KD Q2 Deep Dive: Flat Revenue and Margin Focus Amid Challenging Signings Environment

IT infrastructure services provider Kyndryl (NYSE:KD) missed Wall Street’s revenue expectations in Q2 CY2025, with sales flat year on year at $3.74 billion. Next quarter’s revenue guidance of $3.81 billion underwhelmed, coming in 1.5% below analysts’ estimates. Its non-GAAP profit of $0.37 per share was in line with analysts’ consensus estimates.

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StockStory’s Take

Kyndryl’s Q2 results were marked by flat year-over-year revenue, with management attributing performance to ongoing efforts to shift its business mix toward higher-margin contracts and away from legacy accounts. CEO Martin Schroeter highlighted that all of the quarter’s revenue decline was driven by actions to address eight focus accounts, where Kyndryl intentionally reduced revenue to improve profitability. The company also cited deal timing issues, noting that some expected contract signings slipped beyond the quarter’s end, impacting reported sales. Despite these challenges, Kyndryl pointed to continued growth in its consulting business and strong customer satisfaction scores as positive offsets.

Looking forward, Kyndryl’s guidance is shaped by expectations for accelerated revenue growth in the second half of the year, continued expansion of high-margin consulting and hyperscaler-related services, and ongoing benefits from operational efficiencies. Management remains focused on increasing the share of revenue from post-spin contracts, which carry higher projected margins, and expects consulting revenue to continue growing at a double-digit pace. CFO David Wyshner stated, “Our outlook for the year is for margin expansion and robust free cash flow, driven by new signings and efficiencies across delivery and SG&A.”

Key Insights from Management’s Remarks

Management explained that the revenue shortfall was primarily the result of intentional contract renegotiations in focus accounts, with a secondary impact from delayed deal signings. They also emphasized the growing role of consulting and cloud partnerships.

• Intentional revenue reduction: Kyndryl’s revenue decline related entirely to eight focus accounts where management prioritized margin expansion over top-line growth, halving revenue in these contracts while improving gross margin. This strategy reflects a shift toward higher-value, more profitable business.
• Consulting momentum: The Kyndryl Consult business continued to expand, growing 32% year-over-year and now running at an annualized pace of over $3 billion. Management attributed this growth to demand for advisory services in IT modernization, AI adoption, and cybersecurity.
• Hyperscaler revenue growth: Revenue from cloud “hyperscaler” partners nearly doubled year-over-year to $400 million in the quarter, with strong momentum toward its $1.8 billion annual target. These partnerships play a critical role in Kyndryl’s modernization initiatives for large enterprise clients.
• Operational efficiency gains: The company cited ongoing automation through its Kyndryl Bridge platform and advanced delivery initiatives, which have freed up thousands of delivery professionals and added $50 million to its annual cost savings run rate, supporting margin improvement.
• Book-to-bill and signings strength: Signings over the last twelve months rose 44%, with a book-to-bill ratio above 1, indicating that future contracted business is outpacing revenue recognition. This trend supports management’s longer-term growth and profitability targets.

Drivers of Future Performance

Kyndryl’s forward outlook is fueled by continued strength in consulting and cloud partnerships, with management highlighting margin expansion and free cash flow as central priorities.

• Shift to post-spin contracts: Management expects an increasing share of revenue to come from contracts signed after the company’s separation, which carry higher projected gross and pretax margins. This transition is anticipated to support sustained margin expansion over the next several years.
• Consulting and AI services demand: The company sees ongoing double-digit growth in consulting, driven by enterprises seeking help with AI, cloud migration, and cybersecurity. Management believes these trends will remain robust, with Kyndryl’s infrastructure expertise positioning it as a trusted partner.
• Efficiency and cost tailwinds: Operational efficiencies from automation, lower legacy software cost headwinds, and SG&A streamlining are expected to further bolster profit margins. Management also noted that cash taxes will remain low for the next few years, supporting free cash flow generation.

Catalysts in Upcoming Quarters

As we look ahead, the StockStory team will be monitoring (1) the pace and consistency of new contract signings, especially within consulting and cloud partnerships, (2) how quickly Kyndryl’s revenue mix shifts to post-spin, higher-margin contracts, and (3) the tangible impact of operational efficiency efforts on margin expansion and free cash flow. Execution against these priorities will be critical for validating management’s long-term growth and profitability targets.

Kyndryl currently trades at $29.59, down from $36.70 just before the earnings. At this price, is it a buy or sell? See for yourself in our full research report (it’s free).

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