Kyndryl (KD) Q3 2026 Earnings Call Summary

1Key Financial Results and Metrics

Revenue: $3.9 billion, up 3% year-over-year, unchanged in constant currency.

Adjusted EBITDA: $696 million, a 1% decrease year-over-year.

Adjusted Pretax Income (PTI): Grew 5% year-over-year to $168 million.

Free Cash Flow: $217 million generated in Q3; revised fiscal 2026 free cash flow guidance to $325 million - $375 million, down from previous expectations of $550 million.

Signings: $3.9 billion in new signings for the quarter, totaling $15.4 billion over the last 12 months, maintaining a book-to-bill ratio above 1.0.

Cash Position: Cash balance of $1.35 billion, with a net leverage ratio of 0.7x adjusted EBITDA.

2Strategic Updates and Business Highlights

Leadership Changes: Harsh Chugh appointed as interim CFO.

Kyndryl Consult: Achieved 20% year-over-year growth, now representing 25% of total revenue.

Hyperscaler Revenue: $500 million in hyperscaler-related revenue for Q3, a 58% increase year-over-year; on track to exceed $2 billion for fiscal 2026.

Operational Efficiency: Continued focus on automation through Kyndryl Bridge, with cumulative savings of approximately $950 million annually.

Partnership with IBM: Evolving consumption models impacting revenue; IBM-related revenue reduced from $4 billion to approximately $2 billion, contributing to a 3.5-point adverse effect on revenue growth.

3Forward Guidance and Outlook

Fiscal 2026 Adjusted PTI Guidance: Revised to $575 million - $600 million.

Adjusted EBITDA Margin: Expected to be approximately 17.5% for fiscal 2026.

Long-term Goals: Confidence in achieving fiscal 2028 targets, projecting over $1.2 billion in adjusted pretax income and more than $1 billion in free cash flow.

4Bad News, Challenges, or Points of Concern

Sales Cycle Lengthening: Extended sales cycles due to AI advancements and regulatory uncertainties, particularly affecting Kyndryl Consult and Strategic Markets.

Revenue Headwinds: Ongoing challenges from the evolving IBM partnership and complexities in long-term agreements.

Cost Pressures: Higher labor costs due to unexpected declines in employee attrition, impacting short-term profitability.

Regulatory Challenges: Increased complexity in customer decision-making due to data sovereignty discussions, particularly in Europe.

5Notable Q&A Insights

Sales Cycle Dynamics: Management acknowledged that longer sales cycles are affecting various segments, with a focus on ensuring future-proof contracts.

Strategic Market Adjustments: Plans to address challenges in Strategic Markets and the U.K. through operational adjustments and cost management.

Confidence in Future Growth: Despite current challenges, management remains optimistic about the relevance of their services and the potential for future growth driven by AI and modernization discussions.

Share Buyback Strategy: The ongoing buyback program reflects confidence in the company’s ability to generate cash flow and maintain a strong balance sheet. Overall, Kyndryl's Q3 2026 results reflect a mix of growth in certain segments, challenges from extended sales cycles, and evolving partnerships, leading to a cautious but optimistic outlook for the future.