Kyndryl CEO: Customers Know ‘Their AI Is Only Going To Be As Good As Their Data’

Kyndryl CEO Martin Schroeter on the company’s earnings call said customers are now looking for Kyndryl’s ‘expertise and how to architect their data to set the foundation for the investments they’re making in AI and GenAI.’

Kyndryl is on the way to moving to growth under its own terms, CEO Martin Schroeter Wednesday told investors during the company’s third fiscal quarter 2024 quarterly financial conference call.

Schroeter, during his prepared remarks during the call, said New York-based Kyndryl continues to make great progress in delivering value to customers and to shareholders.

“Our strategy, centered around our alliances, advanced delivery, and accounts initiatives, Kyndryl Consult and Kyndryl Bridge, is paving the way for profitable growth,” he said. “We’re again raising our full-year earnings outlook, which reflects our progress and our prospects.”

Kyndryl in November of 2021 was spun out of IBM, where it was originally known as IBM’s managed infrastructure business, into a stand-alone infrastructure services company.

Kyndryl, ranked No. 8 on CRN’s 2023 Solution Provider 500, started out with a focus on mainframes, given its IBM heritage, but has since expanded to cloud and other non-mainframe-specific technologies and services.

Kyndryl is now on the way to moving beyond its traditional focus on servicing clients that signed contracts before the spinout from IBM and developing its own growing business, Schroeter said.

As Kyndryl’s business evolves and the company moves further away from its IBM past, its revenue mix will continue to shift to higher-margin post-spin signings, he said.

“This fiscal year, only one-third of our revenue is coming from post-spin signings,” he said. “Next year, we’ll move to half of our revenue from coming from post-spin signings. And in fiscal 2026, it will be roughly two-thirds. This inflection point, when our P&L was largely determined by our higher-margin post-spin signings, will dramatically change our earnings profile.”

Kyndryl raised its forecast for fiscal 2024 to now show over $360 million of adjusted pretax income improvement this year compared with last year, Schroeter said.

“And while our efforts to shed low- to no-margin revenue will continue to impact top-line growth this calendar year, we expect to deliver margin expansion and higher earnings each year with revenue growth returning in calendar 2025,” he said.

The margins at which Kyndryl is signing contracts, along with other actions to increase profitability, puts the company on a path to deliver high-single-digit adjusted pretax margins by fiscal 2027, Schroeter said.

“And yes, the math associated with that is ultimately $1 billion or more of adjusted pretax income with a high conversion of our net earnings into cash,” he said.

Kyndryl has proven to be a vital and trusted partner for its customers' current and future technology needs, Schroeter said.

“We have a strong heritage in running complex applications that are highly dependent upon mission-critical infrastructure, such as the mainframe,” he said. “And as an independent company, our freedom of action has allowed us to quickly capitalize on opportunities that are unique to Kyndryl. As a result, we’re building a strong track record of successful execution that is clearly visible in our results.”

New alliances with key technology leaders have significantly increased Kyndryl’s addressable market, Schroeter said. These include cloud-native services working with Amazon Web Services, Google Cloud Platform and Microsoft Azure, he said. This includes collaboration on GenAI, he said.

Kyndryl has also expanded its service delivery capabilities through Kyndryl Bridge, the company’s AI-powered open integration platform, and is now performing over 1 billion automations each year to address risks before they become incidents and generating annual savings for the company of $500 million, he said. Roughly 750 customers are using Kyndryl Bridge, he said.

“Importantly, our strategic progress is driving stronger financial results,” he said. “We’re now three quarters through our fiscal year, and it’s clear that fiscal 2024 is a proof point for us. We grew signings in the first 10 months of the year with higher-value services, earnings are expected to be up meaningfully this year compared to last, and we’ve generated positive adjusted free cash flow in the first nine months of the year.”

It is important to understand that Kyndryl is an AI beneficiary and an AI enabler, Schroeter said.

“As the largest infrastructure services provider in the world, we generate large amounts of data about IT systems,” he said. “We’re using artificial intelligence with this data in our Kyndryl Bridge platform to identify application performance patterns, produce actionable insights, reduce required maintenance and prevent incidents from occurring. And beyond our own use of AI, our customers know that their AI is only going to be as good as their data. So they’re looking for Kyndryl’s expertise and how to architect their data to set the foundation for the investments they’re making in AI and GenAI.”

Kyndryl By The Numbers

For its third fiscal quarter 2024, which ended Dec. 31, Kyndryl reported revenue of $3.94 billion, down about 8.4 percent from the $4.30 billion the company reported for its third fiscal quarter 2022.

That included U.S. revenue of $1.03 billion, down 18 percent over last year; Japan revenue of $581 million, down 4 percent; revenue from its principal markets including Australia, New Zealand, Canada, France, Germany, India, Italy, Spain, Portugal, Ireland and the U.K. of $1.45 billion, down 9 percent; and revenue from other markets of $877 million, down 9 percent.

Kyndryl reported a GAAP net loss of $12 million, or 5 cents per share, significantly better than the net loss of $106 million, or 47 cents per share, it reported last year. On a non-GAAP basis, Kyndryl reported a net loss of $11 million, or 6 cents per share, compared with last year’s net income of $17 million or 7 cents per share.

Looking ahead, Kyndryl increased its fiscal 2024 outlook for adjusted pretax income to at least $150 million and raised its outlook for adjusted EBITDA margin to at least 14.5 percent. Constant-currency revenue growth is expected to fall year over year by 6 percent to 7 percent, but fiscal 2024’s adjusted free cash flow is slated to be positive.