A dive into Kyndryl, IBM’s managed-services spin-off

The managed-infrastructure-services unit of IBM's Global Technology Services faces stiff competition when it goes solo as Kyndryl later this year.

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Thanks to  a US Securities and Exchange Commission filing new details have emerged about Kyndryl, the IBM spin-off of its managed-infrastructure services unit into a separately traded public company.

Kyndryl does exactly what the managed-infrastructure services unit of IBM’s Global Technology Services segment does: manage enterprises IT infrastructure, whether it comes from IBM or another vendor. That’s a challenge for Kyndryl because it has to deal with the trend toward cloud services and against on-premises infrastructure.

The split is expected to be complete by the end of 2021, and when it was announced last year, IBM CEO Arvind Krishna said IBM will focus on open hybrid-cloud and AI capabilities while Kyndryl would focus on modernizing customer infrastructure.

From the start Kyndryl will be massive and include 90,000 workers and 4,400 customers from IBM's Global Technology Services (GTS) division. That's nearly the size of Accenture. The SEC filing for Kyndryl, lists DXC Technology, Atos, Fujitsu, Infosys, Rackspace, Tata Consultancy Services, and Wipro, among others, as major competitors.

In 2020, employees of the managed-services unit of GTS that will make up Kyndryl represented just 8% of IBM's workforce in the US but contributed 38% of the unit's revenues from the Americas and 55% of its gross profit, while its workers in EMEA also brought in 38% of revenue but just 5% of gross profit. Workers in Japan contributed 16% of revenue and 29% of gross profit.

The unit is also shrinking, with business in 2020 down 4.5% compared to 2019, and it fell 7% from 2018 to 2019, so it can’t rightfully blame the Covid pandemic, although it does. In 2018, the managed-services unit of GTS brought in $21.8 billion in revenue. By 2020 it was down to $19.35 billion. And for the first six months of 2021, revenue was $9.52 billion, which will mean $19 billion if the year stays constant.

Part of the reason is that Kyndryl is losing customers. According to the SEC filing, Kyndryl had 5,100 customers in 2018, 4,600 customers in 2019, and 4,400 in 2020. And they make it sound like it was their choice.

“Like our clients, we prioritized higher value opportunities in 2019. Discrete account and portfolio actions were taken to improve our profitability in the long term even though they had an impact on our 2019 results,” Kyndryl said in its SEC filing.

If these steps were designed to improve profitability, they didn’t work. It reported a net loss of $990 million in 2018, $943 million in 2019, and $2.01 billion in 2020. That includes $918 million in pre-tax charges for layoffs and other measures. So far this year it has reported a net loss of $887 million, which included $232 million in pre-tax spin-off charges.

I hate to be harsh, but this is a business in decline and it’s pretty clear why IBM wants to wash its hands of it. It can’t cut its way to profitability and the top line is shrinking. That’s a bad combination.

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