Name: Kyndryl on IBM Spinoff, Tech Infrastructure, and Growing Revenue
Uploaded: 2025-05-01T18:11:00Z
Duration: 19 min 3 s
Description: Kyndryl CEO Martin Schroeter also spoke about the company's path back to growth.

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Kyndryl CEO Martin Schroeter also spoke about the company's path back to growth.

https://m.wsj.net/video/20250501/a4bd742f-ea1c-4500-a3d2-85b012a136ad/1/hls/manifest-hd-wifi.m3u8

Kyndryl on IBM Spinoff, Tech Infrastructure, and Growing Revenue

Hello, everyone, and welcome to "At Barron's," I'm Andy Serwer, and welcome to our guest, Martin Schroeter, CEO of Kyndryl. Martin, nice to see you.

Nice to see you, Andy. Thank you very much for having me here.

So your company was spun off from IBM a number of years ago, why don't we start there. What did IBM keep, and what went with Kyndryl?

Sure, it's a great question. So, three and a half years ago, roughly, we were spun out of IBM, and we were what IBM had as an infrastructure services business. So, IBM ran at the time, you know, mainframes, the infrastructure that runs the banking systems, the airline systems, payment systems, et cetera, et cetera, et cetera. So we were, you know, roughly 80, 85,000 people, we were over 16 billion of revenue, operating in 70 countries, as we were spun out. As we sit here now, you know, a few years after the spin, we're similar size in terms of employees, we're similar size in terms of revenue, and we still do the most important work that everybody relies on every day. As an example, there's a consortium of 70 banks, they trade currencies, that's what they do every day, that's what part of what being a bank does, and we run that clearing system. So think of us as the technology infrastructure behind seven plus trillion dollars of currency trading. We run banking systems in countries that drive a hundred plus million transactions a day. We run healthcare systems for the benefit of members that drive, say, you know, between nine and 10 million lab tests a month. So we run that infrastructure, that's what IBM spun out three years ago, sits at the heart of what we could refer to as hearts and lungs of how the world works. And, even today, while we've expanded our capabilities, while we've added new things to that, we still sit at the heart of the world's technology infrastructure.

I know you may think it's a little bit of ancient history, but what was the rationale? Why did it make sense for these two businesses to be separate?

Yeah, look, from our perspective, it was very obvious that the mission that this part of IBM's business had, being very focused on IBM, for the logical reasons, which meant an inability to really build meaningful partnerships with the rest of the tech ecosystem. This business needed to be part of the tech ecosystem if it was going to be fixed, and, additionally, it needed investment. And so, from our perspective, from my perspective, freedom of action and the ability to invest would allow us to be successful. I think from IBM's perspective, now I'm gonna go a little bit into speculation mode, because I wasn't there at the time, but I think they similarly saw that if they're not willing to invest in the business, and it wouldn't make sense for them to create competition by having this part of their business partner with others who are competitors, I would say that they had a very similar view, which is, without allowing them to have freedom of action investing, it's not gonna get fixed and therefore it's always gonna be a drag. So, again, I wasn't there, but I don't know that the perception of the things that this business got from being separate were viewed any differently.

So does that mean your systems then connect, say IBM machines with Dell servers and other people's hardware, as well? That would be the beauty of it?

Yeah. Even when we were spun out, the hardware infrastructure that we ran, and we run today, it is a hybrid infrastructure. So, while this business, we manage more than half of the world's managed mainframes, obviously, that's an IBM technology, we also manage a pretty big installation of x86 servers made by the Dells and the Lenovos and the HPs of the world. So it has always managed that disparate infrastructure on behalf of our customers, and what the spin has allowed us to do is to become more relevant to our customer base in things like managing their public cloud instances and partnering with their application providers, things that we didn't have before.

And who are your competitors?

So, you know, number one, top of the list, remains companies that do this themselves, and a number of industries just haven't evolved to a sort of a services kind of approach. So we run most of the banks of Europe, we run most of the banking system in the United States, we run banks in Australia, as an example, but most of the big banks in the US tend to run their own system, still, as an example. So, you know, number one is those who retain the capabilities, the skills for a number of reasons, but those who do it themselves. There are other services providers that sit, obviously, in tech services world, but nobody is focused on infrastructure, and solely focused on infrastructure, as we are, and, certainly, nobody who has invested the way we have in the infrastructure space. So when an Accenture, and a Wipro, and a Deloitte, and an HCL, they've invested quite heavily in applications, they've invested quite heavily in even higher level, more strategic consulting. So there's nobody that really sits just in infrastructure who's focused on infrastructure and is investing in the IP and the innovation and the tools that one needs in order to run the modern infrastructure that is becoming more and more hybrid every day.

What's a Kyndryl?

What's a Kyndryl? So, a quick little backstory. There are about three million plus trademarks in our space, in enterprise tech space, so the idea that you can own an English word globally is zero, roughly. So we knew that we had to make something up. So we thought deeply about what kind of firm do we want Kyndryl to be, what sits at sort of the heart of what we do and where do we wanna go? And there were two recurring themes. One was this idea that because of what we do, because of the relationship nature of running company's most mission critical workloads, we need to be kindred with our customers, we need to be of single mind and great partners. And then we also wanna be about growth. This is a business that, when IBM had it, had not grown in many, many years, but we knew that we wanted to be a business about growth. So we took the Kin from kindred and the Dryl from tendril, and we put them together to create Kyndryl to really capture that idea of, you know, "Partner with us and we will find new sources of growth for you, and that'll translate to new sources of growth for us."

Got it. The stock has been a pretty strong performer since the spin in 2021. Recently, though, more recently, it's lagged a little bit, the overall market. What accounts for both the positive and the negative there, Martin?

Yeah, so the performance of the stock, I think, is really reflective over the longer term of getting our story out, proving the investible thesis that we've been talking about in this space. This was not a space, enterprise infrastructure services was not a space that had a great investible thesis. And so, in the first few years now, we've proven that you can make money in this space, you can return capital to shareholders in this space, you can see out far enough that you can provide a good financial roadmap, if you will, to what this business can deliver over time. And I think that's starting to get reflected in the valuation, the multiple of the firm. In a more recent look, just, you know, last week, there was a short report put out that had, what we said were, you know, highly misleading claims, they were intended to drive the stock down, because the short seller's sole goal is to get a reaction. And, you know, we're recovering from that a bit. We were very quick to say that, you know, these were intentionally misleading to drive the stock down. So, over the long term, look, we still believe, I still believe, that the investible thesis of the space is very strong. We've proven we can execute in this space. And, at the end of last year, we did our first Investor Day. And in that Investor Day, we talked about what we shorthanded to triple, double, single, which is we said, "Over the next few years, we will triple our cashflow, we'll do that by doubling our profit, and all we need to do to deliver triple the cashflow and double the profit is to exit with a single-digit revenue growth rate, single-digit growth." So we are on track to take already what was a business that has improved profit dramatically and cash flow dramatically from when it was spun out over three years ago to, again, double the profit in the next few years, again, as I said, triple the cash flow. So we are really well-positioned to return to growth, we're really well-positioned to deliver the very strong, very strong fundamentals that this business can offer.

Yeah, I'm glad you brought up the short seller report from Gotham City. I was gonna ask you about that where they talked about alleged manipulation of certain financial metrics. So no truth to that at all, that's just sort of all out of whole cloth?

Look, we are very comfortable with our disclosures, we're very comfortable with how we present our financials, we get very high marks from our investor base on this. But, again, this is a manipulative short seller trying to, you know, have the stock head lower.

I wanna go back to your strategy, or growth strategy, going forward, Martin, and you talk about how important revenue growth is, obviously, it'd be the driver here, but it has been sort of stuck in that range. So how are you going to grow revenue for this company?

Yeah, it's a great question, and it's something that we've been talking about now, again, for a few years. So, when we first started talking about Kyndryl and the return to growth, we said, you know, "It's gonna take us a few years to fix," if you will, "Fix elements of this business that we inherited. And while we do that, we're gonna be focused on profitability more so than we are on revenue." And what we've been able to accomplish over the last few years is, as we engineer a decline in revenue, and I'll come back to why engineer a decline. We've engineered last year a billion dollar decline in revenue, this year, it'll be not quite that big, but, again, a multi hundred million dollar decline. And, at the same time, we've added, last year, 360 million of profit, and this year, we'll add a similar amount of profit again. So the reason to do that, and the reason to talk about the timeframes that we have, is because the nature of what IBM spun out had some really profit-challenged elements to it. So IBM, in the spin, created the commercial construct that exists between these two firms. And, in many instances, what that meant for us was that we were well underwater with many of the relationships that IBM created with customers. So we said we would need a few years to get those relationships re-imagined, and get those relationships on a more sound economic footing. So, as an example, as I said, this business was born out of and around IBM's technology. So in a stylized way, just envision that a customer's paying us a hundred dollars to run their systems, and, obviously, we need people to do that, but they're paying us a hundred dollars to run their systems, and because of the way IBM set up the spin, we have to pay $150 to IBM, just for the hardware and the software. So what we've done over the last few years through what we call our focus accounts is we've fixed, if you will, we fixed the bulk of those. And, at the same time, so that was the fix, that was the engineer decline in revenue, at the same time, we said, "Two things will be vectors for growth for us, and these are the two things that, as we fix the business, we will demonstrate that they are already growing, and they will put the firm back into a growth position." And those two things are, one, our Kyndryl Consult business. This business, Kyndryl, in total, had less than 10% of its revenue coming from its advisory work, even though the customer base was begging this business to help them with more of their problems, because we are the engineers who know the most about their systems. So we've been able to double that Kyndryl Consult business as a mix of our own with very solid signings growth, followed by revenue growth quarter after quarter after quarter. So that vector of growth has done quite well, and it will be part of how we get back to growth. And then, secondly, as I mentioned, because we were so narrowly focused in IBM, we did not have at the spin relationships with other partners. We took our freedom of action very quickly, we created partnerships with Microsoft, and Google, and AWS, et cetera, and we said that "In the first year alone," now we're, you know, a few years back, "In the first year alone, we will sign a billion dollars worth of business signings," billion dollars worth of business in the first year, we wound up signing like 1,000,000,001. And then, this year, when we started the fiscal year, we said, "We will now have created. This year, we will have created a billion dollar business just with our hyperscaler partners." And so, those two vectors of growth growing the Kyndryl Consult business, which we've been doing quarter after quarter and growing our work related with the hyperscalers is driving a billion dollars of revenue. So those two growth vectors continue to push us back to growth, and we're kind of through now what I'll call the fix on the things that we inherited, that had a challenge.

That's really interesting. I mean, I understand that taking down the unprofitable revenue and getting rid of that, and then creating the new relationships and then the consulting business, that's fascinating stuff. And you have attracted new shareholders, or shareholders to the business, including David Einhorn, I think. Do you talk to him at all about the business?

I do. He's a wonderful owner, he is one of those great real true value investors, and we spend time, obviously, with all our investor base, David included, and we love having him in the share registry, a person who really appreciates a value stock.

And what kind of position has he had in the stock, do you know, Martin?

Look, he is what we would call, you know, a top sheet investor, right? He's not number one, but he's certainly within our top 10 investor base, and he's been a pretty stable investor for us. And I think, in the interactions, he's got a great team who really deeply understands us, which is great. So it's wonderful to have people who've invested the time to understand the firm, and then obviously to have them in the share base, as I said. Fantastic.

Shifting gears a little bit, Martin, are there policies coming out of Washington these days that either excite you or have you worried?

I think the short answer would be yes.

"Yes and yes," or just "Yes"?

Just yes.

Okay.

So look, you know, everything I've seen on the trade is, trade's, obviously, very important to how we operate with our customers, it's important to the world, and for us, the dialogue around, and the willingness to discuss digital trade is super, super important.

And what is digital trade exactly?

So think about digital trade as, for instance, the work we do, and we have a global delivery platform, so we're supporting customers in Europe supporting customers in France, from say Eastern Europe, where we have great mainframe skills, we support customers in the US from some of our Eastern European delivery centers, we have delivery centers in India supporting Japan, et cetera. So we have a global delivery platform. The only way all of that works, the only way that happens, is all the data has to go back and forth. Now, this is not like your phone number and my Social Security, that's not the nature of the data, but we are running, again, the systems that make the world work. So we're sending automobile parts data for a supply chain that a European auto manufacturer needs, and they need to get it around to their entire footprint of manufacturing sites, as an example. So digital trade for us means we need to be able to move data around so that we can create an efficient support for our customer base, so they can run their operations, whether it's a banking system or a supply chain or cargo ships, et cetera, et cetera, et cetera. So, for us, digital trade's good. And the reason I think this is an exciting time is because this administration, in their prior incantation, they had very good digital trade provisions. When I look at what was in USMCA, it's world class with regard to digital trade, the agreement that this administration created with Japan, following USMCA, very good strong digital trade provisions. So, therefore, I remain hopeful that digital trade is on the agenda, It's important, and they have it right in their mind. The discussions around physical trade flows not direct for us, because we're not shifting physical goods, but obviously our customers have to respond to those things. And so, in addition to helping them run their systems, we're also in the productivity business, we're also in the business of helping them respond to changes, we're in the business of helping them get more efficient. So even though there's not a direct either, you know, benefit or impact to us from the physical trade discussions, and maybe tariffs, we will be involved with our customers to help them rethink their supply chains, to help them navigate whatever world that is. And keep in mind that while, you know, this administration has obviously talked about trade a lot, the world of IT, particularly enterprise IT, continues to evolve every day. So, for instance, as we sit here today, there was a regulation in Europe called DORA, which is all about resiliency, it affects the banks and all the financial institutions. We've been working with our customers on DORA to be ready for that as well. That always happens, right? The regulatory environment in every country is constantly evolving and we are constantly helping our customers both keep up with it, you know, be prepared for it, as well as become more efficient, as they try to navigate the world. So I'm hopeful, I think the role we play in the world will once again be super helpful to our customers, and it'll be evident on the kinds of capabilities we can bring.

All right. Martin Schroeter, CEO of Kyndryl, thank you so much for your time.

Thank you, Andy.

This is "At Barron's," I'm Andy Serwer, we'll catch you next time.

Kyndryl on IBM Spinoff, Tech Infrastructure, and Growing Revenue

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