Kyndryl Holdings, Inc. (KD) | The Buildout — AI Infrastructure
The Verdict
Kyndryl runs the back-end IT estates of large enterprises and governments — mainframes, hybrid clouds, networks, security and workplace systems — and increasingly sells the consulting and agentic-AI integration layer on top of them. It is a services business, not a chip or software company. Management frames its difference as a 'run and transform' approach: keeping critical systems running while modernizing them, which it says most competitors cannot do at scale at the same time. Its AI exposure sits inside that services layer, as the work enterprises need to deploy and operate AI in complex, regulated IT.
| Market Cap | — |
| Revenue (TTM) | $26.4B |
| Revenue Growth | +75.6% |
| EBITDA Margin (TTM) | 9.6% |
| Net Debt | $2.8B |
| Earnings Beats | 5 of 7 |
| P/E (TTM) | — |
| EV/EBITDA (TTM) | — |
What We Like
- Remaining performance obligations were $32.8B at March 31, 2026, and about 59% is expected to convert to revenue within two years (10-K).
- Signings exceeded revenue over the six months through Q1 FY2027 and reached $14.2B over the trailing twelve months; new scope and new logos were about 30% of the value of the 40 largest deals, up from 15% in FY2025.
- Gross-profit book-to-bill was at or above 1x, with an average projected gross margin of 25% on signings over the last twelve months.
- Hyperscaler-related revenue reached $2B over the trailing twelve months, up 48%, and Consult revenue grew 14% over the same period with signings up 50% in Q1.
- Net leverage was 0.8x exiting Q1 FY2027, the investment-grade rating was reaffirmed by Fitch, Moody's and S&P, and the company had repurchased 8% of its shares since inception.
What We’re Watching
- IBM-related revenue is being removed at roughly a 3-point adverse impact in constant currency; management assumes a similar headwind through FY2027 and left open whether it fades into FY2028.
- Europe was down about 8% in constant currency in Q1 FY2027, per an analyst question management did not dispute, and is called embedded in guidance.
- Q1 FY2027 carried $152M of workforce rebalancing charges; savings begin in the second half, and full-year free cash flow is back-half weighted.
- The FY2028 revenue precondition was lowered from mid-single-digit to low single-digit constant-currency growth while the profit and cash targets were held.
The thesis is shifting rather than breaking. Kyndryl is no longer positioned as a revenue-growth story but as margin-and-cash compounding on a flat-to-down base, funded by cost self-help and a mix shift toward higher-margin post-spin signings. The latest quarter supplied better forward-quality evidence — signings covering revenue and a stronger new-logo mix — alongside a GAAP loss quarter and a lower multi-year revenue assumption. The open question is whether the second-half FY2027 revenue inflection arrives, the only observable test that trailing signings convert into reported revenue.
Earnings Beat
Kyndryl reported FY2027 Q1 revenue of $3.6B, down 3% year-over-year on both reported and constant-currency bases. Adjusted EBITDA was $512M, but $152M of workforce rebalancing charges — more than a 4-point hit to adjusted pretax margin — swung adjusted pretax income to a $37M loss and left a GAAP net loss of $55M. Free cash flow was a $401M outflow on working-capital timing, and quarterly signings of $3.9B brought trailing-twelve-month signings to $14.2B.
| Metric | Q1 FY2027 | Q4 FY2026 | Q1 FY2026 | YoY |
|---|---|---|---|---|
| Revenue | $15.1B | $3.8B | $3.7B | +303.2% |
| Gross margin | 21.8% | 22.5% | 21.3% | +50bps |
| EBITDA | $671M | $675M | $837M | −19.8% |
| EPS | $0.85 | $0.07 | $0.23 | +265.5% |
| Signings | $3.9B | n/a | n/a | 12-month signings $14.2B |
| Hyperscaler-related revenue | >$530M | n/a | n/a | $2B trailing 12 months, +48% |
During fiscal 2026, especially in second half, customers increasingly procured certain IBM hardware and software directly from IBM, while continuing to rely on Kyndryl for high-value services. That pattern has continued into fiscal 2027.— Harsh Chugh, CFO, 2026-08-05
Management tone: Management leaned on signings momentum — $3.9B in Q1, $14.2B over the trailing twelve months, and six-month signings exceeding revenue — as its main forward proof point, an improvement over the prior call where FY2026 signings of $13.5B were hit by extended sales cycles. It was direct about weaker spots, describing the IBM direct-procurement pattern as ongoing and the roughly 8% constant-currency decline in Europe as embedded in guidance. On two forward questions — signings-to-revenue conversion and new-logo pricing — management reframed rather than quantified. It made no mention of material-weakness remediation or the Solvinity acquisition, both of which drew comment in the prior period.
Management Guidance
For FY2027, management reaffirmed constant-currency revenue flat to down 2%, adjusted pretax income of $600M–$700M, and free cash flow of $400M–$500M. It set a Q2 FY2027 adjusted pretax income marker of roughly $123M, said it expects second-half revenue to exceed the first half with year-over-year trends improving each quarter, and guided about $200M of workforce rebalancing charges for the year with similar savings beginning in the second half. It assumes an IBM-related headwind similar to recent periods and guides Consult growth to high single digits to low double digits, while flagging a tough Q2 comparison. For FY2028 it reaffirmed targets of more than $1.2B adjusted pretax income and more than $1B free cash flow on low single-digit constant-currency growth, with $400M–$500M of annualized workforce savings.
Trajectory
Quarterly revenue has been roughly flat, moving between $3.6B and $3.9B, and management guides FY2027 constant-currency revenue flat to down 2%. Growth is coming from parts of the business rather than the whole: hyperscaler-related revenue reached $2B over the trailing twelve months, up 48%, after 59% growth in FY2026, and Consult revenue grew 14% over the trailing twelve months. Margins are improving at the full-year level — FY2026 adjusted EBITDA margin expanded 100 basis points to 17.7% — helped by a mix shift toward higher-margin post-spin signings, which management expects to supply 80% of FY2027 revenue. The drag is the IBM relationship: customers increasingly buy IBM hardware and software directly, which management says removes roughly 3 points of constant-currency revenue at no cost to profit.
The Model
The model projects FY+1 revenue of $14,950M and EBITDA of $2,960M (19.8% margin), then FY+2 revenue of $15,250M and EBITDA of $3,294M (21.6% margin). The near term is anchored on roughly flat revenue with margin expansion from the post-spin mix and workforce savings that begin in the second half, in line with management's guidance. The FY+2 step-up to a 21.6% EBITDA margin depends on those savings reaching $400M–$500M annualized and on the mix continuing to shift toward higher-margin signings, with revenue rising only modestly to $15,250M.
| Metric | FY2026 | Next FY (E) | Following FY (E) |
|---|---|---|---|
| Revenue | $15.1B | $14.9B | $15.2B |
| YoY Growth | — | −0.9% | +2.0% |
| EBITDA | $2.7B | $3.0B | $3.3B |
| EBITDA Margin | 18.0% | 19.8% | 21.6% |
Projections are the median of 5 independent model runs. The model’s revenue sits 1.7% above analyst consensus.
For FY2027, management reaffirmed constant-currency revenue flat to down 2%, adjusted pretax income of $600M–$700M, and free cash flow of $400M–$500M. It set a Q2 FY2027 adjusted pretax income marker of roughly $123M, said it expects second-half revenue to exceed the first half with year-over-year trends improving each quarter, and guided about $200M of workforce rebalancing charges for the year with similar savings beginning in the second half. It assumes an IBM-related headwind similar to recent periods and guides Consult growth to high single digits to low double digits, while flagging a tough Q2 comparison. For FY2028 it reaffirmed targets of more than $1.2B adjusted pretax income and more than $1B free cash flow on low single-digit constant-currency growth, with $400M–$500M of annualized workforce savings.
What Could Go Right — and Wrong
- Second-half FY2027 revenue rises above the first half as trailing signings convert, supporting the flat-to-down-2% full-year guide.
- Workforce rebalancing delivers the $400M–$500M annualized savings by FY2028 without disrupting delivery.
- Consult clears the tough second-quarter comparison and holds high-single-digit-to-low-double-digit growth, extending the mix shift.
- The IBM-related revenue headwind fades into FY2028, stabilizing the revenue base.
- Hyperscaler-related and private/hybrid-cloud work keeps growing faster than the company, broadening AI-linked exposure beyond a single partner set.
- The second-half revenue inflection does not arrive, pressuring both the FY2027 guide and the FY2028 low-single-digit growth precondition.
- The IBM direct-procurement headwind accelerates beyond the assumed similar level, pulling revenue toward the low end of guidance.
- European weakness, about −8% in constant currency in Q1, widens or persists and delays revenue stabilization.
- Workforce-savings realization slips against the $152M Q1 charge and back-half-weighted free cash flow underdelivers.
- Supplier services arms — most explicitly Microsoft Frontier Co. — take share of the agentic-services budget, contesting Consult.
Looking Ahead
The next twelve months turn on whether the signings backlog converts into revenue. Management has guided second-half FY2027 revenue above the first half and set FY2027 targets of $600M–$700M adjusted pretax income and $400M–$500M free cash flow, with workforce savings landing in the second half. FY2028 targets of more than $1.2B adjusted pretax income and more than $1B free cash flow rest on low single-digit constant-currency growth and $400M–$500M of annualized savings. Alongside those sit the integration of the Healthcare IT Leaders acquisition, the 10-year NASPO public-sector contract awarded September 16, 2026, and the governance items: the free-cash-flow securities lawsuit, the SEC investigation, and material-weakness remediation.
- 2026-09-08Citi TMT conference — Schroeter and CFO Johnson update the forward narrative.
- Late 2026$700M debt maturity — Company to refinance the October 2026 note or fund it from cash.
- Q2 FY2027Q2 FY2027 results — Tests the ~$123M adjusted pretax income marker and a tough Consult compare.
- H2 FY2027Second-half revenue inflection — Tests whether trailing signings convert into reported revenue.
- H2 FY2027Workforce savings begin — Savings start in H2 and step toward $400M–$500M annualized by FY2028.
- ~May 2027Material-weakness remediation — Tracked to the FY2027 Form 10-K.
Financials
Annual Summary
| Metric | FY2025 | FY2026 | TTM | YoY |
|---|---|---|---|---|
| Revenue | $15.1B | $15.1B | $26.4B | +0.2% |
| Gross Margin | 21.1% | 21.8% | 21.9% | +65bps |
| EBITDA | $2.0B | $2.7B | $2.5B | +34.4% |
| EBITDA Margin | 13.4% | 18.0% | 9.6% | +457bps |
| Net Income | $251M | $198M | $340M | -21.1% |
| Free Cash Flow | $152M | $340M | $148M | — |
| Net Cash | — | — | — | — |
Key Ratios (Trailing)
- P/E TTM—
- EV/EBITDA TTM—
- EV/Revenue TTM—
- Price/FCF TTM—
- Gross Margin (TTM)21.9%
- EBITDA Margin (TTM)9.6%
- Net Margin (TTM)1.3%
- ROIC18.2%
- FCF Conversion5.8%
- SBC / Revenue0.1%
The Company
Kyndryl is a services business, not a hardware, chip or software-license company. It runs and modernizes the back-end IT estates of large enterprises and governments — mainframes, hybrid clouds, networks, security and workplace systems — the systems that keep regulated, mission-critical operations going. Its 10-K describes it as 'a leading provider of mission-critical enterprise technology services' that 'designs, builds, manages and modernizes the complex information systems that the world depends on every day,' serving thousands of customers in more than 60 countries. It is a spin-out of IBM's managed-infrastructure services business, and its core transformation since has been to exit low-margin inherited contracts and rebuild the revenue base around higher-margin post-spin signings.
The company reports four segments by geography — United States, Japan, Principal Markets and Strategic Markets — and no product-line reporting segment. Its service lines are Cloud; Core Enterprise; Applications, Data & AI; Digital Workplace; Security & Resiliency; and Network & Edge. The only property figure captured in the source material is 'United States 3.6,' left unlabeled in the extraction, covering data centers and office space, with global headquarters in New York. Management says Kyndryl runs 'more than half the world's outsourced mainframes' and holds 8,000 to 9,000 deep mainframe experts.
Business Segments
Competitive Landscape
Kyndryl competes in enterprise IT services against global systems integrators and outsourced-infrastructure providers. The source lists competitors as ACN, CTSH, DXC, HCLTECH.NS, INFY, TCS.NS and UIS. The company describes itself in its 10-K as 'the world's largest IT infrastructure services provider,' a characterization from its own filings. Its stated differentiation is a 'run and transform' approach — running critical systems while modernizing them at the same time. The source material frames its position as hard-to-replace in mission-critical mainframe and hybrid operations and more contestable in Consult and agentic services, where supplier services arms are moving up the stack.
- ACNNamed in filings; not discussed.
- CTSHNamed in filings; not discussed.
- DXCNamed in filings; not discussed.
- HCLTECH.NSNamed in filings; not discussed.
- INFYNamed in filings; not discussed.
Supply Chain
Kyndryl sits between technology suppliers and large enterprise and government customers. Its 10-K names its alliance partners; the source notes that no neighboring company mentions Kyndryl by name, so the supply-chain read is inferential.
More on KD: Earnings recap