Kyndryl Stock Plunges After Gotham Report Exposes Accounting Red Flags and Looming IBM Cost Surge
At the Edge of Disclosure: Inside the Financial Storm Brewing at Kyndryl
The marble floors and subdued lighting of Kyndryl’s Manhattan headquarters belie the turbulence roiling beneath the surface. Less than four years after its highly anticipated spin-off from IBM, Kyndryl Holdings Inc. is facing a reckoning — one triggered not by external market forces, but from deep within its own ledgers.
At the heart of the storm is a blistering report from Gotham City Research, a short-selling firm known for forensic financial analysis and often scathing public takedowns. Their latest target: Kyndryl. The claim? That the world’s largest IT infrastructure services provider has quietly constructed a façade of profitability, propped up by aggressive accounting, opaque disclosures, and a looming financial time bomb in the form of underreported costs to its former parent, IBM.
Short selling is the practice of betting against a stock's price, anticipating it will fall, a strategy often employed by activist firms. Forensic accounting involves detailed investigation of financial records to detect fraud or irregularities, which can provide the evidence short sellers use to support their negative thesis on a company.
As the markets digest the report’s allegations, the consequences are already materializing. Shares of Kyndryl plunged over 12% today, trading at $29.89 by mid-afternoon — a stark drop from the prior day’s close of $34.01. Investors, long convinced of the company’s turnaround narrative, are now confronting a jarring possibility: that the story they bought into may be fiction.
The Illusion of Operating Health
Since its separation from IBM in late 2021, Kyndryl has sold itself as a company in metamorphosis — shedding low-margin contracts, streamlining operations, and setting its sights on a high-growth, high-margin future. On paper, that transition seemed underway. Adjusted EBITDA margins, once anemic, appeared to expand. Adjusted Free Cash Flow turned positive. The narrative was textbook corporate renewal.
But Gotham City Research — whose work in the past has unraveled accounting inconsistencies at other major firms — paints a different picture. According to their analysis, Kyndryl’s reported metrics are riddled with distortions. The firm accuses Kyndryl of inflating profitability through excessive capitalization of contract costs — at levels 13.6 times higher than peers — and generous adjustments that exclude real, recurring cash expenses.
Did you know that in accounting, certain expenses can be recorded as assets rather than immediate expenses? This practice, known as capitalization of costs, applies to expenditures expected to provide economic benefits over multiple years. Examples include construction costs, machinery purchases, and major repairs. By capitalizing these costs, companies align with the matching principle, which ensures that expenses are matched with the revenues they help generate. This approach affects financial statements by increasing assets temporarily on the balance sheet and spreading expenses over time on the income statement. While it provides a clearer picture of long-term investments, it requires accurate estimation of an asset's useful life and can temporarily inflate profits, potentially misleading stakeholders.
Strip away these enhancements, GCR contends, and the numbers collapse. Adjusted EBITDA, they estimate, is overstated by as much as 72%. Free Cash Flow? Negative every year since the spin-off, totaling a $635 million burn from FY22 to FY24. One independent analyst familiar with Kyndryl’s filings, speaking on condition of anonymity, remarked, “There’s a difference between non-GAAP and non-sense. The line here is thin.”
Comparison of Kyndryl's Reported vs. GCR's Estimated Adjusted EBITDA ($ Millions)
| Time Period | Kyndryl Reported Adj. EBITDA ($M) | GCR Estimated Adj. EBITDA ($M) | Difference ($M) | % Difference (GCR vs. Reported) |
|---|---|---|---|---|
| Dec-31-2019 | 2,561 | 953 | (1,608) | -62.8% |
| Dec-31-2020 | 2,917 | 1,183 | (1,734) | -59.5% |
| Dec-31-2021 | 2,749 | 1,302 | (1,447) | -52.6% |
| Mar-31-2022 | 2,195 | 587 | (1,608) | -73.3% |
| Mar-31-2023 | 1,975 | 493 | (1,482) | -75.0% |
| Mar-31-2024 | 2,367 | 913 | (1,454) | -61.4% |
| LTM Dec-31-2024 | 2,384 | 673 | (1,711) | -71.8% |
The IBM Cost Cliff: A Threat in Disguise
Beneath the accounting allegations lies the report’s core thesis — what GCR dubs “the IBM Cost Problem.” It’s a problem born of history. Before the spin-off, Kyndryl operated as a division within IBM, incurring internal costs that hovered around 21% of its revenue. After independence, those costs dropped precipitously — to just 8% of revenue in FY2023, or $1.382 billion.
Gotham argues this decline wasn’t the result of better operations, but of a temporary sweetheart pricing arrangement between the two companies. That deal, they believe, is expiring — and the real cost of doing business with IBM is about to return. GCR estimates a pending increase of $1.1 to $2.6 billion annually in IBM-related costs.
Kyndryl's IBM-related Costs (Absolute and % of Revenue)
| Category | IBM-related Costs (Absolute Value) | IBM-related Costs (% of Kyndryl's Total Revenue) |
|---|---|---|
| Pre-spin-off (FYE Dec 31, 2021) | $3.943 Billion | ~21.1% |
| Post-spin-off (FYE Mar 31, 2023) | $1.382 Billion | ~8.1% |
| Post-spin-off (3mo Mar 31, 2022) | $0.924 Billion | N/A (Quarterly revenue needed for %) |
| GCR Estimate (Future Impact) | $1.1B - $2.7B Additional Costs | N/A (Represents increase over baseline) |
| Kyndryl Acknowledgment (FY2025) | Increase acknowledged (Amount unspecified) | Increase acknowledged |
Kyndryl has not denied an increase is coming. In fact, recent earnings disclosures reference a “contractually required increase in IBM software costs.” But the company has dismissed concerns, referring to the hike as “a little bit of headwind.”
That minimization has drawn ire from some corners of Wall Street. “If the numbers Gotham estimates are anywhere near correct, calling this a ‘headwind’ is like calling a hurricane a breeze,” said a portfolio manager at a multi-billion-dollar hedge fund with no position in Kyndryl. “The silence and ambiguity around this risk are unacceptable.”
Perhaps most troubling is the pattern of disclosure. After detailing IBM costs through FY2023, Kyndryl stopped providing a clear breakdown. More suspiciously, the reported cost figure — $1.382 billion — appears unchanged across multiple reporting periods (6-month, 9-month, and 12-month), a statistical anomaly GCR suggests indicates manipulation or obfuscation.
A Broken Compass: Internal Controls Under Fire
Adding to the mounting concerns is a damning admission from Kyndryl’s own auditors. In its FY2024 10-K, accounting giant PwC issued a rare and serious declaration: Kyndryl did not maintain effective internal control over financial reporting.
Did you know that a material weakness in internal control is a significant deficiency in a company's financial reporting systems that can lead to substantial inaccuracies in financial statements? These weaknesses can arise from issues like financial reporting errors, IT control failures, or inadequate inventory management. When identified, they must be reported and addressed promptly, as unresolved material weaknesses can result in incorrect financial reporting, increased regulatory scrutiny, and higher operational costs. In fact, companies typically spend millions to rectify each material weakness, emphasizing the importance of robust internal controls to maintain financial integrity and stakeholder trust.
The source of the weakness? A failed ERP implementation that left the company with unreliable IT general controls — from user access to change management. In plain terms, the basic plumbing of the company’s financial systems doesn’t work. Without these controls, even honest accounting becomes suspect. With aggressive accounting, it becomes potentially dangerous.
To seasoned investors, this is a five-alarm fire. “When your auditor tells the world your controls are broken, it doesn’t matter what the numbers say. Trust evaporates,” said a forensic accountant who previously worked on high-profile fraud investigations. “This isn't a footnote — it's the foundation cracking.”
Cash Flow Fiction and the Factoring Mirage
While Kyndryl touts improvements in adjusted cash flow, GCR argues this too is misleading. The real story, they say, lies in the structural cash burn and aggressive use of receivables factoring.
Did you know that accounts receivable factoring can provide businesses with immediate cash flow by selling unpaid invoices to a third-party financial institution? This process involves submitting invoices for verification, receiving an upfront advance (usually 70-90% of the invoice value), and allowing the factor to handle collections. The factor retains a reserve and deducts fees once the customer pays. Factoring fees typically range from 1% to 5% of the invoice value. This financial strategy helps companies manage working capital without waiting for customer payments or taking on additional debt, offering flexibility in managing cash flow needs. By selling invoices to third parties — over $3 billion annually, according to GCR — Kyndryl has kept its Days Sales Outstanding at a remarkably low 34 days, versus an industry average of 80. The effect: artificially elevated operating cash flow, detached from actual cash generation. Comparison of Kyndryl's Days Sales Outstanding (DSO) vs. GCR-Calculated IT Services Peer Average
| Time Period | Kyndryl's DSO (Days) | GCR-Calculated Peer Average DSO (Days) | Difference (Kyndryl vs. Peer Avg) |
|---|---|---|---|
| Dec-31-2019 | 29 | 82 | -53 Days |
| Dec-31-2020 | 46 | 79 | -33 Days |
| Dec-31-2021 | 46 | 80 | -34 Days |
| Mar-31-2022 | 33 | 79 | -46 Days |
| Mar-31-2023 | 37 | 80 | -43 Days |
| Mar-31-2024 | 34 | 80 | -46 Days |
| LTM Dec-31-2024 | 34 | 80 (using latest full year avg)* | -46 Days |
Compounding the issue is the company's decision to stop disclosing key factoring details — data it had provided before the spin-off. “This is not the behavior of a company with nothing to hide,” said an investment research analyst focused on IT services. “It’s financial sleight of hand, and it tells you more about the desperation than the performance.”
Narratives and Incentives: Can You Trust the Turnaround?
Kyndryl’s management insists it is intentionally shrinking revenue to phase out low-margin contracts. But even here, Gotham is skeptical. While revenue has steadily declined, a metric called “Total Signings” — essentially the value of new business commitments — has grown. GCR sees this divergence as suspicious, suggesting management may be using signings to imply momentum that isn’t translating into real revenue.
Kyndryl's Total Signings vs. Reported Revenue Trend ($ Millions)
| Time Period | Total Signings ($M) | Reported Revenue ($M) | Observation |
|---|---|---|---|
| 12 months Dec-31-2020 * | 17,800 | 19,352 | Pre-spin baseline |
| 12 months Dec-31-2021 | 13,500 | 18,657 | Signings drop significantly; Revenue slightly down |
| 12 months Mar-31-2022 | 14,200 | 18,317 | Signings rebound slightly; Revenue continues down |
| 12 months Mar-31-2023 | 12,200 | 17,026 | Signings decline again; Revenue continues down |
| 12 months Mar-31-2024 | 12,500 | 16,052 | Signings tick up slightly; Revenue continues down |
| LTM Dec-31-2024 | 16,300 | 15,107 | Signings jump significantly; Revenue lowest yet |
Further complicating matters is executive compensation. GCR claims 75% of management’s variable pay is tied to non-GAAP metrics like Adjusted Operating Cash Flow (which hasn’t been disclosed since 2021) and Total Signings. “When pay is linked to metrics you control but don’t report, there’s a problem,” noted one governance expert.
Concerns are rising about the use of non-GAAP (adjusted) metrics when determining executive compensation and bonuses. This practice carries risks, potentially misrepresenting company performance and raising corporate governance issues regarding transparent and accurate reporting for pay decisions.
And then there’s the past. CEO Martin Schroeter, formerly IBM’s CFO, was named in prior lawsuits alleging accounting misrepresentation at IBM — cases that were later settled. While no wrongdoing was admitted, GCR draws unsettling parallels between historical IBM tactics and current Kyndryl practices.
The Market Reacts: A House of Metrics on Shaky Ground
Kyndryl’s response has been swift but limited. The CFO rejected the GCR report, labeling it as “containing fundamental factual errors.” In a show of confidence, the company announced a $500 million stock buyback. Yet the market remains unconvinced.
Analysts are split. Morgan Stanley maintains its “Overweight” rating, betting on the long-term transformation. Bernstein, however, slashed its target price from $22 to $14, citing serious concerns. And traders? They’re voting with their feet — and their short positions.
At $29.89 per share, Kyndryl now trades at a valuation far above Gotham’s implied fair value, which ranges from $0 to $11.50 per share. Whether this discrepancy narrows will depend on the company’s ability — or failure — to address the issues now laid bare.
Where Does This Leave Investors?
For institutional investors and professional traders, the situation demands ruthless clarity.
- The risk premium on Kyndryl has just exploded. Even if the GCR report proves exaggerated, the auditor’s material weakness finding is irrefutable — and must be addressed before confidence can rebuild.
- Cash flow will become the focal point. Forget adjusted metrics. Investors will demand GAAP Operating Cash Flow, clear CapEx disclosures, and full IBM cost transparency.
- Short interest will likely rise, and with it, volatility. Unless Kyndryl offers full financial transparency and remediation milestones, expect further selling.
- Debt holders and credit analysts will begin examining the factoring exposure more closely. If facilities tighten, liquidity risk could become a new overhang.
The Bottom Line: A Story Unraveling in Real Time
Kyndryl now finds itself at a crossroads. Its credibility questioned, its accounting challenged, and its leadership scrutinized, the company must do more than deny allegations — it must confront them with data, transparency, and a clear corrective path.
Otherwise, it risks becoming what Gotham City Research warned of: a melting ice cube — without the cash.
Until then, one truth remains unspinnable: when the foundation of your financial house is in doubt, every number that follows is suspect. And for Kyndryl, the reckoning has only just begun.