In its recent third-quarter announcement, Kyndryl Holdings (KD), a global IT infrastructure services provider, reported mixed results. While revenue of $3.74 billion fell short of Wall Street estimates, net income surpassed expectations at $124 million. The company saw strong growth in areas like AI-linked sales and cloud services, offset by strong dollar impact and the termination of low-margin contracts. With over 74% of sales made outside the U.S., currency fluctuations notably impact Kyndryl’s financials. Despite some setbacks, Kyndryl remains positive about its future, particularly with companies adopting its AI technology and a bright outlook for its “hyperscaler” revenue target.
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The stock is attractively priced, making KD a potentially appealing option for investors looking for ways to participate in the burgeoning expansion of AI.
From IBM to Going It Alone
Kyndryl Holdings, IBM’s former infrastructure services business (IBM), is now a stand-alone global technology and IT infrastructure services provider. The company’s services span across areas such as cloud services, core enterprise and zCloud services, and application, data, and artificial intelligence services. Additionally, it offers digital workplace services, and security and resiliency services. Its comprehensive portfolio also includes network and edge services.
In recent developments, Kyndryl has recognized revenue of $300 million due to its Alliances initiative associated with cloud hyperscaler alliances, putting it on track to surpass its revenue target of $1 billion by Fiscal year 2025. Based on the AI-enabled Kyndryl Bridge operating platform, the company’s Advanced Delivery initiative has further amplified its technology services, creating additional revenue streams. These advances have generated an annual saving of about $725 million and are expected to exceed the company’s goal of $750 million by the Fiscal year 2025.
Kyndryl’s Strategic Financial Moves
Kyndryl inherited several no-margin contracts from IBM and has been looking to rework them to generate higher profits. It has progressed in addressing contract elements with substandard margins through its Accounts initiative, which has resulted in $825 million in annualized benefits, ahead of its $850 million Fiscal 2025 year-end target. The company also reported significant growth in third-quarter margins due to recent signings. Further, Kyndryl witnessed a rise of 26% in Kyndryl Consult revenues year-over-year, with Consult signings growing 35% year-over-year in the same period.
In November, the long-planned divestiture of the Securities Industry Services (SIS) platform in Canada was accomplished, yielding an after-tax gain of $138 million. The company also bought back 859,000 shares of its common stock at a cost of $30 million in the third quarter, as part of the $300 million share repurchase program launched in November.
Mixed Recent Financial Results
Kyndryl recently announced results for the third quarter of its Fiscal year 2025. The company reported Q3 total signings of $4.1 billion, marking a year-over-year increase of 10% on a reported basis and 12% in constant currency. Yet, revenue of $3.74 billion fell slightly short of analysts’ expectations by $70 million.
Despite the year-over-year decline in revenue of 5% (or 3% in constant currency), the company reported a 154% increase in adjusted pre-tax income reaching $160 million compared to the previous year, with adjusted net income landing at $124 million. Non-GAAP earnings per share (EPS) reached $0.51, surpassing expectations by $0.10.
Cash flow from operations was $260 million, and adjusted free cash flow was $171 million.
Management has offered forward guidance, projecting an adjusted pre-tax income of $475 million, indicating a rise of at least $310 million compared to the previous year. Further, it expects an increase of at least 200 basis points in its adjusted EBITDA margin, reaching a minimum of 16.7%. Additionally, Kyndryl has forecasted an adjusted free cash flow of approximately $350 million.
Trades with Momentum and Value
The stock has been on an upward trajectory, climbing 86% over the past year. It trades near the top of its 52-week price range of $19.24 – $39.54 and shows positive price momentum as it trades above the 20-day (37.66) and 200-day (28.55) moving averages. The P/S ratio of 0.57x sits well below the Information Technology sector average of 3.3x, suggesting it trades at a significant discount.
Analysts following the company have been bullish on KD stock. For example, Susquehanna’s James Friedman recently reiterated a Positive rating on the shares while raising the price target to $40 (from $33), noting expanding margins and growing revenue.
Four analysts recently recommended Kyndryl Holdings as a strong buy. The average price target for KD stock is $39.33, representing a potential downside of 1.48% from current levels.
Kyndryl in Review
Despite falling slightly short of Wall Street’s revenue estimates, successful endeavors in AI-linked sales, cloud services, and a positive outlook for hyperscaler revenue provide Kyndryl Holdings with an optimistic forecast. Further bolstering its appeal, Kyndryl’s stock showcases positive price momentum while trading at a relative value, making KD stock a potentially compelling option for tech investors.
