KD Q4 Deep Dive: Delayed Sales and IBM Partnership Shift Weigh on Performance

IT infrastructure services provider Kyndryl (NYSE:KD) fell short of the market’s revenue expectations in Q4 CY2025 as sales rose 3.1% year on year to $3.86 billion. Its non-GAAP profit of $0.52 per share was 13.7% below analysts’ consensus estimates.

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StockStory’s Take

Kyndryl’s fourth quarter results were met with a significant negative market reaction, reflecting disappointment as both revenue and non-GAAP profit fell short of Wall Street’s expectations. Management attributed the underperformance to lengthening sales cycles and evolving customer requirements, particularly around artificial intelligence (AI) and data sovereignty. CEO Martin Schroeter described the quarter as one of operational progress but also acknowledged that investments in the company’s consulting business took longer than anticipated to translate into revenue, noting, “the world is getting more complex. AI is making customers rethink how their infrastructure should run.”

Looking forward, Kyndryl’s outlook is shaped by ongoing investments in consulting, automation, and AI-driven services, as well as changes in its longstanding partnership with IBM. Management remains focused on expanding its Kyndryl Consult and hyperscaler alliances, but cautions that regulatory uncertainties and the complexity of new customer demands could continue to impact the pace of large deal signings. Interim CFO Harsh Chug emphasized that, while sales cycles are expected to remain extended in the near term, the company is confident in its multi-year growth targets, stating, “We are growing what matters most: the expected future profit from committed contracts.”

Key Insights from Management’s Remarks

Management cited longer sales cycles, evolving IBM alliance terms, and higher labor costs as key factors affecting recent results, while highlighting ongoing strength in AI-driven modernization and consulting services.

• Sales cycles lengthen: Management pointed to the growing complexity of customer needs—driven by AI adoption and regulatory requirements for data sovereignty—as a central reason for extended sales cycles and delayed deal closures, especially in strategic markets like Europe.
• Consulting investments lag returns: Despite continued high demand for Kyndryl Consult services, investments in this area have not yet produced the anticipated uptick in revenue, with management noting a disconnect between resource allocation and short-term top-line impact.
• IBM partnership evolves: The company’s revenue mix continues to shift away from legacy IBM content, with the annualized run rate of IBM-related spend cut in half since the spin-off. This transition reduced near-term revenue but is expected to improve margins over time.
• Hyperscaler alliances grow: Revenue from cloud provider partnerships, referred to as hyperscalers, rose sharply and is on track to reach nearly $2 billion, reflecting increased demand for cloud modernization and digital transformation projects.
• Cost structure and automation: Kyndryl continues to leverage its Bridge platform and AgenTeq AI framework to automate delivery and improve efficiency, driving margin expansion in key contracts and helping to offset labor cost pressures.

Drivers of Future Performance

Kyndryl’s outlook centers on expanded consulting, AI-enabled delivery, and private cloud demand, offset by persistent sales cycle delays and evolving industry partnerships.

• AI and automation expansion: The company is prioritizing further integration of AI capabilities, especially through its AgenTeq framework and Kyndryl Bridge platform, to enhance service delivery and improve both customer outcomes and profitability.
• Private cloud and security focus: Renewed demand for private cloud solutions—driven by data sovereignty and security requirements—is expected to be a significant growth engine, with management planning to deepen alliances in this area.
• IBM and regulatory headwinds: As customers’ consumption of IBM technology shifts, Kyndryl anticipates a diminishing impact from legacy IBM contracts. However, management cautioned that ongoing regulatory changes and longer deal cycles could continue to delay revenue recognition in the near term.

Catalysts in Upcoming Quarters

In upcoming quarters, the StockStory team will be monitoring (1) the pace of large deal signings and the resolution of extended sales cycles; (2) further progress in reducing reliance on IBM-related revenue and growing hyperscaler partnerships; and (3) the adoption and monetization of AI-driven consulting and delivery solutions. Regulatory developments and the company’s ability to manage labor costs will also be important to watch.

Kyndryl currently trades at $10.57, down from $23.49 just before the earnings. At this price, is it a buy or sell? The answer lies in our full research report (it’s free).

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