Kyndryl stock slides after earnings and guidance miss

'We are taking full advantage of the new freedom associated with our independence and autonomy,’ claims Kyndryl CEO Martin Schroeter

Investors sent Kyndryl's stock down Wednesday a day after a disappointing earnings report, wiping out more than half a billion dollars in market valuation from the IBM global infrastructure service provider spin-off.

The company's stock sank more than 12 per cent Wednesday, with shares closing at $12.53 and its market cap at $2.85bn.

Despite Kyndryl's expectations of continued progress on several of its key initiatives, the New York-based company Tuesday published guidance for fiscal 2024 revenue expected to fall 6 percent to eight per cent compared to its fiscal 2023 revenue, with positive revenue growth not expected until fiscal 2025.

However, that guidance was tempered by expectations of a small rise in adjusted EBITDA margin to 12 per cent to 13 per cent, compared to 2023's 11.6 per cent, while expected adjusted pretax margin of 0 per cent to negative one per cent is an improvement over 2023's negative 1.3 per cent.

Kyndryl Tuesday reported revenue of $4.26bn, which beat analyst expectations by $110m, but its GAAP loss per share of $3.24 was $2.21 per share below expectations, according to Seeking Alpha.

By late afternoon Wednesday, Kyndryl share prices had fallen by nearly 13 per cent to $12.52 per share. This compared to this year's peak of $17.08 per share on February 15, and its all-time peak of $40.75 per share on October 22, 2021, when the company was spun out of IBM.

Kyndryl in March went through a round of layoffs, although the company said it was a small percentage of employees. The layoffs were done to help make the company more efficient and competitive, Kyndryl said at the time.

Kyndryl CEO Martin Schroeter, in his prepared remarks to financial analysts Tuesday during the company's fiscal 2023 financial conference call, said that Kyndryl has accomplished much in its first full fiscal year as an independent company.

"We delivered solid fourth-quarter results exceeding our recent guidance," Schroeter said. "We exceeded our year-one targets for all three of our alliances, advanced delivery, and accounts [initiatives].

"We're solidifying our leadership position in mission-critical IT services. And we are signing new contracts that will drive margin expansion going forward. In short, we are taking full advantage of the new freedom associated with our independence and autonomy.

"We've proven we can deliver on an ambitious plan to transform and strengthen our business. This gives us tremendous confidence as we look ahead to fiscal 2024 and beyond."

Kyndryl is pinning its hopes on future growth on what it calls its 'Three-A' initiative, which includes alliances, advanced delivery, and accounts.

For fiscal 2023, the company signed $1.2bn in alliance deals with hyperscaler cloud providers versus its original target of $1bn in signings.

It also transformed its advanced service delivery with upskilling and automation to realise $275m in annualised savings in fiscal 2023 vs. its target of $200m. And it addresses its accounts by moving away from accounts with substandard margins for an annualised profit improvement of over $210m vs. its target of over $100m.

For fiscal 2024, Kyndryl is expecting see actual revenue related to its cloud hyperscaler alliances of over $300m, report cumulative benefits from advanced delivery of about $450m, and report cumulative benefits from its accounts initiative of about $400m.

"Just over a year ago, we introduced our [Three A initiative], and since then, we've successfully executed each of these initiatives and exceeded the year-one milestones that we laid out," Schroeter said.

"We've reshaped our business through our global practices and alliances, and we've created new avenues for delivering higher value services to customers through Kyndryl Consult, Kyndryl Bridge, and Kyndryl Vital. We're building resiliency and productivity through advanced delivery."

Kyndryl has made great strides in creating a services-oriented culture that is flat and fast and focused on shared success between the company and its customers, Schroeter said.

"I can say confidently that we have laid a solid foundation, and this year our fiscal 2024 will be a year of acceleration," he said.

"We'll continue to execute our strategy, deliver on cost optimisation, and serve even more of our customers needs. Our efforts will strengthen our overall business performance and drive meaningful margin expansion, putting us on track toward our aggressive medium-term transformation goals and setting us up to deliver more value to our customers and our shareholders."

For its fourth fiscal quarter 2023, Kyndryl reported revenue of $4.26bn, down nearly four per cent compared to the $4.43bn the company reported for its fourth fiscal quarter 2022.

This included US revenue of $1.15bn, down two per cent from last year; Japan revenue of $648m, down eight per cent; principal market revenue of $1.50bn, down five per cent; and strategic market revenue of $966m, down one per cent.

On a GAAP basis, Kyndryl reported net loss of $737m or $3.24 per share, which was a significant improvement over the net loss of $1.37bn or $6.06 per share it reported last year. The company also reported non-GAAP EBITDA (earnings before interest, taxes, depreciation, and amortisation) of $476m, down from last year's $536m.

For all of fiscal 2023, Kyndryl reported revenue of $17.03bn, down seven per cent over the $18.32bn the company reported for fiscal 2022.

This included US revenue of $4.73bn, basically flat with last year's $4.75bn; Japan revenue of $2.50bn, down 13 per cent; principal market revenue of $5.96bn, down 13 per cent; and strategic market revenue of $3.84bn, down one per cent.

On a GAAP basis, Kyndryl reported a net loss of $1.37bn or $6.06 per share, significantly improved over its fiscal 2022 net loss of $2.06bn or $9.09 per share. The company also reported non-GAAP EBITDA of $1.98bn, down from last year's $2.20bn.