Kyndryl’s Q4 2025 Results: Navigating Margin Gains Amid Revenue Headwinds

Kyndryl (NYSE:KD), the former IT infrastructure arm of IBM, is set to release its fourth-quarter and full-year 2025 results on May 7, 2025. The earnings will mark a critical juncture for the company, which has prioritized margin expansion over top-line growth while executing its three-pillar strategy—Alliances, Advanced Delivery, and Accounts. Analysts expect a dramatic turnaround in profitability, but revenue trends remain a point of contention. Here’s what investors should watch.

Financial Performance: Profitability Surges, Revenue Declines

Kyndryl’s third-quarter 2025 results (ended December 31, 2024) revealed a stark dichotomy: revenue fell 4.9% year-over-year to $3.74 billion, yet net income soared to $215 million, reversing a $12 million loss in the prior-year period. This turnaround was driven by aggressive margin initiatives, including cutting low-margin legacy contracts and scaling higher-margin consulting services. The adjusted EBITDA margin expanded to 14.5%, with management raising its full-year 2025 guidance to at least 16.3%, underscoring its focus on profitability.

Strategic Initiatives: The Three-A Engine

Kyndryl’s growth hinges on its three-A strategy, which has already delivered tangible results:
1. Alliances: Revenue from cloud partnerships (e.g., AWS, Microsoft Azure) hit $210 million in Q1 2025 and is on track to reach a $1 billion annual target by fiscal 2025’s end.
2. Advanced Delivery: The AI-driven Kyndryl Bridge platform freed up 10,500 delivery professionals, generating $650 million in annualized savings—nearing its $750 million goal.
3. Accounts: Contract renegotiations reduced low-margin revenue, yielding $725 million in annualized benefits, with a $850 million target still in sight.

These initiatives are fueling Kyndryl Consult’s growth, which surged 10% in constant currency in Q1 2025. This segment now represents 15% of total revenue, positioning it as a high-margin driver for future earnings.

Analyst Expectations: EPS Soars, but Revenue Lags

Analysts forecast $0.52 EPS for Q4 2025, a 5,300% year-over-year jump from a $0.052 loss in 2024. Full-year 2025 EPS is projected at $0.83, with estimates rising to $1.94 for 2026—a 133.7% growth rate. However, revenue is expected to decline 1.9% year-over-year to $3.78 billion, reflecting the strategic reduction of legacy contracts.

Risks and Challenges

1. Revenue Declines: Analysts note Kyndryl’s revenue is projected to grow just 1.1% annually, lagging behind the 9.4% growth of the broader IT sector. This could pressure valuation multiples if top-line stagnation persists.
2. Valuation Concerns: While Kyndryl’s Forward P/E of 14.37 is below its industry average (16.62), its PEG ratio of 2.87—double the sector’s 1.4—suggests growth expectations may outpace execution.
3. Insider Activity: Recent stock sales by executives, including a $2.8 million sale by CEO Martin Schroeter, may raise governance questions despite a $300 million buyback program announced in late 2024.

Conclusion: A Margin Story, but Revenue Remains a Hurdle

Kyndryl’s May 7 results will hinge on whether its margin gains can offset revenue declines. With adjusted EBITDA margins now targeting 16.3% and the breakeven point moved forward to 2025, the company is on track to deliver a $460 million adjusted pretax income—a $295 million improvement from 2024.

Investors should prioritize two metrics:
1. Cash Flow: Kyndryl’s adjusted free cash flow is expected to reach $300 million for 2025, a key indicator of operational health.
2. Revenue Stability: If Q4 revenue outperforms the $3.78 billion estimate, it could signal a bottoming-out of the top-line decline.

While Kyndryl’s strategic execution deserves praise, the stock’s valuation—trading at a 46% discount to intrinsic value—reflects skepticism about sustaining growth in a competitive IT services market. For now, the company’s focus on profitability over volume makes it a high-risk, high-reward bet, best suited for investors willing to bet on margin expansion triumphing over revenue headwinds.

The earnings call on May 8 will be pivotal. Management’s commentary on new contract margins, progress toward the $1 billion hyperscaler revenue target, and guidance for 2026 will determine whether Kyndryl’s turnaround story gains enough traction to lift its stock from its current undervalued perch.