Kyndryl (KD) Q1 EPS Drops 55 Percent

Core Insights - Kyndryl reported a significant earnings and revenue miss for Q1 FY26, with non-GAAP EPS at $0.37, missing the estimate of $0.83, and GAAP revenue flat at $3.74 billion, missing expectations of $3.92 billion by 4.6% [1][5] - Despite the shortfall, the company achieved a 16% year-over-year increase in adjusted EBITDA and improved profitability, with management reaffirming full-year guidance [1][13] Financial Performance - Non-GAAP EPS was $0.37, missing the estimate of $0.83, and showing a 184.6% increase from $0.13 in Q1 FY25 [2] - GAAP revenue was $3.74 billion, unchanged from the prior year, but below the consensus estimate of $3.92 billion [2] - Adjusted EBITDA reached $647 million, a 16.4% increase from $556 million in Q1 FY25, with adjusted EBITDA margin rising to 17.3% from 14.9% [2][6] - Free cash flow was negative $222 million, reflecting typical seasonal outflows, and higher than the prior year's outflow [2][9] Business Focus and Strategy - Kyndryl specializes in designing, managing, and modernizing IT systems for enterprise clients, focusing on cloud, data management, security, AI, and networking [3] - The company is expanding higher-value services, particularly in consulting and cloud partnerships, and developing AI tools for enterprise clients [4] - Kyndryl Consult saw a revenue increase of 30% year-over-year, with signings for consulting services up 36% [7] Market Trends and Product Development - The hyperscaler alliances, which integrate clients with major cloud providers, generated significant revenue, with cloud-related revenue soaring 86% to $400 million [7][11] - The launch of the Agentic AI Framework aims to help businesses adopt advanced AI solutions, enhancing Kyndryl's position in automation and AI-enabled IT operations [8][11] Future Outlook - Management reaffirmed guidance for FY2026, projecting at least $725 million in adjusted pre-tax income, an adjusted EBITDA margin of approximately 18%, and free cash flow of approximately $550 million [13] - The company emphasizes the importance of converting contract signings into recognized revenue, particularly in consulting and cloud alliance segments [14]