Kyndryl – Like the old IBM*, except with an Undisclosed Cost Problem: Part I
- Gotham City Research LLC
- Mar 27, 2025
- 2 min read
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:
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That understated “little bit of headwind” line is what really sticks, especially beside your estimate of $1–$2 billion in added IBM costs. I also ended up opening Rancho Markets Foods weekly ad preview afterward because it carries the same thread a little further.
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