Any improvement with the problematic contracts, labeled “Focus Accounts”, should lead to a meaningful improvement in gross profit and earnings. Technology giant International Business Machines (IBM 0.51%) recently completed a long-awaited spinoff, setting Kyndryl Holdings (KD -0.38%) apart as a separate business and independently traded stock. IBM shareholders, including Yours Truly, received 1 Kyndryl share per 5 shares of IBM in the process. IBM’s margins also expanded as it lapped Kyndryl’s divestment, focused on growing its higher-margin services, and reaped the benefits of cost-cutting initiatives. In the first nine months of 2023, gross margin rose 140 basis points year over year to 54% as pre-tax margin improved from negative 4.9% to positive 11.1%. IBM cleared those targets in 2022, but its consulting and infrastructure segments broadly missed those expectations throughout 2023 as the macro headwinds drove companies to rein in their spending.
It is one of the fastest-growing segments of the company and its growth engine, with revenue jumping 20% YoY in Q1 F24. It accounted for 12% of their total revenue in F23, and they expect it will reach ~20% in F27. To date, they’ve been able to free up more than 6,500 delivery professionals to address new revenue opportunities and to backfill attrition. This is worth roughly $375 million a year, representing a $75 million increase in their annual run rate this past quarter.
Also, Kyndryl has way more deferred costs than most other companies. I find including amortized deferred costs in adjusted EBITDA very misleading. The good news is https://forex-reviews.org/ even after factoring amortization on deferred costs out of adjusted EBITDA, there is plenty of EBITDA. That is the EBITDA I will use in the valuation section.
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The biggest move made by International Business Machines (IBM 0.51%) since CEO Arvind Krishna took the helm last year was the planned spinoff of the managed infrastructure services unit. The new company will be called Kyndryl, and it will be led by former IBM CFO Martin Schroeter. The IT industry is undergoing a swift transformation, presenting a host of fresh prospects, and Kyndryl is strategically positioned to harness these opportunities. Moreover, they will also benefit from a larger TAM.
- Unless you sold or otherwise disposed of your IBM shares, your balance before and after the transaction remained the same.
- As of December 3, 2021 it closed at $18.63 having bounced off a low of $15.45 three days earlier.
- IBM after over a decade of futility has jettisoned its worst business in order to grow again.
- More than half of IBM’s revenue currently comes from services.
We assumed the revenue estimates from WS analysts for F24 and F25, and then modeled a modest decline and a return to growth after F27. EBITDA margins this year are expected to be around 14%, and with the ongoing improvement in margins, we think it is very conservative to assume they will reach 15% in F2028. Lastly, we took F24 estimates for capex and taxes and increased them slightly year after year. Finally, we also assumed a WACC of 12% and a TGR of 2%. All things considered, Kyndryl doesn’t have much to offer investors right now.
The company, formerly known as IBM’s (IBM 0.51%) infrastructure services division, was expected to post an adjusted net loss of $0.63 on sales near $3.98 billion in the second quarter of fiscal year 2024. Instead, Kyndryl reported a net loss of $0.62 per share and $4.07 billion in top-line revenue. The company raised its full-year guidance for adjusted pre-tax income and earnings before interest, taxes, depreciation, and amortization (EBITDA).
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Many believe it’s due to management being more focused. I also believe it’s due to management being better incented with compensation including stock and options directly tied to the business. Further, underperforming businesses like this tend to be underinvested in by the parent. Kyndryl was the IT data center services portion of IBM formerly comprising most of IBM Global Technology Services.
This is tax loss season when losers are being sold to reduce tax expenses. The chart below shows KD has dropped from $31.50 when issued to $18.63 currently. It actually started trading at $40 prior to that on a when issued basis in late October.
It traditionally operated and designed datacenters for large corporations and governments. Kyndryl handles most or all IT infrastructure for these corporations. The business is worldwide with 46% coming from the Americas and another 46% from Europe and the Middle East.
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Moreover, they have $3.2B of undrawn senior unsecured credit facility to boost liquidity in case of need. The management made very clear on the earnings call that annual losses are behind now and that as the company continues to hit its profit goals, margins should continue to expand. But the real reason why the stock jumped 15% after the results is because they raised their F24 full-year https://forexbroker-listing.com/ guidance. The company now expects the EBITDA margin to be approximately 14%, versus 12%-13% in May. Moreover, they estimate that adjusted pretax income will be at least $100 million, an increase from breakeven to slightly negative in May. This profitable section of their business supports their entire G&A structure and interest burden and gets the company to roughly breakeven.
Some details have emerged about IBM’s plan to spin off a major business unit.
Tangible net worth was $4.2 billion on September 30, 2021. Total liabilities (I always exclude lease liabilities) were 1.28x tangible net worth on that date. There was only $392 million of interest bearing debt on September 30, 2021. At the time of the spinoff, $3.2 billion in debt was issued in bonds and $2.0 billion in cash was retained on the books. The net debt of $1.2 billion is only 29% of tangible net worth.
Trending Analysis
The company is not sitting on its hands, announcing new or expanded partnerships with household names Microsoft, Pitney Bowes, and VMware along the way. Investors and analysts aren’t exactly bursting with excitement over this unknown new investment vehicle. In the medium and long term, the most important thing here is Kyndryl’s opportunity to pursue a whole range of business they couldn’t before. They already have relationships with the majority of the companies those opportunities are with.
Stock Money Flow
I do see one reason to pick up some Kyndryl shares right now, or hold on to the shares that were created by the spinoff. The stock is just too darn cheap, even if Kyndryl’s growth prospects are dim. Among 1,618 stocks on U.S. exchanges https://broker-review.org/ with a market cap of at least $4 billion (Kyndryl stands at $4.2 billion), only 12 carry lower price-to-sales ratios than this ticker. The managed infrastructure company started life with a $9.1 billion market cap in late October.