Kyndryl Holdings Inc

Previous wording

FOR THE THREE MONTHS ENDED JUNE 30, 2024

Current wording

FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2024

Previous wording

In fiscal year 2024, we saw continuing demand for information technology services, despite concerns about economic growth, increased geopolitical tensions, inflationary pressures and government efforts to stem inflation. Most economists, including the International Monetary Fund, expect positive macroeconomic growth to continue in calendar years 2024 and 2025.

Current wording

In fiscal year 2025, we have seen continuing demand for information technology services, despite concerns about economic growth and geopolitical tensions. Most economists, including the International Monetary Fund, expect positive macroeconomic growth to continue in calendar years 2024 and 2025.

Previous wording

For the three months ended June 30, 2024, we reported $3.7 billion in revenue, a decline of 11 percent compared to the prior-year period. The revenue decline was largely attributable to actions the Company has taken to reduce low-margin components of its customer relationships, as well as currency effects. United States revenue declined 15 percent, Japan revenue declined 7 percent (but increased in constant currency), Principal Markets revenue declined 5 percent and Strategic Markets revenue decreased 15 percent, in each case compared to the three months ended June 30, 2023. Net income of $11 million improved by $152 million versus the prior-year period driven by a combination of lower depreciation expenses resulting from the change of useful life ofinformation technology equipment effective April 1, 2024 (a net year-over-year benefit of $60 million), lower workforce rebalancing charges, lower transaction-related costs, progress on our key initiatives to drive operating efficiencies and increased margins, and a vendor credit, partially offset by increased software costs.

Current wording

For the six months ended September 30, 2024, we reported $7.5 billion in revenue, a decline of 9 percent compared to the prior-year period. The revenue decline was largely attributable to actions the Company has taken to reduce low-margin components of its customer relationships, as well as currency effects. United States revenue declined 14 percent, Japan revenue was unchanged (but increased in constant currency), Principal Markets revenue declined 5 percent and Strategic Markets revenue decreased 14 percent, in each case compared to the six months ended September 30, 2023. Net loss of $32 million improved by $251 million versus the prior-year period driven by a combination of lower depreciation expenses resulting from the change of useful life ofinformation technology equipment effective April 1, 2024 (a net year-over-year benefit of $110 million), lower transaction-related costs, progress on our key initiatives to drive operating efficiencies and increased margins, and a vendor credit, partially offset by increased software costs.

Previous wording

The Company made a minor change to its geographic reportable segments effective June 1, 2024 to reflect how the Company manages its operations and measures business performance, transitioning the reporting and management of its operations in Australia/New Zealand from the Principal Markets segment to the Strategic Markets segment. All historical segment information has been recast to reflect this change. The following table presents our reportable segments’ revenue and adjusted EBITDA for the three months ended June 30, 2024 and 2023. Segment revenue and revenue growth in constant currency exclude any transactions between the segments.

Current wording

The Company made a minor change to its geographic reportable segments effective June 1, 2024 to reflect how the Company manages its operations and measures business performance, transitioning the reporting and management of its operations in Australia/New Zealand from the Principal Markets segment to the Strategic Markets segment. All historical segment information has been recast to reflect this change. The following table presents our reportable segments’ revenue and adjusted EBITDA for the three and six months ended September 30, 2024 and 2023. Segment revenue and revenue growth in constant currency exclude any transactions between the segments.

Previous wording

Revenue growth in constant currency is a non-GAAP measure that eliminates the effects of exchange rate fluctuations when translating from foreign currencies to the United States dollar. It is calculated by using the average exchange rates that existed for the same period of the prior year. Constant-currency measures are provided so that revenue can be viewed without the effect of fluctuations in currency exchange rates, which is consistent with how management evaluates our revenue results and trends.

Current wording

Revenue growth in constant currency is a non-GAAP measure that eliminates the effects of exchange rate fluctuations when translating from foreign currencies to the United States dollar. It is calculated by using the average exchange rates that existed for the same period of the prior year. Constant-currency measures are provided so that

Previous wording

Additionally, management uses adjusted EBITDA to evaluate our performance. Adjusted EBITDA is a non-GAAP measure and defined as net income (loss) excluding income taxes, interest expense, depreciation and amortization (excluding depreciation of right-of-use assets and amortization of capitalized contract costs), charges related to ceasing to use leased/fixed assets, charges related to lease terminations, transaction-related costs, pension expenses other than pension servicing costs and multi-employer plan costs, stock-based compensation expense, workforce rebalancing charges incurred prior to March 31, 2024, impairment expense, significant litigation costs and benefits, and currency impacts of highly inflationary countries. We believe that adjusted EBITDA is a helpful supplemental measure to assist

Current wording

Additionally, management uses adjusted EBITDA to evaluate our performance. Adjusted EBITDA is a non-GAAP measure and defined as net income (loss) excluding income taxes, interest expense, depreciation and amortization (excluding depreciation of right-of-use assets and amortization of capitalized contract costs), charges related to ceasing to use leased/fixed assets, charges related to lease terminations, transaction-related costs, pension expenses other than pension servicing costs and multi-employer plan costs, stock-based compensation expense, workforce rebalancing charges incurred prior to March 31, 2024, impairment expense, significant litigation costs and benefits, and currency impacts of highly inflationary countries. We believe that adjusted EBITDA is a helpful supplemental measure to assist investors in evaluating our operating results as it excludes certain items whose fluctuation from period to period does not necessarily correspond to changes in the operations of our business.

Previous wording

For the three months ended June 30, 2024, United States revenue of $986 million decreased 15 percent compared to the prior-year quarter, driven by the Company’s efforts to reduce certain low-margin revenues and the expiration of certain low- and negative-margin contracts entered into before the Spin-off. Adjusted EBITDA decreased $103 million from the prior-year quarter, primarily driven by lower revenue and the impact of the inclusion of workforce rebalancing charges in adjusted EBITDA in the first quarter of fiscal 2025.

Current wording

For the six months ended September 30, 2024, United States revenue of $1.9 billion decreased 14 percent compared to the prior-year period, driven by the Company’s efforts to reduce certain low-margin revenues and the expiration of certain low- and negative-margin contracts entered into before the Spin-off. Adjusted EBITDA decreased $120 million from the prior-year period, primarily driven by lower revenue and the impact of the inclusion of workforce rebalancing charges in adjusted EBITDA in fiscal 2025.

Previous wording

For the three months ended June 30, 2024, Japan revenue of $569 million decreased 7 percent compared to the prior-year quarter, driven by an unfavorable currency exchange rate impact of thirteen points. Adjusted EBITDA decreased $17 million from the prior-year quarter, primarily driven by unfavorable currency movements that impacted both non-yen-denominated costs and the translation of earnings into U.S. dollars.

Current wording

For the six months ended September 30, 2024, Japan revenue of $1.2 billion was unchanged compared to the prior-year period, and increased 7 percent in constant currency. Adjusted EBITDA decreased $7 million from the prior-year period, primarily driven by unfavorable currency movements that impacted both non-yen-denominated costs and the translation of earnings into U.S. dollars.

Previous wording

For the three months ended June 30, 2024, Principal Markets revenue of $1.3 billion decreased 5 percent compared to the prior-year quarter, driven by actions the Company has taken to reduce equipment sales and other low-margin components of its customer relationships. Adjusted EBITDA increased $90 million from the prior-year quarter, primarily due to increased operating efficiencies and higher margins on recent signings, as well as a vendor credit.

Current wording

For the six months ended September 30, 2024, Principal Markets revenue of $2.6 billion decreased 5 percent compared to the prior-year period, driven by actions the Company has taken to reduce equipment sales and other low-margin components of its customer relationships. Adjusted EBITDA increased $108 million from the prior-year period, primarily due to increased operating efficiencies and higher margins on recent signings, as well as a vendor credit.

Previous wording

For the three months ended June 30, 2024, Strategic Markets revenue of $869 million decreased 15 percent compared to the prior-year quarter. The revenue decline was largely attributable to actions the Company has taken to reduce equipment sales and other low-margin components of its customer relationships. Adjusted EBITDA decreased $29 million from the prior-year quarter primarily due to the impact of the inclusion of workforce rebalancing charges in adjusted EBITDA in the first quarter of fiscal 2025.

Current wording

For the three months ended September 30, 2024, Strategic Markets revenue of $892 million decreased 12 percent compared to the prior-year quarter. The revenue decline was largely attributable to actions the Company has taken to reduce equipment sales and other low-margin components of its customer relationships. Adjusted EBITDA decreased $28 million from the prior-year quarter primarily due to revenue declines and the impact of the inclusion of workforce rebalancing charges in adjusted EBITDA in fiscal 2025.

Previous wording

Corporate and other had an adjusted EBITDA loss of $21 million in the three months ended June 30, 2024, compared to a loss of $24 million in the three months ended June 30, 2023.

Current wording

Corporate and other had an adjusted EBITDA loss of $22 million in the three months ended September 30, 2024, compared to a loss of $21 million in the three months ended September 30, 2023. Corporate and other had an adjusted EBITDA loss of $42 million in the six months ended September 30, 2024, compared to a loss of $45 million in the six months ended September 30, 2023.

Previous wording

Cost of services was 78.5% of revenue in the three months ended June 30, 2024, compared to 82.3% in the three months ended June 30, 2023, driven by lower depreciation expenses, increased operating efficiencies, higher margins on recent signings, and a vendor credit. Selling, general and administrative expenses were 17.6% of revenue in the three months ended June 30, 2024 compared to 17.2% in the prior-year quarter, driven bythe impact of currency on revenue compared to our U.S. dollar-denominated expenses, partially offset by the release of a legal reserve. Workforce rebalancing charges were 1.0% of revenue in the three months ended June 30, 2024 versus 1.4% of revenue in the prior-year quarter, due to workforce rebalancing actions in the first quarter of fiscal 2024. Interest expense was 0.7% of revenue in the three months ended June 30, 2024 compared to 0.7% in the prior-year quarter.

Current wording

Cost of services was 79.3% of revenue in the six months ended September 30, 2024, compared to 83.1% in the six months ended September 30, 2023, driven by lower depreciation expenses, increased operating efficiencies, higher margins on recent signings, and a vendor credit. Selling, general and administrative expenses were 17.4% of revenue in the six months ended September 30, 2024 compared to 16.4% in the prior-year period, driven by lower revenue, partially offset by the release of a legal reserve. Workforce rebalancing charges were 1.0% of revenue in the six months ended September 30, 2024 versus 1.2% of revenue in the prior-year period. Interest expense was 0.7% of revenue in the six months ended September 30, 2024 and 2023. Other expense was 0.6% of revenue in the six months ended September 30, 2024 compared to 0.2% in the prior-year period, driven by currency-related hedging losses recorded this year.

Previous wording

During the three months ended June 30, 2024, management initiated actions to reduce the Company’s overall cost structure and increase our operating efficiency. These actions will result in workforce rebalancing charges, charges related to ceasing to use leased and owned fixed assets, and charges related to lease terminations. During the three months ended June 30, 2024, the Company recorded $36 million in workforce rebalancing charges and $9 million in charges related to ceasing to use leased and owned fixed assets and lease termination charges.

Current wording

During the six months ended September 30, 2024, management initiated actions to reduce the Company’s overall cost structure and increase our operating efficiency. These actions will result in workforce rebalancing charges, charges related to ceasing to use leased and owned fixed assets, and charges related to lease terminations. During the three months ended September 30, 2024, the Company recorded $39 million in workforce rebalancing charges and $10 million in charges related to ceasing to use leased and owned fixed assets including lease termination charges. During the six months ended September 30, 2024, the Company recorded $74 million in workforce rebalancing charges and $20 million in charges related to ceasing to use leased and owned fixed assets, including lease termination charges.

Previous wording

Total cash outlays for this program are expected to be $140 million, of which approximately $10 million has been paid through June 30, 2024 and approximately $90 million is expected to be paid through the end of fiscal year 2025, and the remainder thereafter. Management expects that these workforce rebalancing and site-rationalization activities will reduce payroll costs, rent expenses and depreciation of property and equipment by more than $200 million in fiscal year 2026. There can be no guarantee that we will achieve our expected cost savings.

Current wording

Total cash outlays for this program are expected to be $140 million, of which approximately $60 million has been paid through September 30, 2024 and approximately $50 million is expected to be paid through the end of fiscal year 2025, and the remainder thereafter. Management expects that these workforce rebalancing and site-rationalization activities will reduce payroll costs, rent expenses and depreciation of property and equipment by more than $200 million in fiscal year 2026. There can be no guarantee that we will achieve our expected cost savings.

Previous wording

During the year ended March 31, 2023, management initiated certain actions to reduce the Company’s overall cost structure and increase our operating efficiency, which continued through the year ended March 31, 2024. These actions resulted in workforce rebalancing charges, charges related to ceasing to use leased and owned fixed assets, and charges related to lease terminations. Workforce rebalancing charges arise from cost-reduction actions to enhance productivity and cost-competitiveness and to rebalance skills that result in payments to the terminated employees. In addition, we identified certain leased and owned assets that were inherited from IBM as a result of the Separation that we determined will no longer provide any economic benefit to Kyndryl. During the three months ended June 30, 2023, the Company recognized $58 million in workforce rebalancing charges and $10 million in charges related to ceasing to use leased and owned fixed assets and lease termination charges.

Current wording

During the year ended March 31, 2023, management initiated certain actions to reduce the Company’s overall cost structure and increase our operating efficiency, which continued through the year ended March 31, 2024. These actions resulted in workforce rebalancing charges, charges related to ceasing to use leased and owned fixed assets, and charges related to lease terminations. Workforce rebalancing charges arise from cost-reduction actions to enhance productivity and cost-competitiveness and to rebalance skills that result in payments to the terminated employees. In addition, we identified certain leased and owned assets that were inherited from IBM as a result of the Separation that we determined will no longer provide any economic benefit to Kyndryl. During the three months ended September 30, 2023, the Company recognized $39 million in workforce rebalancing charges. During the six months ended September 30, 2023, the Company recognized $97 million in workforce rebalancing charges and $10 million in charges related to ceasing to use leased and owned fixed assets and lease termination charges.

Previous wording

Total cash outlays for this program were $300 million, of which approximately $240 million has been paid through June 30, 2024 (including approximately $50 million of contractual payments toward leased assets we have ceased to use) and approximately $20 million is expected to be paid in fiscal year 2025. Management estimates that these workforce rebalancing and site-rationalization activities will reduce payroll costs, rent expenses and depreciation of property and equipment by approximately $400 million in fiscal year 2025. There can be no guarantee that we will achieve our expected cost savings.

Current wording

Total cash outlays for this program were $300 million, of which approximately $250 million has been paid through September 30, 2024 (including approximately $50 million of contractual payments toward leased assets we have ceased to use) and approximately $15 million is expected to be paid in fiscal year 2025. Management estimates that these workforce rebalancing and site-rationalization activities will reduce payroll costs, rent expenses and depreciation of property and equipment by approximately $400 million in fiscal year 2025. There can be no guarantee that we will achieve our expected cost savings.

Previous wording

The provision for income taxes for the three months ended June 30, 2024 was $53 million of expense, compared to $32 million of expense for the three months ended June 30, 2023. Our income tax expense for each of the three months ended June 30, 2024 and 2023 was primarily related to taxes on foreign operations and valuation allowances recorded in certain jurisdictions against deferred tax assets that are not more likely than not to be realized.

Current wording

The provision for income taxes for the three months ended September 30, 2024 was $38 million of expense, compared to $33 million of expense for the three months ended September 30, 2023. Our income tax expense for the three months ended September 30, 2024 and 2023 was primarily related to taxes on foreign operations and valuation allowances recorded in certain jurisdictions against deferred tax assets that are not more likely than not to be realized.

Previous wording

Total assets of $10.2 billion decreased by $427 million (and decreased by $297 million adjusted for currency) from March 31, 2024, primarily driven by: a decrease in cash and cash equivalents of $284 million mainly due to payments for annual license agreements and annual incentives; a decrease of $159 million in accounts receivable mainly due to lower revenue; and a decrease of $73 million in deferred costs due to amortization outpacing addition and currency impact; partially offset by an increase of $99 million in prepaid expenses and other current assets mainly due to prepayment for software subscriptions.

Current wording

Total assets of $10.4 billion decreased by $194 million (and decreased by $363 million adjusted for currency) from March 31, 2024, primarily driven by: a decrease in cash and cash equivalents of $228 million mainly due to payments for annual license agreements and annual incentives; and a decrease of $158 million in accounts receivable mainly due to lower revenue; partially offset by an increase of $109 million in prepaid expenses and other current assets mainly due to prepayment for software subscriptions and currency effects.

Previous wording

Total liabilities of $9.1 billion decreased by $406 million (and decreased by $310 million adjusted for currency) from March 31, 2024, primarily as a result of: a decrease in accrued compensation and benefits of $195 million due to payments of annual incentives; and a decrease in accounts payable of $71 million due to lower costs. Total equity of $1.1 billion decreased by $21 million from March 31, 2024, principally due to our comprehensive loss in the period.

Current wording

Total liabilities of $9.2 billion decreased by $244 million (and decreased by $375 million adjusted for currency) from March 31, 2024, primarily as a result of: a decrease in accounts payable of $168 million due to lower costs; a decrease in accrued contract costs of $83 million due to lower volumes; and a decrease in accrued compensation and

Previous wording

Net cash used in investing activities was $166 million in the three months ended June 30, 2024, compared to a net cash use of $113 million in the prior-year period due to higher capital expenditures and the acquisition of Skytap.

Current wording

Net cash used in investing activities was $241 million in the six months ended September 30, 2024, compared to a net cash use of $208 million in the prior-year period due to the acquisition of Skytap.

Previous wording

Net cash used in financing activities totaled $51 million in the three months ended June 30, 2024, compared to net cash used by financing activities of $38 million in the prior-year period.

Current wording

Net cash used in financing activities totaled $101 million in the six months ended September 30, 2024, compared to net cash used in financing activities of $80 million in the prior-year period.

Previous wording

The following table presents the Company’s signings for the three months ended June 30, 2024 and 2023.

Current wording

The following table presents the Company’s signings for the three and six months ended September 30, 2024 and 2023.

Previous wording

Signings increased by $304 million in the three months ended June 30, 2024, or 11%, compared to the prior-year quarter. Management uses signings as a tool to monitor the performance of the business including the business’ ability to attract new customers and sell additional scope into our existing customer base. There are no third-party standards or requirements governing the calculation of signings. We define signings as an initial estimate of the value of a customer’s commitment under a contract. The calculation involves estimates and judgments to gauge the extent of a customer’s commitment, including the type and duration of the agreement and the presence of termination charges or wind-down costs. Contract extensions and increases in scope are treated as signings only to the extent of the incremental new value. Signings can vary over time due to a variety of factors including, but not limited to, the timing of signing a small number of larger outsourcing contracts as well as the length of those contracts. The conversion of signings into revenue may vary based on the types of services and solutions, customer decisions and other factors, which may include, but are not limited to, the macroeconomic environment or external events.

Current wording

Signings increased by $3.2 billion in the three months ended September 30, 2024, or 132%, compared to the prior-year quarter, and signings increased by $3.5 billion in the six months ended September 30, 2024, or 67%, compared to the six months ended September 30, 2023, driven by growth in each of our four operating segments. Management uses signings as a tool to monitor the performance of the business including the business’ ability to attract new customers and sell additional scope into our existing customer base. There are no third-party standards or requirements governing the calculation of signings. We define signings as an initial estimate of the value of a customer’s commitment under a contract. The calculation involves estimates and judgments to gauge the extent of a customer’s commitment, including the type and duration of the agreement and the presence of termination charges or wind-down costs. Contract extensions and increases in scope are treated as signings only to the extent of the incremental new value. Signings can vary over time due to a variety of factors including, but not limited to, the timing of signing a small number of larger outsourcing contracts as well as the length of those contracts. The conversion of signings into revenue may vary based on the types of services and solutions, customer decisions and other factors, which may include, but are not limited to, the macroeconomic environment or external events.

Previous wording

The Company has entered into arrangements with third-party financial institutions to sell certain financial assets (primarily trade receivables) without recourse. The Company has determined these are true sales. The carrying value of the financial asset sold is derecognized, and a net gain or loss on the sale is recognized, at the time of the transfer. The first agreement, which was executed in November 2021 and subsequently amended, enabled us to sell certain of our trade receivables to the counterparty. The initial term of this agreement was 18 months, and the agreement automatically resets to a term of 18 months after every six months, unless either party elects not to extend. The second agreement was executed in June 2022 with a separate third-party financial institution and renews automatically on its anniversary date.

Current wording

The Company has entered into arrangements with third-party financial institutions to sell certain financial assets (primarily trade receivables) without recourse. The Company has determined these are true sales. The carrying value of the financial asset sold is derecognized, and a net gain or loss on the sale is recognized, at the time of the transfer. The first agreement, which was executed in November 2021 and subsequently amended, enabled us to sell certain of our trade receivables to the counterparty. The initial term of this agreement was 18 months, and the agreement automatically resets to a term of 18 months after every six months, unless either party elects not to extend. This agreement was further amended during the quarter ended September 30, 2024 to reduce the committed facility limit from $1 billion to $600 million and to add an incremental uncommitted facility limit of $200 million that is subject to the counterparty’s sole discretion to purchase such incremental amount. The second agreement was executed in June 2022 with a separate third-party financial institution and renews automatically on its anniversary date, unless either party elects not to extend.

Previous wording

The net proceeds from these agreements are reflected as cash provided by operating activities in the Consolidated Statement of Cash Flows. Gross proceeds from receivables sold to third parties under the aforementioned programs were $0.8 billion and $1.2 billion for the three months ended June 30, 2024 and June 30, 2023, respectively. The fees associated with the transfers of receivables were $10 million and $16 million for the three months ended June 30, 2024 and June 30, 2023, respectively.

Current wording

The net proceeds from these agreements are reflected as cash provided by operating activities in the Consolidated Statement of Cash Flows. Gross proceeds from receivables sold to third parties under the aforementioned programs were $1.1 billion and $1.9 billion for the three and six months ended September 30, 2024, respectively, and $913 million and $2.1 billion for the three and six months ended September 30, 2023, respectively. The fees associated with the transfers of receivables were $10 million and $20 million for the three and six months ended September 30, 2024, respectively, and $12 million and $28 million for the three and six months ended September 30, 2023, respectively.