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Kyndryl Holdings, Inc. - 10-Q Summary (Q3 2026)

Business Context and Reporting Period

This filing covers the quarterly period ended December 31, 2025 (Fiscal Q3 2026). Kyndryl is the world's largest IT infrastructure services provider, spun off from IBM in 2021. The company operates in four segments: United States, Japan, Principal Markets, and Strategic Markets.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Q3 revenue increased 3% year-over-year, driven by a favorable currency impact of 3 percentage points. Constant currency revenue growth was flat (0%). YTD revenue increased 1%.
• Profitability Decline: Net income dropped significantly in Q3 ($57M vs. $215M prior year). This decrease is primarily due to the absence of a $145 million pre-tax gain from the sale of the Securities Industry Services (SIS) platform in the prior year, partially offset by a $38 million transaction-related cost in the current quarter related to an arbitration decision.
• Segment Performance:
  • United States: Revenue flat; Adjusted EBITDA flat.
  • Japan: Revenue down 2%; Adjusted EBITDA up 14% due to efficiency initiatives.
  • Principal Markets: Revenue up 10%; Adjusted EBITDA down 2% due to increased expenses for growth.
  • Strategic Markets: Revenue flat; Adjusted EBITDA down 10% due to higher labor costs and regulatory uncertainties.
• Cost Structure: Cost of services as a percentage of revenue improved to 78.1% (from 79.6% prior year) due to operating efficiency initiatives. Workforce rebalancing charges were $16 million for the quarter.

Guidance, Outlook, Risks, and Unusual Items

• Material Weaknesses in Internal Controls: Management concluded that disclosure controls and procedures were not effective as of December 31, 2025. Material weaknesses were identified regarding the tone at the top, transparency with the Board, and the internal investigation/escalation of complaints. These issues are linked to an ongoing SEC inquiry.
• SEC Investigation: The company is responding to voluntary document requests from the SEC Division of Enforcement regarding cash management practices, related disclosures, and internal controls. The outcome is unpredictable.
• Legal Proceedings: A putative class action lawsuit was filed in February 2026 alleging false and misleading statements in disclosures. Additionally, the company recorded a reserve for an interim arbitration decision on a pre-spin customer contract dispute.
• Capital Allocation: The company repurchased $254 million of stock in the first nine months of the fiscal year. Approximately $351 million of repurchase capacity remains. In February 2026, the company borrowed $1 billion under its revolving credit facility.
• Outlook: Management expects subdued global macroeconomic growth in 2026. They anticipate workforce rebalancing actions will reduce annual payroll costs by over $100 million.

Investor Verification Checklist

• Internal Control Remediation: Verify the progress of the remediation plan for the identified material weaknesses in internal controls over financial reporting.
• SEC Inquiry Status: Monitor updates regarding the SEC investigation into cash management practices and potential regulatory outcomes.
• Signings vs. Revenue: Review the trend in "signings" (down 22% YTD) to assess future revenue visibility, noting the impact of the large signing in the prior year.
• Debt Maturities: Confirm the refinancing strategy for the $700 million senior notes maturing in October 2026.
• Legal Reserves: Track the resolution of the pre-spin arbitration matter and the putative class action lawsuit to assess potential financial impact.