Kyndryl Holdings, Inc. (KD) Earnings

Management highlights

### Strategic Priorities & Market Momentum - Core strategic focus remains on AI-led modernization, growth in high-value segments (Kyndryl Consult, hyperscaler alliances), and profitable long-term growth aligned with FY2027 and FY2028 targets - Customer demand is driven by five structural durable trends: enterprises need to deploy new AI technologies on outdated legacy infrastructure; widespread lack of workforce readiness for AI; growing regulatory requirements for data residency, cybersecurity and AI governance; demand for open, interoperable multi-cloud platforms; and expanding AI investment goals beyond productivity to drive direct business growth - Momentum remains strong in the U.S., with continued growth in targeted high-margin segments offsetting ongoing top-line headwinds from legacy focus accounts and changes to IBM procurement patterns ### Alliance & Capability Expansion - Expanded alliances with AWS and Microsoft Azure to support enterprise adoption and scaling of agentic AI for cloud modernization, and strengthened collaborations with Broadcom, Dell, HPE and Red Hat for hybrid and private cloud modernization projects - Invested in expanding Kyndryl Consult capabilities, including forward-deployed engineers, AI solution architects, and AI innovation labs to co-create scalable agentic AI solutions with customers - Kyndryl Bridge, the company's AI-powered delivery platform, currently generates 16-18 million infrastructure insights monthly and runs over 200 million automations monthly, enabling scalable AI orchestration and governance across complex hybrid IT estates ### Operational Efficiency Initiatives - Ongoing workforce rebalancing to address lower-than-expected voluntary attrition and reduce SG&A costs; $152 million in rebalancing charges were recorded in Q1, with full-year FY2027 charges expected to total ~$200 million, offset by $200 million in annualized savings starting in H2 FY2027, rising to $400-$500 million in annualized savings in FY2028 - Advanced delivery initiative embeds AI and automation into core service operations to improve productivity, enable upskilling for high-value work, and improve service quality; the company has generated ~$1 billion in cumulative savings from automation and operational improvements since spinoff, while maintaining world-class net promoter scores for core managed services - Cumulative share repurchases equal 8% of outstanding shares since the program launched, with $64 million in repurchases completed in Q1 FY2027

Guidance

- Full year FY2027 adjusted pre-tax income guidance is maintained at $600 million to $700 million, including the expected ~$200 million in workforce rebalancing charges - Full year FY2027 free cash flow guidance is maintained at $400 million to $500 million - Full year FY2027 constant currency revenue guidance is maintained at flat to down 2% year-over-year, with sequential improvement in year-over-year trends expected each quarter, and H2 FY2027 revenue projected to be stronger than H1 - Kyndryl Consult is on track to meet the prior guidance of high-single-digit to low-double-digit revenue growth for FY2027 - Q2 FY2027 adjusted pre-tax income is expected to be roughly in line with the $123 million reported in Q2 FY2026, and will include additional workforce rebalancing charges - Multi-year FY2028 targets are maintained: at least $1.2 billion in adjusted pre-tax income, $1 billion in free cash flow, achievable with low single-digit constant currency revenue growth, and $400-$500 million in annualized savings from workforce rebalancing

Segment performance

Kyndryl's overall Q1 FY2027 revenue was $3.6 billion, down 3% year-over-year on both reported and constant currency basis. The U.S. market delivered 5% YoY revenue growth for the second consecutive quarter. Kyndryl Consult grew revenue 14% YoY over the last 12 months, with 50% signings growth in Q1 FY2027, and continues to exceed revenue with its signings over the past 12 months. Hyperscaler-related revenue grew 48% YoY over the last 12 months. Overall 12-month signings reached $14.2 billion, with $3.9 billion in new signings in Q1 FY2027. Over the last 12 months, 30% of large deal (over $50 million) value came from scope expansions or new logos, up from 15% in FY2025. Adjusted EBITDA for Q1 was $512 million, with an adjusted pre-tax loss of $37 million, driven by $152 million in Q1 workforce rebalancing charges. 12-month average projected gross margin on new signings is 25%. Free cash flow was a $401 million outflow in Q1, consistent with normal seasonal working capital patterns. Kyndryl exited Q1 with $2.1 billion in cash, a net leverage ratio of 0.8x, and confirmed investment grade ratings from all three major rating agencies.

Risks & headwinds

- Lengthened enterprise IT decision-making and sales cycles, driven by macroeconomic uncertainty and increasing technology complexity, particularly around AI adoption and regulatory changes like data sovereignty requirements - Ongoing top-line revenue headwinds from the evolving partnership with IBM, as customers increasingly procure IBM hardware and software directly from IBM rather than through Kyndryl; this reduces reported revenue but has limited impact on earnings and service margins - Workforce resourcing and skill gaps, as customers have a widespread shortage of workers ready to deploy and manage AI at enterprise scale - General macroeconomic uncertainty that could further delay customer IT investment decisions, particularly for large long-term modernization contracts

Analyst Q&A

• Q: What assumptions are embedded in the FY2027 guidance around Kyndryl Consult growth, signings conversion, sales cycle length, and what are the biggest upside and downside risks to the revenue outlook? /

  A: Kyndryl Consult grew 10% in Q1, which is on track to meet the prior guidance range of high-single-digit to low-double-digit full-year growth, with strong 50% signings growth in Q1 and continued positive momentum in July. New scope and new logos continue to make up 30% of large deal value (up from 15% in FY2025), maintaining strong mixed improvement toward higher-margin business. Sales cycles remain consistent with historical patterns for long-term mission-critical IT commitments, with incremental complexity from new issues like data sovereignty but no material lengthening overall.

• Q: European revenue continued to decline this quarter, how does this performance compare to expectations and what are your outlook for the region going forward? /

  A: European performance was fully in line with the assumptions embedded in full-year guidance, with no material change to expected trends. Data sovereignty discussions do add incremental complexity to decision-making in Europe compared to the U.S., but sales cycle lengths have not changed materially from prior expectations, and there are no new unexpected headwinds that would change the full-year outlook.

• Q: How is Kyndryl aligning its workforce and resourcing to support growth in AI-led modernization and deliver expected cost savings from workforce rebalancing? /

  A: AI and agentic automation integrated via Kyndryl Bridge already automates core operational tasks, freeing up existing employees to redeploy to higher-value customer-facing roles; the company has already redeployed tens of thousands of workers since spinoff with high success rates for reskilling. This automation improves service quality (Kyndryl already holds world-class NPS for core services) while generating cost savings, creating a self-sustaining pathway to align headcount with high-growth service lines. Unique customer insights from existing infrastructure managed by Kyndryl give the company an edge in winning new scope and new logo deals.

• Q: What is Kyndryl's competitive advantage for winning new logos, particularly in consulting, and how do pricing dynamics differ between new logos and existing renewals? /

  A: Kyndryl's key differentiated advantage is its end-to-end agentic AI framework built on Kyndryl Bridge, which provides unified orchestration, governance and automation across complex heterogeneous enterprise IT environments, supported by deep specialized engineering expertise from Kyndryl Consult. The company has invested heavily in growing industry-specific consulting talent to support this framework, which drives the strong growth in consult signings and revenue. Complex enterprise AI modernization requires integrating new AI tools into legacy infrastructure, a capability that is unique to Kyndryl at scale.

• Q: What opportunity do you see in mainframe modernization, and how does this impact your relationship with IBM? /

  A: Mainframe modernization is a large, real ongoing opportunity; Kyndryl is the global leader in outsourced mainframe services, with unmatched scale and a deep bench of specialized mainframe talent that allows it to meet growing customer demand for modernizing legacy mainframe environments to support AI deployment. The relationship with IBM remains strong and collaborative; the focus account initiative is largely complete, and Kyndryl continues to partner with IBM to deliver high-value services to customers regardless of where they procure hardware, supporting customers' need to modernize while retaining mainframe infrastructure where it makes sense for their business.