Feb 3 (Reuters) - Kyndryl KD.N on Monday missed Wall Street estimates for third-quarter revenue, as strong AI-linked sales were offset by a strong dollar and the IT services provider's shedding of lower-margin deals.

The company - the former infrastructure services business of IBM IBM.N - derived more than 74% of its total sales in the third quarter from outside the U.S., making the company susceptible to impacts from changes in foreign exchange rates.

Kyndryl's December-quarter revenue of $3.74 billion missed analysts' average estimate of $3.81 billion, according to data compiled by LSEG.

Still, Kyndryl saw strong demand for its services from businesses adopting generative AI technology.

In the third quarter, Kyndryl recognized $300 million in revenue tied to customers using services from large-scale cloud providers and now expects to exceed its "hyperscaler" revenue target of nearly $1 billion in fiscal year 2025.

Chinese AI startup DeepSeek's breakthrough last month on quick advances with models that it claimed can match or even outperform Western rivals at a fraction of the cost had stirred doubts about high costs of GenAI development.

"I do expect that everyone will try to understand what DeepSeek has accomplished and how relevant it is for them," Kyndryl Chief Executive Martin Schroeter told Reuters in an interview.

"There's a long list of challenges that they (customers) need to tackle and every available technology will be evaluated," Schroeter said in response to questions about customers adopting DeepSeek's technology.

Kyndryl had also inherited multiple no-margin contracts from IBM and has been looking to re-work them to generate higher profits.

The company recorded adjusted net income of $124 million in the third quarter, beating estimates of $64 million.

(Reporting by Arsheeya Bajwa in Bengaluru; Editing by Maju Samuel)

((ArsheeyaSingh.Bajwa@thomsonreuters.com; +91 8510015800;))