Managed services News
Kyndryl Executives Predict ‘Positive Revenue Growth’ In Four Years
Wade Tyler Millward
‘We have a revenue growth problem, and we have a profitability problem,’ Kyndryl CEO Martin Schroeter told attendees during a virtual event Tuesday. ‘We think we can work on both of those simultaneously.’
Executives at Kyndryl, the upcoming spin-off of IBM’s managed infrastructure services business, don’t expect to see “positive revenue growth” until 2025 due in part to how much the company will spend toward employee skills, experimenting with its business model, adding more partnerships and adding more cloud and advisory services.
Advantages Kyndryl will have once it separates from IBM after the market closes Nov. 3 include $19 billion in annual sales, a starting capital structure of $3 billion in debt and $2 billion in cash, a new freedom to partner with vendors outside of IBM and intellectual property that includes 3,000 issued patents, 800 pending and 200 being filed, executives said during a virtual event Tuesday aimed at potential investors.
“We have a revenue growth problem, and we have a profitability problem,” Kyndryl CEO Martin Schroeter (pictured above) told attendees. “We think we can work on both of those simultaneously.”
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 “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.
New York-based Kyndryl and Armonk, N.Y.-based IBM will work together after the spin-off. On Tuesday, both companies announced a 420 million euro 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.
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 President Elly Keinan said during the event that growing the company’s partner ecosystem is key to growth.
“In the past 12 months, we’ve doubled the capability that we have in terms of cloud security, data certifications and skills in that area,” Keinan said. “We will invest in new partnerships, tapping into a broader set of ecosystems. And then finally, we‘ll also invest in our platform in areas like intelligent automation.”
Kyndryl should also move faster once independent, removing “one to two management layers associated with over 70 percent of our revenue,” he said.
“As part of IBM, we’re tied to the growth associated with IBM technology,” Keinan said. “At Kyndryl, we will pivot to a broader set of fast growing transformational services and build partnerships that will result in growth more in line with the market.”
The executives did not touch on any opportunities available for IBM channel partners after the separation. Mark Wyllie, CEO of Flagship Solutions Group, a Boca Raton, Fla.-based IBM Gold Business Partner, told CRN in an interview that he is “cautiously optimistic” that his company could work with Kyndryl in a sub-contractor role on larger projects.
Kyndryl’s investments will “take time to implement and to bear fruit,” CFO David Wyshner said during the event.
“We are enthusiastic about tackling them and realistic about how long it takes to change trajectory in a business like ours, where expanding capabilities takes time, selling cycles are long and new business ramp ups don‘t happen overnight,” Wyshner said. “As we look at the task and opportunities in front of us, we see 2025 as the year when we expect to show positive revenue growth.”
Wyshner also addressed losses revealed in recent U.S. Securities and Exchange Commission filings related to Kyndryl. He said the loss includes “more than $600 million of transaction costs related to our spin, nearly $900 million of workforce rebalancing costs and $591 million of excess cost allocations from IBM.”
“Adjusting solely for these items takes our pre-tax income to positive,” he said.
He continued: “The total of these adjustments brings our pro-forma 2020 adjusted EBITDA to $2.9 billion. This represents a 15 percent margin on our revenue.”
The filing shows that the IBM business now known as 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.
The business’ pro forma $2.01 billion net loss in 2020 represented an increase from 2019, when the reported net loss was $943 million, according to the Kyndryl filing.
Pro forma revenue for the business during the first six months of 2021 was $9.52 billion, with a net loss of $887 million, according to the Kyndryl filing.