KD Q2 Deep Dive: Consulting and AI-Led Modernization Drive Strategy Amid Margin Pressure

IT infrastructure services provider Kyndryl (NYSE:KD) missed Wall Street’s revenue expectations in Q2 CY2026, with sales falling 3.3% year on year to $3.62 billion. Its non-GAAP loss of $0.12 per share was 29.4% above analysts’ consensus estimates.

Is now the time to buy KD? Find out in our full research report (it’s free for active Edge members).

StockStory’s Take

Kyndryl’s second quarter results saw a negative market reaction, as sales declined and missed Wall Street’s revenue expectations. Management attributed the revenue shortfall to ongoing headwinds in its legacy focus accounts and customers increasingly procuring IBM hardware and software directly. CEO Martin Schroeter cited positive momentum in Kyndryl Consult and hyperscaler partnerships, but acknowledged that lengthening sales cycles and workforce rebalancing charges weighed on profitability. He stated, “AI, modernization and cyber preparedness remain important priorities for enterprises,” but also noted that “there is more work ahead.”

Looking forward, Kyndryl’s guidance is shaped by the ongoing transition toward higher-margin, post-spin contract wins and continued investment in AI-powered services. Management believes that growth in Kyndryl Consult and alliances with hyperscalers will help offset revenue headwinds from legacy contracts and evolving customer procurement patterns. CFO Harsh Chugh emphasized that workforce cost savings should support operating leverage in the second half, while Schroeter highlighted the company’s focus on automation and differentiated Agentic AI offerings. The company expects these shifts to position it for improved profitability and free cash flow in the coming years.

Key Insights from Management’s Remarks

Management attributed the quarter’s underperformance to legacy contract headwinds and workforce rebalancing, while highlighting new business momentum in AI-driven consulting and hyperscaler alliances.

• Consulting and hyperscaler growth: Kyndryl Consult revenue grew 14% year-over-year, and hyperscaler-related revenue streams increased 48%, reflecting demand for modernization and AI solutions among enterprise customers. This segment’s strength partially offset declines in legacy focus accounts.
• Shift in IBM relationship: The company’s evolving relationship with IBM, where more customers now procure hardware and software directly from IBM, continued to pressure Kyndryl’s top line. Management stressed that this shift reduces reported revenue but has a limited impact on service margins.
• Workforce rebalancing actions: Management took actions to streamline operations and reduce SG&A costs, incurring $152 million in workforce rebalancing charges. The resulting cost savings are expected to materialize in the second half of the year, improving operating leverage.
• AI-led modernization wins: Kyndryl secured several large contracts leveraging its Agentic AI framework and Kyndryl Bridge platform, enabling customers to automate operations, modernize hybrid IT environments, and strengthen security. Management highlighted new scope deals with global financial and technology firms as evidence of success.
• Investment in talent and partnerships: The company expanded consulting skills and alliance capabilities, investing in forward-deployed engineers, AI innovation labs, and strategic partnerships with AWS, Microsoft Azure, Broadcom, and others. Management views these investments as critical to maintaining differentiation in mission-critical IT services.

Drivers of Future Performance

Kyndryl’s outlook is anchored by ongoing consulting growth, AI-driven service expansion, and efficiency gains from workforce actions, but faces continued legacy revenue headwinds.

• Consult and hyperscaler momentum: Management expects consulting and hyperscaler-related revenues to continue growing, underpinned by enterprise demand for AI-native solutions and complex IT modernization. Expansion of new scope contracts and large deals is seen as a driver of improved revenue mix and higher margins.
• Efficiency and cost savings: The company projects that workforce rebalancing and automation initiatives, including further deployment of AI-based tools through Kyndryl Bridge, will deliver substantial cost savings. These savings are expected to support higher operating leverage, particularly in the second half of the year and into 2027.
• Legacy and IBM contract drag: Kyndryl anticipates ongoing pressure from legacy focus accounts and evolving IBM procurement patterns will limit headline revenue growth, though management asserts the negative margin impact should be modest. The company continues to emphasize high-value, post-spin signings to improve future profitability.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will be watching (1) sustained revenue growth in Kyndryl Consult and hyperscaler partnerships, (2) evidence that workforce rebalancing and automation initiatives deliver the expected improvement in margins, and (3) further reduction in the impact of legacy focus account headwinds. The pace of new contract signings and execution against AI-driven modernization goals will remain critical markers.

Kyndryl currently trades at $13.88, down from $14.55 just before the earnings. In the wake of this quarter, is it a buy or sell? See for yourself in our full research report (it’s free).

Now Could Be The Perfect Time To Invest In These Stocks

ONE MORE THING: Top 6 Stocks for This Week. This market is separating quality stocks from expensive ones fast. AI is taking down whole sectors with no warning. In a rotation this fast, you need more than a list of good companies.

Our AI system flagged Palantir before it ran 1,662% between October 2022 and February 2026. AppLovin before it ran 753% between February 2024 and February 2026. Nvidia before it ran 1,178% between January 2023 and February 2026. Each week it produces 6 new names that pass the same tests. Get Our Top 6 Stocks for Free HERE.

Stocks that have made our list include now familiar names such as Nvidia (+1,460% between June 2020 and June 2025) as well as under-the-radar businesses like the once-micro-cap company Tecnoglass (+1,552% between June 2020 and June 2025). Find your next big winner with StockStory today.