Kyndryl set for IBM spin-off: Can it grow ecosystem, innovation and revenue?

Kyndryl operates in 63 countries, manages 750,000 virtual servers, 270,000 network devices and 25,000 SAP and Oracle systems, but has to expand its cloud, AI and data engineering game.

Kyndryl, a managed services giant spun off from IBM, will officially become a publicly traded independent company on Wednesday and the company has a long to-do list that includes boosting innovation, delivering revenue growth and forging a cohesive employee culture.

Martin Schroeter, CEO of Kyndryl, said at the company's inaugural investor day that Kyndryl will "ramp up our focus on innovation, going after new market opportunity and using our experience and our IP to benefit our customers."

In the meantime, Kyndryl will remain known for being the largest integrator with $19.1 billion in revenue as well as 90,000 employees. According to Gartner, Kyndryl will be the largest implementation services leader followed by DXC, Atos, Fujitsu and Accenture.

Kyndryl operates in 63 countries, manages 750,000 virtual servers, 270,000 network devices and 25,000 SAP and Oracle systems.

Schroeter's plan revolves around extending its implementation and managed services into other areas with more growth. Here's a look at the plan, markets and potential growth through 2024. In short, Kyndryl will ride intelligent automation, data services, cloud services and security to deliver more value and enable digital transformation.

kyndryl-stair-step.png

The argument for Kyndryl is that companies are starting their digital transformations and the company has time to expand even as it simplifies customer infrastructure. Schroeter also said Kyndryl will offer an ESG platform and strategy to address customers' environmental, social and governance challenges.

Among the key areas Kyndryl aims to address:

  • Data services with a move beyond managing storage systems to focusing on data engineering, orchestration and curation. Kyndryl has established practices around the following.
  • Cloud infrastructure services that will move to the broader ecosystem beyond IBM Cloud.
  • Artificial intelligence services.
  • Digital workplace services.
  • Applications management.
  • Security and resiliency.
  • And network and edge computing.

Indeed, Kyndryl has the customer base to expand. It has more than 4,000 customers and only 15% of revenue comes from the top 10. Kyndryl counts 75% of the Fortune 100 as customers and the average customer relationship is more than 10 years.

But the challenge will be pivoting Kyndryl story from implementation to innovation.

kyndryl-digital-transformation.png

The details

Kyndryl's investor day revolved around convincing Wall Street that the company was a solid investment. IBM shareholders will receive one Kyndryl share for every 5 IBM shares held. Kyndryl shares are distributed after market close on Nov. 3 with trading under the KD ticker on Nov. 4.

As for the balance sheet, Kyndryl will start with $2 billion in cash and $3.2 billion of debt with an incremental $3 billion credit facility.

The revenue streams for Kyndryl are also predictable. The company said that about 85% of its expected revenue is under contract at the start of every year. In addition, ABN Amro recently announced a $400 million tech services deal with Kyndryl.

Wall Street analysts were generally cautious following Kyndryl's investor day. For instance, Wedbush analyst Moshe Katri said in a research note that Kyndryl will need to manage cannibalization to its services business and cut costs with restructuring. "We see a long and challenging road for a recovery at Kyndryl," said Katri.

Perhaps the biggest issue facing Kyndryl is that it must operate in an environment that's moving toward cloud models with little capital investment up front and a heavy dose of automation. Simply put, Kyndryl has its own transformation to deliver.

Kyndryl doesn't expect revenue growth until 2025 and there is potential sales contraction leading up to that date. Stifel Nicolaus analyst David Grossman said there are multiple opportunities to expand as Kyndryl expands its ecosystem and partnerships.

Culture

Kyndryl's management team is roughly split between IBM executives, external hires and IBM alums and external hires. The diversified set of opinions and experiences is something that can set Kyndryl apart, said Schroeter.

Indeed, Kyndryl's executive team includes former CIOs of State Street, GE and NBC Universal.

The company's name is derived from the words kinship and tendril to evoke growth and working together well.

At the Kyndryl investor day, executives emphasized that culture and people were the core assets for success. Kyndryl noted that its employees are continually learning, earning certifications and badges and reskilling on the fly.

kyndryl-opps.png

More importantly, Kyndryl has been expanding its skillsets in Amazon Web Services, Microsoft Azure and Google Cloud. Those skills will be critical to making Kyndryl a broader player.

To celebrate the spin-off, Kyndryl will plant a tree for each employee. The company will also aim to build a purpose-driven firm from the ground up.