Kyndryl Holdings, Inc. Q4 FY2025 earnings call

Key Points

• Kyndryl has solidified market leadership in mission-critical technology services and executed a strategy focused on building capabilities, skills, partnerships, and innovation.
• Fiscal 2025 highlights: Signings up 48% in constant currency to over $18B, adjusted pretax income increased $317M to $482M, adjusted free cash flow $446M (53% increase from prior year), and fourth quarter saw return to positive constant currency revenue growth.
• Kyndryl Consult signings grew 50% in constant currency in fiscal 2025, accounting for 22% of total signings, and converted to 29% constant currency revenue growth.
• Hyperscaler related revenue in fiscal 2025 was $1.2B, more than double the prior year. Advanced Delivery initiative has freed up over 13,000 delivery professionals, worth $775M annually. Accounts initiative increased cumulative annualized profit from focus accounts to $900M.
• Fourth quarter adjusted EBITDA was $698M with a margin of 18.4%, up 370 points year-over-year. Adjusted pretax income was $185M, 6 times higher than the prior year.

In fiscal 2025, Kyndryl Consult saw revenue increase by more than 25% and accounted for 22% of total signings. Hyperscaler related revenue more than doubled in fiscal 2025 to $1.2 billion. In the fourth quarter, revenue totaled $3.8 billion, a 1.3% year-over-year increase in constant currency. Kyndryl Consult revenues grew 45% in the quarter, and hyperscaler related work revenues more than doubled. Full year signings were $5.5 billion, marking the sixth consecutive quarter of signings growth with 46% growth overall.

Fiscal 2026 Outlook

• Expect 1% constant currency revenue growth.
• Hyperscaler related revenue to reach $1.8B+ (50% year-over-year increase).
• Kyndryl Consult revenue to grow double digits.
• Adjusted EBITDA margin expected to be approximately 18% (increase of ~130 basis points vs fiscal 2025).
• Adjusted pretax income target at least $725M, continuing progress toward high single-digit adjusted pretax margins by fiscal 2027-2028.
• Reiterates targets from Investor Day 2024: Over $1B adjusted free cash flow and over $1.2B adjusted pretax income by fiscal 2028.

Risks Discussed

• Macro uncertainties, but company's technology services are non-discretionary and insulated to some extent from macro factors.
• Limited direct exposure to U.S. Federal government spending (less than 0.5% of revenue from U.S. government contracts).
• Operations in China represent only about 1% of revenue and costs.
• Limited direct exposure to proposed tariffs.

Q: How to think about accomplishments in 2025 and positioning for 2026 midterm cadence?

A: Martin Schroeter mentioned the strategy laid out 3.5 years ago is executing well, with strong execution by the team, and control over destiny through innovation and capability investment.

Q: Where are we with focus accounts journey?

A: Martin Schroeter said they're well through the substantial majority, with focus accounts driving margin improvement and growth, having exceeded the initial $800M target with $900M annualized savings achieved.

Q: Will book to bill remain above one in fiscal 2026?

A: Martin Schroeter stated yes, expecting continued book to bill north of one due to strong momentum in consult and hyperscaler alliances.

Q: Thoughts on revenue growth guidance given signings growth?

A: Martin Schroeter explained that while signings are strong, the P&L is influenced by both new backlog and legacy signings, with the focus on profitable growth and midterm targets remaining on track.

Q: Impact of macro on strategic global accounts and Kyndryl Bridge?

A: Martin Schroeter noted uncertainty is a tailwind as they help customers optimize infrastructure, and Kyndryl Bridge provides actionable insights to help customers optimize and find savings, uncovering unused resources and avoiding unplanned downtime.

Q: Growth trends in Consult business and margin dynamics?

A: Martin Schroeter said Consult signings continue to grow well, though mix growth will slow, and Consult margins are accretive to overall margins, with heavy investment in Consult this year contributing to profitable growth.