Kyndryl (KD) Q2 2026 earnings review
Profit Engine Strong, but Revenue Sputters for Second Straight Quarter
Kyndryl delivered another quarter of powerful bottom-line improvement, with Adjusted Pretax Income soaring 171% YoY to $123 million, proving its strategic shift to higher-margin business is working. However, the top-line story was less impressive. For the second consecutive quarter, revenue missed internal targets, declining 3.7% in constant currency as longer sales cycles and the run-off of low-margin legacy contracts continued to be a drag. While management reaffirmed full-year guidance of 1% revenue growth, this now requires a significant 4-5% acceleration in the second half of the year. Confidence was signaled via a new $400 million share repurchase authorization, but execution on the steep revenue ramp remains the key risk.
🐂 Bull Case
The core strategy is delivering. Adjusted EBITDA margin expanded 250 bps YoY to 17.2%, and new business is being signed at high-single-digit pretax margins, systematically improving the company's profitability.
Kyndryl Consult (+28% YoY) and Hyperscaler-related revenue (+65% YoY to $440M) continue to fire on all cylinders, providing a clear path to higher-quality revenue growth.
The Board authorized a new $400 million share repurchase program, signaling strong confidence in the company's ability to generate cash and achieve its financial targets.
🐻 Bear Case
For the second quarter in a row, management admitted to missing internal revenue targets by ~$100 million due to deal slippage, raising concerns about forecasting accuracy and execution.
Reaffirming 1% annual growth guidance after a weak first half implies a sharp acceleration to 4-5% growth in H2. This creates significant execution risk if large, complex deals slip again.
Q2 signings fell 49% YoY to $2.8 billion. While this was against a very tough comparison, the volatility makes quarterly revenue contributions harder to predict.
⚖️ Verdict: ⚪
Mixed. The impressive and consistent margin expansion proves the turnaround thesis is sound and management is executing well on profitability. However, the recurring top-line misses and the steep back-end loaded guidance introduce a significant execution risk that cannot be ignored. The increased buyback suggests management's confidence, but investors should remain cautious until revenue growth stabilizes.
Key Themes
Consecutive Revenue Misses Raise Execution Risk for H2
Management confirmed that Q2 revenue was approximately $100 million below target, marking the second consecutive quarter with deal slippage. While the company attributes this to longer sales cycles for complex, multi-scope deals and the deliberate exit from low-margin business, this pattern puts pressure on the back-end loaded guidance. To achieve the reaffirmed +1% constant currency growth for FY26, Kyndryl must now deliver 4-5% growth in the second half, a steep acceleration from the -3.7% posted this quarter. This contradicts the 'momentum' narrative and makes strong execution on closing its record pipeline critical.
High-Growth Services Becoming Material Contributors
Kyndryl's strategic focus areas are delivering standout performance. Kyndryl Consult revenue grew 28% YoY, establishing it as a key advisory entry point for customers. More significantly, Hyperscaler-related revenue surged 65% YoY to $440 million. This puts the company on track to exceed its initial $1.8 billion target for the fiscal year, demonstrating successful execution on its key alliance partnerships and a shift towards higher-value, in-demand services.
US Market Continues to Lag
The United States segment was a notable laggard, with revenue declining 6% YoY. This is significantly worse than the overall company's reported 1% decline and 3.7% CCY decline. As a major market, sustained weakness in the US could be a material headwind to achieving overall growth targets, even as other regions show more stability.
Profitability Transformation Proven by Margin Profile
The '3 A's' strategy (Alliances, Advanced Delivery, Accounts) continues to be the primary driver of value. The benefits are clear in the Q2 results, with Adjusted EBITDA margin expanding by 250 basis points to 17.2%. Critically, management reiterated that new signings carry projected pretax margins in the high-single-digits. As these higher-quality contracts systematically replace legacy deals, they provide a clear, structural uplift to the company's overall margin profile.
AI Adoption Driving New Opportunities
Kyndryl is successfully positioning itself as an enabler of enterprise AI. Management noted that roughly 25% of current signings already contain AI-related content. The company is leveraging its deep infrastructure expertise to help clients with foundational needs like data architecture, migration, and security, which are prerequisites for scaling AI pilots into production. The launch of its Agentic AI Framework is a concrete step to capitalize on this secular trend.
The Great P&L Mix Shift Continues
The core of Kyndryl's multi-year story is the transition from inherited low-margin contracts to new, higher-margin post-spin business. Management stated that two-thirds of the P&L this year will come from these more profitable contracts, up from half last year. This mix shift is the primary reason for the divergence between weak revenue growth and strong profit growth, and it remains the central pillar of the investment case for achieving fiscal 2028 targets.
Other KPIs
Free cash flow for the first half of the year is negative $200 million, reflecting typical seasonality and working capital timing. However, the full-year guidance of approximately $550 million implies a massive cash generation of around $750 million in the second half. This requires significant working capital improvements and sustained profitability to achieve, making H2 cash conversion a critical metric to watch.
This forward-looking metric indicates the quality of new business. With a ratio of 1.2, Kyndryl has added 20% more projected gross profit to its backlog over the last year than it has recognized in its P&L. This demonstrates that future profitability is being structurally built into the business, supporting the long-term margin expansion story even with lumpy quarterly signings.
Stable. Trailing twelve-month signings of $15.6 billion exceed trailing twelve months' revenue of $15.0 billion, resulting in a healthy book-to-bill ratio of over 1.0x for the fifth consecutive quarter. This provides a solid foundation for the company's targeted return to sustained revenue growth, despite the sharp 49% YoY decline in Q2 signings due to a difficult comparison.
Guidance
Reaffirming this target implies a significant acceleration is required in the second half of the year. After declining approximately 3.1% in H1, revenue must grow 4-5% in H2. Management expects this to be driven by a larger revenue contribution from backlog, continued double-digit growth in Kyndryl Consult, and accelerated hyperscaler activity.
Decelerating YoY growth, but accelerating sequentially. Achieving this target implies H2 adjusted pretax income of at least $474 million, a substantial increase from the $251 million generated in H1. This guidance points to continued strong margin performance and operating leverage in the coming quarters.
Accelerating. The outlook for Q3 signals the start of the expected H2 recovery. A return to positive revenue growth and adjusted pretax income between $184M and $200M would represent a strong sequential acceleration from Q2's $123M, demonstrating tangible progress toward the full-year goals.