Kyndryl Debuts: 10 Things To Know On The IBM Spin-Off

‘On launch day, we are the world’s largest IT infrastructure services provider,’ Kyndryl CEO Martin Schroeter said previously.

Kyndryl Debuts

Kyndryl, the spin-off of IBM’s managed infrastructure services business, debuted as an independent company on the New York Stock Exchange Thursday with the symbol “KD.”

In the lead up to Kyndryl’s separation from IBM, company executives held a virtual event and published documents that revealed by competitive advantages and areas of weakness.

“On launch day, we are the world’s largest IT infrastructure services provider,” Kyndryl CEO Martin Schroeter said during a virtual event in October. “We have unmatched intellectual capital and IP, more than 3,000 patents issued, 800 patents pending and 200 more are already submitted. We have world class expertise, with 90,000 employees who have an average of 10 years of industry experience. And we have global scale with state-of-the-art delivery operations around the world, a presence in 63 countries and 459 data centers under our management.”

Still, the New York-based company has to reverse three consecutive years of revenue declines, along with a net loss of $2.01 billion last year and $943 million in 2019. “We have a revenue growth problem, and we have a profitability problem,” Schroeter said in October. “We think we can work on both of those simultaneously.”

A September report by investment bank Morgan Stanley described Kyndryl’s $19.1 billion pro forma revenue and revenue declines of about 7 percent in 2019 and about 4.5 percent in 2020 as “slightly better” than peers DXC Technology and Conduent.

“Overall the margin profile of Kyndryl is similar to peers – while it has lower gross margins (14% vs. 20% for DXC & 23% for CNDT), EBITDA margins are in-line due to higher depreciation & amortization expense (12% vs. 15% for DXC & 12% for CNDT),” according to the report.

The separation process saw headaches for IBM itself along the way. During its most recent quarterly earnings, IBM CEO Arvind Krishna said the separation caused some customers to “pause” spending with the company, contributing to quarterly results that “fell short of our expectations.

“There’s a slight pause, and it will be the end of the third quarter, maybe the beginning of the fourth quarter,” Krishna said at the time. “And we see that pause mostly in hardware and in Kyndryl itself.”

According to an October report from investment bank Bernstein, Kyndryl could prove to provide issues for IBM even after the separation. IBM could have about $29 billion in net operating debt after the transaction, according to the report.

“Q4 EPS will be messy, given that Kyndryl will be considered a discontinued operation post its spin on November 3, and RemainCo financial results could be burdened with Kyndryl overhead costs during the quarter,” according to the report.

The report continued: “While IBM appears to have consciously withdrawn from select unprofitable business over the last year, we worry that the pending spinout has led to incremental customer defections (and/or price renegotiations), particularly since change of control provisions in ITO contracts typically enable clients to opt out of a deal, which could trigger price concessions.”

As Kyndryl debuts, here are 10 key things to know about the IBM spin-off.

Six Practice Areas

Kyndryl will have six global managed services practices: cloud; digital workplace; security and resiliency; network and edge; core enterprise and zCloud; and applications, data and artificial intelligence (AI). Kyndryl will also offer an advisory and implementation services practice to advise customers on digital environments and advanced technology adoption and integration.

Kyndryl CEO Martin Schroeter said in a LinkedIn post earlier this year that Kyndryl partners should expect the company to “work with you to deepen our capabilities and bring the best of our expanded ecosystem to our customers.”

“We understand what it takes to build and run secure and complex technology environments, and our partners will be able to leverage that experience as we support customers with speed and the best technology solutions,” he said.

Kyndryl benefits from the heavy investments IBM has made in its cloud computing and AI business lines before the spin off. In June, IBM closed its acquisition of Turbonomic, a developer of application resource management and network performance management software, and is preparing to combine it with other IBM technologies to provide clients with application-centric AIOps, or artificial intelligence for IT operations, offerings.

Along with the six practice areas, Kyndryl will offer an advisory and implementation services practice. The goal of this group is to advise customers on digital environments and advanced technology adoption and integration.

Kyndryl’s advisory practice comes at a time of heightened digital transformation coming out of the global pandemic and move to remote work. In March, IBM CEO Arvind Krishna said in a letter to investors that he expects the amount of digital transformation set to take place over the next two to three years would have taken far longer to accomplish if it wasn’t for the events set into motion in 2020.

Leadership Team

Leading Kyndryl is Martin Schroeter, who was most recently IBM’s senior vice president, global markets -- a job he held starting in December 2017. There he was responsible for IBM’s global sales, client relationships and satisfaction, and worldwide geographic operations.

He was also responsible for IBM marketing and communications functions and was responsible for building the company’s global brand and reputation.

Schroeter held a number of executive positions at IBM, including serving as IBM’s CFO between 2014 and 2017 and earlier as general manager of global financing where he managed an asset base of more than $37 billion.

Schroeter joined IBM in 1992 and held a number of positions in the U.S., Japan and Australia. He received his undergraduate degree in economics and finance from Temple University and an MBA degree from Carnegie Mellon University. He holds U.S. and Australian dual citizenship.

Two veteran IBM executives with global experience were also tapped to lead Kyndryl. Elly Keinan is group president. Keinan previously worked as general manager of IBM North America, general manager of IBM Latin America, and chairman of IBM Japan, during his 30-year tech career. Keinan was most recently a partner with Pitango Venture Capital, an Israel-based VC firm.

The chief marketing officer is Maria Bartolome Winans. The 25-year IBM veteran has been the chief marketing officer for IBM Americas, responsible for demand generation across the U.S., Canada, and Latin America. She also led marketing teams for IBM Watson’s business, as well as IBM’s software unit.

The company named IBM veteran Matt Milton as president of Kyndryl United States along with nine other regional leaders of markets that represent more than three-fourths of Kyndryl’s revenue. Milton previously served at IBM for the past 19 years, most recently serving as general manager of financial services for Big Blue’s North American presence.

Kyndryl hired Antoine Shagoury, formerly the CIO at State Street Corp. and the London Stock Exchange, to be the chief technology officer.

Other members of the senior leadership team include Chief Transformation Officer Nelly Akoth and Chief Information Officer Michael Bradshaw.

Bradshaw comes from NBCUniversal Media and previously spent 23 years with IBM, leaving in 2010 as vice president of IT infrastructure optimization, according to his LinkedIn profile.

Akoth has held various roles at IBM, including the title of global finance practice leader since July 2020.

Board Of Directors

For Kyndryl’s board of directors, two members are on the boards of Cisco and Juniper Networks and one of whom is a National Medal of Science recipient.

Schroeter chairs the company’s board. Former RSA Insurance Group and Royal Bank of Scotland CEO Stephen A.M. Hester serves as lead independent director.

The board includes John D. Harris II, who retired as CEO of Raytheon International -- the international business of the defense contractor giant -- last year. In January, Cisco Systems announced Harris’ appointment to its own board.

Also on the board is Rahul N. Merchant, senior vice president of client service and technology for Teachers Insurance and Annuity Association of America-College Retirement Equities Fund (TIAA). Merchant is on the boards of directors for Juniper Networks, Convergint Technologies and Global Cloud Exchange.

Other board members include Dominic J. Caruso, former Johnson & Johnson executive vice president and chief financial officer and Shirley Ann Jackson, president of private research university Rensselaer Polytechnic Institute (RPI) since 1999. In 2016, Jackson received the National Medal of Science, the “nation’s highest honor for contributions in science and engineering,” according to RPI.

Board member Janina Kugel is a former chief human resources officer of Siemens AG. She retired in 2020 and joined Siemens in 2001 as vice president of communications group strategy.

According to her LinkedIn, Kugel worked at Accenture for about three years, leaving in 2000. Her responsibilities included leading implementation projects with a focus on process re-engineering, leading restructuring and reorganization projects and developing change management and communication concepts.

Denis Machuel served as CEO of French food services and facilities management company Sodexo since 2018. Jana Schreuder joins the Kyndryl board after retiring from Northern Trust Corp. in 2018. And Howard I. Ungerleider has been president and CFO of global materials science company Dow since 2019.

Employee Count

During a virtual investor event in October, Schroeter pointed to the company’s significant employee count, intellectual property portfolio, existing customer base and freedom to grow through non-IBM partnerships as major advantages over other large partner companies.

Despite the substantial employee count of 90,000, that may be less than the number of people staffing Kyndryl before the spin-off.

In 2020, the IBM business now known as Kyndryl undertook workforce reductions -- referred to as “workforce rebalancing” -- in order to “improve the profit and margin profile of the business,” according to a regulatory filing (resulting in the $800 million charge mentioned previously).

“We took these structural actions to simplify and optimize our operating model,” Kyndryl said in the filing.

The filing did not disclose how many employees have exited the business in connection with the workforce reduction actions. Kyndryl reports having approximately 90,000 employees worldwide.

In the second quarter of this year, Kyndryl saw a “modest margin expansion resulting from the productivity actions taken in 2020 to improve the profit and margin profile of the business,” the filing says. “We continue to expect the majority of the employee exits to be completed by the end of 2021.”

While Kyndryl is based in New York, the vast majority of the company’s 90,000-person workforce is located outside of the U.S., according to a recent regulatory filing.

“Approximately 92% of our employees work outside the U.S., with workforce hubs in India, Poland, Brazil, Japan, Czech Republic, and Hungary,” the filing says.

Still, in 2020, the Americas region contributed 38 percent of Kyndryl’s revenue and 55 percent of the gross profit for the business, according to the filing. For the other regions in 2020, Europe/Middle East/Africa contributed 38 percent of revenue and 5 percent of gross profit; Japan contributed 16 percent of revenue and 29 percent of gross profit; and Asia Pacific contributed 8 percent of revenue and 12 percent of gross profit.

IP Portfolio

Schroeter told potential investors earlier this year that “on launch day, we are the world’s largest IT infrastructure services provider.”

“We have unmatched intellectual capital and IP, more than 3,000 patents issued, 800 patents pending and 200 more are already submitted,” he said. “We have world class expertise, with 90,000 employees who have an average of 10 years of industry experience. And we have global scale with state-of-the-art delivery operations around the world, a presence in 63 countries and 459 data centers under our management.”

He continued: “Last year, our people earned more than 140,000 credits in strategic skills including cloud, AI, analytics and security to name a few. And the continued development of our people, our human capital, broadening their skills even further, is one of our highest priorities.”

Key opportunities for Kyndryl will include cloud, such as with Microsoft Azure, where the company plans to invest for growth, Schroeter said.

Years Until ‘Positive Revenue Growth’

Kyndryl has its work cut out for it after becoming an independent public company. Kyndryl executives don’t expect to see “positive revenue growth” until 2025, Schroeter said -- due in part to how much the company plans to spend around boosting employee skills, experimenting with its business model, adding more partnerships and expanding its cloud and advisory services.

In a recent U.S. Securities and Exchange Commission filing, Kyndryl disclosed three consecutive years of revenue declines, along with a net loss of $2.01 billion last year and $943 million in 2019. “We have a revenue growth problem, and we have a profitability problem,” Schroeter said during a virtual event in October. “We think we can work on both of those simultaneously.”

An October report from investment firm Alliance Bernstein estimated that Kyndryl is likely to be about $10 billion or less.

SEC filings show that Kyndryl generated $19.35 billion in pro forma revenue in 2020. That was down from $20.28 billion in revenue for 2019, and from $21.8 billion in 2018. “Revenue declined primarily due to a reduction in client volumes within industries heavily impacted by the global pandemic,” Kyndryl said in an SEC filing.

In terms of regions where the Kyndryl business has been hit hardest, the SEC filing singles out the Americas. In 2020, for instance, the overall decline in revenue was “driven by declines in the Americas segment,” Kyndryl said in a filing.

Kyndryl revenue in the Americas region for 2020 came in at $7.4 billion, according to a filing. That was a drop of 6.9 percent from 2019, when revenue was $7.95 billion. The revenue results in 2019, meanwhile, represented a drop of 7.3 percent from 2018—when Kyndryl revenue came in at $8.58 billion.

Other regions have also seen declines -- including the Europe, Middle East and Africa region -- but the revenue drop there was just 3.7 percent in 2020, year-over-year. In Japan, revenue grew 3.8 percent to reach $3.04 billion in 2020, according to the filing.

Loss Of Customers

Another factor in Kyndryl’s revenue decline is a loss of customers, according to a regulatory filing. In 2020, Kyndryl ended the year with 4,400 customers. That represented a loss of 200 customers from the prior year, since Kyndryl reports that it had ended 2019 with 4,600 customers.

However, 2019 saw an even larger loss of customers—with the company reporting that its customer base decreased by 500 customers during the year. The Kyndryl business had ended 2018 with 5,100 customers, according to the filing.

“Like our clients, we prioritized higher value opportunities in 2019. Discrete account and portfolio actions were taken to improve our profitability in the long term even though they had an impact on our 2019 results,” Kyndryl said in its SEC filing.

Schroeter talked up Kyndryl’s customer base in October. “When you look at our customer base, we support the operations of more than 4,000 customers around the globe, including approximately 75 percent of the Fortune 100, more than half of the Fortune 500,” he said.

“Our customers make 45 percent of the world’s passenger cars, they account for 50 percent of hypermarket retail sales, manage nearly half of the world’s mobile collections. And our large banking customers represent over 60 percent of total assets managed,” he continued.

Money In The Bank, Big Market Opportunity

An advantage Kyndryl will have against competitors include $19 billion in annual sales and a starting capital structure of $3 billion in debt and $2 billion in cash.

The IBM separation grows the addressable market from $240 billion for infrastructure, network and digital workplace services, to a $510 billion market by 2024 with more digital, cloud and advisory services. While the Kyndryl executives don’t expect any acquisitions in the short term, Schroeter said in October “we have some capacity in our balance sheet” if need be.

The new company will also come with a healthy customer mix, with the biggest one representing 2 percent of the top line. Kyndryl, with 90,000 employees, supports the operations of more than 4,000 customers worldwide.

Kyndryl Chief Financial Officer David Wyshner told CRN in an interview that part of unlocking a larger market is a new freedom to partner with IBM competitors.

As “a company going public with $19 billion of revenue, we’re a unicorn of sorts,” he said. “And we‘re able to combine that base that we have with a brand new growth potential, a new freedom to pursue a somewhat different mission, to reinvest in our business and to grow over time. That’s what I’m hoping people take away. It’s what we’ve been talking to investors about for the last few weeks.”

Still Entangled With IBM

Kyndryl and Armonk, N.Y.-based IBM will work together after the spin-off. In October, both companies announced a deal with Dutch bank ABN AMRO “that builds upon their long-standing services relationship for the management of the bank’s hybrid cloud infrastructure, supporting its domestic and international operations through the end of 2029,” according to a statement from the companies.

IBM will supply IBM Z hardware and software, IBM Cloud Pak for Data, IBM Cloud Pak for Integration and WebSphere Hybrid Edition while Kyndryl works with the bank to implement a single services delivery model and works on implementation.

Following the spin-off from IBM, Kyndryl and IBM will “continue to have a strong commercial relationship,” IBM said in an SEC filing in September. As part of this relationship, Kyndryl said in its filing that it plans to “enter into an Intellectual Property Agreement with IBM, pursuant to which IBM will grant to us perpetual and irrevocable, non-exclusive, royalty-free licenses to certain proprietary software and documentation, databases, trade secrets, and certain other intellectual property rights (excluding patents and trademarks) that are used in the Business but are being retained by IBM.”

“The foregoing license excludes IBM’s commercial software, which will be subject to IBM’s standard commercial terms if we choose to use it in the Business,” Kyndryl said.

Beyond working with IBM, Kyndryl mentioned just a few other vendor partners by name in the filing—VMware, Microsoft and ServiceNow—but said that partnerships with additional vendors is part of the plan.

“We have a strong and long-standing foundation developed by governing and managing complex technology environments, including IBM (e.g., Red Hat and Cloud Paks) and third-party technologies (e.g., VMWare, ServiceNow, and Microsoft),” Kyndryl said in the filing. “With increased freedom of action, we will extend these capabilities to an even broader ecosystem of technology providers and develop more services that are digitally consumable to expand accessibility to new customers and markets.”

In October, IBM CEO Arvind Krishna said during a quarterly earnings call that the upcoming spin-off of IBM’s managed infrastructure services business caused some customers to “pause” spending with the company, contributing to quarterly results that “fell short of our expectations.”

“I am completely confident that this will be well behind us by the beginning of ’22 -- meaning January,” Krishna said.

“There have been a lot of hardware that actually does flow through Kyndryl, and many of our clients think of that as being an alternate way that they have procured infrastructure in the past,” he continued. “So it‘s not a surprise, given the size of the relationship with all those clients, that you see a pause in some of them.”

Wyshner told CRN that IBM will be key for Kyndryl’s mainframe work. He described Kyndryl as “one of IBM’s largest customers.”

He also said that IBM’s 20 percent stake in Kyndryl doesn’t come with board seats or any control over Kyndryl.

Steep Competition

In the risk factors section of the SEC filing, Kyndryl cited competitors as one of the key risks faced by the business.

“Our competitors include incumbents that have expanded their offerings to migration and management of cloud-based environments; companies that utilize labor-based models and leverage talent pools primarily in lower-cost countries that have grown to offer a broad range of services with a worldwide presence; and advisory-focused system integrators specializing in bringing together disparate technology environments so that they function as one,” Kyndryl said in its SEC filing.

“Many of these companies offer a mix of advisory, implementation, and managed services across infrastructure, application, and business processes,” Kyndryl said.

The company singled out a handful of competitors in the filing by name—including DXC Technology, No. 4 on CRN’s Solution Provider 500 list for 2021, which was created in 2017 through the merger of CSC and HPE Enterprise Services. In terms of competitors, “examples include: Atos, DXC, Fujitsu, Infosys, Rackspace, Tata Consultancy Services, and Wipro, among others,” Kyndryl said in the filing.