Kyndryl Stock Leaps After Earnings. Its Turnaround Is Ahead of Schedule.

For the third quarter, Kyndryl posted revenue of $4.1 billion, about $100 million ahead of the consensus call among analysts tracked by FactSet. Adjusted earnings before interest, taxes, depreciation and amortization, or Ebitda, was $574 million, well above the Street consensus of $487 million.

Kyndryl had a pretax profit in the quarter of $25 million, while the Street had been anticipating a loss of $21 million. Its adjusted net loss for the quarter was five cents a share, while the Street had expected a loss of 30 cents. Under generally accepted accounting principles, the company lost $142 million, or 62 cents a share, improving from a loss of $281 million and $1.24 a share in the year-earlier quarter.

When Kyndryl was spun out of
IBM
in 2021, the company told investors it would take a few years for it to return to growth and profitability. But in an interview with Barron’s, CEO Martin Schroeter said the company is ahead of where it had expected to be at this point. Kyndryl is raising its forecast for full-year 2023 adjusted pretax income to at least $140 million, from at least $100 million, while boosting its estimate for adjusted Ebitda margin to 14.5% from 14%.

“We sit at the heart of the secular trends that customers want our help with,” Schroeter said, pointing to the emergence of hybrid infrastructure, cloud computing, and artificial intelligence software as areas where its customers are investing.

“The reason we have turned around the business much faster than the sell-side or investors thought is that we are critical to our customers’ success in taking advantage of secular trends. We’re their heart and lungs.”

The Kyndryl CEO noted that the company’s revenues have been pressured in part by a decision to reduce some zero-margin and low-margin business that was in place at the time of the spin. The company also said its quarterly results reflected $87 million of costs related to the IBM spin and recent workforce reductions.

Schroeter said he remains confident that Kyndryl will begin to post revenue growth starting in calendar 2025. He also said that in the medium term, the company should be able to achieve an adjusted pretax margin in the high single digits, with pretax income in the $1 billion range, and a high rate of converting those profits into cash. 

Kyndryl shares struggled following the spin from IBM in part because Big Blue’s stockholder base—many lured by the company’s 4.5% dividend yield—had little interest in keeping shares of a company that was shrinking at the top line and offered no prospect of income.

That should change in the medium term, Schroeter said.

“This is the kind of business, with great visibility on our outlook, that lends itself to returning cash to shareholders,” he said. “For now we have to maintain focus on our credit ratings and our cash balance. Two years in, we’re still in fix-it mode. It’s not the right time yet. But this is very much a business that can and will consider that in the medium term.”

Kyndryl shares have rallied 40% for the year to date.

Write to Eric J. Savitz at [email protected]