Executive Summary / Key Takeaways

• Kyndryl ($KD), the world's largest IT infrastructure services provider, has successfully navigated its post-spin transformation, pivoting from inherited low-margin business to a strategy focused on profitable growth driven by higher-value services and operational efficiency.
• The company's core investment thesis is underpinned by its unique "run and transform" approach, leveraging deep mission-critical expertise, the AI-powered Kyndryl Bridge platform, and a rapidly expanding ecosystem of technology alliances to address critical enterprise IT needs like cloud migration, AI readiness, security, and modernization.
• Strong execution on the "three-A initiatives" (Alliances, Advanced Delivery, Accounts) has significantly improved financial performance, driving substantial margin expansion and a return to positive constant currency revenue growth in Q4 FY2025, with further growth projected for FY2026.
• Kyndryl Consult, the company's advisory arm, is a key growth engine, consistently delivering double-digit revenue growth and commanding accretive margins, fueled by demand for modernization and AI-related services and insights derived from Kyndryl Bridge.
• Management's outlook points towards significant future profitability and cash flow generation, targeting at least $725 million in adjusted pretax income and approximately $550 million in adjusted free cash flow in FY2026, on the path to over $1.2 billion in adjusted pretax income and $1 billion in adjusted free cash flow by FY2028, supported by mid-single-digit revenue growth.

The Foundation: From Spin-Off to Strategic Powerhouse

Kyndryl Holdings, Inc. emerged as an independent entity in November 2021, spun out from IBM's Global Technology Services segment. This separation created the world's largest IT infrastructure services provider, inheriting a vast customer base and a deep legacy in managing complex, mission-critical systems. However, it also came with the challenge of optimizing a portfolio that included contracts with substandard margins.

From day one, Kyndryl embarked on a strategic evolution, recognizing that its foundational strength lay not just in running the world's vital IT systems, but in helping customers transform them for the future. The core of this strategy is a differentiated "run and transform" approach, acknowledging that enterprises need to continuously innovate and modernize their technology estates while maintaining the operational excellence and resilience of their existing critical infrastructure.

This strategic pivot is executed through three key pillars: expanding technology alliances, transforming service delivery through advanced capabilities, and proactively addressing the profitability of inherited accounts. These interconnected initiatives, collectively known as the "three-A initiatives," have been the engine driving Kyndryl's turnaround and positioning it for sustainable profitable growth.

Technological Differentiation: The Power of Kyndryl Bridge

At the heart of Kyndryl's operational transformation and technological differentiation is Kyndryl Bridge, an AI-powered open integration platform. Built upon decades of experience and proprietary intellectual property derived from managing diverse and complex IT environments at scale, Kyndryl Bridge provides unprecedented observability and actionable insights across a customer's entire technology estate, regardless of vendor or platform.

This platform is not merely a monitoring tool; it's an operational engine. Kyndryl Bridge enables the execution of over 180 million automated actions per month, ranging from routine maintenance like security patches and version upgrades to complex configuration changes and best practice implementations. This automation drives significant improvements in speed, reliability, and productivity of IT operations. For customers, this translates into tangible, quantifiable benefits: avoiding major incidents, reducing planned maintenance costs, and ultimately providing productivity benefits totaling nearly $3 billion a year across Kyndryl's portfolio, as noted by management. Specific examples highlight its impact, such as reducing disruptions by over 30% and cutting severe incidents in half for a global advertising firm, or enabling rapid recovery for hundreds of customers during a widespread vendor cybersecurity outage, addressing most impacted servers and mission-critical applications within 24 hours.

Kyndryl's investment in R&D and new technologies is focused on enhancing Kyndryl Bridge and expanding its capabilities, particularly in areas like AI-infused operational insights, security operations, application modernization, and regulatory compliance. The platform also serves as a natural source of opportunities for Kyndryl Consult, providing data-driven insights that fuel advisory engagements around AI readiness, data architecture, security, and resiliency.

The strategic intent behind these technological investments is clear: to create a competitive moat by offering a level of operational insight, automation, and efficiency that is difficult for competitors to replicate, particularly given Kyndryl's scale and unique access to operational data from managing the world's most complex systems. This technological edge directly contributes to Kyndryl's ability to deliver higher-value services, improve margins, and strengthen its market positioning as the trusted partner for managing and transforming mission-critical IT.

Competitive Landscape: Carving a Niche Through Expertise and Ecosystem

Kyndryl operates in a highly competitive technology services market, facing a diverse set of rivals ranging from large, multi-service enterprises like Accenture , Cognizant , and its former parent IBM , to specialized providers and the cloud hyperscalers themselves (AWS , Microsoft Azure , Google Cloud ). Competition hinges on factors including quality of service, technical skills, industry knowledge, financial value, innovation, and speed of execution.

Compared to broad consulting firms like Accenture, Kyndryl differentiates itself through its deep focus on IT infrastructure and its "run and transform" expertise. While Accenture excels in high-level strategic consulting and digital transformation across the entire business stack, Kyndryl's strength lies in the foundational layer – ensuring the underlying systems are optimized, secure, and resilient while enabling modernization. Kyndryl's operational margins (TTM Operating Margin: 3.23%) currently trail those of more consulting-heavy peers like Accenture (FY24 Operating Margin: 15%), reflecting the different cost structures inherent in managing physical and complex digital infrastructure compared to delivering purely intellectual services. However, Kyndryl's focus on improving efficiency through Advanced Delivery and Kyndryl Bridge is aimed at closing this margin gap over time.

Against traditional outsourcing providers like Cognizant and Infosys , which often leverage cost advantages through offshore delivery models, Kyndryl emphasizes the value derived from its mission-critical expertise, global delivery model, and technological differentiation via Kyndryl Bridge. While competitors may offer lower per-unit costs in certain commoditized services, Kyndryl's ability to deliver higher reliability (e.g., claims of higher uptime) and provide unique operational insights positions it for higher-value engagements, particularly in regulated industries or for complex hybrid environments where downtime is exceptionally costly. Kyndryl's TTM Net Profit Margin (1.67%) is currently significantly lower than INFY's (FY25 Net Profit Margin: 16%), highlighting the profitability challenge Kyndryl is actively addressing through its strategic initiatives.

Kyndryl's relationship with IBM is complex, shifting from a parent-subsidiary dynamic to primarily a vendor-customer relationship. While IBM also offers IT infrastructure services, Kyndryl's independence allows it to partner broadly across the ecosystem, including with IBM's competitors. This broad alliance strategy, encompassing major hyperscalers (AWS, Google Cloud, Microsoft) and technology vendors (SAP , NVIDIA , Databricks, Palo Alto Networks , etc.), is a key competitive advantage. It enables Kyndryl to offer objective, multi-vendor solutions tailored to customer needs, unlike competitors tied to a single technology stack. Hyperscaler-related revenue more than doubled in FY2025 to $1.2 billion and is expected to reach $1.8 billion or more in FY2026, demonstrating the success of this alliance strategy.

Kyndryl's strategy to invest when others may pull back, coupled with its differentiated capabilities and mission-critical focus, is creating opportunities to gain market share and win new logos, positioning it to perform differently than the overall market in certain segments.

Financial Performance: A Turnaround in Progress

Kyndryl's financial performance in fiscal year 2025 reflects a business in active transformation. Revenue for the year ended March 31, 2025, was $15.06 billion, a decline of 6% (or 4% in constant currency) compared to $16.05 billion in fiscal year 2024. This decline was largely anticipated and attributable to the company's intentional actions to reduce or exit low-margin components of customer relationships as part of its Accounts initiative.

Despite the revenue decline, profitability saw significant improvement. The net income for fiscal year 2025 was $252 million, a substantial improvement from a net loss of $340 million in fiscal year 2024 and a net loss of $1.37 billion in fiscal year 2023. This turnaround was driven by progress on the three-A initiatives, leading to increased operating efficiencies and higher margins on new signings.

The cost of services as a percentage of revenue decreased to 79.1% in FY2025 from 82.2% in FY2024, reflecting lower depreciation (partially due to a change in accounting estimate for IT equipment useful life, contributing approximately $180 million to pretax income in FY2025), increased operating efficiencies, and higher margins on recent signings. Selling, general and administrative expenses remained relatively stable as a percentage of revenue (17.2% in FY2025 vs. 17.3% in FY2024).

Adjusted EBITDA improved to $2.52 billion in FY2025 from $2.37 billion in FY2024, and adjusted pretax income reached $482 million, a significant increase from $165 million in FY2024. This demonstrates substantial margin expansion, with the adjusted EBITDA margin increasing by 200 basis points and adjusted pretax margin by 220 basis points year-over-year.

Signings, a key indicator of future revenue, were strong, increasing 46% to $18.2 billion in FY2025 compared to $12.5 billion in FY2024. This growth was broad-based across segments and practices and included a record 55 contracts valued over $50 million. The projected pretax margins on these new signings remain consistently in the high single digits, significantly higher than the margins on the inherited backlog. The gross profit book-to-bill ratio has been consistently above 1 over the last three years, indicating that Kyndryl is adding significantly more expected gross profit to its backlog than it is recognizing in current revenue.

Cash flow generation also saw marked improvement. Net cash provided by operating activities was $942 million in FY2025, up from $454 million in FY2024, primarily due to higher earnings. Adjusted free cash flow reached approximately $446 million in FY2025, a 53% increase from the prior year.

The company maintains a strong liquidity position, with $1.8 billion in cash and cash equivalents at March 31, 2025, and access to a $3.15 billion revolving credit facility (undrawn). Net debt stood at $1.4 billion, resulting in a net leverage ratio of 0.6 times adjusted EBITDA, well within the company's target range of below 1x. A $300 million share repurchase program was authorized in November 2024, with $94 million executed in FY2025, signaling confidence in future cash flow generation and a commitment to returning capital to shareholders.

Outlook: Accelerating Towards Profitable Growth

Kyndryl's outlook for fiscal year 2026 and its medium-term targets underscore management's confidence in the company's strategic trajectory and its ability to translate operational improvements and signings growth into sustained financial performance.

For fiscal year 2026, Kyndryl projects positive constant currency revenue growth of approximately 1%. This follows the significant milestone achieved in Q4 FY2025, which saw a return to positive constant currency growth (1.3% year-over-year). This top-line growth is expected to be fueled by continued double-digit growth in Kyndryl Consult and a 50% increase in hyperscaler-related revenue, targeting $1.8 billion or more.

Profitability is expected to see further substantial expansion. Management guides for adjusted EBITDA margin of approximately 18% in FY2026, an increase of roughly 130 basis points from FY2025. Adjusted pretax income is projected to be at least $725 million, representing an increase of over $240 million and a margin expansion of at least 150 basis points year-over-year. This marks a third consecutive year of strong margin improvement, keeping the company on track for its target of high single-digit adjusted pretax margins in fiscal years 2027 and 2028. The outlook includes the final year of the contractually committed IBM software cost increase, after which costs related to the former parent are expected to normalize to standard inflationary adjustments, increasingly mitigated by protective clauses in customer contracts.

Cash flow generation is also forecast to grow significantly. Kyndryl projects approximately $550 million in adjusted free cash flow for FY2026, with roughly 100% conversion of adjusted pretax income less cash taxes into free cash flow. Net capital expenditures are expected to be around $675 million, roughly matching depreciation expense.

These near-term projections align with the medium-term financial objectives for fiscal year 2028: tripling adjusted free cash flow from FY2025 levels to roughly $1 billion, and more than doubling adjusted pretax income to at least $1.2 billion. Management believes these targets are achievable with only mid-single-digit annual revenue growth by FY2028, highlighting the significant operating leverage inherent in the business model as the mix shifts towards higher-margin services.

Risks and Challenges

Despite the positive momentum, Kyndryl faces several risks and challenges that could impact its trajectory. The competitive landscape remains intense, with rivals constantly evolving their offerings and pricing strategies. While Kyndryl's independence and alliance strategy provide differentiation, effectively managing these complex partnerships, some of which are also competitors, is crucial.

Macroeconomic uncertainty, geopolitical tensions, and currency fluctuations pose ongoing risks. Although Kyndryl's mission-critical services offer some insulation, prolonged downturns or significant shifts in customer spending priorities could affect demand and contract terms. The company's global presence also exposes it to diverse and sometimes conflicting legal and regulatory requirements, including evolving cybersecurity and data privacy laws, which increase compliance costs and potential liabilities.

Attracting and retaining skilled talent, particularly in high-demand areas like cloud, AI, and cybersecurity, remains a challenge in a competitive labor market. The success of Kyndryl's strategic initiatives, including Advanced Delivery and Kyndryl Consult, heavily relies on its ability to maintain and enhance its workforce's technical capabilities.

Operational risks include the ability to accurately estimate costs and timelines for complex service contracts, particularly in transformation projects. Service delivery issues or failure to meet service-level commitments could result in penalties, customer dissatisfaction, and reputational damage. While Kyndryl Bridge and automation aim to mitigate these, the scale and complexity of the environments managed present inherent challenges.

Finally, while the Accounts initiative has made significant progress in addressing low-margin contracts, the remaining portion still represents a drag on overall profitability. Successfully renegotiating or exiting these contracts while retaining customer relationships is an ongoing effort.

Conclusion

Kyndryl's journey since its spin-off has been one of purposeful transformation. By leveraging its foundational strength in managing mission-critical IT infrastructure and strategically investing in technological differentiation (Kyndryl Bridge), expanding its ecosystem of alliances, and focusing on higher-value services through Kyndryl Consult and its Accounts initiative, the company is successfully pivoting towards profitable growth.

The financial results for fiscal year 2025, marked by significant earnings improvement and a return to positive constant currency revenue growth in the final quarter, provide tangible evidence of this strategy's effectiveness. Management's clear outlook for fiscal year 2026 and ambitious medium-term targets for fiscal year 2028, supported by concrete guidance on revenue growth, profitability, and cash flow, paint a picture of a business poised for continued financial acceleration.

While competitive pressures, macroeconomic volatility, and operational execution risks persist, Kyndryl's unique positioning at the nexus of critical IT trends, its deep customer relationships, and its technological capabilities provide a compelling foundation for its investment thesis. The increasing contribution of higher-margin post-spin business to the P&L is the key financial lever expected to drive substantial value creation for shareholders in the coming years. Kyndryl is no longer just running the world's IT; it's actively shaping its future, one transformation project at a time.

Executive Summary / Key Takeaways

• Kyndryl ($KD), the world's largest IT infrastructure services provider, has successfully navigated its post-spin transformation, pivoting from inherited low-margin business to a strategy focused on profitable growth driven by higher-value services and operational efficiency.
• The company's core investment thesis is underpinned by its unique "run and transform" approach, leveraging deep mission-critical expertise, the AI-powered Kyndryl Bridge platform, and a rapidly expanding ecosystem of technology alliances to address critical enterprise IT needs like cloud migration, AI readiness, security, and modernization.
• Strong execution on the "three-A initiatives" (Alliances, Advanced Delivery, Accounts) has significantly improved financial performance, driving substantial margin expansion and a return to positive constant currency revenue growth in Q4 FY2025, with further growth projected for FY2026.
• Kyndryl Consult, the company's advisory arm, is a key growth engine, consistently delivering double-digit revenue growth and commanding accretive margins, fueled by demand for modernization and AI-related services and insights derived from Kyndryl Bridge.
• Management's outlook points towards significant future profitability and cash flow generation, targeting at least $725 million in adjusted pretax income and approximately $550 million in adjusted free cash flow in FY2026, on the path to over $1.2 billion in adjusted pretax income and $1 billion in adjusted free cash flow by FY2028, supported by mid-single-digit revenue growth.

The Foundation: From Spin-Off to Strategic Powerhouse

Kyndryl Holdings, Inc. emerged as an independent entity in November 2021, spun out from IBM (IBM)'s Global Technology Services segment. This separation created the world's largest IT infrastructure services provider, inheriting a vast customer base and a deep legacy in managing complex, mission-critical systems. However, it also came with the challenge of optimizing a portfolio that included contracts with substandard margins.

From day one, Kyndryl embarked on a strategic evolution, recognizing that its foundational strength lay not just in running the world's vital IT systems, but in helping customers transform them for the future. The core of this strategy is a differentiated "run and transform" approach, acknowledging that enterprises need to continuously innovate and modernize their technology estates while maintaining the operational excellence and resilience of their existing critical infrastructure.

This strategic pivot is executed through three key pillars: expanding technology alliances, transforming service delivery through advanced capabilities, and proactively addressing the profitability of inherited accounts. These interconnected initiatives, collectively known as the "three-A initiatives," have been the engine driving Kyndryl's turnaround and positioning it for sustainable profitable growth.

Technological Differentiation: The Power of Kyndryl Bridge

At the heart of Kyndryl's operational transformation and technological differentiation is Kyndryl Bridge, an AI-powered open integration platform. Built upon decades of experience and proprietary intellectual property derived from managing diverse and complex IT environments at scale, Kyndryl Bridge provides unprecedented observability and actionable insights across a customer's entire technology estate, regardless of vendor or platform.

This platform is not merely a monitoring tool; it's an operational engine. Kyndryl Bridge enables the execution of over 180 million automated actions per month, ranging from routine maintenance like security patches and version upgrades to complex configuration changes and best practice implementations. This automation drives significant improvements in speed, reliability, and productivity of IT operations. For customers, this translates into tangible, quantifiable benefits: avoiding major incidents, reducing planned maintenance costs, and ultimately providing productivity benefits totaling nearly $3 billion a year across Kyndryl's portfolio, as noted by management. Specific examples highlight its impact, such as reducing disruptions by over 30% and cutting severe incidents in half for a global advertising firm, or enabling rapid recovery for hundreds of customers during a widespread vendor cybersecurity outage, addressing most impacted servers and mission-critical applications within 24 hours.

Kyndryl's investment in R&D and new technologies is focused on enhancing Kyndryl Bridge and expanding its capabilities, particularly in areas like AI-infused operational insights, security operations, application modernization, and regulatory compliance. The platform also serves as a natural source of opportunities for Kyndryl Consult, providing data-driven insights that fuel advisory engagements around AI readiness, data architecture, security, and resiliency.

The strategic intent behind these technological investments is clear: to create a competitive moat by offering a level of operational insight, automation, and efficiency that is difficult for competitors to replicate, particularly given Kyndryl's scale and unique access to operational data from managing the world's most complex systems. This technological edge directly contributes to Kyndryl's ability to deliver higher-value services, improve margins, and strengthen its market positioning as the trusted partner for managing and transforming mission-critical IT.

Competitive Landscape: Carving a Niche Through Expertise and Ecosystem

Kyndryl operates in a highly competitive technology services market, facing a diverse set of rivals ranging from large, multi-service enterprises like Accenture (ACN), Cognizant (CTSH), and its former parent IBM, to specialized providers and the cloud hyperscalers themselves (AWS (AMZN), Microsoft Azure (MSFT), Google Cloud (GOOGL)). Competition hinges on factors including quality of service, technical skills, industry knowledge, financial value, innovation, and speed of execution.

Compared to broad consulting firms like Accenture, Kyndryl differentiates itself through its deep focus on IT infrastructure and its "run and transform" expertise. While Accenture excels in high-level strategic consulting and digital transformation across the entire business stack, Kyndryl's strength lies in the foundational layer – ensuring the underlying systems are optimized, secure, and resilient while enabling modernization. Kyndryl's operational margins (TTM Operating Margin: 3.23%) currently trail those of more consulting-heavy peers like Accenture (FY24 Operating Margin: 15%), reflecting the different cost structures inherent in managing physical and complex digital infrastructure compared to delivering purely intellectual services. However, Kyndryl's focus on improving efficiency through Advanced Delivery and Kyndryl Bridge is aimed at closing this margin gap over time.

Against traditional outsourcing providers like Cognizant and Infosys (INFY), which often leverage cost advantages through offshore delivery models, Kyndryl emphasizes the value derived from its mission-critical expertise, global delivery model, and technological differentiation via Kyndryl Bridge. While competitors may offer lower per-unit costs in certain commoditized services, Kyndryl's ability to deliver higher reliability (e.g., claims of higher uptime) and provide unique operational insights positions it for higher-value engagements, particularly in regulated industries or for complex hybrid environments where downtime is exceptionally costly. Kyndryl's TTM Net Profit Margin (1.67%) is currently significantly lower than INFY's (FY25 Net Profit Margin: 16%), highlighting the profitability challenge Kyndryl is actively addressing through its strategic initiatives.

Kyndryl's relationship with IBM is complex, shifting from a parent-subsidiary dynamic to primarily a vendor-customer relationship. While IBM also offers IT infrastructure services, Kyndryl's independence allows it to partner broadly across the ecosystem, including with IBM's competitors. This broad alliance strategy, encompassing major hyperscalers (AWS, Google Cloud, Microsoft) and technology vendors (SAP (SAP), NVIDIA (NVDA), Databricks, Palo Alto Networks (PANW), etc.), is a key competitive advantage. It enables Kyndryl to offer objective, multi-vendor solutions tailored to customer needs, unlike competitors tied to a single technology stack. Hyperscaler-related revenue more than doubled in FY2025 to $1.2 billion and is expected to reach $1.8 billion or more in FY2026, demonstrating the success of this alliance strategy.

Kyndryl's strategy to invest when others may pull back, coupled with its differentiated capabilities and mission-critical focus, is creating opportunities to gain market share and win new logos, positioning it to perform differently than the overall market in certain segments.

Financial Performance: A Turnaround in Progress

Kyndryl's financial performance in fiscal year 2025 reflects a business in active transformation. Revenue for the year ended March 31, 2025, was $15.06 billion, a decline of 6% (or 4% in constant currency) compared to $16.05 billion in fiscal year 2024. This decline was largely anticipated and attributable to the company's intentional actions to reduce or exit low-margin components of customer relationships as part of its Accounts initiative.

Despite the revenue decline, profitability saw significant improvement. The net income for fiscal year 2025 was $252 million, a substantial improvement from a net loss of $340 million in fiscal year 2024 and a net loss of $1.37 billion in fiscal year 2023. This turnaround was driven by progress on the three-A initiatives, leading to increased operating efficiencies and higher margins on new signings.

The cost of services as a percentage of revenue decreased to 79.1% in FY2025 from 82.2% in FY2024, reflecting lower depreciation (partially due to a change in accounting estimate for IT equipment useful life, contributing approximately $180 million to pretax income in FY2025), increased operating efficiencies, and higher margins on recent signings. Selling, general and administrative expenses remained relatively stable as a percentage of revenue (17.2% in FY2025 vs. 17.3% in FY2024).

Adjusted EBITDA improved to $2.52 billion in FY2025 from $2.37 billion in FY2024, and adjusted pretax income reached $482 million, a significant increase from $165 million in FY2024. This demonstrates substantial margin expansion, with the adjusted EBITDA margin increasing by 200 basis points and adjusted pretax margin by 220 basis points year-over-year.

Signings, a key indicator of future revenue, were strong, increasing 46% to $18.2 billion in FY2025 compared to $12.5 billion in FY2024. This growth was broad-based across segments and practices and included a record 55 contracts valued over $50 million. The projected pretax margins on these new signings remain consistently in the high single digits, significantly higher than the margins on the inherited backlog. The gross profit book-to-bill ratio has been consistently above 1 over the last three years, indicating that Kyndryl is adding significantly more expected gross profit to its backlog than it is recognizing in current revenue.

Cash flow generation also saw marked improvement. Net cash provided by operating activities was $942 million in FY2025, up from $454 million in FY2024, primarily due to higher earnings. Adjusted free cash flow reached approximately $446 million in FY2025, a 53% increase from the prior year.

The company maintains a strong liquidity position, with $1.8 billion in cash and cash equivalents at March 31, 2025, and access to a $3.15 billion revolving credit facility (undrawn). Net debt stood at $1.4 billion, resulting in a net leverage ratio of 0.6 times adjusted EBITDA, well within the company's target range of below 1x. A $300 million share repurchase program was authorized in November 2024, with $94 million executed in FY2025, signaling confidence in future cash flow generation and a commitment to returning capital to shareholders.

Outlook: Accelerating Towards Profitable Growth

Kyndryl's outlook for fiscal year 2026 and its medium-term targets underscore management's confidence in the company's strategic trajectory and its ability to translate operational improvements and signings growth into sustained financial performance.

For fiscal year 2026, Kyndryl projects positive constant currency revenue growth of approximately 1%. This follows the significant milestone achieved in Q4 FY2025, which saw a return to positive constant currency growth (1.3% year-over-year). This top-line growth is expected to be fueled by continued double-digit growth in Kyndryl Consult and a 50% increase in hyperscaler-related revenue, targeting $1.8 billion or more.

Profitability is expected to see further substantial expansion. Management guides for adjusted EBITDA margin of approximately 18% in FY2026, an increase of roughly 130 basis points from FY2025. Adjusted pretax income is projected to be at least $725 million, representing an increase of over $240 million and a margin expansion of at least 150 basis points year-over-year. This marks a third consecutive year of strong margin improvement, keeping the company on track for its target of high single-digit adjusted pretax margins in fiscal years 2027 and 2028. The outlook includes the final year of the contractually committed IBM software cost increase, after which costs related to the former parent are expected to normalize to standard inflationary adjustments, increasingly mitigated by protective clauses in customer contracts.

Cash flow generation is also forecast to grow significantly. Kyndryl projects approximately $550 million in adjusted free cash flow for FY2026, with roughly 100% conversion of adjusted pretax income less cash taxes into free cash flow. Net capital expenditures are expected to be around $675 million, roughly matching depreciation expense.

These near-term projections align with the medium-term financial objectives for fiscal year 2028: tripling adjusted free cash flow from FY2025 levels to roughly $1 billion, and more than doubling adjusted pretax income to at least $1.2 billion. Management believes these targets are achievable with only mid-single-digit annual revenue growth by FY2028, highlighting the significant operating leverage inherent in the business model as the mix shifts towards higher-margin services.

Risks and Challenges

Despite the positive momentum, Kyndryl faces several risks and challenges that could impact its trajectory. The competitive landscape remains intense, with rivals constantly evolving their offerings and pricing strategies. While Kyndryl's independence and alliance strategy provide differentiation, effectively managing these complex partnerships, some of which are also competitors, is crucial.

Macroeconomic uncertainty, geopolitical tensions, and currency fluctuations pose ongoing risks. Although Kyndryl's mission-critical services offer some insulation, prolonged downturns or significant shifts in customer spending priorities could affect demand and contract terms. The company's global presence also exposes it to diverse and sometimes conflicting legal and regulatory requirements, including evolving cybersecurity and data privacy laws, which increase compliance costs and potential liabilities.

Attracting and retaining skilled talent, particularly in high-demand areas like cloud, AI, and cybersecurity, remains a challenge in a competitive labor market. The success of Kyndryl's strategic initiatives, including Advanced Delivery and Kyndryl Consult, heavily relies on its ability to maintain and enhance its workforce's technical capabilities.

Operational risks include the ability to accurately estimate costs and timelines for complex service contracts, particularly in transformation projects. Service delivery issues or failure to meet service-level commitments could result in penalties, customer dissatisfaction, and reputational damage. While Kyndryl Bridge and automation aim to mitigate these, the scale and complexity of the environments managed present inherent challenges.

Finally, while the Accounts initiative has made significant progress in addressing low-margin contracts, the remaining portion still represents a drag on overall profitability. Successfully renegotiating or exiting these contracts while retaining customer relationships is an ongoing effort.

Conclusion

Kyndryl's journey since its spin-off has been one of purposeful transformation. By leveraging its foundational strength in managing mission-critical IT infrastructure and strategically investing in technological differentiation (Kyndryl Bridge), expanding its ecosystem of alliances, and focusing on higher-value services through Kyndryl Consult and its Accounts initiative, the company is successfully pivoting towards profitable growth.

The financial results for fiscal year 2025, marked by significant earnings improvement and a return to positive constant currency revenue growth in the final quarter, provide tangible evidence of this strategy's effectiveness. Management's clear outlook for fiscal year 2026 and ambitious medium-term targets for fiscal year 2028, supported by concrete guidance on revenue growth, profitability, and cash flow, paint a picture of a business poised for continued financial acceleration.

While competitive pressures, macroeconomic volatility, and operational execution risks persist, Kyndryl's unique positioning at the nexus of critical IT trends, its deep customer relationships, and its technological capabilities provide a compelling foundation for its investment thesis. The increasing contribution of higher-margin post-spin business to the P&L is the key financial lever expected to drive substantial value creation for shareholders in the coming years. Kyndryl is no longer just running the world's IT; it's actively shaping its future, one transformation project at a time.