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01/10 17:23
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Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
The earnings call reveals strong financial performance, with significant growth in Kyndryl Consult revenues and hyperscaler-related revenues. Adjusted EBITDA and pretax income have increased substantially, indicating operational efficiency. The company is investing in AI and acquisitions, enhancing its competitive position. Shareholder returns through repurchases and optimistic guidance for the second half further support a positive outlook. Despite some uncertainties in management's responses, the overall sentiment is positive, suggesting a likely stock price increase.
Revenue Revenue totaled $3.7 billion, down 1% from the prior year quarter on a reported basis and 3.7% in constant currency. The decline was attributed to longer sales cycles for expanded scope deals, removal of low-margin hardware and software content, and a strong prior-year quarter.
Kyndryl Consult Revenue Kyndryl Consult revenues grew 25% year-over-year in constant currency, driven by higher-margin advisory services and expanded share in this higher value-add space.
Hyperscaler-related Revenue Hyperscaler-related revenues doubled since last year and reached $440 million in Q2, tracking above the initial $1.8 billion fiscal 2026 target. Growth was fueled by partnerships with companies like Cisco, Dell, and HPE.
Adjusted EBITDA Adjusted EBITDA increased 15% year-over-year to $641 million, with an adjusted EBITDA margin of 17.2%, up 250 basis points year-over-year. This was driven by higher-margin post-spin signings and operational efficiencies.
Adjusted Pretax Income Adjusted pretax income grew 171% year-over-year to $123 million, with an adjusted pretax margin increase of 210 basis points. This growth was attributed to strategic initiatives like advanced delivery and accounts remediation.
Free Cash Flow Free cash flow was $22 million in the second quarter, impacted by the timing of receivables and vendor payments, which are expected to reverse in the second half of the year.
Advanced Delivery Initiative Savings The advanced delivery initiative generated $875 million in annual savings, with a $50 million increase in the annual run rate this past quarter. Savings were driven by automation and operational efficiencies.
Focus Accounts Initiative The focus accounts initiative increased cumulative annualized profit by $25 million in Q2, reaching $950 million. This was achieved by remediating substandard margins in inherited contracts.
Kyndryl Consult Revenue: Increased 32% in constant currency over the last 12 months, now running at an annual pace of $3.4 billion.
Hyperscaler-related Revenues: Doubled since last year, tracking above the initial $1.8 billion fiscal 2026 target.
Agentic AI Framework: Launched to help customers deploy AI agents for business process innovation and productivity.
Geographic Growth: Strongest geographies include Canada, Spain, India, and Latin America.
New Logos: Won 450 new logos over the last 4 years.
Acquisition: Announced acquisition of a midsized cloud services provider in Europe.
Kyndryl Bridge: AI-powered platform performing 186 million automations and generating 15 million actionable insights monthly, integrated with over 100 partners.
Advanced Delivery Initiative: Generating $875 million in annual savings through automation and efficiency improvements.
Accounts Initiative: Increased cumulative annualized profit from focus accounts by $25 million to $950 million.
Margin Expansion: Adjusted EBITDA margin increased by 250 basis points year-over-year to 17.2%.
Revenue Growth Strategy: Focus on IT modernization, AI, and cybersecurity to drive growth.
Share Repurchase Program: Increased by $400 million, reflecting confidence in fiscal 2028 objectives.
Revenue shortfall: Revenue for the quarter came in $100 million below target due to longer sales cycles for expanded scope deals and the removal of low-margin hardware and software content, which created a 4-point drag on revenue growth.
Longer sales cycles: Efforts to expand scope in contract renewals have led to longer sales cycles, delaying revenue realization.
Revenue headwinds from margin expansion: The focus on margin expansion by removing low-margin hardware and software content has negatively impacted revenue growth in the short term.
Economic uncertainties: The company faces challenges in achieving revenue growth amidst broader economic uncertainties and customer hesitations.
Dependence on IT modernization and AI trends: The company's growth strategy heavily relies on trends like IT modernization and AI adoption, which may not materialize as expected or could face competitive pressures.
Competitive pressures: Displacing incumbents and transitioning in-sourced work to Kyndryl involves significant competitive challenges.
Execution risks in modernization projects: Modernizing mission-critical systems and addressing tech debt for customers involve complex execution risks, including potential delays and cost overruns.
Customer concentration risk: The company’s reliance on large, complex deals and existing customer relationships poses risks if these customers reduce spending or switch providers.
Regulatory compliance: Modernization projects and AI deployments must adhere to evolving regulatory standards, which could increase costs and complexity.
Supply chain and resource constraints: The company’s ability to deliver on modernization and AI projects could be impacted by supply chain disruptions or shortages of skilled personnel.
Revenue Growth: Kyndryl expects to deliver revenue growth in the back half of fiscal year 2026, supported by a record pipeline and a full-year book-to-bill ratio above 1. The company is targeting 1% full-year constant currency revenue growth, implying 4% to 5% growth in the second half.
Margin Expansion: The company forecasts adjusted EBITDA margin of approximately 18% for fiscal 2026, an increase of roughly 130 basis points versus fiscal 2025. Adjusted pretax income is expected to grow by at least 50%, with adjusted pretax margins increasing by roughly 150 basis points year-over-year.
Free Cash Flow: Kyndryl projects free cash flow of approximately $550 million for fiscal 2026, with roughly 100% conversion of adjusted pretax income less cash taxes into free cash flow.
Growth Drivers: Incremental growth opportunities are expected from Kyndryl Consult and Hyperscaler-related revenues, driven by IT modernization, AI, and cybersecurity demand. Kyndryl Consult revenue has increased 32% in constant currency over the last 12 months, and Hyperscaler-related revenues have doubled since last year.
Long-Term Objectives: The company remains on track to achieve its fiscal 2028 objectives, including more than $1 billion in adjusted free cash flow and $1.2 billion in adjusted pretax income. This requires mid-single-digit revenue growth by 2028.
AI and Infrastructure Modernization: Kyndryl is leveraging AI and infrastructure modernization as key growth vectors. The company is deploying AI in its operations and enabling customers to adopt AI at scale. Infrastructure modernization is expected to drive double-digit growth in Kyndryl Consult and additional managed services scope.
Share Repurchase Program: The company has increased its share repurchase program by $400 million, reflecting confidence in its fiscal 2028 objectives and earnings trajectory.
Third Quarter 2026 Outlook: Kyndryl expects positive constant currency revenue growth in Q3 2026 and adjusted pretax income to be 15% to 25% higher than the $160 million reported in Q3 2025.
Share Repurchase Program: Kyndryl announced an increase in their share repurchase program by $400 million, reflecting confidence in achieving fiscal 2028 objectives. They repurchased 2.9 million shares in the quarter, representing 1.2% of outstanding shares, at a cost of $89 million. The company has a strong financial position with $1.3 billion in cash and no borrowings under their revolving credit facility. The expansion of the buyback capacity is part of their capital allocation strategy, which includes reinvesting in the business, maintaining investment-grade ratings, and distributing cash to shareholders.
The earnings call reveals strong financial performance, with significant growth in Kyndryl Consult revenues and hyperscaler-related revenues. Adjusted EBITDA and pretax income have increased substantially, indicating operational efficiency. The company is investing in AI and acquisitions, enhancing its competitive position. Shareholder returns through repurchases and optimistic guidance for the second half further support a positive outlook. Despite some uncertainties in management's responses, the overall sentiment is positive, suggesting a likely stock price increase.
The earnings call reveals strong growth in Kyndryl Consult and Hyperscaler-related revenue, improved EBITDA margins, and a solid increase in signings. Despite a Q1 cash outflow, the company expects significant free cash flow for the fiscal year. The Q&A highlights confidence in growth and margin expansion, with positive catalysts like AI partnerships. Stock buybacks indicate shareholder returns. Overall, the positive aspects outweigh the negatives, suggesting a likely stock price increase in the short term.
The earnings call summary shows strong financial performance with significant increases in revenue, adjusted EBITDA, and free cash flow, along with a robust share repurchase program. The Q&A section indicates positive sentiment with expectations of continued growth and strategic investments. Despite some macroeconomic uncertainties and cost concerns, the company's proactive measures and optimistic guidance suggest a positive outlook. The absence of specific market cap data limits the precise prediction, but overall indicators point towards a positive stock price movement in the next two weeks.
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