Key Points
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Revenue fell, but margins improved:Q2 revenue was $3.65 billion, down 1.9% year over year, while adjusted EBITDA margin rose 190 basis points to 19.1%. U.S. revenue grew 9%, supported by Kyndryl Consult and the resolution of a commercial matter.
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Consulting and deal activity showed momentum:Kyndryl Consult revenue grew 6% in constant currency, and management expects growth to accelerate after Q2. Signings reached $4.1 billion for the quarter, up 34% in the fiscal first half.
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Fiscal 2027 guidance was reaffirmed:Kyndryl expects constant-currency revenue to be flat to down 2%, adjusted pretax income of $600 million to $700 million, and free cash flow of $400 million to $500 million. Management also said its fiscal 2028 target of $1 billion in adjusted free cash flow remains on track.
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Kyndryl (NYSE:KD) reaffirmed its fiscal 2027 outlook after reporting higher margins and growth in its consulting business for the second quarter, even as total revenue declined from a year earlier.
The technology infrastructure services company reported revenue of $3.65 billion for the quarter ended September 30, 2026, down 1.9% as reported and 0.8% in constant currency. Adjusted earnings before interest, taxes, depreciation and amortization were $699 million, with a margin of 19.1%, up 190 basis points year over year.
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Adjusted pretax income was $150 million, and the adjusted pretax margin rose 80 basis points to 4.1%. Chief Financial Officer Ellen Johnson said the improvement was largely driven by gross margin expansion as the company's revenue mix improved.
Revenue in the U.S. segment rose 9%, its third consecutive quarter of growth. Roughly 6 percentage points of that increase came largely from Kyndryl Consult, while approximately 3 points reflected the resolution of a commercial matter, Johnson said. She said the commercial matter did not change the company's full-year guidance.
Consulting Growth and Deal Signings
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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 said the slowdown reflected a difficult comparison with the prior year and slower signings in the second half of the previous fiscal year. He expects the second quarter to be the low point for Kyndryl Consult's growth this fiscal year and said the business remains positioned for high-single-digit to low-double-digit growth for the full year.
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Total signings were $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 past 12 months, Kyndryl signed 43 deals worth more than $50 million each, including 11 in the second quarter. About one-third of the value of those large deals involved expanded scope or new customers, up from roughly one-quarter a year earlier, Schroeter said.
The company said it completed its acquisition of Healthcare IT Leaders, adding capabilities in healthcare application implementation and managed services. Schroeter said Kyndryl is integrating the business and sees opportunities to serve both companies' customer bases.
Cash Flow and Fiscal 2027 Outlook
Kyndryl used $434 million in free cash flow in the first half of the fiscal year. Johnson said the largest use of cash was $447 million in working capital, primarily reflecting seasonal vendor payments, including 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. The company reaffirmed its fiscal 2027 outlook for:
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Revenue that is flat to down 2% in constant currency, including the acquisition's contribution in the second half.
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Adjusted pretax income of $600 million to $700 million.
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Free cash flow of $400 million to $500 million.
The pretax income outlook includes approximately $200 million in workforce rebalancing charges and a similar amount of savings this year. Schroeter said the workforce actions are substantially complete, with annualized operating expense savings of approximately $400 million to $500 million expected in fiscal 2028.
Asked about a previously disclosed fiscal 2028 target of $1 billion in adjusted free cash flow, Schroeter said the target remains on track. "I would not over-interpret anything other than we're still on track," he said.
Kyndryl ended September with $1.7 billion in cash, down from $2.6 billion at the end of March, primarily because of first-half working capital needs and the Healthcare IT Leaders acquisition. Johnson said available liquidity was $4.8 billion.
Margins and New Offerings
Johnson said Kyndryl's gross margin improvement reflected delivery efficiencies and that additional workforce savings should contribute in the second half. The average projected gross margin on signings over the past 12 months was 25%, and Schroeter said the company expects to exit the fiscal year with a quarterly gross margin close to that level.
Schroeter also said Kyndryl plans to announce a co-developed offering with ServiceNow that combines ServiceNow's AI-powered workflows with data and agents from Kyndryl Bridge. The company also plans to introduce a solution addressing customers' data sovereignty challenges.
While Kyndryl is not relying on its core business to move beyond a high-single-digit pretax margin profile, Schroeter said offerings built around its data and insights could support higher margins over time.
About Kyndryl (NYSE:KD)
Kyndryl Holdings, Inc (NYSE:KD) is an information technology services company that designs, builds, manages and modernizes mission-critical technology systems for businesses and public-sector organizations. Its services help customers operate and transform complex IT environments, including cloud, data centers, networks, applications and digital workplaces.
The company provides consulting and implementation services as well as ongoing managed services. Its capabilities include cloud solutions, network and edge services, cybersecurity, data and artificial intelligence, application management, enterprise computing and technology modernization.
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The article " What Kyndryl (KD) Said on Its Q2 Earnings Call " was originally published by MarketBeat.
