Kyndryl Holdings, Inc. Q3 FY2026 earnings call

• Harsh Chug appointed interim CFO. - Delivered margin expansion, higher earnings, and positive free cash flow. 3% top-line growth unchanged in constant currency. $3.9 billion signings in the quarter, including 11 contracts over $50M. Trailing twelve-month revenue book-to-bill ratio above 1.0. - Evolution of IBM partnership impacts signings and revenue, with IBM content having a 3.5% adverse effect on revenue growth. - Invested in Kyndryl Consult, leveraging Kyndryl Bridge and AgenTeq AI framework. - Hyperscaler-related revenue on track to reach nearly $2 billion by end of 2026. - Focus on private cloud expansion driven by AI, data sovereignty, and security. - Aim to get cost base back in line while maintaining strategic direction.

Kyndryl Consult grew 20% year over year in constant currency and now represents 25% of total revenue in the quarter. Hyperscaler alliances generated $500 million in the third quarter, a 58% increase year over year. Revenue for the quarter totaled $3.9 billion, up 3% from the prior year quarter on a reported basis and unchanged in constant currency. Adjusted EBITDA decreased 1% year over year to $696 million, while adjusted pretax income grew 5% year over year to $168 million.

• Adjusted pretax income outlook for fiscal 2026 in range of $575 million to $600 million. - Adjusted EBITDA margin in fiscal 2026 expected to be approximately 17.5%. - Free cash flow for fiscal 2026 in range of $325 million to $375 million. - Confident in driving toward more than $1.2 billion in adjusted pretax income in fiscal 2028 and converting that to more than $1 billion in adjusted free cash flow, with mid-single-digit growth by end of fiscal 2028.

• SEC is reviewing cash management practices, related disclosures, effectiveness of internal control over financial reporting, and certain other matters. - Longer sales cycles due to accelerating AI capabilities, regulatory uncertainties on data sovereignty, and extended timelines for large enterprise ERP transitions to cloud solutions.

Q: Tien-Tsin Huang asked about the outlook revision, attribution, and broad-based issues.

A: Harsh Chug said they fell short on acceleration in Consult, sales cycle extension, and IBM headwind. Martin Schroeter added world complexity from AI and data sovereignty affected acceleration.

Q: Tien-Tsin Huang followed up on strategic markets and UK.

A: Martin Schroeter mentioned addressing attrition and local investment; Harsh Chug noted data sovereignty impact in Europe.

Q: James Faucette asked about SEC review impact on forward commentary.

A: Martin Schroeter said can't comment until examination complete but fiscal 2028 goals remain and no restatement expected.

Q: Ian Zaffino asked about buyback message and visibility.

A: Harsh Chug said balanced capital allocation; Martin Schroeter noted cash flow conversion tied to profit and cash taxes.

Q: James Eric Friedman asked about free cash flow and fourth quarter working capital.

A: Harsh Chug said driven by pretax income revision and working capital use.

Q: Jonathan Lee asked about building blocks for fiscal 2028 targets.

A: Martin Schroeter mentioned shift to high 9% PTI backlog elements, growth in hyperscaler and consult, and Harsh Chug added gross profit book-to-bill and relevant consulting engagement.

Q: Jonathan Lee followed up on sales cycle elongation timeline.

A: Harsh Chug said deals have timely nature and slip seen as opportunity rather than backward.