Kyndryl lifts margins and reaffirms fiscal 2027 outlook

By Marcus Bennett

Kyndryl reported adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $699 million for the fiscal second quarter ended September 30, 2026, with margin up 190 basis points year over year at 19.1%.

Revenue reached $3.65 billion, down 1.9% as reported and 0.8% in constant currency (excluding currency movements). Chief Financial Officer Ellen Johnson attributed the margin improvement largely to gross margin expansion (revenue less direct costs, as a percentage of revenue) as revenue mix improved. Adjusted pretax income reached $150 million, and adjusted pretax margin (adjusted pretax income divided by revenue) rose 80 basis points to 4.1%.

What changed in the quarter?

U.S. segment revenue rose 9%, marking Kyndryl's third consecutive quarter of growth. Johnson said roughly 6 percentage points came largely from Kyndryl Consult, while approximately 3 points reflected the resolution of a commercial matter. The matter did not change full-year guidance.

Chairman and CEO Martin Schroeter said demand for modernization, artificial intelligence and cybersecurity helped drive growth in Kyndryl Consult signings and revenue. The business's constant-currency revenue growth slowed to 6% in the second quarter from 11% in the first. Schroeter attributed the slowdown to a difficult prior-year comparison and slower signings in the second half of the previous fiscal year.

Schroeter expects the second quarter to mark the low point for Kyndryl Consult's growth this fiscal year. He said the business remains positioned for “high-single-digit to low-double-digit growth” for the full year.

What do deal signings show?

Total signings reached $4.1 billion in the quarter and $15.5 billion over the preceding 12 months. Johnson said overall signings rose 34% in the first half of the fiscal year. Over the trailing 12 months, Kyndryl signed 43 deals worth more than $50 million each, including 11 during the second quarter.

About one-third of those large deals' value involved expanded scope or new customers. That share rose from roughly one-quarter a year earlier, Schroeter said. Kyndryl also completed its acquisition of Healthcare IT Leaders, adding healthcare application implementation and managed services. The company is integrating the business and sees opportunities to serve both customer bases.

Can cash flow recover in the second half?

Free cash flow (cash remaining after operating and capital spending) was negative $434 million in the first half of the fiscal year. Working capital (current assets less current liabilities) consumed $447 million, the largest use of cash, mainly through seasonal vendor payments. Those payments included multi-year renewals and annual prepaid software subscriptions.

Management expects meaningfully higher earnings and working-capital contributions to support cash flow in the second half. Kyndryl reaffirmed its fiscal 2027 outlook:

• Revenue flat to down 2% in constant currency, including the Healthcare IT Leaders contribution in the second half.
• Adjusted pretax income of $600 million to $700 million.
• Free cash flow of $400 million to $500 million.

The pretax-income outlook includes approximately $200 million of workforce rebalancing charges and a similar amount of savings this year. Schroeter said Kyndryl had substantially completed the workforce actions. Kyndryl expects approximately $400 million to $500 million in annualized operating expense savings in fiscal 2028.

Asked about the previously disclosed fiscal 2028 target of $1 billion in adjusted free cash flow, Schroeter said: “I would not over-interpret anything other than we’re still on track.”

Kyndryl ended September with $1.7 billion in cash, down from $2.6 billion at the end of March. Johnson attributed the decline primarily to first-half working-capital needs and the Healthcare IT Leaders acquisition. Available liquidity totaled $4.8 billion.

What could lift margins and create new offerings?

Johnson said delivery efficiencies drove gross-margin improvement, and additional workforce savings should contribute in the second half. The average projected gross margin on signings over the trailing 12 months stood at 25%. Kyndryl expects to exit the fiscal year with a quarterly gross margin close to 25%.

Schroeter said Kyndryl plans to announce a co-developed offering with ServiceNow. The product will combine ServiceNow's AI-powered workflows with data and agents from Kyndryl Bridge. Kyndryl also plans a solution addressing customers' data sovereignty challenges.

Schroeter said he would not rely on the core business to move Kyndryl beyond a high-single-digit pretax-margin profile. Offerings built around data and insights could support higher margins over time, he said.

What does Kyndryl do?

Kyndryl Holdings, Inc. is an information technology services company listed on the New York Stock Exchange under KD. It designs, builds, manages and modernizes mission-critical technology systems for businesses and public-sector organizations. Its work helps customers operate and transform complex IT environments, including cloud, data centers, networks, applications and digital workplaces.

The company provides consulting and implementation services alongside ongoing managed services. Its capabilities include cloud solutions, network and edge services, cybersecurity, data and artificial intelligence, application management, enterprise computing and technology modernization.