The Signal Interview
“Nobody needs to own us,” Martin Schroeter admits, sitting in his midtown Manhattan boardroom with a countdown clock outside, marking the minutes to the end of its fiscal year. The one-time IBM chief financial officer now runs Kyndryl, IBM’s former IT services business, whose $16 billion annual revenues make it a minnow in a tech sector dominated by hyperscalers.
“If you’re a fund manager, you have to own Nvidia, you have to own Microsoft, you have to own Apple… We’re not on that bingo card,” Schroeter notes. To make his challenge harder, when IBM spun his company off to its shareholders in November 2021, most of them knew it as a lossmaking, low-priority unit that hadn’t grown in years — and Schroeter told them its turnaround would take three years. For its first year as a public company, Kyndryl’s stock sank relentlessly.
“They were right to be skeptical that there was an investable thesis,” Schroeter says. His task since then has been to find the profitability, growth, and narrative that would convince the market that its customers saw more value in the 80,000-person business that IBM did.
Three-and-a-half years later, Kyndryl has been reporting quarterly profits ahead of schedule after cutting $700 million of costs, and S&P Global has upgraded its credit rating outlook.
Its shares have staged a convincing rally. But Schroeter now faces a new form of skeptic, in the form of short-seller Gotham City Research, which last month publicly questioned its accounting.
Kyndryl rejected the report as an inaccurate attempt to manipulate its stock, saying that its accounting and disclosures are “correct, accurate and in accordance with all applicable reporting requirements.”
Schroeter, who carries around a little red booklet of leadership principles such as “serve with trust, transparency, and integrity,” is due to report Kyndryl’s full-year earnings on May 7. So far, he is sticking to his “three-two-one” forecast that it can triple its adjusted free cash flow and more than double adjusted pretax income with mid-single-digit annual revenue growth over the next three years.
Analysts from JPMorgan to Bank of America have sided with the company in its fight against the short-seller, and Schroeter argues that it can prosper even as business confidence cools. “When our customers feel or sense a change in [the economy], we’re one of the first ports of call to help them become more efficient,” he says. “I think things are slowing. I don’t feel that good about it, but we’ll be fine.”
The culture challenge of moving from ‘fix-it mode’ to growth
Kyndryl, which runs 60% of the world’s managed mainframes and counts most Fortune 100 companies among its clients, competes with the likes of Accenture, Deloitte, and Wipro, but Schroeter claims its business is in a “category of one.” He likens the task of convincing investors of its value to Michelangelo’s reputed comment on carving his statue of David: “[We] just needed to chip away all that superfluous marble and material and stone to expose it.”
He has leaned on simple investor narratives, such as his “three-two-one” goal and a “three-A’s” initiative that stands for its work on alliances with cloud hyperscalers, advanced delivery of new AI-driven services, and addressing low-margin accounts. But he says his most important work has been on the company’s culture.
“The culture of a division in a matrix organization and the culture of a successful, growing public company — they’re worlds apart,” he notes. Kyndryl had been “playing not to lose” and had to be told how to play to win. His team couldn’t afford to say, “We’re going to fix the business on Tuesdays and Wednesdays and Thursdays, and we’re going to work on culture on Mondays and Fridays,” he says — it needed to work on culture every day to generate the willingness to improve its financial performance.
It is now out of “fix-it mode” and growing again, but it required “a whole new mindset” to be thinking about how it could gain market share, he says, pointing again to the principles set out in his little red booklet. “If you’re shrinking and you don’t make any money, talking about share gain sounds a little delusional, and we’ve been careful not to sound delusional.”
Spinoffs ‘don’t get to pack our own suitcase’
Schroeter was once talked of as a possible future CEO of IBM, but he retired after the job went instead to Arvind Krishna in January 2020. Krishna announced the spin-off plan in October that year, and soon after called Schroeter out of retirement to run what was then called “Newco.”
Schroeter acknowledges that splitting off from its former parent doubled Kyndryl’s addressable market and gave it “freedom of action,” but he blames several of his challenges as CEO on the way it was given its independence.
First, IBM told the market it was keeping a 19.9% stake in Kyndryl, which it would sell within a year. That could have been taken as a vote of confidence, but Schroeter says the knowledge that so many shares would be coming on the market depressed the new company’s stock. “I mean, if you looked up ‘overhang’ in the dictionary, my picture was there for about 364 days.”
In a spinoff, he adds, “the spinner packs your suitcase. We don’t get to pack our own suitcase, so — and I think this is true in most spins — they hand you the suitcase, you open up the suitcase, and there’s a lot of sh*t.” Kyndryl, for example, inherited an IBM-negotiated agreement with European works councils that there would be no layoffs for a year after the spin-off. “But it’s not your first year, it’s our first year,” he protests, saying such obligations tied his hands. IBM declined to comment.
Now, he says, Kyndryl’s dealings with IBM have settled into “a very typical relationship,” and his company has done enough to establish its own brand that clients rarely mention IBM in the same breath.
But if managers decades ago could say that nobody ever got fired for buying IBM, because it was the safe, established option at the time, will they one day say the same about Kyndryl?
“I think so,” Schroeter replies. “We’re the trusted partner running the systems that make the world work every day, and… I think everything we’ve done has enhanced the trust, and enhanced our engineering culture — and now we’ve supplemented that with an innovation culture.”