Investing.com -- S&P Global Ratings has revised its outlook for Kyndryl Holdings (NYSE: KD ) Inc. to positive from stable, while affirming the ’BBB-’ issuer credit rating and the ’BBB-’ issue-level ratings on its senior unsecured secured debt. The revision comes after Kyndryl’s better-than-expected progress in delivering on its transformation initiatives and its recent contract signings.
The company, which was spun off from IBM (NYSE: IBM ) in 2021, has been reshaping its business and has seen continued momentum in contract signings for some of its higher-value services, as well as sequential improvements in profitability and cash flow generation. The positive outlook considers Kyndryl’s progress in delivering its transformation initiatives, which is believed to support improved prospects for generating revenue growth and increasing levels of profitability and free cash flow.
Kyndryl has raised its revenue targets from its newly formed Alliances, a key driver behind the five consecutive quarters of contract signing growth. It has also achieved $700 million in cost savings and is tracking toward $750 million by the end of fiscal 2025 under the Advanced Delivery initiative. However, due to the multiyear contractual relationships it maintains with its customers, the benefits of these improvements have yet to fully reflect in its operating results.
In the third quarter of fiscal 2025, Kyndryl saw a solid growth trajectory in signings, totaling $16.3 billion over the past 12 months, a 31% increase. The company has also gained significant momentum in expanding its consulting business, which has supported revenue stabilization. As a result, Kyndryl is starting to pivot from transformation to growth with an increasing proportion of revenue visibility from these engagements and post-spin signings becoming a larger share of total revenue.
S&P Global Ratings also noted that Kyndryl’s ability to sustain these gains will continue to be monitored. Despite the shorter-term nature of its consulting arrangements, the business could be reaping some outsized benefits from its efforts to remediate unprofitable accounts, helping its customers pursue cloud migrations.
As of Dec. 31, 2024, Kyndryl’s S&P Global Ratings-adjusted debt was about $3.3 billion and leverage was approximately 1.2x, levels that are cushioned to the 1.5x threshold expected for a higher rating. With improved cash flow generation prospects, Kyndryl initiated its first share repurchase authorization in November 2024 and began buying back stock in the most recent quarter.
S&P Global Ratings could revise its outlook to stable if Kyndryl’s turnaround initiatives appear insufficient to produce revenue growth or the higher profitability and free cash flow set out in the base-case forecast. It could also revise the outlook if Kyndryl elects to pursue more aggressive financial policies. Conversely, the rating could be raised if Kyndryl continues to advance its turnaround initiatives and adheres to financial policies that are supportive of sustaining S&P Global Ratings-adjusted leverage of less than 1.5x and a free operating cash flow (FOCF) to debt ratio approaching 40%.
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