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IBM spinoff Kyndryl begins trading: ‘We have now complete freedom of action,’ CEO says

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Kyndrl CEO Martin Schroeter speaks with Yahoo Finance Live about the company’s debut and its $19 billion IT infrastructure business that spun off from IBM

Video Transcript

- Today, Kyndryl is set free from IBM. The spin off announced last year by IBM as a way to improve its profits and stock price will see a sizable infrastructure services business hit the market for investors to consider. Kyndryl says it has $19 billion in annual sales, but has forecast sales to drop 5% to 6% this year. Martin Schroeter is Kyndryl's first ever CEO and joins us now. Martin, good to see you, congrats on the debut. For those not familiar with Kyndryl, what do you do and how do you do it?

MARTIN SCHROETER: Good, thank you very much. And thanks for the opportunity to be here. It's obviously-- it's an exciting day for us. So the way to think about us is we run kind of the hearts and lungs, the world's technology infrastructure for the things that affect us every day, the things we interact with every day. So think banking systems, telecommunication systems, airline reservation systems, supply chain.

So we sit at the very heart of over 4,000 customer's digital infrastructure. And that work is done by 88,477 of the world's most talented digital engineers. So we really are-- we really are helping the world work.

- And to that end, it does seem like you're involved with a lot of key areas of growth, cloud, for example. Why are you forecasting sales to be down this year?

MARTIN SCHROETER: Yeah, it's a really good question. Look, we are in a pretty narrow part of the market today because we had a different mission as part of IBM. And now, with our new mission being independent, we really get two things out of this. We get an ability to invest, we have our own P&L, so we have an ability to invest and build new capabilities. And then really importantly, Bryan, we have an ability to use the freedom of action we now have to go enter into the more relevant for our customer ecosystem that exists, so will the other hyperscalers.

And every one of our customers is on a journey of some, you know, a cloud journey, a data journey, a security journey. And this gives us the opportunity, the ability to really, really bring to our customers the ecosystem that really matters to them. So it's going to take us a little while to turn the business around. But as we enter into that part of the ecosystem, there's growth there for us. And we see actually double the market opportunity than the one we sit-in today with a much narrower ecosystem.

- Martin, this is Emily. How were you thinking about creating Kyndryl's identity in the market? Are you trying to distinguish yourself from IBM or are there benefits to be being seen as being connected to that brand?

MARTIN SCHROETER: Yeah, it's a really good question, Emily. Look, IBM and Kyndryl will be very close partners because our customers expect that. And we'll still be solving customer problems together because we have complementary offerings, complementary technologies, if you will. And so I think our customers should expect-- I know I expect that we'll continue to work together really, really well.

But as I said, we have now complete freedom of action to go engage with other hyperscalers. We have complete freedom of action to engage across a much broader ecosystem. So we really get to do both things. We'll continue to have a very special relationship with IBM.

We'll continue to take advantage of the things we can do together. But at the same time, we'll move into some of these new areas that our customers, quite frankly, have been really asking us to help them with. Everybody, as I said, is on a cloud journey here. And this gives us a chance to help them in so many more ways.

- Yeah. And speaking of that special relationship, Martin, if I'm correct, IBM have retaining a 19.9% stake in your company. Any indication on how long they will hold that stake?

MARTIN SCHROETER: What they've announced is that they'll hold it up to a year. And they're going to look to bring that ownership interest down through a debt for equity swap. You know, for us, practically, there's really no impact on our business. They don't have operational influence, they don't have a board seat. They've already said that they're not even going to vote the shares. They're just going to vote the shares as the rest of the shareholders do. So it's very much, I think, this debt for equity swap idea.

And again, they said they'll hold it as long as a year, but it's really up to them. But again, no influence, no real impact to us. I don't think our customers are worried about it. I know we're not worried about it. It's not going to change-- it's not going to change what we do. And it's certainly not going to change the ecosystem we participate in.

- IBM talked a little bit about the road to bringing you public when they reported earnings a couple of weeks ago. They focused on-- they said that they tried to improve the profit profile of Kyndryl. What are some of the measures you took in the lead up to the IPO or the spin off?

MARTIN SCHROETER: Yeah, so look, we've done a few things. IBM has done a few things to try to position the business for success. You know, for instance, we have a great balance sheet, we're really well capitalized, really well capitalized. And I think we start in a really strong place. We have investment grade credit ratings, which is not only important to us but it's important to our customers as well. So from a capitalization standpoint, I think they've positioned us really well.

And from a sort of a cash flow perspective, you know, we have cash and we generate cash that we can go invest in our business. So the overall picture is one where we have work to do to get back to revenue growth. We have work to do because we think we can keep improving margins from here. But we start, really, with the two things we needed most, which was well capitalized and free cash flow so we can invest in the business. And I think we're well positioned for both of those.

- What's it like-- what's it like to be the first CEO of a company?

MARTIN SCHROETER: Oh, it's an amazing experience, it's an amazing experience. There was no way that I wasn't going to be a part of this. Like I said, the 88,477 people, they're so talented. And they can't wait, there's so much energy waiting to show the world that we can do.

And obviously, I had an opportunity to build a phenomenal leadership team. I had-- I was able to help the IBM board to put together the Kyndryl board of directors. They are phenomenally talented, they will play a big role in helping us rebuild this business, and, quite frankly, to reinvent it. So this was something that is just such a phenomenal opportunity. It's so energizing to be a part of it.

- And Martin, when you think about the road to growth here for Kyndryl and your reinvention, is M&A going to be part of that playbook or is most of this innovation going to be coming from your existing in-house talent and business units?

MARTIN SCHROETER: Yeah, it's a really good question. So as I think about it, you know, we're going to make a big, big bet on our existing customer base. We're really going to double down on the relationships, we're really going to double down on investing in skills for the people that they trust today to run their most important system. So everything we've talked about in terms of our path back to growth has all been done on an organic basis.

Now, I do think, as I said, we have a great balance sheet. I think we have some capacity to do something inorganically, and that could be to accelerate our progress, maybe on the platform that we're building, which is kind of an IP based platform. It could be to accelerate the skills transformation we're going through. But everything we've done so far is-- everything we've talked about is an organic path back to growth with, I think, the possibility that we could do something inorganically.

- All right, we'll leave it there. Martin Schroeter, Kyndryl CEO. Congrats on the debut. I look forward to staying in touch.