Kyndryl CEO: Reselling ‘Other People’s Equipment’ Was ‘Empty Calorie Revenue’
Joseph F. Kovar
‘What we’ve been talking about, particularly this year, is engineering a decline in revenue to get rid of either low-[margin] or no-margin businesses that we inherited in the [spin-out from IBM]. ... We inherited a business [from IBM] that was basically reselling other people’s equipment. And we’re taking that down dramatically this year because there’s nothing in it for us,’ Kyndryl Chairman and CEO Martin Schroeter tells CRN.
Global IT infrastructure services provider Kyndryl late Tuesday reported what it described as a strong second fiscal quarter 2024 despite a 3 percent drop in revenue and a net loss of $142 million.
Investors agreed, driving up the New York-based company’s stock 1.11 percent by the close of trade and another 12.44 percent in after-hours trading.
The reason for the optimism came from two places, said Martin Schroeter, chairman and CEO of Kyndryl, ranked No. 8 on the CRN 2023 Solution Provider 500.
The first, Schroeter told CRN, was the fact that Kyndryl has “engineered” a decrease in revenue that resulted from product sales and contracts left over from two years ago this month when Kyndryl was spun out of IBM into a stand-alone company.
“We inherited a business [from IBM] that was basically reselling other people’s equipment,” he said. “And we’re taking that down dramatically this year because there’s nothing in it for us. It’s all empty calorie revenue. We also inherited a lot of contracts that basically had other companies’ IP, primarily IBM: IBM mainframes, IBM software stack.”
Replacing that revenue, partially for now but expected to grow over time, are Kyndryl’s own services, including services for IBM hardware and software licenses the solution provider is asking customers to purchase directly from IBM. This has created the unusual situation where a solution provider pushes customers to purchase directly from the manufacturer.
The second reason for the optimism is how Kyndryl raised its full-year adjusted earnings outlook. The company now expects its adjusted pretax income to be at least $140 million, compared with its prior outlook of at least $100 million, and raised its EBITDA margin outlook to 14.5 percent, up from 14.0 percent.
In an interview with CRN, Schroeter detailed the company’s moves to engineer a drop in revenue while increasing profitability and said that its spin-off from IBM will lead to a significant drop in costs and in turn a move toward GAAP profitability.