The News: Kyndryl, post-spin-off from IBM, has strategically shifted its focus to high-margin services and developed its Consult business and Kyndryl Bridge platform, despite a significant revenue drop. Looking forward, the company aims for sustainable growth through strategic initiatives and strong financial positioning, setting it apart from struggling peers like Atos. Read the earnings release here.

By the Numbers:

Revenues for the quarter ended June 30, 2024 total $3.74 billion, pretax income is $64 million, and net income is $11 million
Adjusted EBITDA is $556 million, adjusted pretax income is $92 million, and adjusted net income is $31 million
Kyndryl Consult continues to gain momentum with double-digit revenue growth in the quarter and over the last twelve months
Raises adjusted earnings outlook for fiscal year 2025 and reaffirms constant-currency revenue outlook with revenue growth in the fourth quarter

How Kyndryl’s Consult Business and Bridge Platform Drive Revenue Growth

Analyst Take: Kyndryl, which spun off from IBM in November 2021, has faced a challenging journey in its initial years as an independent company. The company’s revenue has dropped approximately $4 billion, a decline that underscores the complexity of its rebalancing efforts. I have covered this journey over the last couple of years and now the company is turning the corner. This rebalancing has been aimed at shifting the profit mix and exiting low-margin contracts inherited from its former parent. Despite the revenue drop, Kyndryl has strategically developed its Consult business and launched the Kyndryl Bridge platform to drive innovation and differentiation, which are pivotal, in my opinion, to its future growth and stability.

The Consult business focuses on delivering high-margin, high-value advisory services, which have seen substantial growth. A key focus has been providing consulting services that complement hyperscale cloud deployments from AWS, Azure and Google Cloud. Kyndryl Bridge, on the other hand, is a platform designed to automate and optimize IT infrastructure, enabling customers to achieve higher efficiency and better outcomes from their IT investments. These initiatives are crucial for Kyndryl as it aims to establish itself as a leader in mission-critical IT services.

Q1 2025 Earnings

Kyndryl’s fiscal first-quarter 2025 earnings reflect both the challenges and progress of its strategic transformation. The company reported revenue of $3.8 billion, marking a 9% decline in constant currency compared to the same period last year. This decline was anticipated as part of Kyndryl’s deliberate strategy to exit negative or low-margin revenue streams within ongoing customer relationships. Despite the revenue drop, the company demonstrated strong operational execution and significant progress in its key initiatives.

The company’s adjusted EBITDA for the quarter grew 19% year-over-year to $566 million, with an adjusted EBITDA margin of 14.7%, up 350 basis points from the prior year. This improvement highlights Kyndryl’s focus on driving efficiency and profitability. Adjusted pretax income was $30 million, a $91 million improvement year-over-year, showcasing the company’s ability to enhance its earnings despite the revenue challenges.

Kyndryl’s strategic initiatives, known as the “3As” – alliances, advanced delivery, and accounts – were key drivers of this earnings growth. The Consult business, which is part of the alliances initiative, saw revenue growth of 15% year-over-year in constant currency, with signings growing even faster at 30%. This underscores Kyndryl’s success in capturing higher-margin, higher-value-add business. Total signings for the quarter grew 3% year-over-year in constant currency, marking the second consecutive quarter of signings growth.

One of the significant accomplishments in the quarter was the performance of the Kyndryl Bridge platform. The platform has been instrumental in driving automation and efficiency across Kyndryl’s delivery operations. It has enabled the company to free up more than 9,500 delivery professionals to address new revenue opportunities and backfill attrition, representing a substantial cost-saving measure. Kyndryl Bridge is also generating actionable insights through AI, helping customers achieve nearly $2 billion in annual savings by avoiding maintenance and incident costs.

In addition to these operational achievements, Kyndryl’s financial position remains strong. The company’s cash balance at the end of the quarter was $1.6 billion, with total liquidity of $4.7 billion, including available debt capacity. Kyndryl’s net debt was $1.7 billion, and the company is rated investment grade by Moody’s, Fitch, and S&P. This strong financial position provides Kyndryl with the flexibility to continue investing in its strategic initiatives and supporting its long-term growth plans.

Looking Ahead

Kyndryl’s strategy is centered on achieving sustainable growth and profitability by capitalizing on secular trends in the IT industry. The company aims to pivot from transformation to growth in fiscal 2025, with a focus on driving higher-margin revenue streams and leveraging its technology alliances. Kyndryl expects to generate approximately $1 billion in hyperscaler-related revenue, reflecting its strong partnerships with leading cloud providers.

The company’s outlook for fiscal 2025 includes an anticipated revenue range of $15.2 billion to $15.5 billion, with a return to year-over-year revenue growth expected in the fourth quarter. Kyndryl also projects significant margin expansion, with an adjusted EBITDA margin of at least 16.2%, up 150 basis points from fiscal 2024. Adjusted pretax income is forecasted to be at least $435 million, representing a year-over-year increase of more than $270 million.

Kyndryl’s ability to execute on its strategic initiatives and deliver strong financial performance positions it favorably against its peers in the IT services industry. While players like Atos has been facing significant troubles, including restructuring challenges and financial difficulties, Kyndryl’s disciplined approach and strategic focus provide a stark contrast. Cap Gemini and DXC Technology, both key competitors, also face their own set of challenges in maintaining growth and profitability in a highly competitive market.

As Kyndryl continues to build on its strengths and leverage its strategic initiatives, the company is well-positioned to capture market share and drive long-term growth. The industry should view Kyndryl as a resilient player with a robust strategy focused on delivering high-value, mission-critical IT services to its customers. The company’s ongoing transformation efforts and commitment to operational excellence are key factors that will support its growth trajectory and competitive positioning in the years ahead and I will be closely tracking the turnaround story as the company returns to growth in the next couple of quarters.

Disclosure: The Futurum Group is a research and advisory firm that engages or has engaged in research, analysis, and advisory services with many technology companies, including those mentioned in this article. The author does not hold any equity positions with any company mentioned in this article.

Analysis and opinions expressed herein are specific to the analyst individually and data and other information that might have been provided for validation, not those of The Futurum Group as a whole.