Kyndryl's Q3 Earnings Show Margin Gains but Revenue Growth Remains Elusive

What happened

Kyndryl reported Q3 FY2026 revenue of $3.9 billion, with adjusted EBITDA of $696 million, reflecting continued margin improvement from cost-cutting and higher-margin consult work. Kyndryl Consult delivered double-digit growth, supporting the strategic pivot highlighted in the DeepValue report, but overall revenue growth is still muted, raising doubts about the timing of a turnaround. GAAP net income was only $57 million, and pretax income was $91 million, underscoring the volatility in cash flow and the reliance on adjusted metrics to paint a rosier picture. The company updated its FY2026 outlook and announced leadership changes, introducing fresh execution risks during a critical period when investors are scrutinizing backlog conversion. These results arrive amid market skepticism, with the stock down nearly 30% over the past year and persistent concerns about whether strong signings can translate into sustainable top-line growth.

Implication

The double-digit growth in Kyndryl Consult is a positive signal, but it must scale rapidly to offset declines in legacy segments and prove the mix shift thesis. Adjusted EBITDA improvements are encouraging, yet low GAAP earnings and weak cash flow in recent quarters suggest underlying profitability issues masked by non-cash adjustments. Leadership changes add uncertainty to stewardship, requiring close monitoring of new executives' ability to execute on growth and cost initiatives amid a challenging market environment. The updated FY2026 outlook should be viewed with caution, given Kyndryl's history of revenue misses and the elongated sales cycles cited in filings, which could delay the promised growth inflection. If Q4 fails to deliver on revenue and free cash flow guidance, the stock risks further de-rating as investors lose patience with the slow conversion from backlog to actual growth.

Thesis delta

The turnaround thesis based on margin expansion and Consult growth remains intact, but the lack of robust revenue growth in Q3 reinforces skepticism about the timing of a clean inflection. Leadership changes and persistent cash flow volatility add incremental risk, suggesting investors should temper expectations until Q4 results validate the full-year guidance for +1% constant-currency growth and ~$550 million free cash flow. No major shift is needed yet, but the thesis now hinges more critically on near-term execution, with failure to meet targets potentially downgrading the call from Potential Buy to Wait.