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01/10 17:25
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Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
The earnings call reveals strong growth in Kyndryl Consult and Hyperscaler-related revenue, improved EBITDA margins, and a solid increase in signings. Despite a Q1 cash outflow, the company expects significant free cash flow for the fiscal year. The Q&A highlights confidence in growth and margin expansion, with positive catalysts like AI partnerships. Stock buybacks indicate shareholder returns. Overall, the positive aspects outweigh the negatives, suggesting a likely stock price increase in the short term.
Adjusted Pretax Income $128 million, a 39% year-over-year increase. The increase is attributed to continued growth in Kyndryl Consult revenue, collaboration with cloud hyperscalers, and expanded capabilities in cloud, cybersecurity, AI, and Kyndryl Bridge.
Revenue $3.7 billion, up slightly on a reported basis but a 2.6% decline in constant currency. The decline is primarily due to the focus accounts initiative, where revenue from 8 focus accounts was reduced by half to improve gross margins.
Kyndryl Consult Revenue Grew 30% year-over-year, now running at an annual pace of more than $3 billion. Growth is driven by increased demand for advisory services and investments in skills and innovation.
Hyperscaler-Related Revenue $400 million in Q1, nearly doubled year-over-year. Growth is attributed to strong demand and progress toward the $1.8 billion fiscal 2026 target.
Adjusted EBITDA $647 million, with a margin of 17.3%, up 240 basis points year-over-year. The improvement reflects strategic achievements, including leveraging technology alliances and driving efficiency.
Free Cash Flow A $222 million outflow in Q1, attributed to seasonal factors like annual software and incentive compensation payments. The company expects to generate $550 million in free cash flow for the fiscal year.
Signings $18.3 billion over the last 12 months, a 43% increase year-over-year. The growth is driven by strong demand in applications, data and AI, and cloud practices.
Kyndryl Consult: Revenue grew 32% in constant currency over the last 12 months, now running at an annual pace of more than $3 billion. Positioned as a growth engine with double-digit growth expected.
Hyperscaler-related revenue: Nearly doubled from a year ago to $400 million in Q1, progressing towards a $1.8 billion fiscal 2026 target.
AI and Kyndryl Bridge: Investments in AI-powered Kyndryl Bridge operating platform and partnerships like Databricks to deliver AI at scale and modernize IT estates.
New partnerships: Announced partnership with Databricks to enable AI delivery at scale and modernize IT estates. Expanded technology alliances to meet evolving customer needs.
Geographic investments: Invested in technology hubs in England, France, and Singapore to support AI adoption and digital transformation. Launched AI private cloud in Japan in collaboration with Dell and NVIDIA.
Focus accounts initiative: Reduced revenue by half in 8 focus accounts while significantly increasing gross margin over the last year.
Advanced delivery initiative: Driven by Kyndryl Bridge, automation has freed up thousands of delivery professionals, worth $825 million annually.
Signings growth: Signings increased 44% in constant currency over the last 12 months, with a book-to-bill ratio above 1.
Revenue growth strategy: Focused on alliances, advanced delivery, and accounts to drive profitable growth. Targeting mid-single-digit revenue growth by fiscal 2028.
AI and modernization: Positioned as a leader in AI adoption, cloud migration, and hybrid IT modernization, leveraging partnerships and internal expertise.
Revenue Decline in Constant Currency: Q1 revenue declined in constant currency due to actions taken to address 8 focus accounts, where revenue was reduced by half to improve gross margins. This indicates potential challenges in maintaining revenue growth while improving profitability.
Delayed Deals: Some deals targeted for Q1 were moved out of the quarter, which could impact short-term revenue and financial performance.
Focus Accounts Initiative: The initiative to address focus accounts has led to reduced revenue but improved gross margins. This strategy may pose risks to overall revenue growth and customer retention.
Economic Uncertainty: Forward-looking statements are subject to risk factors, including economic uncertainties that may impact actual results.
Regulatory Compliance: The company faces challenges in ensuring regulatory compliance, especially in areas like AI and cybersecurity, which are critical to its growth strategy.
Supply Chain and Resource Allocation: Efforts to free up delivery professionals and optimize operations may face challenges in execution, potentially impacting service levels and operational efficiency.
Competitive Pressures: The company operates in a highly competitive IT services market, which may impact its ability to win new contracts and maintain margins.
Customer Dependency: Significant reliance on large accounts and long-term contracts could pose risks if customer needs or market conditions change.
Currency Fluctuations: Revenue and earnings are subject to currency fluctuations, although the company has hedged most of its fiscal 2026 pretax income exposures.
Strategic Execution Risks: The company’s ambitious growth and transformation plans, including AI adoption and cloud migration, require flawless execution to achieve projected outcomes.
Revenue Growth: Kyndryl projects a 1% constant currency revenue growth for fiscal 2026, with acceleration expected in the second half of the year. Kyndryl Consult revenue is anticipated to grow in double digits.
Adjusted Pretax Income: The company expects adjusted pretax income to grow by at least $243 million, reaching a minimum of $725 million in fiscal 2026. This represents a margin expansion of approximately 150 basis points year-over-year.
Free Cash Flow: Kyndryl forecasts approximately $550 million in free cash flow for fiscal 2026, with a conversion rate of roughly 100% of adjusted pretax income less cash taxes.
Hyperscaler-Related Revenue: The company aims to achieve $1.8 billion in hyperscaler-related revenue in fiscal 2026, a 50% increase from fiscal 2025.
Long-Term Financial Goals: By fiscal 2028, Kyndryl expects to deliver more than $1 billion in adjusted free cash flow and over $1.2 billion in adjusted pretax income, with mid-single-digit revenue growth.
Margin Expansion: The adjusted EBITDA margin is projected to increase to approximately 18% in fiscal 2026, up 130 basis points from fiscal 2025.
Signings and Backlog: Kyndryl has achieved $18.3 billion in signings over the last 12 months, with a gross profit book-to-bill ratio of 1.5, indicating growth in future profit from committed contracts.
AI and Modernization Initiatives: The company is investing in AI and IT modernization, including partnerships with Databricks and the development of AI-powered solutions like Kyndryl Bridge. These initiatives are expected to drive long-term growth.
Share Repurchase Program: Kyndryl has been returning capital to shareholders through its share repurchase program. Under the share repurchase authorization announced in late November, the company bought back 1.8 million shares of its common stock in the quarter at a cost of $65 million. As of June 30, $141 million of repurchase capacity remains under the authorization.
The earnings call reveals strong financial performance, with significant growth in Kyndryl Consult revenues and hyperscaler-related revenues. Adjusted EBITDA and pretax income have increased substantially, indicating operational efficiency. The company is investing in AI and acquisitions, enhancing its competitive position. Shareholder returns through repurchases and optimistic guidance for the second half further support a positive outlook. Despite some uncertainties in management's responses, the overall sentiment is positive, suggesting a likely stock price increase.
The earnings call reveals strong growth in Kyndryl Consult and Hyperscaler-related revenue, improved EBITDA margins, and a solid increase in signings. Despite a Q1 cash outflow, the company expects significant free cash flow for the fiscal year. The Q&A highlights confidence in growth and margin expansion, with positive catalysts like AI partnerships. Stock buybacks indicate shareholder returns. Overall, the positive aspects outweigh the negatives, suggesting a likely stock price increase in the short term.
The earnings call summary shows strong financial performance with significant increases in revenue, adjusted EBITDA, and free cash flow, along with a robust share repurchase program. The Q&A section indicates positive sentiment with expectations of continued growth and strategic investments. Despite some macroeconomic uncertainties and cost concerns, the company's proactive measures and optimistic guidance suggest a positive outlook. The absence of specific market cap data limits the precise prediction, but overall indicators point towards a positive stock price movement in the next two weeks.
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