Q4 2020 Rackspace Technology Inc Earnings Call
Greetings and welcome to Rackspace Technology fourth quarter 2020 earnings Conference call. At this time all participants are in a listen only mode for a question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference.
And is being recorded I would now like to turn the conference over to your host Joe Crivelli, Vice President of Investor Relations.
Good afternoon, everyone welcome to Rackspace technologies fourth quarter 2020 earnings Conference call with me today are Kevin Jones, our Chief Executive Officer, and a more military and our president and Chief Financial Officer.
On slide deck, we will refer to today can be found on our Investor relations website on.
On slide two you'll see that certain comments, we make on this call will be forward. Looking these statements are subject to risks and uncertainties, which could cause actual results to differ.
A discussion of these risks and uncertainties is included in our SEC filings Rackspace technology assumes no obligation to update the information presented on the call except as required by law.
Our presentation includes certain non-GAAP financial measures and certain further adjustments to these measures, which we believe provide useful information to our investors and in accordance with SEC rules. We have provided a reconciliation of these measures to their respective and most directly comparable GAAP measures.
Conciliations are found in the tables included in today's earnings release, and our slide presentation, both of which are available on our website. After our prepared remarks, we will take your questions I'll now turn the call over to Kevin.
Good afternoon, and thanks for joining us to discuss our fourth quarter financial results. It was another excellent quarter for Rackspace technology, and we are excited to share the results with you.
I'll start by giving an overview of the quarter as well as additional perspective on the massive multi cloud market opportunity that we're addressing and the competitive advantages that are enabling our success.
And tomorrow Mallet, Terra, our president and Chief Financial Officer will walk through the financial results in more detail.
On that topic. Please join me in welcoming Amar to his first official earnings call.
He has made a huge impact on how we operate and view of the company and he will share his perspective with you.
And I will make some concluding remarks before we open the call for questions.
And you can see on slide five it was another strong quarter for Rackspace technology.
The sales bookings success, we've discussed in recent quarters is positively impacting the top line and in addition, we are seeing very strong earnings leverage and resulting growth and profitability.
Revenue was $716 million and the quarter.
This is up 14% compared to last year's fourth quarter and five per cent compared to the third quarter of 'twenty and 'twenty.
Excluding our legacy open stack business core revenue growth was even stronger at 18% year over year, and 6% compared to the third quarter.
Revenue growth was driven by the strong bookings growth we've delivered over the past year as well as continued improvements and net revenue retention.
As noted on the slide our land and expand strategy is working.
<unk> were $293 million and the quarter and core net revenue retention increased to 101% from 100% and the third quarter.
The Rackspace technology sales engine is firing on all cylinders and I continue to be pleased with our sales execution as well as our customer success organization, which is finding new ways to increase business with our installed base.
Adjusted EBIT was $199 million up 6% year over year and 4% sequentially.
Tomorrow, we'll talk more about the puts and takes there and a moment.
But the key takeaway for investors is that earnings growth is materially outpacing revenue growth.
Non-GAAP operating profit was up 23% year over year, and 12% sequentially and.
Non-GAAP earnings per share was 26 cents up 24% year over year, and 37 per cent compared to the third quarter.
This earnings leverage was driven by our scalable business model best in class automation as well as the transformation programs, we've executed to date.
I'm also pleased that we refinanced our senior notes and the fourth quarter and reduced the rate on this debt by nearly 40%.
Which will deliver significant cash interest savings to the company and our investors and.
And we follow this up by refinancing our term loan B earlier this month.
And then in the maturity of this debt for an additional seven years. We now have no significant debt maturities until 2028 Omar will provide more details about this and a moment.
Turning to slide six I want to spend a few moments discussing why we believe the Rackspace technology, it's a compelling investment for shareholders with a long runway for continued growth.
And multi cloud has exploded in the past two years, because it helps customers save money quickly scale up scale down and change their business model.
Our customers no longer pick just one cloud platform and build their whole business on it.
Customers want to diversify and keeping some other compute resources on one platform while operating on other platforms for competitive reasons.
Some applications may run better on one platform versus another.
Still other data may belong only on private cloud for privacy or security reasons, while legacy applications may be too cumbersome or expensive to move to the cloud.
Validating this on the left side of the slide 81% of cloud users are working with two or more cloud providers and according to Gartner.
But multi cloud is complex landscape is constantly changing with new rules, new pricing and new service offerings.
As a result, even the most sophisticated organizations at the worlds largest companies need help managing their multi cloud environment.
So on the middle of the slide you see that 75% of customers are using multi cloud managed services.
Gartner is forecasting that multi cloud will continue to grow into a $520 billion market opportunity by 2023.
The great news for our investors is that this is almost entirely white space for Rackspace technology and gives us years of runway for continued growth.
As shown on slide seven and Rackspace technology has painstakingly built a product portfolio that helps companies from small business to mid market to enterprise navigate the entire lifecycle of their multi cloud journey, including the infrastructure applications data and security.
We provide and end to end stack of services across all of these lines of business, including Advisory services design and implementation services as well as managed services, where we operate and continually optimize seats environments.
We had these capabilities at scale across private cloud and all the major public cloud Hyperscale and we.
We believe there is no other services provider and the industry that can deliver this breadth or depth of capabilities and multi cloud.
Turning to slide eight it's worth noting that one of the biggest challenges that customers face and a digital transformation is staffing.
It professionals with cloud expertise and certifications for some of the most sought after talent and the world today.
And by and large they prefer to work at a technology company.
And Rackspace technology, we are able to attract and train the best talent across the globe.
So as shown on this slide a key Rackspace technology asset is the collective value. It is represented by our 7200 rackers and depth of talent and expertise and multi cloud that they bring to the table for our customers on.
And on the right side of the slide you'll note that we have certifications and recognition from all of the public cloud Hyperscale and many leading cloud software companies.
On slide nine Rackspace fabric is the proprietary software that underpins our industry, leading automation and.
It includes over 200 unique tools and components to deliver our services.
Rackspace fabric represents an investment of more than $1 billion and 12 million hours of highly skilled professionals time.
We believe it gives us a sustainable competitive advantage that would be difficult if not impossible for a competitor to replicate.
Here's why over.
Over the course of over two decades, and the cloud business, we've seen a lot of workflows.
And anytime a rack or sees the same task multiple times with different customers. They write code to automate the task.
We also use advanced machine learning tools to identify work that can be automated.
So we have a critical mass of automation and based upon institutional knowledge and know how that we continue to increment every year.
Approximately 75% of our workloads for automated today and industry, leading figure and increased dramatically in 2000 20-F.
And we continue to optimize our automation to drive further efficiency gains and our business.
On slide 10, and one of Rackspace technology significant accomplishments in 'twenty and 'twenty was being recognized as a leader and the Forrester wave for hosted private cloud services, and North America, and the Forrester wave for multi cloud and managed services providers you.
You can see the Rackspace technology was the only company identified as a leader and both Forrester studies.
In addition, the horizontal axis identifies rackspace technology is having the strongest strategy at any of the companies mentioned.
We were also named a leader and the Gartner 'twenty and 'twenty Magic quadrant for public cloud infrastructure professional and managed services worldwide.
I want to share. Some examples of how we are helping customers navigate their journey to the cloud.
On slide 11, let's talk about Mrs. Ts, the leading manufacturer of frozen Pirogies and the United States.
To give you a sense of scale Mrs. Ts makes over 600 million per obese a year.
This is ts needed help moving to Google cloud as part of an ERP system migration.
With Rackspace technologies help they completed the very complex process and just seven months, which is shorter than all timelines and estimates.
In addition, and migration help them modernize their sales forecasting capabilities and accelerate transaction processing by up to 60% with minimal downtime and no disruptions.
This is a great case study of a complex cross functional solution from Rackspace technology, including business and I T transformation managed public cloud migration services application services and managed storage.
The customers I T director and commenting on and migration said Rackspace technology was a one stop shop, a single pane of glass one partner that can do everything.
Finally last week, we were awarded S. A pea on Google Cloud expertise certification for our work with Mrs. Ts. This is a major step and our differentiation with Google and potential joint clients.
On slide 12, the auto pets little robot is and Internet of things solution enabled by Rackspace technology.
And auto pets case, the company needed to modernize its infrastructure enhance the customer on boarding experience and improve application speed and reliability.
One of the reasons multi cloud is growing today is because it helps companies quickly scale up.
With help from our arnica team within Rackspace technology auto pets migrated to the cloud and was able to quickly scale. Its business from just 500 users at the onset of the relationship to over 100000 users today.
As you can imagine their revenue during this period grew exponentially.
I'm proud of the work we did for other pets, because it utilized a wide cross section of AWS solutions as well as cloud native application development, our own internet of things solutions, and ultimately increased product reliability, while lowering costs.
Now Omar will take you through our financial results in more detail and I'll make some concluding remarks before we open for Q&A.
Omar.
Thank you Kevin and thank you everyone for joining today.
Before getting into the financials, let me share some initial observations as incoming CFO.
I've been in the technology industry for more than 25 years, and I've seen multiple technology and business cycles.
However, what we are experiencing today in the marketplace.
Digital transformation and shift work groups to multi cloud is truly unprecedented.
And I believe we are just at the beginning of a massive multiyear cycles.
Rackspace technology is well positioned to benefit from the cyclic shrink.
We are addressing and attractive and growing market.
And the right strategy and good execution machine and and overall momentum in the business.
The results, we announced today are evidence of that fact.
With that said, let me get into the details of our financial results.
Slide 14 shows key financial metrics for the three months ended December 31 2020.
Bookings were up 27% to $2 $93 million from.
$31 million last year.
This is our second best quarter in the Companys history, and it was driven by continued strong execution by our sales and customer success organizations.
Total revenue and the fourth quarter at $716 million increased 14% compared to last year's fourth quarter and core revenue increased 18%.
While pro forma core revenue grew 14%.
This was driven by the success, we've had over the past year as new bookings have converted into revenue.
Mike I called revenue grew 19% and action Cross platform grew 13% year over year.
Fourth quarter earnings growth outpaced revenue growth non-GAAP operating profit was up 23 per cent compared to last year and non-GAAP EPS was up 24%.
This was driven by our <unk>.
Our top line growth cost transformation and ongoing efficiency programs.
Non-GAAP EPS also benefited from lower interest expense due to repayment and refinancing of a day.
We continue to actively manage both the operating and financial levers and the company to optimize profitability and cash.
On slide 15 for the full year bookings and 112 6 billion were up 61% driven by broad based growth and multi cloud as well as apps and cross platform.
This was largely due to sales execution and overall growth and the multi cloud market.
This led to an 11% growth and total revenue at $2 7 billion.
Our core revenue grew 15% year over year and pro forma core revenue grew 9%.
Non-GAAP operating profit for the full year at $4 $73 million was up 14% and.
And non-GAAP EPS at <unk> 83 cents was up.
<unk> 18 per cent.
These were driven by revenue growth cost transformation programs and reduced interest expense.
Slide 16 provides a breakdown of revenue by business segment and by geography for fiscal year 'twenty and 'twenty.
The multifamily segment represented 79% of revenue and 2020 and grew 17% year over year.
Absent cross platform was 13% of revenue and grew 5% year over year.
We have multiple opportunities and this business segment as the market continues to evolve.
We will selectively and strategically investing in new offerings and expect this segment to accelerate and the next few years.
Oh and open stack public cloud business, which we are not actively marketing was 8% of total revenue for the full year and declined by 20%.
Geography, the Americas at 2 billion and revenue represented 75% of 'twenty and 'twenty revenue and grew 13% year over year.
EMEA represented 22% of revenue and grew 4%, while APG at 3% of revenue grew 9% year over year.
We believe we're underpenetrated and EMEA and APG and have a solid runway for growth in these two regions.
For the past year in these two regions, we have enhanced our leadership and we find our go to market strategy and broaden our sales coverage and we expect these efforts to drive results in the coming years.
We expanded our global presence and 2020, we incurred additional countries such as New Zealand.
And Japan, the UAE, Egypt, Ireland, South Africa, Malaysia bearing and other places in Southeast Asia.
Slide 17 is a snapshot of our cash flow metrics for the fourth quarter and full year.
For the fourth quarter, adjusted EBITDA was $199 million up 6% year over year and 4% sequentially.
Capital expenditures were $51 million.
If you do the math and just get free cash flow, which we define as adjusted EBITDA less capex was $148 million.
For the full year, adjusted EBITDA was $763 million up 3% compared to 2019 and capital expenditures were $225 million.
And just a free cash flow was $538 million.
Capital intensity was 7% and the fourth quarter and 8% for the full year.
We expect GAAP earnings and good speed to be slightly higher in the first half of 2021 due to investments, we are making and the business and should be and the range of 7% to 9% for the full year.
We ended the year with cash and equivalents at one 5 million and we have 375 million of Undrawn revolving credit facility.
Turning to slide 18 over the past two years non-GAAP operating margins have trended up for the for time and consistently been in the mid to high teens.
This was a result of our ongoing opex efficiency programs.
Higher productivity across SG&A functions, while making targeted investments and our go to market to increase market coverage.
And the same timeframe, we delivered higher net income margins, which further reflect lower interest expense as we optimize our capital structure.
While we're on this topic I would like to address the adjusted EBITDA and gross margin trends.
And just had EBITDA margins reflect a shift to a capital light model as depreciation and amortization expense continued to decline with lower capital intensity.
And gross margin reflect where we are and our groceries.
We on a solution provider.
And as most of our new customers are and the initial phase and get cloud journey.
And is more weighted to infrastructure compared to services.
Chicken, we are making the investments to build our installed base as part of on land and expand strategy.
While public cloud infrastructure carries gross margins below our corporate average it is gross profit dollars and cricket and delivers a consistently high return on investment.
Good doing this growth piece of land and expand we expect gross margins to be approximately mid 30% plus or minus a couple of points and operating margin in the mid to high teens.
Which is in line with or better than.
Most USB is best in class solutions providers.
And fourth as we sell higher margin services for the LIFO for installed base, we should see both gross margin and operating margin profile improve over time.
From a favorable revenue mix and operating leverage.
We believe that non-GAAP operating margin is the best metric to gauge our performance as we make this business model shift to capture the secular growth trend and multi cloud.
Now turning to slide 19, and other capital structure since our last earnings calls we have completely refinanced all outstanding debt.
This generated significant interest savings and we now have no meaningful debt maturities for the next seven years.
And total debt repayments and refinancing after IPO will reduce our total interest expense by $75 million to $80 million annually.
Now before I talk about our expectations for fiscal year 2021 on slide 20, I want to recap how we performed against the guidance provided immediately after IPO.
We guided to for primary metrics for 2020.
Total revenue growth core revenue growth adjusted EBITDA and non-GAAP EPS.
And you can see here, we exceeded the forecast for the year for each of these metrics.
Our outperformance was driven by the continued significant growth on the multi cloud market.
Sales transformation programs that we implemented to capitalize on this growth.
Cost transformation programs, which are ongoing and optimize earnings leverage for the company.
And lower interest expense from our debt repayments and refinancing.
So with that as a backdrop, let me share our outlook for 'twenty and 'twenty one.
On Slide 21, you will see our outlook for the coming year.
For the full year, we expect revenue and the range of $2 90 to $3 1 billion.
This is an implied growth of 11% year over year at the midpoint.
Which is an acceleration from 6% pro forma revenue growth and fiscal 2020.
Okay, and lets just can assume 48% of the guided revenue and the first half and 52% and the second half of fiscal 2021.
Core revenue and the range of two 7% to $2 9 billion.
This is an implied growth of 13% year over year at the midpoint, which is also an acceleration from 9% pro forma revenue growth and fiscal 'twenty and 'twenty.
Non-GAAP operating profit and the range of 500 to find and 30 million.
Which represents 9% growth at the midpoint.
We expect about 46% for operating profit and the first half and 54% and the second half of fiscal 2021.
Which is roughly in line with other historical seasonality.
Non-GAAP earnings per share and the range of 95 per cent to $1.05 per share.
Our 20% growth at the midpoint.
Non-GAAP other income or expenses of $2 $26 million to $233 million of expense.
Non-GAAP tax expense rate is expected to be at 26%.
And we expect non-GAAP weighted average shares of 210 to $2 $14 million.
With that I will turn the call back to Kevin for closing remarks, Kevin.
Thanks, Mark before we open for questions. Let me reiterate why we believe Rackspace technology is extremely well positioned to capitalize on its estimated to be a 520 billion dollar multi cloud market opportunity by 2023.
Turning to slide 23, multi cloud is arguably the hottest sector and technology today.
Every company on the planet from small business to Midmarket and enterprise is evaluating how bake and best apply multi cloud to improve their business and drive efficiency and agility.
Secondly, multi cloud is incredibly complex it is not simply moving data to a new provider and calling it good.
There are a myriad of factors that I T department's need to consider.
Siding, which app works best on which platform.
Effectively migrating data, ensuring bulletproof security managing legacy storage infrastructure, and a multi cloud environment and staying on top of the landscape that is literally changing daily I T department's need help with all of us.
So we belief rackspace technology is extremely well positioned to be the partner of choice.
We have the automation and the expertise and the partners to help customers of all sizes optimize their multi cloud journey all wrapped in the fanatical customer experience we are known for.
And we are the leading pure play multi cloud services and solutions company.
On a 'twenty was an important proof point of our value proposition. We grew core revenue, 15% bookings and 61% non-GAAP operating profit and 14% and non-GAAP earnings per share by 118%.
We restructured our balance sheet to ensure years for financial flexibility.
And we set the stage for years of incremental revenue growth earnings growth and enhancement of shareholder value. So I am very pleased with where Rackspace technology stands at the beginning of 'twenty 'twenty. One we expect to deliver great results for our shareholders and the years to come with that we will take your questions. Operator. Please go ahead.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad for confirmation tone will indicate your line is and the question queue. You May press star two if you'd like to remove your question from the queue and for participants using speaker equipment it may be necessary.
And we did pick up per handset before pressing the star keys.
One moment, please while we poll for questions.
And our first question comes from Dan Perlin with RBC.
Thanks, guys. Good evening, I hope things are well.
I just wanted to circle back to.
For the non-GAAP operating profit guidance of 500 to 530.
You know it was a little bit light on what we were expecting it has kind of implicit margins that are actually declining a little bit year on year, and although I know you kind of talked about it a little bit in your prepared remarks in terms of the shift, but maybe you could walk us through like what's explicitly embedded in those assumptions both from a gross margin perspective, but also just as we think about.
The cadence of the shifts as well as the investments that are that are going to take place throughout the year.
So thanks, Dan and absolutely let me just let me just start with saying that and when you look at our guidance we are.
For our plan on the revenue side.
And we're guiding to a very healthy 11% growth, which is an acceleration from the 6% pro forma growth that we saw in fiscal 2020.
And on the profit side, we are growing operating profit at 9% and EPS at 20% and within that guide, we are making investments for growth.
So just to be clear here, we have a huge opportunity and front office visit.
And there's a tectonic shift happening and multi cloud.
And we are running this business for the long haul. So we are making certain growth investments and I will give you some of the configurations here Dan shortly but let me just touch on this topic on growth investments. Because this is an important point that we are trying to make for you.
So when you think about our growth investments and the business, it's quite broad based.
Including our go to market team operations and professional services, which is the tip of the sphere. We also launching new service offerings and I'll touch on that shortly and we expect some of these.
Investments to be more weighted towards the first half of particularly one now.
Now let me give you some additional color on two areas of investments, which we'll touch on your topic about the gross margins and gross profit as well as the operating profit so.
The two areas.
One is and our new services and solutions offering and second is in our land and expense strategy.
And at the core we are a technology company. So we are making investments and innovative services that can clearly redefined the we'd be services are offered and assumed as well as delivered and a multi cloud environment. So it's all about addressing a huge multi cloud opportunity that we have in front of us. So we will be launching U.
These new market, leading products and services starting in the first half of 2021, it will be our most exciting year and the history of the company with new services offering on tap and managed public cloud, but service blocked road at all where we are redefining managed services and the public cloud using elastic engineering, but the way we have tested this with the cash.
<unk> they love it we are true.
Totally re imagining the way private cloud gets delivered with our next generation offering which is more capital light again in line with our strategy to moving towards more capsulate offerings.
And we'll immensely benefit the customers as we offer a hybrid of multi tenancy and single tenancy. We're also moving up the stack and the offerings and with.
And cloud native applications for example to help our customers develop solus applications, where in fact other applications to work effectively on cloud. Additionally, we will also have new offerings and Iot security data services. So really excited about the services and solutions roadmap and fiscal 2021, I've been here and really for three months.
And I look at for the team has accomplished and the investments we are making will be in fact skating to where the puck is going not only in terms of changing the revenue growth, but also the profit pools and so that is one part of the investments and that is broad based I will not get into the nitty gritty of it that's what's baked into our plan the second lien.
<unk> is we are making is and our land and expand strategy.
Now these investments on and go to market, but also it is and the form of lower start up gross margins that we land and then will and the new customer and explain this in my prepared remarks, as most of our new customers and the initial phase of their cloud journey. The spend is more weighted to infrastructure compared to services.
So we are also making investments and landing new accounts. So we can expand this relationship over multiple years by Upselling and cross selling higher margin services. So this should give both gross margins and operating margins and should drive it outputs due to favorable revenue mix as well as operating leverage and the model. So let me give you three data.
<unk>, which are very important for you guys to understand how we will be expanding margins and the longer term.
Most of the industry analysts, we have been talking to estimate that cloud customers will spend nearly $10 of services for every $1 of infrastructure spend or the life of the engagement.
And our recent new customers exhibit this dynamic and when you look at our new customers that we signed in 2020 within the very first year in the follow on sales.
<unk> bought on an average $2 of additional higher margin offerings for every incremental dollar of public cloud infrastructure.
And also when you look at the data for the cohorts of customers for from 2016 to 2019 that we've shared with you guys last quarter you will see there was a healthy double digit growth on a CAGR basis in each of these cohorts.
So we have all these data points to suggest that we get not only expand after landing new customers and you're clearly seeing it and our growth trajectory and our bookings, but also expand with higher margin mix of our business and the installed base. So when you take a look at the guidance and it'll be we always plan conservatively and Gwen.
Execute aggressively and that's why you see the gross margins. We are assuming the gross margin should be and the mid 30, plus or minus a couple of points. We are expecting the operating margins to be and say mid to high teens. This is in line with best in class.
Service providers and the U S and we feel very good about our position here. So the choice and this other choice points, we had been.
And the choice, we're making the investments to capture the secular wave.
Yeah, No that's fantastic color I really appreciate that if I could just ask one other quick follow up.
Bookings in the quarter, another really successful quarter for you guys I'm wondering.
And then can you talk a little bit about the mix, it's kind of inside of inside of the bookings number.
And then also as it pertains to kind of.
Legacy client churn, how that's progressing and then maybe what the pipeline looks like as you sit here today. Thank you.
Hey, good tomorrow, how about I kickoff on bookings and churn and revenue retention and then you jump in as well Hey, Dan. Thanks very much for your question. So yeah look we're very pleased with our sales bookings. Once again, you know fourth quarter bookings of $293 million second best quarter, and the Companys history and <unk>.
7% year over year growth. So we're pleased with that.
Just to give you a little bit of color. We had over 7000 deals closed in the quarter. So once again lots of diversity and our bookings and bookings were broad based across all regions for.
For example on the Americas, our sales bookings were up 21% year over year and.
In EMEA, we were actually up 35% year over year and sales bookings and in Asia Pacific and Japan were actually up 101% year over year, so terrific acceleration of growth all over the world as multi cloud continues to accelerate at different rates and different countries. So pleased with the regional kind of performance if we look across customer.
Segments again very broad based.
Good growth and small business customer segment and mid market customer segment, and the enterprise segment, where we continue to make a lot of traction penetrating the enterprise market.
The other thing Dan we saw substantial year over year increase and larger deals right. So we're excited about that.
In terms of our sales pipeline you had asked about that sales pipeline continues to increase so despite continuing to put up great sales numbers. The sales pipeline is also going up and some are indicated you know this is really on.
Our time to invest and take capitalize on this great opportunity. So sales pipeline for the fourth quarter was up 150% year over year, that's 150, and 20% sequentially. So really good really good growth and the and the pipeline.
One last thing I'll mention and then tomorrow, you might want to touch on your view on NAV.
Sales bookings and maybe one point there, but you had mentioned churn and net revenue retention and so you know churn is a component of our net revenue retention.
And I figure that we report and very pleased here as well or.
Net revenue retention as you probably remember, it's really stepped up each quarter and 2020, we started out 2020 at 98% net revenue retention.
That was and the first quarter and we exited the year at 101% core net revenue retention, so delighted with that and we expect continued momentum there are more and.
Any other color you want to provide I think just one one quick comment Kevin and me and so on the bookings growth for Q4.
Had a 27% bookings growth both on a pro forma basis as well as on a reported basis I just wanted to make sure I clear that I know of somewhere in the press release, it says, 15%, but it's 27% both on a pro forma basis as well as on a reported basis.
One more quick point I would like to make and probably Kevin alluded to as we in total for the year, we signed approximately 400 new logos.
So we continue to feel good about our new logo sales motion and is it just mentioned that give you some color on our land and expand strategy and if you don't land expand and we are at this at the very beginning of a multiyear cycle and in the very early innings and this is our opportunity to capture the wave.
And I think we have so many data points that suggest that it will.
This opportunity is just ahead of us so lots of excitement there from not only.
Bookings perspective, but the investments that we are going to make.
And launching new offerings too.
To skate, where the puck is going as I mentioned earlier.
Thank you Bob.
Thanks, Dan.
Thank you Dan.
And on net and the question is from Amit <unk> with Evercore.
Thanks for taking my question and I'll have two as well I guess, both on maybe just to follow up on what Dan was talking about on bookings.
Kevin I would love to maybe just understand when do you see this bookings momentum eventually helping drive or accelerating our sales growth run rate that we've had so far and is there anything you would call up and on the duration of bookings in 'twenty, one versus 'twenty, let's say.
Hey, Amit Yeah look great question we.
We continue to be pleased with the bookings.
Success that we've had and and also as you've seen that booking success is translating into a into revenue growth. So we're pleased with that are.
Pleased with the diversity of bookings.
And to kind of your point.
In terms of duration, we continue to see really good success and lengthening the duration of our relationships with customers. The other really exciting thing is.
Our increase in large deals you know I alluded to that a little bit earlier, just to give you a little bit more specifics and we actually had a 40% year on year increase and signing large deals and we define large deals as having more than $1 million of annual recurring revenue. So it's just proof that.
The penetration of this enterprise market continues to to accelerate.
For the duration and strong size of deal strong really and our sweet spot.
And the 400 and new logos that Omar mentioned by far a company record right. We're really excited about the new.
The new logos of that size that we've been able to.
To book, So you know, killing feeling very optimistic.
And the other thing Amit is we can be very selective about the deals that we're doing so we want to make sure. We're doing deals that line up with our strategy and customer segmentation is as we've defined it so terrific market just continues to gain momentum.
So let me just maybe if I may and I had and connect the other way.
Great to hear your voice.
And finally add just to connect bookings to revenue growth and I think that was also part of your question.
First of all our bookings is a leading indicator and captures only the new business generated and the period.
And through new customer acquisition, and ultra and new services that we sell to existing customers right So and.
Additionally, the bookings are annualized numbers and it takes generally three quarters for a project to ramp and for bookings to fully materialize and the revenue run rate. So if you look at our revenue guidance you will see our bookings growth in fiscal 'twenty and 'twenty is driving revenue growth in fiscal 2021 as I mentioned, our core revenue growth is accelerating from a pro forma.
Out of 90% and fiscal 'twenty 'twenty, 213% at the midpoint of our guidance for fiscal 2021.
So let me summarize by saying we are seeing the revenue growth as a result of our sales and bookings success that we that we have seen the last couple of quarters.
Fair enough and AMR, and Nigeria, and Youll was again as well, but if I could maybe follow up with you all and you touched a bit on the operating leverage for the business. I was wondering if you could maybe talk a little bit about how do you think about the current free cash flow generation for <unk>.
<unk> space and really the levers that we have at your disposal to improve this as we go forward.
Yes, I think that's a great question and thanks for asking the question Amit.
We look at our cash flow metrics over to cash flow metrics to cash flow metrics. One is it just did one that I.
<unk> talked about.
During my prepared remarks, and the other one is as reported and our cash flow statement and.
And just to be clear I am focused on both.
Theyre just if cash flow is good number to look at from a pro forma and operations perspective for the end of the day what we're on.
Also very focused on is what Lance and my bank, which is cash flow from operations and free cash flow that we reported.
Our reported cash flow from operations was down and fiscal Q4, and let me give some color there.
And three things that are happening one is there was a large one time software license prepayment in the fourth quarter related to a major customer accounts that we on boarded.
Two as we integrated on it because billing system and went live in Q4, we did additional quality control checks on all of the invoices for Anika customer keep in mind, a differentiator with the customers is a critical customer experience and we are very very careful.
Carefully and making sure that we don't lose that so we believe this and voices. The collection was pushed off for January and we have collected all those receivables and cash in January.
The third one is in addition, you can notice from on balance sheet. Our accounts receivable is growing and the account receivable is growing because our revenues have been sequentially growing. This is a good problem to have on it but we have good opportunities and plan and pleased to improve our working capital metrics and was seven point program that have launched already.
And this was month free, but that's something that I always watch out for optimizing profitability and cash flow growing revenue.
Continuously look at that now with that said if you control for all these three one time items, our cash flow from operations would have been solid so I'm not really worried about cash generation by this company.
Now, we do have a lot of opportunities to improve our cash flow. So you have you can be assured that as the CFO and I'll be very focused on improving our cash flow and 2021, and we have several levers in fiscal 2021.
One we are forecasting at the midpoint for a 40% net income growth on a non-GAAP basis, which will help cash flow improvement in 2021.
Second we will tightly manage our working capital as I mentioned I was seven point plan to do that and it's.
<unk> implemented across the company toward a debt refinancing and repayment has reduced our cash interest expense for that will also be a tailwind for fiscal 2021, and finally, we had some onetime cash expenses related to our IPO that won't repeat.
So I expect our reported cash from operations should grow in 2021, and it will be a good indicator of our superior earnings quality and that's what we'll be focused on our revenue growth profit maximization optimization and cash flow optimization and.
Quality of earnings.
Perfect. Thank you very much for all the details.
Thanks to kick off on that.
Yeah.
And our next question is from Ramsey El <unk> with Barclays.
Hi, Thanks, so much for taking my question.
I wanted to ask about the apps and cross platform revenues and and specifically about Armours comment about acceleration over the next few years and exited the year quite strong accelerating quarter over quarter, that's presumably largely due to the state of Texas contract I'm, just trying to get a better sense of what is the underlying kind of normalized organic growth rate and that segment, maybe once you and.
Virtually that contract and and.
Maybe comment on the sort of the lever levers and sort of timing of that acceleration.
So I will take that question, Kevin and if you'd like to jump and later so let me just.
And that's a good question too when you look at our action Cross platform I think it's a pretty critical part of our portfolio because we are trying to move up the stack.
And in our business with multi cloud environment and our customers are asking us to also move up the stack. So what you should expect at least in fiscal 'twenty and 'twenty 'twenty. One based on what we are guiding we should be and high single digit to low double digit kind of growth in fiscal 'twenty, one right and and some of it accelerate.
And in the first half.
<unk> is an important one and or at the end of the day. This particular market is at.
And very early innings it is greenfield.
You don't find lot of companies out there who have cloud layer to abdullah per minute at scale and customers as I mentioned in my previous amongst customers want us to do re factoring of their applications as we move their applications from on Prem or from a private cloud environment and to a more of a multi cloud environment. They want.
For us to write those solar applications and that's where we are we'll be focusing on investments on and we believe that this is this is this is a long tail. We are just getting started.
So just moving the workloads to multi cloud and I think they will also start looking at how do the refractories that applications for the they can improve the performance of the application on a multi cloud environment. So a lot of worked here a lot of opportunities I don't think if you look at the universe of service providers go and can claim that they have a desk.
<unk> and I think this is an opportunity for us and this is where we will be focused on so stay tuned we should expect that and the next couple of years to start growing double digits. This is a very exciting opportunities for us.
I think that's well said no Ramsey I would just say you know this is really where we see the next generation of economic value being created for customers and.
Pink, where we're innovating fast here and we've got a great product team you will.
And we'll be talking more about some of our internet of things solutions cloud native application development.
Moving up the stack, where we've got lots more visibility and.
And then put into customer's strategic initiatives.
Initiatives and spending although work around big data that we're doing and security. So very focused here a huge area of opportunity are early days and you know really really.
Really greenfield for us.
Great that's helpful and.
Also wanted to ask you about just balance sheet.
Capital allocation.
Location and specifically the M&A pipeline.
Now that you guys have got your balance sheet and order in terms of your debt maturities you are paying down debt and at a nice clip and how should we think about M&A going forward strategic M&A.
Yeah, So I'll take that one.
The other one and I'll go with the Alka I'll come back with the capital capital allocation. Yeah. So look great question here on M&A, it's been a very important part of our strategy. Since you know the LBO and 2016, we've done five acquisitions that have really revolutionized our service offerings. So.
And then M&A strategy very focused on enhancing growth reach our product capabilities.
And the two acquisitions, we've done since I've been here at.
And at Rackspace is arnica, which has been spectacular right. It's been a terrific acquisition enhanced our AWS advisory and consulting capabilities moved us up the stack. We've got just some amazing engineers architects and.
And go to market teams from Monica and then the latest one that we did at the end of last year was bright skies, which gave us expanded Microsoft Azure capabilities in Europe.
So so really good and now we've got we've got this integration center of excellence and and integration playbook, which is a great platform. So as we do more acquisitions, we've got a really good management system and really good playbook to make sure that we realize the synergies and the value right that we pay for these companies. So so look M&A and import.
And part of our transformation going forward, we will you know will.
And be very thoughtful about the size of deals that we do particularly over the last couple of years as we deleverage with tomorrow I'll talk about and the minute and capital allocation structure, but we will do deals and you know, we'll do them to enhance our multi cloud capabilities and our growth prospects for geographic presence and continue to develop the service offerings as we mentioned.
And I will let me just touch on the capital allocation priorities, So first and foremost.
And we haven't we will make organic investments and the areas of secular growth and I did explain to that and my previous comment the.
The second investment we are also making is making sure that we continuously drive cost efficiency programs and the company and that's across automation.
And I know, our best shoring, making sure that we have right mix of resources and the right location and there's not just and operations, but across our G&A function as an example, and they've done this before and my previous company and types of huge operating leverage.
Third as we will continue and solid data centers as we move to a more capital light model and all the savings that we will.
That was true Delaware.
And fluid for the to the bottom line and a lot of it was reinvested back into the business. The third is debt repayment and deleveraging the balance sheet. That's why my earlier comment on.
On a mix question is focus on cash we will generate cash so that we can stop being on the debt very opportunistically. The fourth is targeted inorganic investments that are Kevin just alluded to and then finally, we will also try and opportunistically buy back shares to offset dilution from stock based compensation.
And as and when we feel that is attracted to buybacks. So that's on capital allocation priorities for the company.
That makes perfect sense I appreciate your interest today.
Thank you. Thank you.
And our next question is from Matt Cabral with credit Suisse.
Yes, Thank you and.
Thanks, and Mark for all the detail on gross margin, but I guess I wanted to follow up on some of your earlier commentary around investment you're talking about two different vectors soon new services and solutions and more of that land and expand model. Just wondering how we should think about the payback period across those two initiatives and then more broadly you talked about and mid thirties gross margin.
Just wondering duration, we should thinking about about being in that range I guess for the quarters as the years and and how do we think about sort of the path back to our longer term outlook for the company.
Yeah. So great question, Matt. So let me first start with the long term outlook and I'm not and are positioned to provide a long term outlook today.
Again, and one 300 job I'm just looking at the exciting opportunity ahead of us and we will basically talk to day sometime in September and the Joy and I are finalizing that for Regal.
And a lunch and we'll have an analyst day and I can give you some long term outlook at that point in time.
And though in terms of you know.
How does the gross margin I think and end of the day, we want to make sure that the gross margins. We made the right kind of investments so as Kevin mentioned.
We will not go and sign up for.
Any deal that comes our way the demand is strong and as the demand is strong we have an option to be selective and will be selected from that perspective, we want to land accounts, where we have an opportunity to expand so the investments that we're making and gross margins, making sure that we get these deals ahead of time and the early stages.
And we'll be very mindful on the investments we make so I do believe the mid 30%.
From minus will be for the next maybe a year or two or maybe better I don't know at this point and time matter on tiers, but definitely for this particular year in fiscal 'twenty, one and Thats, what we are planning for.
And again as I said, we will always plan conservatively and blue and execute aggressively but at the same time, we do not want to lose the opportunity to invest I think that's the point we continue to make here because we are at the beginning of the cycle. If we missed this cycle and after.
After four or five years, it's hard for us to get back into into this weighted and I've seen companies. Mr cycle, and then wait for five or six years to get back into the next cycle. I think we are very well positioned right now so.
What you should be focused on is as as investors and US and list is how do we do from an operating margin perspective, and that's that's that's where I'm, saying, we will be in the mid to high teens and operating margins and we will continue to drive and SG&A efficiency and productivity, while making investments and sales.
And go to market et cetera.
Does that help net.
It doesn't actually and it leaves us pretty well under the follow up I was going to ask you anyway.
And to talk a little bit more about opex for the company I guess it looks like a lot of the margin expenses you guys have seen is driven by the transformation of the cost takeout efforts you put in and so far just wondering if you could expand a little bit more about sort of the biggest effort you've made and and where you are on the program and just how we should think about the opex and the trajectory of op.
X going forward from here.
So listen I think the way to think about Opex and I encourage everybody to do it is to think about Opex is what's the dollar reduction we should think about opex as a percentage of revenue when you're a growing organization and are you.
And we want to grow opex slower and the growth and the top line. Okay. So if you think about our opex, we in fiscal 'twenty, where we landed at roughly about.
20% or 21% as a percentage of revenue.
In Q4, it was roughly about 18% and I expect that to continue in fiscal 'twenty fiscal 2021.
Now where are we seeing the growth.
And are driving efficiencies across G&A as I said and in G&A. We have just touched the surface. So to speak in terms of vis showing we have touched the surface in terms of automation.
I've led programs from their previous company, where used box to automate some of the processes. So that you can take labor out of the process, but more importantly, when you scale revenue you don't have to scale opex at the same rate. So from that perspective, we are a company that does automation to help customers and we can help on.
Sales to the automation internally, so that we can drive higher efficiency and this journey. So you should expect us to be focused on that there's a lot of runway here and I think as I said on one three.
And I see a huge opportunity.
In terms of not only driving efficiency, but terms of reinvesting it back into the business. So that we can grow profitably.
Yeah.
Yes, I would just add I think that's really well said, Matt you know would add huge opportunities on the cost side, We mentioned best shoring really early days, there automation and more opportunity supply chain management.
And then as these new logos that we've signed we signed so many new logos and we use.
The margins are lower as soon as we sign them, they're still very good and positive, but as we add on additional workloads and additional services that will drive profitability.
Profitability as well so it's where are we kind of are and the lifecycle with all these new customers said that we are so we believe we've got a really good margin expansion opportunity here, so some and.
If I can just to add we are driving higher sales productivity, because we made investments and go to market last year most of the sales.
And this is becoming more productive and number two is we have consolidated some of the office space and will continue to do that we also consolidated and legal entities.
Second on bank accounts and this company has done a very good job from that perspective. So there are a lot of opportunities there.
But we can go after from and from a G&A perspective.
Yeah.
So I have a funnel let me put it this way Matt just as closing like our sales leader a funnel of opportunities on the cost side and I look at how to fill that funnel and how to convert that funnel and then how to reinvest some of it back into the business.
Very helpful. Thanks for all the color guys.
Thanks, Matt.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back over to Joe Crivelli for closing remarks.
Okay, well, thanks, everybody for joining us today apologies to those we didn't get too and the Q will be sure to circle back with you later this evening and.
And if you have any other follow up questions or would like to schedule time to speak with US give me a shout at IR at Rackspace Dot com have a great evening and we look forward to talking to you soon.
Yeah.
And thank you. This concludes Tonight's conference you may disconnect. Your lines at this time again. Thank you for your participation and have a great evening.
Oh.
Okay.
Yes.
Yeah.
Okay.
Alright, Omar can you go ahead and disconnect. Please.
Okay.
Okay.
Okay.
Okay.