Kyndryl Holdings, Inc. (KD) Q4 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
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.
Key Financial Performance
Free Cash Flow Generated over $400 million in fiscal year 2026, relatively in line with fiscal 2025. This performance was driven by stronger cash collections and lower net CapEx in the fourth quarter.
Revenue $15.1 billion for fiscal year 2026, flat from the prior year on a reported basis and down 3% in constant currency. Revenue was impacted by extended sales cycles, particularly in the U.K. and strategic markets, and the evolution of the relationship with IBM.
Adjusted EBITDA $2.7 billion in fiscal 2026. Adjusted EBITDA margin increased 100 basis points year-over-year, reflective of a mix shift in the business as more post-spin signings flow to the P&L.
Adjusted Pretax Income $581 million in fiscal 2026. Adjusted pretax margin increased 60 basis points year-over-year, driven by a mix shift in the business and post-spin signings.
Hyperscaler-Related Revenue $1.9 billion in fiscal 2026, up 59% versus last year. This growth exceeded the 50% growth expectation at the beginning of the year and reflects strengthened core capabilities and partnerships.
Signings $13.5 billion in fiscal 2026. Signings were impacted by extended sales cycles and changes in customer procurement behavior, particularly in the U.K. and strategic markets.
Net CapEx $543 million in fiscal 2026, up $20 million from last year. Lower than anticipated due to changing customer consumption behaviors where they are buying directly from IBM.
Cash Balance $2.6 billion as of March 31, 2026, up $1.3 billion from December 31, 2025. This includes $300 million from operations and $1 billion drawn under the revolving credit facility.
Debt Maturities Well-laddered from late 2026 to 2041. Annualized run rate of spend with IBM reduced to less than $2 billion by the end of fiscal 2026, down from nearly $4 billion at the time of spin-off.
Share Repurchase Repurchased 11.6 million shares of common stock at a cost of $304 million in fiscal 2026, reducing outstanding shares by 6% since the inception of the program.
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Operating Highlights
Kyndryl Consult: Delivered double-digit revenue growth for the third consecutive year. Investments include hiring engineers, human systems architects, and AI innovation labs. Positioned for another year of strong revenue growth.
Hyperscaler-related revenue: Achieved nearly $2 billion in revenue in fiscal 2026, growing from essentially zero four years ago. Focused on data sovereignty and agentic modernization.
Alliance partnerships: Strengthened collaborations with hyperscalers and private cloud providers like Broadcom, Dell, and HP Enterprise. Positioned for continued growth in fiscal 2027.
New deals and scope: Signed 38 deals exceeding $50 million, with over 30% being new scope or new logos. Signed more than 125 large deals over the last three years.
AI-driven operational efficiencies: Using AI agents to resolve incidents 70%-90% faster, reduce root cause analysis cycles by 75%, and cut dependency on people's time by 50%-70%.
Advanced delivery initiative: Achieved $1 billion in annual savings through automation and AI integration.
Workforce rebalancing: Expected to yield $400-$500 million in annualized savings by fiscal 2028.
Evolving IBM relationship: Revenue impacted by customers procuring directly from IBM, but profitability remains unaffected.
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Risk or Challenges
Extended Sales Cycles: The company is experiencing extended sales cycles, particularly in the U.K. and strategic markets, which is impacting revenue and signings performance.
Customer Decision-Making: Customers are becoming more deliberate in their IT decision-making, driven by factors like sovereignty, AI, and cyber preparedness, which could slow down modernization and transformation initiatives.
Evolving Relationship with IBM: Changes in how customers consume IBM innovation are leading to a reduction in the size of signings and revenue over time, creating headwinds for the company.
Economic and Operational Costs: Increasing tech and operational costs are making modernization a necessity rather than an option, but traditional approaches to modernization are labor-intensive, slow, and often fail to deliver expected ROI.
AI and IT Infrastructure Challenges: Many customers struggle to generate meaningful returns on AI due to outdated IT environments, infrastructure, and business processes, which are not built for modern AI applications.
Material Weaknesses in Internal Controls: The company disclosed material weaknesses in internal controls, which could impact financial reporting and operational efficiency.
Workforce Rebalancing Actions: The company is undertaking workforce rebalancing actions, which involve significant charges and could lead to disruptions in the short term, even though they are expected to yield long-term savings.
Dependency on IBM Revenue: A significant portion of revenue is still tied to IBM, and changes in this relationship have already halved the annualized run rate of spend with IBM, impacting revenue streams.
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Guidance & Outlook
Revenue Growth: Kyndryl expects revenue to be flat to down 2% in constant currency for fiscal 2027. Growth is anticipated in Kyndryl Consult and alliances-related revenue streams, while headwinds are expected from the evolving relationship with IBM.
Profitability: The company targets adjusted pretax income in the range of $600 million to $700 million for fiscal 2027, including $200 million in workforce rebalancing charges. These actions are expected to yield annualized savings of $400 million to $500 million in fiscal 2028.
Free Cash Flow: Free cash flow is projected to be in the range of $400 million to $500 million for fiscal 2027, with stronger cash flow expected in the second half of the year.
Long-Term Financial Targets: Kyndryl aims to achieve more than $1.2 billion in adjusted pretax income and over $1 billion in free cash flow by fiscal 2028, supported by low single-digit constant currency revenue growth.
Kyndryl Consult and Hyperscaler Revenue: Strong growth is expected in Kyndryl Consult and hyperscaler-related revenue streams in fiscal 2027, building on double-digit growth in fiscal 2026.
Operational Efficiency: The company plans to continue embedding AI and automation into operations, with workforce rebalancing actions expected to improve SG&A efficiencies and reduce costs.
Customer Modernization Needs: Kyndryl anticipates increased demand for modernization services, including private cloud and AI-led solutions, as customers face rising tech and operational costs.
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Shareholder Return Plan
Share Repurchase Program: Under the share repurchase authorization, Kyndryl bought back 11.6 million shares of common stock at a cost of $304 million in fiscal 2026, of which 3.3 million shares were purchased in the fourth quarter at a cost of $49 million. Since the inception of the program, the company has repurchased 6% of its outstanding shares. As of March 31, there is approximately $300 million capacity available under the current authorization.
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Key Q&A
Q:Can you discuss the macroeconomic factors and buying decisions affecting your revenue growth, particularly in the U.K. and strategic markets?
A:The company emphasized the mission-critical nature of their services, which involve long-term commitments and multiple stakeholders. They noted that customers have more choices now, including platforms, AI deployment, and addressing tech debt. Sovereignty, especially in Europe, and regulatory concerns elongate sales cycles. Despite these challenges, demand trends are positive, with a larger pipeline entering the year and momentum in consulting. The company highlighted a successful April due to deal closures delayed from March.
Q:Where are customers prioritizing their spending, and how has this changed compared to a year ago?
A:Customers are focusing on security, governance, AI evolution, and data sovereignty. The emergence of private cloud has become significant, with customers in regulated industries balancing mainframe and hyperscaler environments. Decisions on data control and AI model deployment are becoming more complex. The company sees opportunities in modernization, resilience, and Agentic AI, which are driving investment.
Q:How is the evolving IBM relationship impacting your fiscal '27 and '28 targets?
A:The IBM relationship has evolved differently than expected, with customers choosing direct relationships or alternative consumption methods. This has impacted revenue but not profit, as the company cannot mark up IBM's content. The company acknowledged that their initial assumption of neutrality in the IBM relationship for fiscal '28 may not hold, but they remain confident in their profit targets.
Q:What are the catalysts for normalizing or improving elongated sales cycles?
A:The company does not expect a return to faster sales cycles due to the complexity of their services and customer environments. Instead, they focus on expanding their customer base and introducing new content in deals. They highlighted the importance of maintaining strong customer relationships and evolving with customer needs, such as through Agentic AI and modernization efforts.
Q:What is the path to achieving fiscal '28 revenue growth given the longer decision cycles and sub 1x book-to-bill ratio this year?
A:The company remains confident in their fiscal '28 targets due to a strong pipeline, consistent consult book-to-bill ratios above 1x, and the relevance of their services. They highlighted modernization, data sovereignty, and Agentic AI as key growth areas. Despite challenges with the IBM relationship, they see opportunities in higher-margin services and new customer engagements.
Q:Review of Unclear Management Responses
A:Management avoided directly addressing the specific catalysts that could normalize sales cycles, instead focusing on broader strategies like expanding the customer base and introducing new content. Additionally, they did not provide detailed explanations for the downtick in fiscal '28 revenue growth targets, attributing it broadly to the evolving IBM relationship and customer decision-making complexities.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI agent
AI cyber
AI modernization
Bridge
IBM chart
action saving
agency
charge
compensation payment
complexity
country
decade
decision making
discipline
disruption
dynamic
engineering expertise
environment sale
flow rate
headwind
hyperscaler stream
hyperscalers
incentive compensation
information
infrastructure application
mile hour
modernization approach
rebalancing action
relationship IBM
sale cycle
self service
solution Agentic
sovereignty
state
transformation
workforce
KD Transcript
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.
Kyndryl Holdings, Inc. (KD) Q2 2026 Earnings Call Transcript
Positive11-5
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.
KD Slides
KD Report
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