Kyndryl Earnings Call: Growth Engines Amid Revenue Strain

Kyndryl Holdings Incorporation ((KD)) has held its Q4 earnings call. Read on for the main highlights of the call.

Kyndryl’s latest earnings call painted a cautiously optimistic picture. Management highlighted strong progress in high‑value areas like consulting, cloud alliances, and AI‑driven efficiency, alongside healthier margins and cash generation. Yet they also acknowledged persistent revenue headwinds from longer sales cycles and a shifting IBM relationship that continue to weigh on top‑line growth.

Hyperscaler Alliances Drive Rapid Revenue Expansion

Kyndryl’s hyperscaler and alliance business has become a major pillar of growth. Revenue tied to hyperscalers nearly reached $2.0 billion in fiscal 2026, up 59% year over year and well above the company’s 50% growth target, underscoring how quickly this line has scaled from virtually nothing just four years ago.

Kyndryl Consult Sustains Strong Growth and Large Deals

The Kyndryl Consult segment logged double‑digit revenue growth for the third straight year, confirming its role as a growth engine. Consult signings outpaced revenue in fiscal 2026, supported by 38 deals over $50 million—more than 30% from new scope or new customers—and over 125 large deals signed in the past three years.

Margins Improve on Higher-Value Post-Spin Business

Profitability continued to move in the right direction as the company shifted its mix toward higher‑margin post‑spin contracts. Adjusted EBITDA reached $2.7 billion and adjusted pretax income rose to $581 million, with EBITDA margin expanding by 100 basis points and pretax margin improving by 60 basis points year over year.

Cash Generation Strengthens Balance Sheet Flexibility

Cash flow and balance‑sheet metrics were another bright spot, giving Kyndryl more strategic flexibility. Free cash flow came in at $406 million, about $50 million above guidance, pushing the cash balance to $2.6 billion and helping reduce net leverage to 0.5 times adjusted EBITDA after more than $800 million of free cash flow over two years.

AI-Enabled Delivery Yields Major Cost and Time Savings

Operational efficiency programs, heavily supported by AI and Kyndryl Bridge, are translating into sizable cost savings. Management cited roughly $1.0 billion in cumulative annual savings from advanced delivery initiatives and focus accounts, with AI agents cutting incident resolution times by up to 90% and compressing root cause analysis cycles by about 75%.

Disciplined Capital Allocation and Share Repurchases

Kyndryl continued to return capital while maintaining investment‑grade discipline. The company repurchased 11.6 million shares for $304 million in fiscal 2026, retiring around 6% of shares since the program began, while keeping net CapEx slightly below expectations at $543 million and preserving a well‑laddered debt profile.

Revenue Stagnation Highlights Top-Line Challenges

Despite solid execution in growth areas, overall revenue remained under pressure. Fiscal 2026 revenue was $15.1 billion, flat on a reported basis and down 3% in constant currency, reflecting sluggish demand conversion and underscoring that the transformation story is still not fully visible in headline sales figures.

Extended Sales Cycles and Regional Weakness Weigh on Signings

Management pointed to elongated sales cycles as a major drag on near‑term performance. The U.K. and other strategic markets have seen slower decision‑making and more cautious customer procurement, leading to compressed signings and delayed revenue recognition that are expected to persist into fiscal 2027.

Evolving IBM Relationship Creates Structural Headwind

A changing go‑to‑market dynamic with IBM also continues to impact growth. More customers are buying IBM innovation directly, reducing the volume of IBM‑related business flowing through Kyndryl and cutting revenue by more than three percentage points since the spin‑off, a headwind that management expects will continue into fiscal 2027.

Near-Term Guidance Signals Earnings Pressure Before Benefits

For fiscal 2027, Kyndryl expects revenue to be flat to down 2% in constant currency, with consulting and alliances growing but IBM‑related headwinds persisting. Adjusted pretax income is projected at $600 million to $700 million, including about $200 million of workforce‑rebalancing charges that will depress first‑quarter earnings before second‑half savings kick in.

Workforce Rebalancing to Unlock Future Savings

The company is front‑loading restructuring costs to reshape its cost base. Approximately $200 million of workforce rebalancing charges, mostly in the first quarter, are expected to generate $400 million to $500 million of annualized savings by fiscal 2028, introducing near‑term earnings volatility but setting up a leaner operating model.

Control Remediation Remains an Execution Priority

Kyndryl is also working through previously disclosed material weaknesses in internal controls, which have not affected past results. Management aims to complete design, implementation, and testing of fixes by the time it files its fiscal 2027 annual report, making remediation an important operational and compliance milestone for investors to watch.

Guidance Signals Steady Progress Toward 2028 Targets

Looking ahead, management expects fiscal 2027 free cash flow of $400 million to $500 million, with pretax income after cash taxes largely converting to cash. The company reaffirmed its fiscal 2028 goals of more than $1.2 billion in adjusted pretax income and over $1 billion in free cash flow on low single‑digit revenue growth, underpinned by higher‑margin signings and structural cost savings.

Kyndryl’s earnings call underscored a business in transition, with solid progress in cloud, consulting, margins, and cash flow set against stubborn top‑line and IBM‑related pressures. Investors will now focus on whether management can sustain momentum in high‑value segments, deliver the promised cost savings, and translate operational improvements into durable revenue and earnings growth.