Kyndryl (KD) Q1 EPS Drops 55 Percent

Kyndryl (KD -20.98%), the world’s largest IT infrastructure services provider, reported its first quarter fiscal 2026 results on August 4, 2025. The key news from the release was a significant earnings and revenue miss: Earnings per share came in at $0.37 (non-GAAP), missing the analyst estimate of $0.83, and GAAP revenue was flat at $3.74 billion, missing consensus expectations of $3.92 billion by 4.6%. Despite the shortfall, the company delivered a 16% year-over-year increase in adjusted EBITDA and a notable improvement in profitability. Management reiterated its full-year guidance, pointing to high-margin growth in consulting, cloud partnerships, and an expanding services backlog. Overall, the quarter showed operational progress in margins and signings but raised questions about forecasting reliability and top-line momentum.

Source: Analyst estimates provided by FactSet. Management expectations based on management's guidance, as provided in Q4 2025 earnings report.

About Kyndryl’s Business and Key Focus Areas

Kyndryl (KD -20.98%) designs, manages, and modernizes complex information technology (IT) systems for enterprise clients. Its services cover cloud, data management, security, artificial intelligence (AI), and networking. The company’s core business is helping large organizations navigate digital transformation by upgrading, securing, and running critical IT infrastructure, both in-house and in the cloud.

Recently, Kyndryl has focused on expanding higher-value services, such as consulting and cloud infrastructure partnerships, as well as developing AI tools for enterprise clients. Success depends on its ability to modernize clients’ systems, grow through partnerships with top technology vendors, capitalize on the enterprise move to digital and cloud systems, and maintain a highly trained and adaptable workforce. Security and resiliency also remain central, as clients increasingly expect robust protection from cyber threats and disruptions.

This Quarter’s Performance: Financial and Operational Highlights

Kyndryl posted nearly flat GAAP revenue, falling short of analyst expectations by $180 million but holding steady compared to the prior-year period. Adjusted earnings per share (non-GAAP) missed by more than half, at $0.37 versus the estimated $0.83, while adjusted EBITDA reached $647 million, a 16% increase from a year earlier. Despite robust signings growth—contracts valued at $3.2 billion, up 3%—U.S. revenue, the company’s largest market, slid 8%. Japan’s reported growth was offset by currency effects, showing an underlying decline once adjusted.

Margins, however, showed strong improvement. The adjusted EBITDA margin rose to 17.3% from 14.9% in Q1 FY2025, reflecting gains from higher-margin service lines and improved operational efficiency. Net income (GAAP) climbed to $56 million from $11 million in the prior-year period, while adjusted pre-tax income rose 39%, hitting $128 million.

Kyndryl Consult, its advisory services line, saw revenue jump 30% year over year. Signings for consulting services surged 36% over the last twelve months, pointing to future growth in this area. In cloud alliances, revenue linked to major public cloud providers (often called “hyperscalers,” such as Amazon Web Services, Google Cloud, and Microsoft Azure) soared 86% to $400 million. These segments contributed to a high book-to-bill ratio for FY2025—a measure indicating that signed contracts exceed revenue recognized—suggesting a healthy pipeline for future earnings.

The company also showcased the launch of its Agentic AI Framework, an enterprise-grade platform to help businesses adopt advanced AI solutions across different IT environments. This move strengthens Kyndryl’s position in automation and AI-enabled IT operations. Share repurchases totaled 1.8 million shares at a cost of $65 million, marking continued efforts to return capital to shareholders. Non-GAAP free cash flow was negative $222 million, reflecting typical seasonal outflows, and was higher than the prior year’s outflow. Overall, cash and equivalents stood at $1.46 billion, and debt totaled $3.14 billion as of June 30, 2025.

Business Context: Product Families and Market Trends

Kyndryl’s services center around managed IT infrastructure -- supporting the critical backbone of large organizations’ technology systems. Kyndryl Consult, comprising advisory and transformation consulting, has grown steadily to account for over 25% of revenue as of Q4 FY2025. This segment helps clients modernize applications, transition to cloud systems, manage data, and address technology “debt,” which refers to outdated systems or incomplete technology initiatives.

The company’s hyperscaler alliances represent a product family focused on integrating clients with major cloud providers. These cloud partnerships generate significant revenue through migration projects and ongoing management of cloud-based systems. The recently introduced Agentic AI Framework builds on Kyndryl Bridge, its platform for automating IT workflows, and aims to help clients deploy and manage artificial intelligence solutions at enterprise scale. These toolsets are designed to bring higher efficiency, cost savings, and improved system resilience -- attributes increasingly demanded by enterprise customers.

Although signings and higher-value services are trending up, legacy revenue streams such as traditional IT outsourcing continue to shrink, pulling down total sales in some regions, particularly the United States. Signings, however, remained strong overall, and management views the backlog of high-margin contracts as a support for future business performance. Share buybacks also continued, supported by recent financial gains.

Looking Ahead: Guidance and Key Watchpoints

For full FY2026, management reaffirmed earlier guidance, projecting at least $725 million in adjusted pre-tax income, an adjusted EBITDA margin of approximately 18%, free cash flow of approximately $550 million, and 1% growth in constant-currency revenue. These FY2026 targets rely on continued margin expansion and revenue conversion from the expanding backlog of signed contracts. No notable change or update to guidance was made for FY2026, despite the shortfalls in the current quarter.

Investors should monitor the company’s ability to convert contract signings into recognized revenue, especially within the high-growth consulting and cloud alliance lines. The scaling of new service launches, such as the Agentic AI Framework, and performance on free cash flow in upcoming quarters will be important for tracking progress against management’s stated goals.

Revenue and net income presented using U.S. generally accepted accounting principles (GAAP) unless otherwise noted.