about over the medium term. And I think this is a great quarter, a great start. And our strategy, not only is it working, but it’s clear it can work to turn around this company and get to a stable revenue growth and a much more solid competitive level of profitability.”
That strategy is a combination of what Kyndryl calls its “Three A’s” and “Plus Plus.”
The ‘Three A’s,’ Schroeter said, refers to the company’s alliance activity, its advanced delivery work, and its focused accounts, while Plus Plus refers to a new organization, Kyndryl Consult, as well as managing costs.
The largest contributor to Kyndryl’s growth for now is its work on addressing focus accounts, which Schroeter said are the accounts it inherited from IBM in the spin-out.
“[Those accounts] are essentially break-even, and many of them even worse,” he said. “We’ve made a lot of progress in the quarter to restructure the contracts to keep and continue to do the work that our customers love where we provide high-value services, but to address elements from the IBM spin-out that put us in a highly negative spot. There are instances, as an example, where we get $100 of revenue for a customer, and it costs us $150 in software and hardware costs from IBM.”
The second-biggest contributor is advanced delivery work that Schroeter said is using Kyndryl’s own intellectual property and its own data to deliver better levels of service.
“So reducing our customers’ operational risk by using our data and our AI to automate and to deliver services that allow us to free up our labor, which is a big part of our costs, in order to move them into other revenue producing activities,” he said.
The company’s shares in after-hours trading rose by over 13 percent to $14.10 per share after falling about 2 percent before the close of the trading day.
For its first fiscal quarter 2024, which ended June 30, Kyndryl reported total revenue of $4.20 billion, down about 2 percent from the $4.30 billion the company reported for its first fiscal quarter 2023.
That included U.S. revenue of $1.16 billion, which was basically flat from last year’s $1.17 billion.
Total revenue beat analyst expectations by $100 million, according to Seeking Alpha.
The company also reported a GAAP net loss of $141 million or 62 cents per share, down significantly from the $250 million or $1.11 per share the company reported last year.
On a non-GAAP basis, Kyndryl broke even during the quarter compared to a net loss of $100 million or 44 cents per share.
This was significantly above analysts expectations of a non-GAAP loss of $1.11.
Adjusted pre-tax income was $47 million, compared to a loss of $50 million last year.
Looking ahead, Kyndryl raised its fiscal 2024 adjusted EBITDA margin outlook to about 14 percent compared to its previous projection of 12 percent to 13 percent, and now expects its fiscal 2024 adjusted pretax income to be at least $100 million. The company also said it expects its fiscal 2024 adjusted free cash flow will be positive.