Shares of Kyndryl Holdings Inc., the former services business unit of IBM Corp., fell more than 10% in early trading today as the company’s full-year revenue forecast issued Tuesday fell below analysts’ expectations.

However, the company said it’s beating its goals on booking new business in the lucrative hyperscale market and is successfully shedding low-margin business inherited from its IBM days.

Fourth-quarter revenues inched up 1%, to $4.3 billion, on a constant currency basis and beat analysts’ estimates of $4.18 billion. The adjusted pretax loss of $61 million beat estimates of a $100 million loss.

For fiscal 2024 Kyndryl said it expects revenue to decline between 6% and 8% from the current year to a range of $16 billion to $16.4 billion based on current foreign exchange rates. That was below estimates of $16.47 billion.

Hyperscale bookings grow

The company said it has booked a total of $1.2 billion in signings with cloud hyperscalers – ahead of a target of $1 billion — underscoring its ability to strike deals that were not available when it was an IBM subsidiary.

“These are alliances that weren’t available to the company as a captive unit of IBM and we’re taking advantage of the freedom of action associated with our independence to give customers greater choice in the partners they want to work with,” Chief Financial Officer David Wyshner said in an email response to questions.

As further evidence of Kyndryl’s efforts to shed IBM baggage, the company said it has reduced the volume of low- and no-margin accounts by $210 million on an annualized basis against a target of $200 million. The process is more involved than just letting old contracts expire, Wyshner said.

“We’re frequently expanding the scope of our relationships by adding higher-value services and leveraging our new capabilities,” he said. “We’re identifying opportunities to reduce scope by removing the unprofitable elements of a contract [and implementing] automated technology or adjusting the quantity and mix of resources required to take out costs and drive productivity.”

In the short term, those contract revisions are contributing to revenue shrinkage. “Most of the decline is due to our accelerated actions to address low-margin revenue streams as part of our accounts initiative,” a spokesman said. Kyndryl said it expects deliver cumulative annualized benefits from the reduction of low-margin accounts of approximately $400 million by 2025.

For the time being, the company has been focused on improving margin growth. The fiscal year 2024 forecast of a 12% to 13% adjusted margin was up from to 11.6% for fiscal 2023. The adjusted pretax margin forecast of -1% to 0%, compared with -1.3% for fiscal 2023.

“Our guidance for fiscal 2024 implies meaningful margin expansion, bringing profitability close to break-even,” Wyshner said. “We are also reiterating our target to return to revenue growth in calendar 2025.”

Business consulting unit grows

Signings for Kyndryl Consult, the business consulting unit the company launched last year to focus on cloud applications, cybersecurity, digital workplace, next-generation networks and mainframe modernization grew 31% in fiscal 2023. “We anticipate another year of double-digit growth for Kyndryl Consult in fiscal 2024,” Wyshner said.

Despite today’s selloff, Kyndryl’s its stock price is up over 50% since IBM sold the majority of its stake in the company last November.

Freed from the competitive constraints of IBM ownership, the company has formed new collaborations with Nokia OYJ, Palo Alto Networks Inc., Cloudflare Inc. and Fortinet Inc. It said it has also doubled the number of hyperscaler certifications held by its employees, to 35,000 in the past year.

Photo: Kyndryl