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.