Kyndryl Holdings, Inc. (KD) | The Buildout — AI Infrastructure
The Verdict
Kyndryl is a global provider of mission-critical enterprise technology services. It designs, builds, manages, and modernizes the complex information systems enterprises depend on, and it is increasingly the services layer that prepares enterprises for AI — modernizing mainframes, connecting workloads to hyperscaler clouds, and running the AI-powered delivery platform Kyndryl Bridge. It does not sell GPUs, foundation models, or raw AI hardware; it sells the advisory, implementation, and managed services work the AI buildout forces onto enterprises.
| Market Cap | — |
| Revenue (TTM) | $15.1B |
| Revenue Growth | +0.2% |
| EBITDA Margin (TTM) | 18.0% |
| Net Debt | $2.3B |
| Earnings Beats | 5 of 7 |
| P/E (TTM) | — |
| EV/EBITDA (TTM) | — |
What We Like
- Hyperscaler-related revenue reached $1.9 billion in FY2026 and $2 billion on a trailing 12-month basis, up 59% and 48% respectively.
- Kyndryl Consult grew double digits in FY2026 for the third consecutive year, with 14% trailing 12-month revenue growth and 50% Q1 FY2027 signings growth.
- Gross profit book-to-bill is at or above 1x over the last three years, and average projected gross margin on signings is 25% over the last 12 months.
- Management expects 80% of FY2027 revenue to come from post-spin higher-margin signings, replacing the low-to-no margin inherited contracts that were roughly 40% of revenue at spin-off.
- Management is holding FY2028 targets of more than $1.2 billion adjusted pretax income and more than $1 billion free cash flow on low-single-digit constant-currency revenue growth.
What We’re Watching
- Q1 FY2027 printed an adjusted pretax loss of $37 million and a $401 million free cash flow outflow, so the full-year FCF target of $400–500 million depends on a large second-half swing.
- FY2026 total signings of $13.5 billion were below revenue of $15.1 billion, though management says six-month signings have since exceeded revenue.
- IBM direct procurement is a more-than-3-point constant-currency revenue headwind; management calls it profit-neutral, but the evidence does not yet prove services scope will never follow.
- Solvinity was prohibited by the Dutch regulator on May 25, 2026, and material weaknesses in internal controls remain open with remediation expected by the fiscal 2027 Form 10-K.
The thesis is strengthening on mix but still unproven on total revenue. Signings momentum, hyperscaler growth, and gross-profit book-to-bill support the profit and cash targets, while the IBM pass-through drag suppresses the top line. The open question is whether IBM direct procurement remains confined to pass-through content or eventually pulls services scope away too.
Earnings Beat
Q1 FY2027 revenue was $3.6 billion, down 3% year over year on both a reported and constant-currency basis. Adjusted EBITDA was $512 million, and the quarter printed an adjusted pretax loss of $37 million after $152 million of workforce rebalancing charges. Free cash flow was a $401 million outflow, while Q1 signings were $3.9 billion.
| Metric | Q4 FY2026 | Q3 FY2026 | Q4 FY2025 | YoY |
|---|---|---|---|---|
| Revenue | $3.8B | $3.9B | $3.8B | −0.8% |
| Gross margin | 22.5% | 21.8% | 22.7% | -20bps |
| EBITDA | $675M | $868M | $939M | −28.1% |
| EPS | $0.07 | $0.25 | $0.28 | −73.6% |
| Signings | $3.9B | n/a | n/a | — |
| Hyperscaler-related revenue | >$530M | n/a | n/a | — |
We’re encouraged that over the last 6 months, our total signings have exceeded our revenue.— Martin Schroeter, Chief Executive Officer, August 5, 2026
Management tone: Management was direct and confident, acknowledging the IBM revenue headwind while emphasizing profit-neutrality and reaffirming FY2027 and FY2028 targets. The tone cast Q1 FY2027 as the expected low point, with signings, new-logo mix, and cost productivity guiding the path forward.
Management Guidance
Management reaffirmed FY2027 guidance for revenue flat to down 2% constant currency, adjusted pretax income of $600 million to $700 million, and free cash flow of $400 million to $500 million. The outlook includes approximately $200 million of workforce rebalancing charges and a similar amount of savings to largely offset them. For Q2 FY2027, management expects adjusted pretax income relatively in line with $123 million from the prior year, including more workforce rebalancing charges.
Trajectory
Revenue is roughly stable in dollars but still contracting in constant currency: FY2026 revenue was $15.1 billion, down 3% constant currency, and Q1 FY2027 revenue was $3.6 billion, down 3% year over year. The mix is shifting toward faster-growing hyperscaler-related revenue and Kyndryl Consult signings, while IBM pass-through content and low-margin focus accounts drag the top line. FY2026 adjusted EBITDA margin expanded 100 basis points and gross margin improved, but Q1 FY2027 profitability was depressed by $152 million of workforce rebalancing charges that flowed through adjusted results.
The Model
The model projects FY+1 revenue of $14,950 million with EBITDA of $2,915 million, a 19.5% margin. FY+2 revenue is projected at $15,240 million with EBITDA of $3,338 million, a 21.9% margin. The near-term case reflects a flat top line as IBM pass-through revenue declines with margin expansion from higher-margin post-spin signings. The FY+2 step-up assumes signings convert and workforce rebalancing savings reach the guided $400–500 million annualized level.
| Metric | FY2026 | Next FY (E) | Following FY (E) |
|---|---|---|---|
| Revenue | $15.1B | $14.9B | $15.2B |
| YoY Growth | — | −0.9% | +1.9% |
| EBITDA | $2.7B | $2.9B | $3.3B |
| EBITDA Margin | 18.0% | 19.5% | 21.9% |
Projections are the median of 5 independent model runs. The model’s revenue sits 1.6% above analyst consensus.
Management reaffirmed FY2027 guidance for revenue flat to down 2% constant currency, adjusted pretax income of $600 million to $700 million, and free cash flow of $400 million to $500 million. The outlook includes approximately $200 million of workforce rebalancing charges and a similar amount of savings to largely offset them. For Q2 FY2027, management expects adjusted pretax income relatively in line with $123 million from the prior year, including more workforce rebalancing charges.
What Could Go Right — and Wrong
- Total constant-currency revenue inflects positive while IBM content keeps falling, showing the new growth lines have overtaken the legacy drag.
- IBM direct procurement stays confined to pass-through content, leaving services scope and margin unaffected and allowing services content to grow inside IBM-influenced accounts.
- New-scope and new-logo share of large-deal value keeps rising from about 30%, sustaining signings above revenue.
- Workforce rebalancing savings convert at the guided $400–500 million annualized level in FY2028 without damage to delivery quality or win rates.
- Kyndryl discloses AI-specific revenue or Consult dollar scale, making the AI narrative directly measurable.
- IBM direct procurement pulls services scope away too, ending the profit-neutral characterization and pressuring margins and cash.
- Signings stall after the recent six-month improvement and quarterly signings fall back below revenue, weakening H2 FY2027 and FY2028 assumptions.
- Europe declines further from roughly 8% constant currency and puts the flat-to-down revenue guide under pressure.
- Internal-control remediation slips past the fiscal 2027 Form 10-K deadline or legal overhangs deepen.
- Workforce rebalancing harms delivery quality, win rates, or retention, delaying or reducing the expected $400–500 million annualized savings.
Looking Ahead
The next 12 months hinge on conversion: management expects year-over-year revenue trends to improve each quarter and second-half FY2027 revenue to be stronger than the first half. The explicit signposts are Q2 FY2027 adjusted pretax income near the prior-year $123 million, continued Consult and hyperscaler growth, and progress toward the fiscal 2027 internal-control remediation deadline. The newly announced Healthcare IT Leaders acquisition and the digital solutions disposal add smaller execution variables.
- Q2 FY2027Earnings and adjusted PTI checkpoint — Tests management's expectation of adjusted PTI relatively in line with $123 million prior year.
- H2 FY2027Second-half revenue acceleration — Management expects H2 revenue stronger than H1 and YoY trends to improve each quarter.
- Late calendar 2026$700M debt maturity — Management plans to refinance or use cash on hand.
- Fiscal 2027 Form 10-KInternal-control remediation deadline — Management expects controls design, implementation, and testing completed at filing.
- FY2028Workforce savings annualized — Management targets $400–500 million annualized savings by fiscal 2028.
Financials
Annual Summary
| Metric | FY2025 | FY2026 | TTM | YoY |
|---|---|---|---|---|
| Revenue | $15.1B | $15.1B | $15.1B | +0.2% |
| Gross Margin | 21.1% | 21.8% | 21.8% | +65bps |
| EBITDA | $2.5B | $2.7B | $14.8B | +7.0% |
| EBITDA Margin | 16.8% | 18.0% | 18.0% | +114bps |
| Net Income | $251M | $198M | $198M | -21.1% |
| Free Cash Flow | $193M | $340M | −$573M | — |
| Net Cash | — | — | — | — |
Key Ratios (Trailing)
- P/E TTM—
- EV/EBITDA TTM—
- EV/Revenue TTM—
- Price/FCF TTM—
- Gross Margin (TTM)21.8%
- EBITDA Margin (TTM)18.0%
- Net Margin (TTM)1.3%
- ROIC14.3%
- FCF Conversion12.5%
- SBC / Revenue0.4%
The Company
Kyndryl is a global provider of mission-critical enterprise technology services. The 10-K describes it as the world's largest IT infrastructure services provider, designing, building, managing, and modernizing the complex information systems enterprises depend on every day. Its practice areas are Cloud, Core Enterprise, Applications, Data & AI, Digital Workplace, Security & Resiliency, and Network & Edge. The company does not sell GPUs, foundation models, or raw AI hardware; it sells the advisory, implementation, and managed services work that prepares enterprises for AI.
Kyndryl reports four geographic segments — United States, Japan, Principal Markets, and Strategic Markets — and serves thousands of customers in more than 60 countries. Its global headquarters is in New York. Delivery is organized around Kyndryl Bridge, its AI-powered services delivery platform, and an alliance ecosystem that includes AWS, Microsoft, Broadcom, Dell, HPE, and Red Hat. The 10-K lists only U.S. data centers and office space; the source set shows no evidence of owned data center construction or power purchase agreements.
Business Segments
Competitive Landscape
Kyndryl's main scale claim is in mainframe services: management says it has more scale than anybody else in mainframe and mainframe services, runs more than half the world's outsourced mainframes, and has 8,000 to 9,000 deep mainframe experts. The supplied source set does not name competitors in the broader IT services market.
Supply Chain
Kyndryl sits on the services-and-integration layer of the enterprise technology stack, between hardware and cloud partners and enterprise customers. No neighbor transcript named Kyndryl directly.
More on KD: Earnings recap