IT infrastructure services provider Kyndryl (NYSE: KD) met Wall Street’s revenue expectations in calendar Q3 2026 (fiscal Q2 2027), but sales fell by 1.9% year on year to $3.65 billion. Its non-GAAP profit of $0.42 per share was 10% above analysts’ consensus estimates.

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StockStory’s take

Kyndryl’s third quarter results were received positively by the market, with management attributing the performance to growth in its Kyndryl Consult business and ongoing demand for modernization and AI-enabled services. CEO Martin Schroeter highlighted momentum in the U.S., Spain, and Latin America, underscoring strong customer trust in Kyndryl’s ability to manage complex technology environments. The company noted that operational streamlining efforts are largely complete, setting the stage for future cost savings and improved productivity. CFO Ellen Johnson pointed to gross margin expansion as a key factor in the quarter, driven by a shift toward higher-value service mix and increased efficiencies in service delivery.

Looking ahead, Kyndryl’s guidance is anchored by expectations for sustained growth in Kyndryl Consult and alliances-related revenue streams, as well as further margin expansion. Management identified AI-led modernization, automation, and the ramp-up of workforce rebalancing savings as central to its strategy. Schroeter emphasized the growing importance of partnerships and data-driven solutions, stating that upcoming offerings—such as the new ServiceNow collaboration—will help address customer concerns around IT sovereignty and operational complexity. Johnson reaffirmed targets for improved free cash flow and ongoing gross margin gains, noting a focus on executing against multi-year financial objectives despite ongoing macro and industry uncertainties.

Key insights from management’s remarks

Management credited Q3 performance to higher-value service mix, AI-led modernization, and improved operational efficiency, while recent acquisitions and new partnerships are expected to enhance Kyndryl’s capabilities and address evolving customer needs.

• AI-led modernization momentum: Customer demand for modernization, particularly integrating AI into infrastructure and applications, drove signings growth in Kyndryl Consult. Management noted that over the past year, signings in this unit have consistently outpaced revenue, reflecting robust enterprise demand for digital transformation and cyber preparedness.
• Operational streamlining near completion: The company has largely finished workforce rebalancing initiatives, which management expects will yield significant cost savings in the coming quarters. These actions are anticipated to improve operating leverage and free up resources for investment in growth areas.
• Expansion of partner ecosystem: Kyndryl highlighted the strategic importance of alliances, including a newly expanded relationship with Broadcom for VMware Cloud Foundation and an upcoming co-developed solution with ServiceNow. These partnerships are seen as critical for helping customers modernize and secure both public and private cloud environments.
• New acquisition in healthcare IT: The acquisition of Healthcare IT Leaders is expanding Kyndryl’s application implementation and managed services capabilities in the healthcare sector. Management believes this move will allow the company to address the growing demand for modernization in highly regulated environments and to offer more integrated solutions.
• Geographic and segment momentum: The U.S. business delivered its third consecutive quarter of revenue growth, supported by strong Kyndryl Consult performance and resolution of a commercial matter. Management also cited improving trends in Europe, particularly as the region navigates regulatory and IT sovereignty challenges.

Drivers of future performance

Kyndryl’s outlook relies on continued modernization demand, AI-driven service expansion, and operational efficiency, balanced by ongoing investments in talent and strategic partnerships.

• Sustained modernization and AI demand: Management expects enterprise appetite for modernization, especially in integrating AI and automation, to remain a key growth driver. New offerings, such as the ServiceNow collaboration and expanded AI innovation labs, are designed to meet evolving customer requirements in areas like IT sovereignty and operational resilience.
• Efficiency and margin improvement: The company anticipates ongoing benefits from workforce rebalancing and automation, with gross margin expected to trend higher as a greater share of revenue shifts toward higher-value services. These savings are expected to support additional investments in talent and technology while maintaining a disciplined approach to cost management.
• Sector and regional expansion: Kyndryl is targeting growth in sectors like healthcare through recent acquisitions, while also focusing on geographic opportunities in the U.S., Japan, and Europe. Management acknowledged that while regulatory and geopolitical headwinds persist—particularly in Europe—strengthening local partnerships and compliance solutions are expected to drive new business and improve customer retention.

Catalysts in upcoming quarters

In the coming quarters, the StockStory team will be closely monitoring (1) the rollout and customer adoption of new AI-powered offerings such as the ServiceNow partnership, (2) execution of workforce rebalancing and realization of associated cost savings, and (3) integration progress and revenue contribution from the Healthcare IT Leaders acquisition. Additional focus will be placed on signs of recovery in Europe and ongoing growth in higher-value service segments like Kyndryl Consult.

Kyndryl currently trades at $16.94, up from $12.94 just before the earnings. Is the company at an inflection point that warrants a buy or sell? The answer lies in our full research report (it’s free).

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