KD Q1 Deep Dive: Flat Revenue, IBM Headwinds, and AI-Led Modernization in Focus

IT infrastructure services provider Kyndryl (NYSE:KD) met Wall Street’s revenue expectations in Q1 CY2026, but sales were flat year on year at $3.77 billion. Its non-GAAP profit of $0.18 per share was 61.6% below analysts’ consensus estimates.

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StockStory’s Take

Kyndryl’s first quarter results were met with a negative market reaction, as the company posted flat year-on-year revenue while its non-GAAP profit per share fell significantly below Wall Street’s expectations. Management attributed the quarter’s performance to prolonged sales cycles and evolving customer purchasing behaviors, particularly in relation to IBM partnerships. CEO Martin Schroeter noted that customers are increasingly deliberate in IT decision-making as they balance modernization and operational stability, impacting both signings and revenue growth.

Looking forward, Kyndryl’s guidance is shaped by ongoing investments in agentic AI capabilities, workforce restructuring, and further development of its consult and alliance businesses. Management expects continued growth in high-value consulting and hyperscaler-related revenue streams, but cautioned that evolving relationships with IBM and extended customer decision cycles are likely to remain headwinds. CFO Harsh Chugh stated, “Our outlook assumes that revenue will be flat to down 2%, with growth coming from consult and alliance streams offset by IBM-related dynamics.”

Key Insights from Management’s Remarks

Management pointed to momentum in Kyndryl Consult and hyperscaler partnerships as offsetting some persistent headwinds, while also highlighting ongoing challenges tied to the IBM relationship and shifting customer procurement patterns.

• Consulting growth momentum: Kyndryl Consult achieved double-digit revenue growth for the third consecutive year, with signings exceeding revenue. Management highlighted investments in forward-deployed engineers and AI innovation labs as key contributors to this trend.
• Hyperscaler partnerships expanding: Revenue from alliances with cloud hyperscalers approached $2 billion, up sharply from prior years. These partnerships have become a meaningful growth vector, particularly as customers seek greater data sovereignty and flexibility.
• IBM relationship changes: Management noted that more customers are choosing to procure IBM hardware and software directly, rather than through Kyndryl. This shift reduces reported revenue and signings but has a limited impact on profitability, as Kyndryl cannot mark up IBM’s content.
• AI-driven operational efficiencies: The company is embedding agentic AI into its Kyndryl Bridge platform, resulting in faster incident resolution, reduced reliance on manual intervention, and freeing up employee capacity for higher-value work.
• Large deal activity and new scope: Kyndryl signed 38 deals over $50 million, more than 30% of which were new scope or new customers. Management sees these multiyear contracts as supporting future margin expansion and deeper strategic relationships.

Drivers of Future Performance

Kyndryl’s outlook for the year is influenced by ongoing consult and alliance growth, further operational streamlining, and the continued impact of changing IBM customer relationships.

• Consulting and alliance expansion: Management expects Kyndryl Consult and hyperscaler-related revenue streams to remain the primary growth drivers, with additional investments in AI capabilities and workforce skills supporting these segments. These areas are seen as offsetting revenue pressure elsewhere.
• IBM partnership headwinds: The company anticipates a continued negative impact from customers directly procuring IBM products, which reduces Kyndryl’s reported revenue. While management emphasized that this dynamic does not materially affect profit margins, it contributes to flat or declining topline guidance.
• Workforce and operational restructuring: Cost savings from ongoing workforce rebalancing are expected to yield $400–$500 million in annualized savings by next year. These measures, along with improved automation and efficiency, are aimed at supporting long-term profitability even in the face of sluggish revenue growth.

Catalysts in Upcoming Quarters

Looking ahead, our team will be closely monitoring (1) the pace of large deal signings and conversion of consult engagements into revenue, (2) progress in driving operational efficiencies and realizing savings from workforce rebalancing, and (3) the ongoing impact of direct IBM procurement on reported revenue. We will also track whether investments in agentic AI and alliance partnerships translate into sustained margin expansion.

Kyndryl currently trades at $13.15, down from $14.70 just before the earnings. Is the company at an inflection point that warrants a buy or sell? Find out in our full research report (it’s free).

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