Kyndryl Holdings, Inc. (KD) Q3 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call presented mixed signals. Strong growth in hyperscaler-related revenue and a robust share repurchase program are positives. However, the Q&A revealed concerns about extended sales cycles, market dynamics, and a revision in free cash flow guidance, which offset some positives. The lack of clear guidance due to an ongoing review adds uncertainty. The overall sentiment is neutral, as positive long-term growth drivers are balanced by short-term challenges and uncertainties.
Key Financial Performance
Revenue $3.9 billion, up 3% year-over-year on a reported basis and unchanged in constant currency. The growth was driven by strong demand for modernization services, although longer sales cycles in Strategic Markets and U.K. operations impacted expectations.
Kyndryl Consult Revenue Grew 20% year-over-year in constant currency, now representing 25% of total revenue. Growth was attributed to expanding higher-value services, though performance was below expectations due to longer sales cycles.
Adjusted EBITDA $696 million, decreased 1% year-over-year. The decline was due to depreciation and amortization being a larger percentage of costs in the prior year.
Adjusted Pretax Income $168 million, grew 5% year-over-year. Growth reflects benefits from the three-A's initiative, offset by investments in Kyndryl Consult.
Hyperscaler-related Revenue $500 million in the third quarter, a 58% increase year-over-year. Growth was driven by strong execution and demand for hyperscaler alliances.
Free Cash Flow $217 million in the third quarter. Working capital was a source of cash, and net CapEx was $210 million, consistent with expectations.
Three-A's Initiative Savings Cumulative annualized profit savings from focus accounts reached $975 million. Hyperscaler-related revenue and automation through Kyndryl Bridge contributed to margin expansion.
Share Repurchases 3.7 million shares repurchased in the quarter, representing 1.6% of outstanding shares, at a cost of $100 million. Since inception, 5% of outstanding shares have been repurchased.
Cash Balance $1.35 billion as of December 31, 2025. The company remains investment grade with well-laddered debt maturities.
You have reached the limit. Sign up to access full content
Get started
Operating Highlights
Agentic AI Framework: Kyndryl is expanding its capabilities with a focus on AI, particularly through its Agentic AI Framework, which is resonating strongly with customers.
AI Innovation Labs: Investments are being made in AI innovation labs and related capabilities to deliver emerging technologies to customers at scale.
Hyperscaler Alliances: Revenue from hyperscaler-related activities is expected to reach nearly $2 billion by the end of fiscal 2026, up from essentially zero at the time of the spin-off.
Private Cloud Expansion: Kyndryl is expanding its presence in private cloud, driven by demand for AI, data sovereignty, and security requirements.
Three-A's Initiatives: These initiatives, including alliances, advanced delivery, and accounts, have become core to operational discipline, contributing to $950 million in annual savings.
Labor Cost Adjustments: Higher labor costs due to lower-than-expected employee attrition are being addressed to improve operational efficiency.
IBM Partnership Evolution: The partnership with IBM has evolved, reducing annualized spend from $4 billion to $2 billion, impacting revenue growth but improving profitability.
Focus Accounts Initiative: Efforts to address low-margin focus accounts have led to significant profitability improvements.
You have reached the limit. Sign up to access full content
Get started
Risk or Challenges
Longer Sales Cycles: The accelerating pace of new AI capabilities and regulatory uncertainties, particularly on data sovereignty, have made long-term agreements more complex, leading to longer sales cycles. This has impacted revenue growth and delayed the realization of investments in Kyndryl Consult.
Evolving Partnership with IBM: Changes in customer consumption models for IBM's innovation have reduced the size of signings and revenue over time. This has resulted in a 3.5-point adverse effect on revenue growth and a significant reduction in the annualized run rate of spend with IBM from $4 billion to $2 billion.
Higher Labor Costs: An unanticipated decline in employee attrition has led to higher labor costs in the near term, impacting profitability.
Underperformance in Strategic Markets and U.K. Operations: Revenue variances were concentrated in Strategic Markets and U.K. operations, which have underperformed expectations.
Delayed Contributions from Investments: Investments in Kyndryl Consult have taken longer than expected to contribute to the top line, further impacting revenue and earnings.
Regulatory and Data Sovereignty Challenges: Regulatory uncertainties, particularly around data sovereignty, have added complexity to long-term agreements, affecting sales cycles and customer decision-making.
Internal Control and Cash Management Review: The company is under review by the SEC for cash management practices and related disclosures, which could pose reputational risks and operational distractions.
You have reached the limit. Sign up to access full content
Get started
Guidance & Outlook
Revenue Expectations: Kyndryl expects to achieve nearly $2 billion in hyperscaler-related revenue by the end of fiscal 2026, exceeding the initial target of $1.8 billion. The company also anticipates mid-single-digit growth as it exits fiscal 2028.
Margin Projections: Kyndryl aims to achieve more than $1.2 billion in adjusted pretax income in fiscal 2028, with a target to convert this into over $1 billion in adjusted free cash flow. The adjusted EBITDA margin for fiscal 2026 is estimated to be approximately 17.5%.
Capital Expenditures: Net capital expenditures for fiscal 2026 are expected to align with the quarterly run rate, with $210 million reported in the third quarter.
Market Trends and Business Segment Performance: The company is observing longer sales cycles due to complexities in AI capabilities and regulatory uncertainties, as well as extended timelines for large enterprise ERP transitions to cloud solutions. Kyndryl Consult, a key growth driver, grew 20% year-over-year in constant currency but underperformed expectations in the third quarter. The company is expanding its presence in private cloud and AI-driven solutions to meet increasing demand.
Strategic Plans: Kyndryl plans to continue investing in AI innovation labs, private cloud capabilities, and its Agentic AI Framework to enhance service delivery and efficiency. The company is also leveraging its Kyndryl Bridge operating platform to drive automation and cost savings. Additionally, it is focusing on modernizing IT infrastructure for clients, as evidenced by a recent 5-year contract extension with Hertz.
You have reached the limit. Sign up to access full content
Get started
Shareholder Return Plan
Share Repurchase Program: Under the share repurchase authorization announced in late 2024, Kyndryl bought back 3.7 million shares of its common stock in the quarter, representing 1.6% of its outstanding shares at a cost of $100 million. Since the inception of the program, the company has repurchased 5% of its outstanding shares. Approximately $350 million capacity remains available under the authorized program.
You have reached the limit. Sign up to access full content
Get started
Key Q&A
Q:What were the primary drivers for the company's outlook revision?
A:The company fell short on three factors they were confident about last quarter: acceleration in Consult (20% growth in constant currency but below expectations), hyperscaler growth, and rapid acceleration in sales pipeline conversion. Sales cycle extensions impacted Consult, hyperscaler, and overall acceleration. Continued headwinds from IBM and market dynamics like ERP conversion onto cloud platforms also contributed.
Q:What changes are being made in Strategic Markets and the UK?
A:The company is addressing issues in Strategic Markets and the UK, where investments are more expensive due to local hiring. They are working on optimizing the 'wiring diagram' and leveraging automation to free up and reskill employees. Data sovereignty and evolving regulations in Europe are major factors impacting Strategic Markets.
Q:How has the ongoing review impacted forward commentary?
A:The company cannot comment on the ongoing review until it is complete. However, they remain confident in their fiscal '28 goals and do not expect a restatement. The review has not changed their long-term targets.
Q:What is causing the extension of sales cycles, and how is the company addressing it?
A:Sales cycles are being extended due to industry dynamics like AI disruption, data sovereignty, and infrastructure modernization. Customers are rethinking their infrastructure, making decisions more complex. The company is engaging deeply with customers through Consult teams and focusing on relevance in private cloud and hyperscaler partnerships.
Q:What is the rationale behind the company's buyback program?
A:The buyback reflects confidence in the company's ability to generate cash and maintain financial flexibility. The company focuses on balanced capital allocation, including investments in Kyndryl Bridge, internal capabilities, Consult resources, and tuck-in acquisitions.
Q:What factors contributed to the revision in free cash flow guidance?
A:The revision is primarily due to a $150 million change in pretax income (PTI) and working capital dynamics. While working capital was a benefit in Q3, it is expected to be a headwind in Q4.
Q:What gives the company confidence in achieving fiscal '28 targets despite the fiscal '26 shortfall?
A:Confidence stems from improved cash flow due to stable cash taxes and profitability growth, a shift in backlog composition to higher-margin post-spin deals, and growth in hyperscaler and Consult businesses. The company also expects a better starting position next year.
Q:What is the timeline for closing deals impacted by elongated sales cycles?
A:Many deals are linked to customer renewals and are expected to close within a couple of quarters. The company views elongated cycles as an opportunity to include more content in future deals, ensuring they are future-proof.
Q:Review of Unclear Management Responses
A:Management avoided directly addressing the impact of the ongoing review on forward commentary, citing the inability to comment until the review is complete. They also did not quantify the expected working capital impact for Q4, providing only general statements about its role in the free cash flow revision.
You have reached the limit. Sign up to access full content
Get started
Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI Framework
AI lab
AI sovereignty
Accounts initiative
Administration hello
Alliances foothold
IBM value
Kyndryl
agreement
alliance partner
attrition
bill ratio
calculation
content
context
cost
decline
demand
dynamic
finance
flow rate
focus initiative
information
labor
line
month contract
profitability
quality
result outlook
risk uncertainty
sale cycle
saving
share repurchase
signing book
start
target
tuck acquisition
value service
variance
KD Transcript
Kyndryl Holdings, Inc. (KD) Presents at J.P. Morgan 54th Annual Global Technology, Media and Communications Conference Transcript
Neutral5-18
Kyndryl Holdings, Inc. (KD) Q4 2026 Earnings Call Transcript
Unknown5-6
The earnings call summary presents mixed indicators. Financial performance shows flat revenue and extended sales cycles, but a significant rise in hyperscaler revenue and increased EBITDA margins. The shareholder return plan is positive with share repurchases. However, uncertainties in the IBM relationship and elongated sales cycles pose risks. The Q&A highlights challenges in revenue growth due to macroeconomic factors and regulatory concerns, with management's responses lacking clarity on resolving these issues. Overall, these factors suggest a neutral stock price movement over the next two weeks.
Kyndryl Holdings, Inc. (KD) Presents at Morgan Stanley Technology, Media & Telecom Conference 2026 Transcript
Neutral3-3
Kyndryl Holdings, Inc. (KD) Q3 2026 Earnings Call Transcript
Unknown2-9
The earnings call presented mixed signals. Strong growth in hyperscaler-related revenue and a robust share repurchase program are positives. However, the Q&A revealed concerns about extended sales cycles, market dynamics, and a revision in free cash flow guidance, which offset some positives. The lack of clear guidance due to an ongoing review adds uncertainty. The overall sentiment is neutral, as positive long-term growth drivers are balanced by short-term challenges and uncertainties.
KD Slides
KD Report
Frequently Asked Questions
Where does this earnings call transcript come from?
All transcripts are sourced directly from the official live webcast or the company’s official investor relations website. We use the exact words spoken during the call with no paraphrasing of the core discussion.
How soon is the transcript available after the earnings call ends?
Full verbatim transcripts are typically published within 4–12 hours after the call ends. Same-day availability is guaranteed for all S&P 500 and most mid-cap companies.
Is the transcript edited or altered in any way?
No material content is ever changed or summarized in the “Full Transcript” section. We only correct obvious spoken typos (e.g., “um”, “ah”, repeated 10 times”, or clear misspoken ticker symbols) and add speaker names/titles for readability. Every substantive sentence remains 100% as spoken.
Why do some answers appear as “Unclear” or “Inaudible”?
When audio quality is poor or multiple speakers talk over each other, we mark the section instead of guessing. This ensures complete accuracy rather than introducing potential errors.
Who creates the AI Summary and Key Q&A highlights shown above the transcript?
They are generated by a specialized financial-language model trained exclusively on 15+ years of earnings transcripts. The model extracts financial figures, guidance, and tone with 97%+ accuracy and is regularly validated against human analysts. The full raw transcript always remains available for verification.
