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Kyndryl Holdings, Inc. - Q1 2026 (Ended June 30, 2025) Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2025 for Kyndryl Holdings, Inc., the world's largest IT infrastructure services provider. The company operates globally across four reportable segments: United States, Japan, Principal Markets, and Strategic Markets. The filing reflects the company's ongoing transition from its 2021 spin-off from IBM, focusing on cost structure optimization and operational efficiency.

Key Financial Metrics

Note: Operating cash flow was negative primarily due to a significant increase in deferred costs ($1.38 billion outflow) related to an extended multi-year software agreement.

Material Changes vs. Prior Period

• Profitability Surge: Net income increased by $45 million (409%) year-over-year, driven by a $17 million reduction in income tax provision, an $11 million decrease in workforce rebalancing charges, and the absence of transaction-related costs in the current quarter.
• Revenue Stability: GAAP revenue remained flat (+0.1%), though constant currency revenue declined by 3%. The United States segment saw an 8% revenue decline due to the expiration of low-margin contracts, while Japan, Principal Markets, and Strategic Markets saw growth of 2%, 3%, and 3% respectively.
• Margin Expansion: Adjusted EBITDA grew 16% to $647 million. The United States segment saw a 48% increase in Adjusted EBITDA despite revenue declines, attributed to cost reduction initiatives.
• Balance Sheet Shifts: Total assets increased by $1.0 billion to $11.5 billion, largely driven by a $1.1 billion increase in deferred costs. Total liabilities rose by $1.0 billion, primarily due to noncurrent liabilities associated with the new software agreement.

Outlook, Risks, and Unusual Items

• Cost Reduction Programs: The company initiated the "Fiscal 2026 Program," expecting total charges of approximately $80 million, with $25 million recognized in this quarter. Management expects these actions to reduce annual payroll costs by over $100 million. The prior "Fiscal 2025 Program" is nearing completion with total expected cash outlays of $150 million.
• Share Repurchases: The company repurchased 1.8 million shares for $65 million under its $300 million authorization program. Additionally, $67 million was spent on shares repurchased for tax withholdings. Approximately $141 million remains available under the program.
• Signings: Total signings increased 2% to $3.2 billion, indicating steady customer engagement.
• Risks: Key risks include global macroeconomic volatility, geopolitical developments, cybersecurity threats, and the ability to retain customers and key personnel. The company also faces potential impacts from new U.S. tax legislation enacted in July 2025.
• Unusual Items: A significant portion of the operating cash flow outflow was due to the prepayment of a multi-year third-party software agreement, classified as deferred costs. This is a non-recurring cash timing item rather than an operational loss.

Investor Verification Checklist

• Deferred Costs Impact: Verify the long-term revenue recognition schedule for the $1.1 billion increase in deferred costs to ensure future revenue visibility matches the cash outflow.
• US Segment Turnaround: Monitor the United States segment's ability to replace expiring low-margin contracts with higher-margin work to sustain the 48% Adjusted EBITDA growth despite revenue declines.
• Cash Flow Sustainability: Assess whether the negative operating cash flow is a temporary anomaly due to the software prepayment or indicative of broader working capital challenges.
• Cost Savings Realization: Track the realization of the projected $100 million+ annual savings from the Fiscal 2026 workforce rebalancing program.
• Debt Covenants: Confirm continued compliance with the 3.50x indebtedness to EBITDA maintenance covenant on the revolving credit facility, especially given the recent debt issuance in 2024.