Kyndryl – Like the old IBM*, except with an Undisclosed Cost Problem: Part I
GOTHAM CITY RESEARCH’S OPINIONS
• KD manipulates reported Adj EBITDA + Adj. FCF to artificially give the appearance that it generates profits and cash flow. In reality, KD generates losses and burns cash.
• KD faces higher incremental IBM cost of services, which will pressure earnings far below consensus, for ’25 & ‘26.
• As a result of the issues identified in this report, we believe shares are worth between $4.71-$11.50 and $0.00 per share, implying 67%-100% downside to current levels.
SUMMARY OF THE BASES OF OPINIONS
• KD CEO claims “we’ll have a little bit of headwind next year, but not substantial” re: IBM costs. We estimate KD faces up to $1-$2 billion in additional costs over the next few years.
• We have identified accounting and disclosure irregularities regarding KD’s reported 2019-2023 payments to IBM.
• KD reports $1,382 million as its 6-month, 9-month, and 12-month related party cost of services figure (how much it pays to IBM). We find this highly confusing and suspect.
• KD discontinued reporting its IBM costs since 2023, despite the fact that IBM has been Kyndryl’s largest supplier.
• KD’s capitalized costs are 13.6x versus its peers and this difference has widened since its spin-off.
• We calculate that KD’s Adj EBITDA is 61%-72%lower were the company to capitalize costs in line with peers.
• KD’s DSOs are an outlier at 34 days vs Peers’ avg. of 80 days; receivables factoring appears to explain why. Without this factoring benefit, operating cash flows would be lower.
• We find the “Total Signings” metric suspect, as KD reports it grew from $13.5bn in FY2021 to $16.3bn as of 2024, yet total revenues declined over the same time period.
• KD’s auditor identified a new Critical Audit Matter in its 10K 2024: material weakness related to revenue recognition.
• KD’s auditor believes that the Company did not maintain, in all material respects, effective internal control over financial reporting as of March 31, 2024.
• 50% of management’s compensation appears tied to pro forma “Adj. Operating Cash Flow” – we find this suspect as the company hasn’t even disclosed this # since 2021.
• Insiders recently started selling shares, accelerating over the last few quarters.
• We attempted to contact the company. KD refused to respond to our request to discuss our questions.
Our full report:
Всем привет! Очень интересная статья, которая заставляет задуматься о том, насколько сильно Kyndryl унаследовала подходы старой IBM к управлению бизнесом. Особенно настораживает проблема скрытых расходов, ведь отсутствие прозрачности может серьёзно повлиять на доверие клиентов и инвесторов. Иногда подобные корпоративные решения напоминают казино, где компании делают крупные ставки, не понимая всех финансовых рисков. На мой взгляд, открытость в вопросах затрат должна быть одним из главных принципов работы крупных технологических корпораций. Интересно было бы узнать, какие конкретные изменения Kyndryl планирует внедрить для повышения финансовой прозрачности. Спасибо автору за содержательный анализ и возможность взглянуть на эту проблему с другой стороны!
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