Kyndryl (NYSE:KD) reported third-quarter fiscal 2026 results that management said reflected margin expansion, higher earnings, and positive free cash flow, even as longer sales cycles and changes in customer consumption of IBM offerings pressured its second-half outlook.
On the call, CEO Martin Schroeter said the company delivered 3% revenue growth year-over-year on a reported basis, though results were unchanged in constant currency. He also announced leadership changes, including the appointment of Harsh Chugh as interim chief financial officer.
Quarterly results and demand trends
Kyndryl Consult remained a key growth driver. Chugh said Kyndryl Consult grew 20% year-over-year in constant currency and represented 25% of total revenue in the quarter, which he said underscores the company’s shift toward higher-value services.
Signings totaled $3.9 billion in the quarter, including 11 contracts larger than $50 million, according to Schroeter. While signings declined 3% year-over-year, trailing 12-month signings were $15.4 billion, and management said its trailing 12-month revenue book-to-bill remained above 1.0x.
Chugh highlighted “strong demand for our modernization services,” pointing to a recently announced five-year contract extension with Hertz to modernize IT infrastructure.
Profitability, “3A’s” initiatives, and hyperscaler momentum
Adjusted EBITDA was $696 million, down 1% year-over-year, which Chugh attributed to depreciation and amortization being a larger percent of costs in the prior-year third quarter. Adjusted pre-tax income increased 5% year-over-year to $168 million, reflecting benefits from the company’s “3A’s” initiatives, partially offset by incremental investments—primarily in Kyndryl Consult.
Management pointed to several operational programs as ongoing sources of margin expansion:
- Alliances: Chugh said hyperscaler-related revenue was $500 million in the quarter, up 58% year-over-year, putting the company on track to exceed its earlier expectation of 50% growth for the year.
- Advanced Delivery powered by Kyndryl Bridge: Chugh said automation and technology embedded in delivery operations reduce costs and support service levels, and described this as “worth roughly accumulative $950 million of savings a year.”
- Accounts/Focus Accounts initiative: In the quarter, Chugh said cumulative annualized profit savings from remediating inherited low-margin contracts totaled $975 million.
Schroeter also said the company is “building even more Agentic AI” into service delivery through Kyndryl Bridge to improve quality and efficiency, while continuing to invest in AI innovation labs and skills. He added that Kyndryl is expanding in private cloud amid renewed demand tied to AI, data sovereignty, and security requirements.
Sales cycles lengthen amid AI, data sovereignty, and ERP timing
Both Schroeter and Chugh said sales cycles have been taking longer, which weighed on results and expectations. Schroeter cited “the accelerating pace of new AI capabilities” and regulatory uncertainty around data sovereignty as factors making long-term agreements more complex. He also said timelines for large enterprise ERP transitions to cloud solutions have extended, contributing to longer sales cycles.
These dynamics were “particularly noticeable” in Kyndryl Consult’s third-quarter performance, Schroeter said: while Consult delivered double-digit growth, it came in below expectations.
On the Q&A, management said the sales-cycle impact was not limited to one area. Chugh described customers reassessing infrastructure and modernization decisions as AI changes business processes and technology requirements, while data sovereignty questions add complexity around where data and AI workloads should reside.
Asked about timing, Chugh said the elongation is measured in “a couple of quarters,” rather than multi-year delays, noting many discussions are tied to renewals and have inherent urgency.
Evolving IBM relationship and revenue headwinds
Schroeter provided additional context on the company’s evolving partnership with IBM, which he said is affecting the “size of our signings and, therefore, the revenue we receive over time,” while having a limited impact on earnings. He said the evolving IBM content created a 3.5-point adverse effect on revenue growth in constant currency.
Schroeter said that when Kyndryl was spun off, its annualized run rate of spend with IBM was nearly $4 billion and is now approximately $2 billion. He framed the shift as part of a broader transformation in which hyperscaler-related revenue has grown from essentially zero to nearly $2 billion, which he described as a profound change in the company’s underlying capabilities.
Chugh said the company originally expected $1.8 billion in hyperscaler-related revenue for the year, then expected to exceed it after a strong first half, and is now on track to realize nearly $2 billion by the end of fiscal 2026.
Cash flow, capital allocation, and revised fiscal 2026 outlook
Kyndryl generated free cash flow of $217 million in the quarter. Net CapEx was $210 million, which Chugh said was above the typical quarterly run rate but consistent with expectations. Working capital was a source of cash in the quarter.
The company repurchased 3.7 million shares for $100 million during the quarter under an authorization announced in late 2024. Chugh said Kyndryl has repurchased 5% of outstanding shares since inception of the program and has approximately $350 million of remaining capacity.
Chugh said the company ended the quarter with $1.35 billion in cash and net leverage of 0.7x adjusted EBITDA, within its target of keeping net leverage below 1x. He also said Kyndryl plans to refinance or use cash on hand to fund a $700 million near-term debt maturity later in the calendar year, and recently drew $1 billion on a revolving credit facility to increase flexibility ahead of seasonally higher cash outflows and for general corporate purposes, including tuck-in acquisitions.
For fiscal 2026, Kyndryl revised its outlook for adjusted pre-tax income to a range of $575 million to $600 million and said it expects adjusted EBITDA margin of approximately 17.5%. Chugh said expected cash taxes of roughly $160 million and a net use of cash for working capital imply free cash flow of $325 million to $375 million for fiscal 2026.
Management attributed the revised outlook primarily to longer sales cycles, expected revenue headwinds from the evolving IBM partnership, investments to support future Consult growth, and the time needed to adjust hiring in response to lower-than-anticipated employee attrition. Schroeter added that a decline in attrition increased near-term labor costs relative to assumptions, and the company intends to address labor efficiencies and “get our cost base back in line.”
Schroeter also disclosed the company expects to delay filing its quarterly report, stating that following voluntary document requests from the SEC, Kyndryl—through its audit committee—is reviewing cash management practices, related disclosures, the effectiveness of internal control over financial reporting, and certain other matters. He said the company is cooperating and does not expect a restatement or other impact to its financial statements.
Despite near-term headwinds, management reiterated confidence in longer-term targets. Schroeter said the company remains focused on its fiscal 2028 goals, including more than $1.2 billion in adjusted pre-tax income and more than $1 billion in adjusted free cash flow, driven by a greater mix of higher-margin post-spin contracts and continued growth in Consult and hyperscaler-related services.
About Kyndryl (NYSE:KD)
Kyndryl (NYSE: KD) is a global managed infrastructure services provider formed in November 2021 through the spin-off of IBM’s Managed Infrastructure Services business. The company designs, builds, manages and modernizes critical information technology systems for enterprises worldwide. Kyndryl’s core offerings include cloud migration and management, network and edge computing solutions, digital workplace services and IT resiliency and security capabilities.
With a workforce of approximately 90,000 professionals and operations in more than 60 countries, Kyndryl serves clients across a broad range of industries, including financial services, telecommunications, healthcare, manufacturing and retail.
