Q3 2020 Rackspace Technology Inc Earnings Call
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Thank you.
This is the conference operator.
Right.
Third quarter Twentytwenty earnings call.
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I would now like to turn the conference over to Joe Crivelli, Vice President Investor Relations. Please go ahead.
Good afternoon, everyone welcome to Rex based technologies third quarter 2020 earnings Conference call I'm joke rebellion with me on the call today are Kevin Jones, our Chief Executive Officer, and thus, the Cmax or Chief Financial Officer.
Slide deck, we will refer to during today's prepared remarks can be found on the Investor Relations section of our website.
Before I turn the call over to Kevin.
Slide two you'll see that certain comments, we make on this call will be forward looking.
These statements are subject to known and unknown risks and uncertainties, which could cause actual results to differ materially from those expressed on the call. A discussion of these risks and uncertainties is included in our S. One registration statement for quarterly reports on form 10-Q, and other FCC filings.
I'd like to remind our listeners that Rex based technology assumes no obligation to update the information presented on the call except as required by law.
Slide two also informs our participants that her presentation includes certain non-GAAP financial measures and certain further adjustments to these measures, which we believe provide useful information to our investors in accordance with FCC rules. We have provided a reconciliation of these measures to their respective and most directly comparable.
GAAP measures. These reconciliations can be found in the tables included in today's earnings release, and our slide presentation, both of which are available on our website.
We will also provide revenue metrics in constant currency when available as a framework for assessing how our underlying businesses performed excluding the effects of foreign currency rate fluctuations all growth comparisons we make on the call today relate to the corresponding period of last year unless otherwise noted after our prepared remarks. This afternoon will be.
Happy to take your questions I'll now turn the call over to Kevin.
Thank you Joe and thank you all for joining us this afternoon.
Rackspace technology continues to execute our strategy to capitalize on the incredible multi cloud market opportunity.
As a result, we are excited to share another quarter of record results.
If you turn to slide four you can see our agenda.
Similar to last quarter I'll begin with a summary of our Q3 results, how we delivered a record quarter.
As well as highlight some significant wins in other updates on the overall business.
And duston will cover our financial results.
So let's begin on slide five we are very pleased with our results for the third quarter EPS.
As you can see we improved against each of our key performance metrics.
The third quarter represented another quarter of record sales bookings, our highest revenue in the history of the company and the strongest quarterly free cash flow since 2017.
We are incredibly proud of this accomplishment capitalizing on the tectonic shift to multi cloud and our relentless execution.
Two years ago, we made a number of strategic changes at rack space technology.
We partnered with the Hyperscalers eight of U.S., Google and Microsoft We focused on the enterprise market and we expand it globally.
And through the implementation of our management system and the execution of over 120 transformation programs. We continue to transform the company into a leader in end to end multi cloud solutions.
The quarter was highlighted by another record quarter for sales bookings, which grew 9% sequentially and 64% over last year.
The growth was broad based across both customer types and geographies.
I'll provide more color on our third quarter sales booking success in a minute, but I'll state at the top that the breadth of growth further validates our view the rack space technology is uniquely well positioned to capitalize on the secular growth in the cloud market.
As we stated previously sales.
Sales bookings growth is a leading indicator of core revenue growth.
As a result of our strong bookings performance over the past several quarters core revenue increased 17% over last year on a constant currency basis, driven by our core multi cloud services applications and cross platform sales.
Consolidated revenues grew 13% over last year on a constant currency basis.
Core net revenue retention for the quarter also increased to 100% versus 99% last quarter.
This demonstrates that our land and expand strategy is working.
Additionally, as you May remember our revenue is over 95% reoccurring and gives us great visibility into our revenue trajectory.
This allows us to play offense and aggressively pursue growth in the market.
Adjusted EBITDA for the quarter grew to $191 million up $4 million year over year and $3 million sequentially and adjusted earnings per share of 19 cents was up 36% year over year.
Lastly, our capital intensity was 7% and improved 1% versus last quarter due to our continued shift in our capital light offerings.
This is the key part of our strategy and should continue to improve free cash flow going forward.
Turning to slide six you will see the updated chart of our sales bookings ramp.
This is a great visual of both the significant growth dynamic and multi cloud as well as the success. We have had implemented a number of initiatives to enable this growth.
Sales bookings were $315 million, an increase of 64% compared to $192 million in last years third quarter.
On a pro forma basis, assuming the Ondeck acquisition had occurred on January Onest 2019, but.
Bookings increased 39% compared to last years third quarter.
We continue to see momentum and our sales bookings ramp driven by the strategy and initiatives we are implementing.
And as you can see on the right core revenue growth continues to accelerate as sales bookings flow through to the top line.
In the third quarter pro forma core revenue growth was 10% and overall GAAP revenue growth was 18% up from 7% and 13% respectively in the second quarter.
We are proud that we had double digit pro forma core revenue growth well ahead of our previously discussed timeframe.
Slide seven provides additional perspective on our bookings growth.
Firstly, you can see how much progress we have made in aggregate sales bookings growth over a short period of time.
From 2018, we have now grown our trailing 12 month bookings by approximately $500 million or over 80%.
Secondly, our bookings growth has been broad base across new logos and our installed base of customers.
New logo bookings are up over 400% since 2018.
We are excited by the momentum with these new customers and are optimistic has 29% of our bookings were from new logos in the 12 months ended September Thirtyth 2020.
Likewise, our installed base bookings were up 40% in the 12 months ended September Thirtyth 2020 compared to 2018.
This speaks to the core strengths of rack space technologies go to market strategy, which I will detail in a minute.
In addition, we are very pleased with the expanding breadth of our bookings growth.
We grew across all sizes of customers and across all of our geographies.
Additionally, we continue to expand globally and had our first customer wins in South Africa, Indonesia and Vietnam.
And even with the record sales quarter. Our pipeline is up from Q2 2020 and has more than doubled from Q3 of 2019.
In short we believe our bookings growth momentum will continue as we see additional sales opportunities with both our installed base and new logos.
As multi cloud expands rapidly all over the world Brac space technology will be there to capitalize on the opportunity.
If we turn to slide eight let me spend a minute speaking to our go to market strategy in more detail.
We think about our sales strategy in Threeq tiers.
Firstly is Brett.
We deploy separate resources to not only land new logos, but also expand relationships within our existing client base.
This approach allows us to have laser focus when managing customer relationships.
Secondly, as debt.
Each of our specialty areas map directly back to our core solutions segments, allowing customers to access focus and specialized experts in a way that they cannot do with our peers.
Our account team came quickly assigned solution architects and sales specialists in focus areas such as applications data security and multi cloud to provide our customers with precisely the expertise they need to solve their unique challenges.
And thirdly the scale.
Leverage functions, such as demand marketing and our strategic deal center to increase velocity with new and potential customers, whether that means using marketing to communicate our value proposition more widely or using pattern recognition to pursue large and complex opportunities more effectively.
This strategy has worked incredibly well for us and it's enabled a strong new logo motion and our land and expand model that has driven the record bookings growth. We just detailed.
Help explain how we work with existing customers, let's turn to slide nine which shows how we have organized rack space technology and its offerings to grow with our clients as their business needs become increasingly complex.
Our service blocks allow customers to buy offerings that fit their particular needs at a given point in time.
Our offerings are truly modular and cover the lifecycle of a customer's cloud journey.
The result is that we have satisfied customers, we see clear return on investment in working with us and ultimately partner with us longer.
As we continue to stack service blocks with our customers, we recognize both improving customer retention and scale.
Slide 10 demonstrates how our strategic shift to multi cloud solutions is working and has driven double digit growth across all customer cohorts since 2016.
As you can see the 2016 customer cohort has grown at a compounded annual rate of 13%.
The 2017 cohort has grown at a rate of 25% and the 2018 cohort has grown at a rate of 27%.
The numbers show that once customers are onboard our mandates expand they buy additional service blocks and we grow revenue from the installed base.
This also shows while investing in growth is so important for rack space technology.
As we sign up new customers. The history shows that we can successfully grow our business with them, which leads to higher future revenue as well as expanding profitability for each customer account.
To illustrate how this plays out for two global customers Slide 11 highlights two recent wins, one with a brand new customer and one within our existing installed base.
On the left side of the slide you will see that we recently expanded our solution set for Teva to help them broaden their digital health platform.
We now provide cloud native App development Internet of things Serverless containers and more to help cabinets business.
Kevin did you Heyler uses data and primarily new way that will help doctors see exactly when their patients are using asthma inhalers.
Rather than relying on patient memory. This.
This in turn will enable better medical care and can even save lives by predicting when a patient may have an asthma attack.
The entire system is backed by Rackspace technology.
I Love. This example of how widespread applications for multi cloud are and how we can grow with our clients bring cutting edge solutions to the table and protect even the most sensitive data a patient's medical history.
On the right side Zio tap as a venture funded identity and data platform based in Germany.
The company needed to manage optimize and innovate faster on Google cloud to serve their major customers, including the global Fortune 100.
Rackspace technology won the business by providing a means to stabilize and optimize a large complex Google cloud supported application through platform essential since service blocks, along with advisory guidance for critical areas of security and compliance best practices.
Using the rack space technology solution.
Zero tap is able to accelerate time to market enhance their customers experienced save money with streamline processes and ultimately free their internal it resources to focus on core business activities.
Slide 12 gives a quick review of some new technology initiatives underway at rack space technology.
By no means is this an exhaustive list.
Using insights from customers and partners to develop new services and capabilities around Tomorrows technologies.
Staying ahead of the curve ultimately, enabling our customers to remain at the forefront of technology innovation.
Currently we are developing new cloud native security to bring managed security operation center capabilities to cloud native adopters.
Service blocks to Dido to simplify and streamline our managed service offerings made.
Native support for Kubernetes, and our private cloud as well as true multi cloud kubernetes managed services.
Prebuilt production ready I O T accelerators to help our customers rapidly build and adopt innovative internet of things solutions.
And new market, leading private cloud features that deliver enhanced hybrid cloud capabilities advanced automation and data independents.
Before I turn the call to Dustin I want to thank him again for his outstanding service to our company.
As we announced previously duston will be leaving rack space technology and transitioning the CFO role to Amar Maletira.
Dustin has been a great partner and we look forward to keeping in touch with him in the future.
We are thrilled to welcome Amar to rack space technology, as president and CFO.
His first day will be November 20 Threerd.
Amar is a seasoned public company CFO with 27 years of technology industry experience, including five years as a successful public company CFO at Viavi.
I am incredibly excited to be back together with the Maher and looking forward to working with them to lead Brac space technology to the next phase of growth.
So turning to slide 13 to close I want to recap why we believe Rackspace technology is such a compelling investment.
We are sitting in a unique position in the cloud ecosystem and our offering customers a compelling combination of software enabled multi cloud solutions in a way that the market is not seen before.
Our ecosystem is built on our proprietary software IP and automation that allows us to differentiate our offerings and positions us well to win time and time again.
This drives our double digit revenue growth profile improves profitability and results and strong and sustainable free cash flow growth.
What is most amazing about the third quarter sales bookings record is that we beat a second quarter bookings figure that included one very large deal.
This makes our achievement in Q3, even more special.
With broad based growth across geographies industries and market segments.
We are at the early stages of a significant secular trend and we are well positioned to capture and capitalize on this market momentum.
As I mentioned earlier, we have never been more confident that the strategic shift we implemented two years ago is driving results.
We know we will benefit from that decision for years to come.
But even in the near term each quarter, our pipeline continues to grow and we will win in the marketplace due to our unique position as a leading pure play multi cloud provider.
And we believe we will stack success upon success in that our sales bookings momentum and revenue are sustainable.
We are also focused on continuing to optimize our earnings leverage.
To that end, we are implementing our efficiency transformation programs to reduce costs through best shoring and automation.
We also continue to evaluate acquisition opportunities to bolster growth our.
Our focus is to add either new geographies or new capabilities through strategic bolt on acquisitions.
As a result of the strength, we're seeing across our business. We are raising our full year 2020 guidance for revenue growth core revenue growth adjusted EBITDA and adjusted earnings per share.
Justin will provide more details in a moment, we are very proud of the results and we're even more excited to see our strategy play out against the huge market opportunity ahead of us.
Thank you again for joining us today and with that I will turn it over to Dustin to take you through our third quarter results in more detail.
Thanks, Kevin Good afternoon, everyone as Kevin just mentioned, we're very pleased with our third quarter results as we delivered another record sales bookings quarter and strong core revenue growth.
On slide 15, you'll see highlights of our financial model updated for the third quarter results.
For the 12 months ended September Thirtyth 2020, we generated $2.6 billion in revenue more than 95% of which is recurring.
Pro forma core revenue growth accelerated to 10% in the third quarter, which as Kevin mentioned, the milestone that we had well ahead of schedule.
Our capital intensity approved a 7% inline with our shift to capital light offerings.
For reference capital intensity was 20% just a few years ago.
And finally, we have a robust cash flow profile with annual adjusted EBITDA of over $750 million and adjusted EBITDA margin of 29% in the 12 months ended September Thirtyth.
Slide 16 summarizes our third quarter results across our four key financial metrics.
In the upper left quadrant, you can see we generated record sales bookings of $350 million, which represents growth of 64% year over year.
And on the upper right. We again showed strong double digit total and core revenue growth, reflecting the strong bookings performance we've had over the past several quarters.
Adjusted EBITDA of $191 million in third quarter up 2% from 187 million in the last year's third quarter. This was driven by operating leverage from revenue growth and cost takeout the transformation, partially offset by investment in our go to market areas as well as the expected mix shifted capital light offerings would generally come with a lower initial.
Margin.
However, this margin also generally increases as customers grow with us and that service blocks.
We're also seeing the massive multi cloud opportunity available to us and investing in growth.
Over time, we expect margins will increase as our new customer relationships mature.
Lastly on the bottom right you can see that capital intensity, which is defined as capital expenditures as a percentage of our revenues improved 7% that third quarter from 9% last year.
As improvement with the desired and result of the shift I just mentioned to a capital light sales mix and multi cloud services that we expect to drive cash flow growth in the years to come.
Slide 17 shows our components of revenue.
Our core segments continued to increase as an overall percentage of our revenue and reached 92% of the total of the third quarter, 80% from multi cloud services and 12% from Aston Cross platform.
Openstack now generate only 8% of our overall revenue. We expect this segment to continue to decline in coming quarters.
As we May have mentioned, we are no longer actively marketing services within this segment.
On slide 18, multi cloud now account for 80% of our overall revenue.
In Q3, we grew these revenues by 20% on a constant currency basis compared to last years third quarter.
As Kevin noted the growth was driven by strong performance in the broad based impact of our bookings growth as well as expansion of existing clients to our land and expand strategy.
On slide 19, our apps across platform revenues accounted for 12% of our Q3 revenues.
In general these complimentary services tend to grow in tandem with our multi cloud services, but for Q3. The segment grew 3% on a constant currency basis compared to last year's third quarter due to the state of Texas deal coming online.
This contract will continue to ramp in Q4 and drive further acceleration in that segment going forward.
Lastly on slide 20, you can see our legacy Openstack revenues now represent 8% of the total we expect openstack to continue to decrease over time as we grow multi club revenue in this segment declined 21% on a constant currency basis compared to Q3 of last year.
Now if we turn to slide 21, you can see that Rackspace technology is very well positioned from a balance sheet standpoint, we have no meaningful debt maturities before 2023 that are raising $658 million net proceeds from our IPO. Our leverage now stands at 4.3 times trailing 12 month adjusted EBITDA.
As we previously stated our intention longer term is to reduce our leverage target range of three to three to five times.
We believe we can lower our funding costs over time, given the highly recurring nature of our cash flows and our improved leverage profile.
We repaid 550 million of our senior notes in September and we will repay an additional $86 million next week on November 16. Please.
We expect these repayments to save approximately $52 million, an annual cash interest expense.
Finally, turning to guidance on slide 22, as Kevin previously announced full year 2020 got it is being rates to the following.
For the full year 2020, we now expect revenue growth of 10% to 11% up from our previous range of 9% to 10%.
We expect our core revenue growth to be 14% to 15% up from the previous range of 12.5% to 13%.
We expect adjusted EBITDA in the range of $758 million to $762 million up from 756 to 760 million previously.
We expect adjusted EPS of 79 to 81 cents per share up from the previous range of 75 to 81 cents per share.
We will address 2021 guidance during our fourth quarter earnings call.
With that let's turn to questions operator over to you.
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One moment for the first question.
And our first question is from the line of admit sorry, sorry, any with Evercore. Please go ahead.
Yes. Thank you for taking my question and congrats on a nice print guys. I guess, the first question I have and I get this a fair amount regarding you guys, which is the lack of operating leverage in the model. Some hoping you could speak to the fact that the revenues are growing double digit gross margins I think that down on a year over year basis, a fair bit EBITDA growth.
Low single digits can you just touch on the dynamics over there and perhaps worthwhile just to help us think through the free cash flow metrics and how do you think the growth like is there as well.
Good good hey, thanks, very much yeah. We're excited about the quarter look I'll make a few points about your question first of all.
Our key profitability metrics are improving right, we're growing EBIT and EBITDA dollars quarter on quarter and year on year. We also reported 36% year over year growth and adjusted earnings per share in the third quarter. So that's that's the first point, we are growing our key profitability metrics.
Second point is we are as Duston mentioned is.
Opening remarks, we are intentionally investing to grow right and this is paying off extremely well and our topline.
We're very well positioned to capture and capitalize on this tectonic shift in the industry to multi cloud so on.
On that were absolutely in growth mode. Our bookings are up our pipelines up year on year and quarter on quarter and what we're doing here is for creating an amazing installed base of customers, where we're up we're going to up sell and we're in a cross sell higher margin offerings over time, using our land and expand strategy.
And then the last thing I'll say about this is we do have a growing funnel of cost transformation programs that we're executing and those cost transformation programs include additional best shoring automation supply chain management workforce strategy and others to improve profitability, while we are making the the growth investments so.
All in all I'm very confident that we're going to continue our profit momentum with a focus on growing our revenue profitability and cash flow.
That's really helpful and I guess, if I could just follow up on this up.
The bookings growth has been really impressive for a couple of quarters and I think this quarter, 39% organic without any large deals is really notable up could you just maybe provide some metrics some sense of what the underlying drivers the drivers on either new logo wins, a larger deal sizes tend to get a sense on what's the sustainability of these metrics look like as we go forward.
Sure Yeah, absolutely. So yes, we're very excited about our sales and revenue momentum our execution on sales per month sales front has been very consistent right. As you probably notice we've now posted a fifth quarter in a row of record sales bookings so weve broken on record.
Five quarters in a row and by the way just to also say.
In October we exceeded our sales targets again and that 16 months in a row rights that we've exceeded our sales targets as a company that consistency of sales execution and performances fantastic not.
Not only that in addition to all of the sales success. We've had if you just look at our pipeline our pipeline is double what it was at this time last year and it's also up from last quarter. So we're very excited about our sales execution.
On top of all that we're in the early innings of the 400 billion dollar market opportunity the tectonic shift in the industry to multi cloud. So we're feeling good about our sales momentum and absolutely believe it is sustainable.
Perfect. Thank you.
Thanks, Amit.
And our next question is from the line of Dan Perlin with RBC capital markets. Please go.
Thanks, and good evening, guys I wanted to I wanted to kind of follow up a little bit on what what I meant was poking at there in terms of the churn in the quarter.
Any insight around what what's happening there you're able to improve upon that and then the second part of that really is what.
When we think about the the size the absolute dollar size of new bookings relative to maybe what's embedded in the churn like when should we start to hit this kind of inflection point, where we start to get a little bit of a better connection between.
Bookings and revenue growth I know, it's improving but I suspect there is going to be a point in time, the not too distant future where that becomes a lot more meaningful.
Very good well, maybe I'll kick off with that one and then dust and you can you can jump in as well absolutely. So Dan Dan. Thanks for the question. It's a good one you know really how we think about your installed base of customers is through the net revenue retention metric and as we indicated on the call. We're really quite excited about the moment.
From there right. We if you you probably remember in Q1, we had roughly 98% net revenue retention for our core business that income.
Increased in Q2 to 99% and we're delighted that we've gotten to the 100% net revenue retention mark and in the third quarter. So it's really.
Proof that the go to market strategy that we've implemented in the strategic changes along with the transformation programs are driving significant momentum in net revenue retention, which we expect to continue Dusty.
Dusting any other color to add there just a couple points yet so that first off 100% that is to put a pet audit really implies that the installed base sales that were doing are offsetting charges point, which again gives us a huge balls to really really excited about it what I will say you've seen that acceleration already step up as you think about Q3 excuse me Q2 to Q3 and then what.
Our guide for Q4 again, you're going to continue to see Dizzy bucklew materialized revenue net revenue retention improve and overall growth accelerates.
Does that help Dan.
You're on mute if you're.
And our next question comes from the line of Bryan Keane with Deutsche Bank. Please go ahead.
Hi, guys. Congrats on these results.
I want to ask the popular question about the impact from Covidien is there been a pull forward of demand and as we think about I know you are not giving 21 guidance, but the question that a a lot of companies are facing especially ones with strong demand is.
Does this create tough comps and grow over issues for you guys when we get into 21.
Hey, Brian Hey, Thanks, a lot for the question. So let me just talk a little bit about the pandemic and kind of how it's impacted our business as a.
As you know, Brian we had a really good.
Kind of agile response to pandemic removed crackers to work from home environment, and we seamlessly transitioned our 120000 customers.
To this environment that we've been working and since then and really what we saw with the the pandemic was customers really accelerating their journey to multi cloud, but keep in mind that there was a lot of momentum with.
Multi cloud migrations before the pandemic rights, so that that that momentum did accelerate a bit but we certainly do not see it as something that was temporary.
By any means and.
What we really see now is we see continued acceleration for the customers go to multi cloud because customers want to save money, that's kind of a timeless objective and the cloud is great from that.
Customers want to be able to scale up and scale down and also customers and a lot of cases, when a pivot to new business models. So we absolutely do not believe this is a temporary phenomenon. This is something that that is here to stay and whether or not our customers are working from home or everyone's back in the.
Office were in a great spot really prime because there's this tectonic shift in the industry to multi cloud 400 billion dollar market opportunity.
Multi cloud again was already accelerating before coated and is accelerating all around the world before co that we strongly believe this momentum will only build as world emerges out of the cobot situation.
Got it and then one follow up I wanted to ask is on the margins.
When we think about the margins going forward and especially in multi cloud one of the comments you guys made on the call is as these businesses mature or as it matures and people add more business on top the margin should increase I just wanted to make sure I understand that point and how long of a period does that take.
Before you see a client at maturity and really expanding the margin.
Yeah. That's a great question, maybe I'll start with that doesn't mean you can jump yeah. We are yeah, we're pretty excited about kind of how we're executing the strategy there, Brian we probably a little bit of detail and our presentation today with our customer cohorts you, probably remember that analysis and really what has demonstrated.
Is that once a customer is onboard with rackspace technology that they grow with us at consistent double digit rates and now with our transformation, we've got roughly 71% of our new bookings from installed base and 29%.
For new logos. So it's basically a dynamic is they're growing faster and faster right and as we add new logos to install base really what happens with our customers as their needs become more and more complex and we're very well positioned to sell additional service blocks with them, which increase both our revenue and our margins with each customer.
And that's really the reason that we invented service blocks. That's why we've invested in growth right invest in growth is a key theme here because you can see how it's paying off for us in the very short term in terms of our revenue growth and over the longer term as we add more and more service blocks more and more workloads are going to move to the cloud right.
Says what's happening in the market and Rackspace technologies profitability will also just continue to improve.
And just a follow that probably bri. This other question just keep in mind on the margin point, particularly as it relates to Q3, we talk about making a number of investments for growth and if excluding those investments as it goes without saying to the adjusted EBITDA was already up quarter on quarter of a year over year, but it would have been even higher right and so that's part of what you're seeing right now we want to make sure that we're well positioned to capitalize on them.
Let them going into fiscal year 2001.
Helpful. Thanks for taking it to taking the questions.
Hey, Thanks, Brian.
And our next question is from the line of Matt Cabral with Credit Suisse. Please go ahead.
Yeah. Thank you.
It looks like a strong pickup in multi cloud revenue during the quarter I am just wondering if you could dig a little bit deeper into that portfolio and talk about what's driving that acceleration then in particular, if there is any way to sort of dimensionalize or think about the contribution between growth in the public cloud versus private cloud or more.
Funnel on Prem underneath there.
Very good hey, thanks, Matt.
So I'll start and then doesn't you can jump in as well first of all yeah. We're we're pleased with our third quarter as we mentioned fifth record sales quarter in a row bookings up over 60% year over year.
9% since last quarter, even though the last quarter included large state of Texas deals. So just a little bit more color about the bookings as you as you asked.
Even with this record sales quarter pipelines up right more than doubled since Q3 last year and as in terms of the multi cloud segment as multi cloud continues to kind of accelerate all over the world where their right to capitalize on the on the momentum so I would say.
In terms of where we're seeing the growth very broad base, we're seeing it across.
All of our service offerings, we are seeing across different customer segments as well as.
The different geographies, where where we compete we see movement from private cloud to public cloud, we see movement from public cloud to private cloud and really the way that we approach our customers now as we approach them.
On a workload by workload basis. So it's not really a question of going to private or public cloud and Thats why youve kind of organized the company around multi cloud, it's really workload by workload.
And the good news is we're seeing broad based.
Growth in our in our bookings.
Cost of service offerings Duston anything else to add there. The I think you said it well so again the just to hit it on the head right. There is broad based across the board again, all service offering service offerings geographies et cetera, and where we see where we see opportunity Matt going forward for you know.
A lot of the you know kind of what you would consider traditional.
You know more traditional private cloud business is in the public sector business, which is growing for us health care.
Of course financial services and also technology companies that we do a lot of business with technology companies, particularly because they require low.
No latency and fast response times and then of course the.
The.
The public cloud environments, just continue to to gain more and more steam and more and more momentum and we're having great lot partnering with the Hyperscalers as we go to market.
And by the way, we're going to market with our Hyperscalers not just in public cloud, but in private cloud to with the release of some of the pro.
Private cloud products by the Hyperscalers. So multi cloud is kind of how customers are buying today with over 80% of enterprises, considering some sort of multi cloud strategy today, and that's really how we're seeing the market play out.
Got it and then.
Kevin You mentioned M&A during your prepared remarks, I'm wondering if you talk a little bit more about where you see the biggest pockets of opportunity to acquire and just how you guys are thinking about the trade off between M&A versus maybe some accelerated debt redemption going forward.
Yeah, absolutely love to Matt. Thanks for the question. So look this is an important topic because you kind of look at how Rackspace technology is now no really completely transformed company versus where we were before the take private a lot of that is because of the M&A that we've done to company drive we've done four acquisitions since the elbow.
Try core data pipe relation meds and rumors most recently anecdotes a fantastic acquisition so.
Our M&A strategy has been very successful because it has gotten us into the enterprise part of the market, where we have great success and it's also really revolutionize our service on and now that that's happening we're on our way to becoming the leading pure play multi cloud providers.
In our industry and all of that happening in such a short period of time is pretty exciting in terms of future M&A. So you know our approach here is to acquire businesses that are going to enhance our multi cloud capabilities our growth in our geographic presence right. So we're going to continue to focus on multi cloud as well as applications.
At year end.
In security, So we're really quite.
Quite enthusiastic about that will be very thought.
Thoughtful as we do.
Do additional acquisitions, because we do have some.
Some important deleveraging targets, but it's given the extraordinary cash flow that this company produces its very straightforward for us to both Delever The company and do acquisitions. Just give the example, you may have seen we announced today that we acquired bright skies, which is.
Company in Germany, it's part of our strategy to expand geographically and this is a great opportunity, particularly with multi cloud as it accelerates rapidly all over the world. So gives us a 55.
And has stick folks and.
In the central European in German market that will help us kind of expand our presence not just in Europe, but also in the multi cloud ecosystem in a whole where we continue to work on it.
The increase in our innovation and increasing our customer penetration there so very keen on M&A going to do it thoughtfully, particularly over the next couple of years, that's a key part of our growth strategy and by the way a little more on this color color for you here, Matt our philosophy when integrating companies like we did with Monica is.
Is.
Is to to make sure we do it with extreme quality, we protect the assets that we acquire and we.
Integrate the business seamlessly into Rackspace technology, we had a fantastic and TASC integration with Monica, it's been spectacular.
Asset that we've acquired and were going to continue to do that with the other assets. We've got to integration center of excellence.
As well as a team and integration team ready to go with future acquisitions.
Thank you.
And our next question.
And our next question comes from the line of a tinge in language JP Morgan. Please go ahead.
Thanks, so much.
Her the strong sales bookings and a lot of questions have been asked about it but I wanted to ask about your sales targets you mentioned, Kevin you're right.
Pipelines up to X how much have you raised your your sales targets just want to better gauge your confidence and replenishing the backlog here given the the.
The string of good a good sales bookings results.
Yeah, Hey, thanks tension I appreciate it so yeah, we're we're really quite excited about.
The sales bookings momentum, we've had and you know while we don't publish the exact sales targets that we have each month, we do track them monthly right and thats different than a lot of companies thats the level of rigor and kind of execution orientation that we have in our sales organization.
And you know over time, the sales targets certainly are increasing the targets and thus nice set for the team certainly are increasing and what that really helps.
The organization do is continue.
Continue to reach higher and higher for.
You know for the results now what we've done to enable that 16 months in a row of sales execution is first of all you probably remember we increased our sales force we implemented.
Several transformation programs that have enabled this execution and those transformation programs include kind.
Kind of revised incentives for the sales force additional account planning got an entire said sales education program called race to win we've upgraded the sales leadership across the company our offerings are completely different even and there were several years ago because of the acquisitions that we've done so all of those things together in addition to heighten.
Now we're in the middle of this tectonic shift in the industry to multi cloud all of those things together are really what.
As help contribute to kind of like the consistency of our sales execution. So the good news here engine is we've got we do have good execution, but we are also in a market with.
Absolutely fantastic secular tailwinds in both those things together is what's causing the rep revenue momentum.
Sure got it.
Thanks for that so my quick follow up just on the back on gross margin I know that you're you're investing.
But I'm curious if the impact of the sales bookings and implementations of that's also having an impact on on gross margin here I don't know if there is a classic inverse correlation or not but is that worth calling out.
In terms of implementation impact to gross margin.
Yeah, absolutely so in so when we if you look back to my prepared remarks around gross margins in general and about some of the growth that we're experiencing what we mentioned is that some of these deals, particularly as we're doing so many so quickly coming to initially a little bit lower margin. Some of that's associated with implementing them as well and then over time as we add surface boxes margins will go up.
As you are experiencing that accelerated growth like that sometimes you have that dip in the beginning coupled with investing that we did for overall growth in setting up expectations for next year.
As to couple together did drive an impact overall gross margin and adjusted EBITDA together with that said there is as you look at the bottom line keep in mind that with all of that investment and some of the hyper growth, you're still getting to quarter quarter growth and adjusted EBITDA, you're getting the year over year growth adjusted EBITDA and EPS were point you look as you look at guidance for Q4, you will see it and get a more material step up.
And the last point up but to put a finer point on it when you look at it from a cash flow perspective, if you knock out capital intensity look overall free cash flow margins still very very strong at that level.
Yes. So we're you know we're very confident we have the right strategy here I think we're doing a nice job of balancing the investment in the revenue growth and with continued profit improvement right. We're doing both so.
So I think we've got it balanced out pretty well and we're balancing the mix shift as well the capital light offerings, having capital light offerings that while they do have lower gross margins lower operating expenses lower capital intensity, we really think that's a winning combination. So we're very optimistic we've got a long runway.
Not just revenue improvement the profitability improvement ahead of us absolutely.
Understood. Thanks for that and goes to invest the best wishes to you.
All right. Thank you.
And our next question is from the line of Keith Bachman with Bank of Montreal. Please go ahead.
Hi, Thank you I wanted to start out with some cross platform.
Good just had 3% growth in the quarter and 3% growth year to date. So it's it's underperforming your growth.
The weighted average how should investors be thinking about this not only in the near term pressures present, but as we look longer term over call. It. The next 12 to 15 months.
Very good so we've actually got pretty significant momentum here Keith It's a great question and you May remember the state of Texas deal that we signed in Q2, so yes.
A large part of that deal is related to applications and some of our cross platform services. So we anticipate.
Very very strong momentum picking up and apps and cross platform services going forward. We're also seeing an increased pipeline. This is a very key area for US strategically you just kind of think about the acquisition. We did with Anelka. Keith This really helped us get into cloud native application development, all the cross platform services.
Is that you mentioned before artificial intelligence machine learning everything around.
Our data business and our security business, So definitely an area of you know Kurt.
Current investment an area of significant sales momentum with the state of Texas deal that we talked about before and.
More to come here, but we're super optimistic about this very key to our strategy of continued to move up the stack with our customers Dustin.
Anything else to add just to say that again, when we talk about broad based strength across offerings beyond just the state of Texas still there. We Didnt Q3, we had an incredibly strong quarter application sales as well in Q3 as an acceleration you'll see pick up pretty materially that will drive a pretty significant momentum exiting exiting this year at a material step up from Q3 to Q4.
And then also just say Keith.
This apps applications Cross platform point, we are very focused on staying in the hyper growth areas. So.
You know, where we're going to focus is in cloud native application development.
Internet of things artificial intelligence machine learning containers, and then App monetization. So that's a that's kind of our current and future focus and really that's where we see the next generation of economic value being created for our customers. So we're really super pumped about our strategy here.
Okay, Okay, and then my follow up.
Go go back to the bookings for a second.
Just trying to understand the convergence between 39% and 10% what's your both pro forma growth.
And to ask it a different way was there any changing was there any changes and duration of the signings.
That might lead to less convergence so to speak over time and or is there anything more broadly you can say about.
How you anticipate pro forma revenue growth to start to mirror, the bookings growth or get the benefit from that over time.
[noise] Dusty you want to start with that one and then I'll yeah sure. So so theres a couple of things, yes, there's nothing different about the duration on average our contract length is about is about three years and I think what you're seeing is it is actually stepping up. So if you go back to Q1 Q2 Q3 your talk about net revenue retention on a quarterly basis stepping up nicely.
99, 100, we showcased during the earnings call. The presentation will be about the new logos as well as the mix between that and install base and so as you've seen if you look at the guidance for Q4 as well you've seen has had a pretty material step up from a revenue basis quarter to quarter to quarter and some of the underlying metrics operational metrics, improving I think you'll see that that momentum in country.
To accelerate what I will tell you is that you know obviously, there you're continuing to converge now and once we get to Q4 will give a better indication of a about what a fiscal year 21 holds.
Okay perfect. Many thanks gentlemen, good luck in your next chapter.
Thanks, Keith were ER. Thank you for that we're excited about the about the momentum and yes, I do believe our revenue momentum is sustainable you are seeing that revenue accretion that we've been talking about because of kind of the the five record sales bookings in a row now the thing just to say just to finish off on this just remember.
Keith you know our revenue models, 95% recurring so thats. The other dynamic here is we we got 95% recurring revenue that drive strong visibility into future and that really allows us to play offense.
Which is exactly what we're doing in this fantastic market.
And our next question is from the line of Ramsey Lasalle with Barclays. Please go ahead.
Hi, guys. Thanks for taking my question Tonight, I wanted to actually just make sure I understood. The a prior comment from the question before mine regarding the universe or the government of Texas, when and when that sort of starts to feather and we also had a little more quick acceleration and absent cross platform this quarter and I think.
What was printed and so I'm just curious if you could just reiterate how much within that govern the Texas when how much was in this quarter and what's the kind of path that that should sort of is it more of a gradual ramp or should we just see one quarter, where it really just sort of spikes up just based on that one alone.
Yeah. So a couple of things you've seen it kinda again to feather in just a very little bit in Q2, and you've seen a more gradual step up in Q3, and you'll see much more of a full ramp in Q4. So the acceleration will be will be materially in there almost 100% at Q4 going forward.
Got it okay, Great and then my follow up is just about commentary in general from IP service providers that are that are talking about vendor consolidation I'm. Just wondering if that's a trend you see in your business and.
And if you do see it how does it impact you guys threat and opportunity how do you look at that.
Yeah, Great question Ramsey look we do see.
It is an opportunity we see what customers want.
Is they want a partner that can handle handle their multi cloud environment. So no. It's really been occurring is because a hyper competition within the public cloud providers and extreme specialization now occurring within the customer's environment. They are very particular, and which types of cloud environments that they want.
So these niche providers that may be provide services in one particular geography or one particular platform, maybe it's just Google or just eight of us or et cetera, et cetera, those types of firms.
You know in my view are not as advantaged as Rackspace technology. We essentially are an end to end multi cloud provider and were pure play. So we just we just focus on the cloud so the dynamic in the market like we're talking about $400 billion market growing fast terrific opportunity and what comes.
Summers want is they want one provider to be able to handle all those environments. It's way too complex. The complexity is mind boggling for customers. You know, it's not a cloud is not a data center requires new skills, new methodologies new technologies.
And it's virtually impossible for customers to do that at scale in a world class way and so what's happening is we're seeing lots of demand from first of all customers who were trying to do it themselves that the complexity is now too much for them and also customers that were may be trying to do it.
With a provider that handle just one part or their journey or just one platform and all that up.
Opportunity is there for us as a pure play multi cloud provider. So we really see the trends and the t. market as very very favorable to track space technology.
Right that makes lot of sense. Thanks, a lot.
Thanks Randy.
And there are no further questions at this time I will now turn the call back to Kevin Jones for closing remarks.
Great well, thanks, Jennifer and thanks, everyone. So much for joining us Tonight and for the questions. So in conclusion I'd like to make just a few points.
I am the most optimistic I've ever been about rack space technology, right now and I'd like to thank the rack space technology team and our partners for an outstanding performance. We reached the milestone of double digit pro forma core revenue growth much faster than our expectations.
In the third quarter, we recorded the largest sales bookings in the history of the company the highest revenue in the history of the company and had the strongest free cash flow since 2017.
Also our adjusted earnings per share grew 36% year on year.
Looking forward I'm excited about the future for rack space technology as we've discussed previously we're right in the middle of a tectonic shift in the industry to multi cloud ran a $400 billion market, which is growing fast and has secular tailwinds because.
Because of our strong execution in this attractive market, we have raised our guidance for full year 2020, with the strong revenue profit and cash flow momentum we have in our business we're off to a great start as a public company. So thank you all for your support a rackspace technology and we look forward to talking with you again soon thank you.
That does conclude your conference call for today, we thank you for your participation and ask that you. Please disconnect your line.
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