Kyndryl (KD) Q2 2027 earnings review
Kyndryl beats its profit target, but its cash burn deepens
Kyndryl beat its second-quarter profit target and signed more contracts, but higher capital spending pushed cash flow into a loss. Revenue in constant currency dipped 1% while pretax profit excluding one-offs jumped 22% to $150 million on lower service delivery costs. Chief executive Martin Schroeter kept the full-year outlook unchanged, which by our math leaves $884 million of free cash flow to generate in the second half.
| Revenue in constant currency | -0.8% from a year ago (-1.9% reported to $3,651M) |
|---|---|
| Pretax income, excluding one-offs | $150M +22% from a year ago (vs ~$123M target) |
| Free cash flow | -$34M +$22M a year ago (-$434M in first half) |
| Full-year outlook | Unchanged middle of the range: $650M pretax profit, $450M cash |
⚖️ Verdict: ⚪ Neutral
The story is unchanged because progress on profit and debt offset a deeper cash burn and slower growth in newer services. The IT infrastructure provider paid off its maturing debt and lifted twelve-month contract signings back above revenue, yet consulting revenue growth slowed to 4% and first-half cash burn more than doubled.
The question now is whether second-half cost savings can deliver the $884 million of free cash flow implied by the full-year plan. One view is that ending severance charges and $400 million to $500 million of annualised staff savings will lift cash; the other is that capital spending and scrutiny of vendor-payment timing will keep cash short. Third-quarter free cash flow and the Form 10-Q working-capital disclosures will tell.
🐂 Bull Case
New Contract Signings Push Deal Ratio Above One
Signings are Kyndryl's initial estimate of the value of new customer contracts and extensions. For the past year, twelve-month signings sat below twelve-month revenue, which meant the IT infrastructure group was replacing less business than it billed.
In the second quarter, customers signed $4.1 billion of contracts, up 46.4% from a weak $2.8 billion a year ago. That lifted twelve-month signings to $15.5 billion, including 43 deals above $50 million. By our math, twelve-month signings now equal 1.04 times twelve-month revenue, up from 0.95 times last quarter.
What to watch: third-quarter signings against last year's $3.9 billion comparison. Staying near $4 billion without an easy comparison would confirm that contract demand has stabilised.
Lower Service Costs Lift Profit Above Plan
Kyndryl is cutting staff and reworking older low-margin contracts to lift profit while revenue shrinks. Last quarter, management told investors to expect second-quarter pretax income excluding one-offs near last year's $123 million.
The technology services provider delivered $150 million, up 22.0% from a year ago and 22.0% above that target. The gain came from the cost of running customer systems, which fell 2.0 percentage points of revenue to 76.5%. That drop outweighed a 0.6-point rise in overhead costs, a 0.5-point increase in severance charges to $38 million, and a 0.5-point rise in interest expense.
Excluding severance charges in both periods, pretax profit excluding one-offs rose 32.4% to $188 million by our math. The company has now booked $190 million of its planned $200 million full-year severance bill, with "savings expected to begin in the second half of fiscal 2027 that will largely offset the charges".
What to watch: third-quarter pretax income excluding one-offs. By our math, the full-year plan requires $537 million across the second half, or nearly double the first-half run rate once severance charges stop.
US Sales Accelerate Without One-Off Dispute Gain
The United States is Kyndryl's largest single-country segment, generating more than a quarter of total sales. After shrinking in fiscal 2026, US revenue returned to 5% growth in each of the last two quarters.
In the second quarter, US revenue rose 9.0% from a year ago to $980 million, and segment Ebitda excluding one-offs rose 40.0% to $273 million. A footnote shows the quarter included a 3-point revenue boost and a 15-point Ebitda boost "from the resolution of a commercial matter". Even without that one-off settlement, US sales grew 6.0% and segment Ebitda grew 25.0% by our math.
What to watch: US revenue growth in the third quarter, when the settlement gain will not repeat and the Healthcare IT Leaders purchase will contribute for a full quarter.
Refinancing Clears Near-Term Debt Wall
Entering the quarter, Kyndryl faced $1.7 billion of debt coming due within two months: $1 billion drawn on its revolving credit line and $700 million of 2.05% notes maturing in October 2026.
On September 28, the company sold $600 million of 7.80% notes due 2029 and $400 million of 7.875% notes due 2032. It used those proceeds and cash on hand to pay off the $1 billion credit line at the end of September and retired the $700 million October notes at maturity. That removes the refinancing risk, though higher rates pushed quarterly interest expense up from $20 million to $37 million.
What to watch: quarterly interest expense in the third quarter, which will show the full cost of replacing 2.05% notes with nearly 8% debt.
🐻 Bear Case
Full-Year Cash Target Needs Record Second Half
Finance chief Ellen Johnson said the company remains focused on execution to "support margin expansion and drive free cash flow growth". Yet second-quarter free cash flow was an outflow of $34 million, down from a $22 million inflow a year ago.
Operating cash flow rose by $25 million to $172 million, but net capital spending jumped 64.8% from $125 million to $206 million (5.6% of revenue). Through the first six months, Kyndryl has burned $434 million of free cash flow, more than double the $200 million outflow in the first half of last year.
Management still kept its full-year free cash flow outlook at $400 million to $500 million. By our math, hitting the middle of that range requires $884 million of free cash flow in the second half, up 46.1% from the $605 million generated in the second half of fiscal 2026.
What to watch: third-quarter net capital spending and severance cash payments, which will show whether equipment outlays were merely pulled forward or will keep draining cash.
Consulting and Cloud Partner Growth Slowed Again
"Strong signings and continued growth in Kyndryl Consult and hyperscaler-related revenue reinforce our confidence in our fiscal 2027 outlook," chief executive Martin Schroeter said. Kyndryl Consult is the company's technology advisory arm, and hyperscaler revenue comes from work linked to large cloud providers such as Amazon, Microsoft and Google.
Both businesses grew in the second quarter, and the company launched Agentic Modernization software services and opened AI labs in Dallas and Luxembourg. However, the pace of expansion in both growth engines slowed for afourth straight quarter:
- Kyndryl Consult quarterly revenue growth: 4.2% from a year ago, down from 10% in the first quarter and 28% a year ago
- Hyperscaler-related quarterly revenue growth: 27.2% (to over $550 million), down from 34% in the first quarter and 65% a year ago
- Kyndryl Consult 12-month signings: $4.6 billion, up 19.1% from a year ago
Because these two higher-margin lines represent over a third of revenue, their slowdown makes it harder to offset shrinking traditional infrastructure contracts outside the United States.
What to watch: whether the 19.1% rise in twelve-month advisory signings lifts Kyndryl Consult revenue growth back into double digits in the third quarter.
Risks This Quarter Didn't Answer
The earnings release did not provide new figures on several standing accounting, customer and operational risks; the quarterly Form 10-Q filing and conference call are needed to read them.
- SEC cash-management investigation and internal-control weaknesses: no update in the release on the enforcement review of vendor-payment deferrals or receivable sales; the Form 10-Q legal and liquidity notes will show the current status.
- Direct IBM software purchasing and European delays: constant-currency revenue fell 4.8% in Principal Markets (major European countries and Canada) and 6.7% in Strategic Markets (other international regions), and the release did not quantify the drag from customers buying IBM software directly.
- Service quality after workforce cuts and AI renewal pricing: $190 million of severance charges are now booked, and the gross-profit book-to-bill ratio was not in the release to show whether automation or staffing cuts are pressuring renewal margins.
👓 Other Themes
Healthcare IT Purchase Closes and India Moves
In mid-September, Kyndryl closed its purchase of Healthcare IT Leaders, a US hospital technology services provider; the cash flow statement shows $275 million spent on acquisitions in the first half. Separately, the company moved its Indian operations from Principal Markets to Strategic Markets and restated prior segment tables.
💲 Other KPIs
Net debt (total debt of $4,059 million minus $1,659 million of cash) rose by $934 million over the first six months of fiscal 2027, up from $1,466 million at March 31 and $1,966 million in the first quarter. First-half free cash flow burn of $434 million, $275 million of acquisition spending and $97 million of share buybacks reduced the cash balance.
Diluted shares fell 7.1% from 235.9 million a year ago and 0.7% from 220.6 million in the first quarter. By our math, Kyndryl spent $33 million on share buybacks in the second quarter ($97 million for the first half minus $64 million in the first quarter), down from $89 million a year ago.
Outside the United States, sales fell in two of three geographic segments after stripping out currency moves. Japan grew 2.9% in constant currency to $555 million, improving from 2% in the first quarter. Principal Markets fell 4.8% to $1,177 million (after -8% in Q1), and Strategic Markets fell 6.7% to $939 million (after -8% in Q1).
🔮 Guidance
Unchanged. The full-year plan still calls for revenue in constant currency to finish between flat and down 2% (-1% at the middle of the range). After a 2.1% constant-currency decline in the first half (-3.0% in Q1 and -0.8% in Q2), the middle of the range leaves roughly 0.1% growth for the second half by our math, helped by easier comparisons.
Unchanged. The outlook still targets $650 million at the middle of the range, up 11.9% from $581 million in fiscal 2026, and includes about $200 million of severance charges. With $113 million earned in the first half (and $190 million of the severance charges already taken), the middle of the range leaves $537 million for the second half by our math, up 62.7% from $330 million a year ago.
Unchanged. The plan still calls for $450 million at the middle of the range, up 10.8% from $406 million last year. Because first-half free cash flow was an outflow of $434 million, reaching the middle of the range requires $884 million of cash generation in the second half by our math, up 46.1% from $605 million in the second half of fiscal 2026.
❓ Key Questions
How much did vendor deferrals affect second-quarter cash flow?
First-half accounts payable fell by $396 million and receivable sales were not detailed in the release. Investors need the quarter-end vendor-deferral and factoring balances from the Form 10-Q to judge underlying cash generation during the SEC investigation.
Why did net capital spending jump 65% in the quarter?
Net capital outlays rose to $206 million from $125 million a year ago and $91 million in the first quarter, pushing free cash flow negative. Management has not said whether this reflects new contract hardware or a higher full-year capital bill.
Why did Kyndryl Consult revenue growth slow to 4.2%?
Advisory revenue growth slowed from 28% a year ago and 10% in the first quarter to 4.2%, even as twelve-month advisory signings rose 19.1%. Investors need to know whether project delays or pricing caused the gap.
What was the commercial dispute that lifted US profit?
Resolving a commercial matter added 3 points to US revenue growth and 15 points to US Ebitda growth, but was mitigated at the total company level. Management should explain where the offsetting charge landed across the other segments.