Kyndryl's Turnaround Plan Hits Speed Bump in Q1

Kyndryl, an IT infrastructure and services company spun off from IBM in 2021, reported its first-quarter results which missed Wall Street's revenue estimate. The company posted a $3.62 billion revenue, short of analysts' expectation of $3.64 billion. This was not the only issue as Kyndryl also booked a $152 million charge to reshape its workforce.

The largest region for Kyndryl, Principal Markets, saw revenue fall 7% to $1.26 billion. Despite this weakness in services contracts due to slower client spending, management argued that the bigger story is the cost reset. They reiterated their plan to reach $400 million to $500 million of annual operating cost cuts by fiscal 2028.

The company kept its targets for fiscal 2027, which include $600 million to $700 million in adjusted pretax income and $400 million to $500 million in free cash flow. This restructuring charge is expected to fund these annual savings and pressure near-term earnings and cash flow but permanently lower expenses once the new staffing mix is in place.

The test for Kyndryl will be whether its margins and cash generation improve quarter by quarter, as hitting its fiscal 2027 targets depends on saving faster than revenue cools. If the savings arrive on schedule, they can offset modest sales softness by widening operating leverage.