Q1 2021 Rackspace Technology Inc Earnings Call
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Yeah.
Good afternoon, everyone and welcome to the Rackspace technologies first quarter earnings Conference call.
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At this time I'd like to turn the conference call over to Joe Crivelli, Vice President of Investor Relations. Sir you may begin.
Good afternoon, and welcome to Rackspace technologies first quarter of 2021 earnings Conference call, Kevin Jones, Our Chief Executive Officer on a more military on our President and Chief Financial Officer join US today. The slide deck, we will refer to today can be found on our Investor relations website on.
On slide two of 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 in accordance with the SEC rules. We've provided a reconciliation of these measures for their respective and most directly comparable GAAP measures. These reconciliations are in the <unk>.
Included in our earnings release, and 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 first quarter financial results.
One of 21 is off to a great start and we are excited to share the results with you.
Today, I'll discuss quarterly highlights and provide additional perspective on some recent product launches. The we believe position Rackspace technology exactly where the market is moving.
As I've done in past quarters also touch on some case studies of customers, who were doing truly innovative things with cloud technology and.
And our President and Chief Financial Officer, Omar Malik Tara will go into detail on the financial results before I make some concluding remarks.
Slide five shows the main messages, we would like to deliver it today.
First quarter was very strong for Rackspace technology, and we exceeded the guidance targets. We set in late February with record revenue and very strong earnings growth.
The tectonic shift of multi cloud as well as the success, we had on boarding new logos in 2019, and 2020 are expected to fuel double digit revenue growth throughout 2021 and beyond.
You've heard me say the 2021 is going to be the most exciting year for new product launches in the history of the company and.
And in the first quarter, we launched Rackspace elastic engineering.
And Rackspace services for Vmware cloud, which had been extremely well received by industry analysts and customers.
I'll talk more about these in a moment.
The work that our finance team has done to improve cash flow drove a significant turnaround in the first quarter with strong growth in operating cash flow Omar will discuss this in his section.
It also bears repeating that our first quarter debt refinancing put us in a position of strength from a balance sheet perspective for years to come.
As we've noted previously we now have no significant debt maturities for the next seven years and in addition, our debt was booked at historically low interest rates.
In fact, the $550 million financing that we completed in February was the best pricing ever for a non investment grade senior secured notes offering.
Yeah.
Turning to slide six we posted another record quarter with revenue up 11% compared to the first quarter of 2000 $20 million to $726 million.
Core revenue growth was even stronger up 15% year over year to $677 million. The strong growth was driven by continued momentum in our multi cloud business.
We are winning new customer engagements and expanding share of wallet with the customers. We on boarded in late 2019 and throughout 2020.
As a result, we believe we are expanding market share in cloud services.
Earnings leverage continues to be excellent non-GAAP operating profit was $119 million and non-GAAP earnings per share was 23 cents up 10% and 44% respectively compared to last year's first quarter.
And we see opportunity for additional earnings leverage.
Omar now on a six month has taken a fresh look at everything we do.
As a result, we have driven a number of changes in our decision, making process and management system.
To give you a few examples we revamped the way, we analyze steel profitability and decide which deals to pursue.
This in turn has informed how we structure, our sales force and which product lines, we lean into for growth.
We have reexamined, our expense structure and uncovered additional efficiencies that we can drive in 2021 and beyond.
And identified areas, where we can invest the savings to accelerate the trajectory of our top line.
Additional discipline and working capital management has led to a significant turnaround in cash flow.
Laura will provide more details in a moment.
And we continue to improve our investor reporting and give the investment community more insight into our growth drivers and value creation strategies.
New sales bookings in the first quarter were $244 million up 6% compared to the first quarter 2020.
This was a solid bookings quarter the year over year bookings growth was lower than in past quarters for a number of reasons. Firstly, we are lapping our own efforts and are up against tough compares from a bookings growth standpoint.
This will continue throughout the year as we landed a number of marquee multi cloud deals, including the state of Texas deal on the second quarter of last year.
So while we expect continued strong bookings in 2020 one of the year over year compares will be more modest we remain confident in our revenue guidance for fiscal 2021 and expect double digit revenue growth for the year.
Secondly, we are focused on driving the right mix of business and increasing the initial margin we're willing to accept on new deals. This.
This is a benefit of the booking success. We've had as we now have a significant installed base of enterprise accounts that will serve as a foundation for our growth.
Thirdly, we adjusted sales incentives and realigned our sales force to prioritize high value deals in line with our land and expand strategy.
As these changes have taken root we are encouraged the bookings accelerated and grew sequentially each successive month of the year.
Slide seven shows how we're evolving the strategy of the company.
We have gotten encouraging signals from customers that they see us as the opposite of the global systems integrators or gsi's.
This is because we bring the benefits of the GSI, including size and scale, but unlike the Gsi's. We're also cloud focus disruptive flexible fast agile and we have our fanatical customer experience.
So we are staking our claim as the on GSI.
We believe this makes a clear statement with customers and prospects about who we are and the competitive advantages we bring to the table.
On slide eight our positioning as the <unk> S I as well as market trends have influenced our product development efforts.
As a result, we recently introduced two new offerings that we believe hit the sweet spot in the market.
Many of you participated in a webinar on Rackspace elastic engineering in April and that service offering has garnered significant early interest from customers around the world.
Last week, we introduced Rackspace services for Vmware cloud as Vmware is in many cases the platform of choice for private cloud workloads.
Looking forward, we believe Vmware is an important fourth cloud platform alongside AWS Azure and Google cloud.
On slide nine Rackspace elastic engineering is the next iteration of our service blocks. We are very excited about this new offering and believe it is exactly what the market needs to move cloud adoption to the next level.
Rackspace elastic engineering is on demand access to a pod of multi disciplinary cloud specialists, who will know the customer's application team and desire of business objectives and will be laser focused on driving their cloud outcomes.
The pod will work seamlessly with the customers' internal Dev ops teams, essentially becoming a trusted part of their permanent cloud team.
The pod is capable of delivering a broad spectrum of outcomes without the constraints of a fixed scope of management.
This is the complete opposite of how a GSI structures and prices of their services.
Rackspace elastic engineering is already available and fully supported across AWS Azure, Google cloud and Vmware.
It's really cracks the code for customers, who are trapped between running their traditional operations and evolving to be more cloud native and modern.
After just a few weeks elastic engineering has been one of the most successful new product launches and Rackspace history.
We've already closed significant deals in all three regions of the world and the pipeline for this offering is growing very fast.
On slide 10 last week, we announced our rebranded private cloud offering Rackspace services for Vmware cloud.
In conversations with customers it became clear that they needed a solution that provided a public cloud experience with private cloud security data sovereignty, low latency and pricing flexibility.
We are excited about this offering and view it as a way to significantly increase growth in private cloud and further extend our lead in multi cloud.
In addition, this offering aligns to our Capex light business model.
And in the early going it is clear the customers who are hungry for this kind of architecture as we are off to a great early start with this offering as well.
As I've done in past quarters, I would like to highlight some customers who are doing truly innovative things in the cloud.
On slide 11, let's talk about Porsche, which is a signature enterprise cloud customer for Rackspace technology.
As you can imagine automobile manufacturing is a complex undertaking and a complex industry and it requires best of breed systems and tools across a variety of I T environments to execute at the very highest level like Porsche does.
So Porsche is in many ways a textbook case study for multi cloud as the company Leverages, all three hyperscale or AWS, Microsoft Azure and Google cloud for its cloud environment.
Accordingly, we are very proud to have been selected as porsches cloud partner of choice to help this world renown automaker harmonized and govern its multi cloud platform.
On.
The 12 auto desk subsidiary in of ice is one of the preeminent software companies for the water industry. The company knew that it needed to be on the technological forefront to continue to lead its industry.
They had to modernize their solution, which was a desktop app with on premise client servers.
While the company had highly skilled SaaS engineers and machine learning and Dev ops teams. They did not have the resources to meet an aggressive timeline.
Pivoting from a desktop centric product suite to a SaaS solution would require all hands on deck they needed to bolster their teams with equally skilled engineers.
With Rackspace technologies help they built and introduced and so $3 60, a SaaS offering based on AWS, which also included advanced Iot analytics using real time data.
The new platform was built with cirrhosis technology and micro services enable their customers to transfer the asset network information to the cloud.
It also leverage geospatial mapping functionalities, which were previously available only with additional third party software.
I'm so proud of the rackers, who helped in device meet its aggressive timeline, so that it could maintain its lead in the industry.
Now Omar will take you through our financial results in more detail then I'll make some concluding remarks before we open for Q&A.
Sure.
Thank you Kevin and thank you everyone for joining our call today Slide 14, recaps, our financial results for the quarter.
The demand trends across the customer segments and geographical markets continue to remain robust.
Which coupled with strong execution drove another quarter of double digit top and bottom line growth.
Now first quarter of fiscal 2021, we posted revenue of $726 million, an increase of 11% year over year.
This was unheard of for expectation driven by strong performance in our core business.
Our core business revenue of $677 million grew 15% year over year.
Non-GAAP gross margin at $34 four per cent in the first quarter came in within the expected range and was down compared to prior year, reflecting the mix shift from strong growth in a multi cloud business the.
The decline in our legacy open stack and ongoing investments.
While the mixed primarily impacted our gross margins our operating margin at 16, 4% was relatively unchanged year over year.
Compared to prior year non-GAAP gross profit of $250 million was down 2% due to decline in our legacy open stack revenue, partially offset by growth in gross profits in our core business.
Our non-GAAP operating profit was above our expectations at $119 million up 10% year over year.
This was the result of operating leverage from strong revenue growth in the multi club business and Opex efficiencies primarily in G&A.
Non-GAAP earnings per share of 23 cents Likewise beat our expectations and was up 44% from last year. This reflected strong growth in operating profit and also lower interest expense from debt repayment and our recent debt refinancing.
Slide 15 shows the company's revenue mix in the first quarter by segment and by geography.
The multi cloud continues to represent the vast majority of revenue at 80% of the mix and it grew 14% year over year.
Absent cross platform at 13% of total revenue grew 19% year over year, driven by strong performance in application services, coupled with strength in our data and security services businesses.
Open stack, which is the legacy business declined 23% inline with the expectations.
This segment now represents only 7% of total revenue.
From a regional perspective, the Americas continues to represent 75% of our revenue and had a solid 11% year over year growth.
EBITDA grew at 28%, while EMEA grew 8% year over year.
Now moving to slide 16, let.
Let me give you more color on our multi cloud segment, which represents 80% of of total revenue.
The trending bar chart on the slide shows our successful strategy of driving the significant mix shift to the higher growth markets within the segment.
The purple bar represents estimated revenue from our solutions in high growth markets, which includes all for cloud platforms, AWS Azure, Google and Vmware.
The Green bar represents revenue from our solutions and low growth in mature markets, primarily non reimbursed private cloud and managed hosting.
This chart really shows the business transformation that has taken place since mid 2019.
We leaned into high growth areas of the market such as managed public cloud by winning new logos, while also proactively transitioning some of our existing customers to newer cloud platforms.
This was a purposeful strategy to extend our customer relationships and position us well in an attractive and growing cloud services market.
On a trailing 12 month basis in the physical.
Fiscal first quarter 2021 of revenue in high growth markets made up approximately 65% to 70% of our multi cloud segment revenue.
And grew roughly between 30% and 40% year over year.
Within this segment of managed public cloud revenue grew even faster.
Facing the overall public cloud market growth.
We are targeting the high growth revenue mix within this segment to exceed 80% of total multi cloud revenue in the next 12 to 18 months, we believe our gross margins will stabilize within 12 to 18 months period for two reasons first this mixed shift within the multi cloud segment will be large.
The complete and the majority of our revenue in multi cloud will come from high growth areas.
Second we are confident that the land and expense strategy with the new customers. We have on boarded since early 2020 will work and drive higher margins in the installed base I'll explain why we have this confidence in the next slide.
All of this bodes well for Rackspace to deliver long term growth and profit through both revenue growth and operating margin expansion.
On Slide 17, you will see some proof points of of land and expense strategy with two very different real customer examples.
Delivering the solutions, which includes cloud services and infrastructure is of key value proposition to help customers optimize the cost it creates stickiness in the relationship and provides an opportunity for rackspace to upsell and cross sell more higher value solutions in.
In the first case on the left we show of long term customer in the financial services industry.
In this case, we led with services and as infrastructure mix grew you can see a modest decrease in sort of gross margin.
But as we have cross sold additional services to this customer you can see that the margin rebounds and exceeds the starting point.
On the right is a relatively new customer in the manufacturing industry.
This was one of the new logos, we on boarded in the first quarter of 2020 the.
Again, you can see that the initial services led margin is high and as the customer deploys a multi cloud solution, which includes cloud infrastructure the margin dips, but then as we expand the relationship with higher value services the margins of course.
These are the types of customer use cases that we are focused on replicating across our entire customer base and.
And we are having some good success in this regard on slide 18, we analyzed the managed public cloud customer cohort from the first quarter of 2020 and as you can see our cumulative bookings have increased 21% in the first year and solid gross margins of expanded over 200 basis points.
This is an area that is intense focus in our weekly management system meetings, ensuring that we continue to execute our expense strategy.
It is also one of the areas for which we elevated the focus of our sales force and account teams and aligned our incentive plans.
Slide 19 provides the snapshot of our cash flow and balance sheet cash.
Cash flow was strong in the first quarter to the improved working capital management.
We had operating cash flow at one of $3 million and free cash flow was $66 million.
Total capital expenditures in the first quarter was 59 million and total Capex intensity was 8% in line with our expectations.
Please note that in the second quarter, the odds renewing several large multiyear enterprise license agreements on Elas.
The accounting treatment for these renewals requires us to recognize the full amount of these elas as capex in the period. The deal is signed even though the cash payments are spread out over time.
Accordingly, we expect second quarter Capex intensity in the low teens, which is in line with the plants, but for the full fiscal year of 2021, we expect capex intensity to be in the range of 7% to 9%.
Our cash Capex was $37 million in cash Capex intensity was 5% in the first quarter.
For fiscal year 2021, we expect cash capex intensity in the 4% to 6% range.
Total cash at quarter end was $198 million, and we had $375 million of unused revolving credit facility.
On slide 20, we have of guidance for the second quarter and fiscal 2021.
For the second quarter, we expect revenue in the range of 735% $45 million, which at the midpoint is 13% year over year growth.
Core revenue of $6 90 to $6 $98 million, which at the midpoint of 16% year over year growth.
And non-GAAP operating profit in the range of $1 $13 million to $117 million.
This guidance reflects continued investments and mix shift to high growth areas and multi cloud.
We also expect non-GAAP earnings per share in the second quarter in the range of 21 to 'twenty three since non-GAAP other expenses of $52 million to $53 million non-GAAP tax expense rate of 46% and we expect non-GAAP weighted average shares of $2 $14 million to $215 million, we have made.
No changes to our guidance for the full year, except for a minor change for the full year non-GAAP other expenses and 2021 weighted average share count up to six months of track space I am more convinced than ever that we have a lot of opportunity and runway for continued growth and shareholder value creation.
I will now turn the call back to Kevin for closing comments Kevin.
Thanks Omar.
Before we open the call for your questions. Let me say that I'm proud of the first quarter results, which we believe we're a strong validation of the Rackspace technology investment thesis.
We continue to grow both total and core revenue by double digits.
The earnings leverage inherent in our business model and our cost transformation programs are driving significant improvements in year over year profitability.
In the first quarter, our discipline with working capital assets resulted in a dramatic increase in both operating and free cash flow mode.
Most importantly, we are continuing to position the company for consistent ongoing growth and earnings leverage.
The new customers, we landed in 2019 and 2020 provide a strong growth foundation and the continued tectonic shift of workloads to the cloud will provide secular tailwind for years to come.
Our new market positioning as the on GSI as well as the new service offerings. We've introduced in 2021 position Rackspace technology as the clear of partner of choice for companies that want to migrate their business to the cloud.
We are already seeing significant traction in the market for these initiatives.
Also we are committed to driving cost efficiencies and making ongoing growth investments to continue our financial momentum.
So I remain excited about our opportunities in 2021, as we continued to see double digit growth in both revenue and earnings per share for the full year.
And with that we will take your questions operator.
Ladies and gentlemen at the time well begin the question and answer session.
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Our first question today comes from Ramsey El <unk> from Barclays. Please go ahead with your question.
Hey, guys. This is Ben on for Ramsey. Thanks, So much for taking my question.
Wanted to ask about the first of the pace of bookings growth of I know, what like kind of at some time ago. We had talked about just kind of like a low double digits low teens kind of growth rate over like the next several years.
Understand that Youre lumps on tough comps at that sort of what we should expect as we kind of lap those comps on get into 2022 of that sort of a reasonable expectation.
Hey, Ramsey, it's Kevin here. Thanks for the question, so I'll kick off here on bookings and I'm sure of Marvel at the few things to add on.
So as a reminder, ramsey the the of the figure for bookings that we reported only new business bookings and the $244 million of bookings in the first quarter is very healthy.
New business bookings is just one of the factors in our revenue growth alongside of recurring revenue you know theres renewals contract extensions churn implementation and.
The revenue realization.
The.
The one component of revenue new business bookings grew a healthy 6% year on year. We're also more selective and the first quarter about the deals we pursued because we on boarded a significant install base of new customers in 2020, and now can increase our initial margin on new deals.
In addition to our land and expand strategy drove a significant increase in sold gross margins in the first quarter. So overall, new bookings were solid we're committed to our revenue guidance for the year and double digit revenue growth in 2021 and beyond.
<unk> two on add something yes, let me, let me 90 of Ben So just stepping back when you take a look at.
Bookings and the revenue growth for relation here, we've been executing very well on the sales front, we have had strong year on year bookings growth for the past seven quarters and what this is done the significantly increase the baseline off of bookings, which captures incremental new business as Kevin mentioned earlier.
So at an annualized bookings baseline of roughly a 1 billion plus we will be able to deliver double digit revenue growth in 2021, and beyond and having said that we are focused on continuing to drive bookings performance going forward.
Hopefully that hundreds of the fisherman.
Yeah very helpful. Thanks, so much of them if I could ask one more of just in the quarter apps and cross platform that the revenues came in a bit higher than we were expecting which is great to see is that related to maybe like the timing of the state of Texas deal or is that just kind of a broader outperformance on is that level of revenue growth kind of indicative of what we should see in that line for the rest of the year or should the perhaps moderate a little bit.
So much.
So that's of Great question. So it was very broad based it was not just application services. So within the applications and cross platform. We have three services offerings at the high level is an application services offering this data services and security services and we saw broad based growth across all of those three service offerings.
And of course application services also benefited from the Texas DIR deal. So you should expect that kind of level going forward now it'll moderate year on their interest.
Some of it is transactional business, but we are confident on this particular portfolio.
Yeah I would also say then.
We're pretty excited about this area you know we've got lots of investment that we're making in cloud native application development artificial intelligence machine learning a lot of our Iot.
Iot and edge computing services here so.
Yeah broad based and you know when you kind of look at the the.
The short and medium term future.
Pretty excited yes, so just to just to add the will be levered at about $97 million in Q1, we should be slightly in that particular range between say of 93% to 97 going forward.
There'll be some quarters without some quarters will be down based on based on the seasonality of the business.
Okay. That's super helpful. Thank you guys so much.
Thanks Pat.
Our next question comes from Amit <unk> from Evercore. Please go ahead with your question.
Thank you very much for taking my question I have two as well.
The sports maybe if I could just go back to the free cash flow discussion on Merrell a little bit.
Really good Smartwater performance the share maybe just walk me through given some of the commentary on Q2, how should we think about free cash flow conversion of the go forward in the we think Q2, the negative and the ramp up in the back half.
So overall I think as you know Amit there is an intense focus on the entire company around free cash flow.
And they often.
The repeat my CFO of Monterrey, and the company as I say revenues Vanity profit is sanity in cash as reality. The entire company has heard this hundreds of times since they joined the company number and I think we've made tremendous we have.
Tremendous opportunity to continue to drive improved cash flow and we are executing against the transformation program that we talked about.
On the last quarter that addresses the entire lifecycle of cash flow, including forecasting the cash flow the collections aspect of it credit terms the.
Payables and so on and so forth so I would say the.
I would say, we will deliver a significant increase in.
In cash flow from operations as well as free cash flow compared to fiscal 'twenty 'twenty for fiscal 'twenty to 'twenty, one should be much higher than fiscal 2020, and there'll be some quarters will be lower some quarters will be higher but I do believe what we are focused on is to driving higher and held the quality of earnings and I believe.
Cash flow from operations should be roughly about 80% to 85% of the operating income in the longer term. So that's what we are focused on.
Got it.
Just kind of go back or have you guys talk a little bit on the gross margin on line for the March quarter.
Year over year, I think the performance of sort of notable items of drop.
You guys have talked about this in the past the so I'd love to understand when you look at the gross margin contraction on the year over year basis, how much of that new tech investments rackspace as many of their business.
What's the mix.
The implications I would love to enter some of those two buckets and then should we feel comfortable the gross margins of trough for calendar 'twenty. One at this point. Thank you.
Yes, So let me let me start here by saying.
Our gross margin cement of not declining due to any competitive pricing on market pressures.
And the decline in gross margin is mainly a result of mix shift in our business driven by three factors very clearly first as you know our open stack business, which is the legacy business is declining as expected and this is the higher margin business. So there's an unfavorable mix impact.
Second we are Onboarding, new business with the initial low margins due to the higher mix of cloud infrastructure of the solutions as discussed earlier.
And also of the startup costs associated with it and third as customer migration from the older generation private cloud offerings and managed hosting two of your cloud platforms and in many cases, we are proactively managing this for our customers. So all of this has the near term dilutive impact on the gross margins because of the.
Older generation offerings for the Capex intensive and now as we drive and the it also had higher gross margins while the newer offerings that we are selling of Capex light. It is initially low gross margins, but as we upsell and higher value services. The gross margins improve as is shown in the earnings presentation with the <unk>.
Q1, 'twenty 'twenty cohort of customers.
So we believe our gross margins will stabilize within the next 12 to 18 months for two reasons as I mentioned during the during the prepared remarks first is the mix shift to high growth areas within the multi cloud segment will be largely complete and second as we discussed we are confident at the London expense strategy with the new customers that we on boarded.
It will drive higher margins in the installed base with that said I do expect even during this period of operating margins to remain in the mid to high teens in line with other best in class U S based <unk> service providers.
Does that help on that.
No that's really helpful. Omar Thank you.
Thanks, Amit our tech.
Our next question comes from Ashwin.
<unk> from Citi. Please go ahead with your question.
Yes.
Alright.
Hello can you hear me.
Yeah, Hey, excellent.
Okay.
I guess, Mike I wanted to ask about.
The.
The pipeline that Youre seeing in terms of the split between multi cloud apps versus the absent the platform.
The who are you beginning of the mix shift towards more apps and cross platform.
And then part of the Nathan's question.
The name of <unk>.
Perfect.
One of the world.
The impact.
Okay.
Okay.
Great. Thanks, Ashwin, Yeah, I'll start with that and then the more you can jump in as well. So let me give you just a little bit color on the pipeline as you had asked and then I'll talk about absent cross platform as it relates to the pipeline and then the elastic engineering and kind of what I see there for the future.
So ashwin pipeline strong healthy continues to build.
I did mentioned on the earnings call, we are being more selective on the deals we pursue so I'd also say it.
It's very high quality pipeline of higher margin deals. So excited about the pipeline is growing.
And I would say, it's broad based you know theirs.
Still a massive opportunity and multi cloud.
But we are seeing a lot of opportunity and apps and cross platform as well. So I would say you know really high in both areas.
I'm really excited about the the early signs of Rackspace elastic engineering right now.
So really we believe reinvented managed services for the cloud with Rackspace elastic engineering and whats happened here Ashwin. It's just really shortened our sales cycles on these deals which is great for future conversion of revenue.
Rackspace elastic engineering, one of the most successful new product launches in the history of the company.
Close many deals already closed another one in Europe over the weekend. So on three weeks of this offering being released signed deals in every region of new and existing customers. We've got nearly 100, new business opportunities identified for Rackspace elastic engineering, so excited about that one.
Excited about Rackspace services for Vmware cloud that was just released on Thursday of last week.
Oh, that's can be.
Tremendous as well pipeline for professional migration services.
You know is growing very strong also.
Got it and then a question I guess for our.
After for key the provided a very detailed.
Split across quarters in terms of the cadence that we should expect.
Did you say that anything has changed relative to what you had indicated back then.
In terms of.
The revenues and profits.
I think so thanks the screen for the for the question so our guidance for I'm not changed the guidance for the full year.
And let me let me give you let me start with the Big picture here and answer your question on the on the seasonality and the authorization of the guidance.
If you look at the Big picture and if you look at the first half profit in the total I'm just talking on the operating profit side, and then I'll come to the revenue side too.
If you look at the first half operating profit in total we are on pace with our original guidance, even with the lower expected total operating profit.
And then going forward, let me walk you through the four key drivers of improved second half profitability for us as they have indicated earlier the seasonal expense headwinds such as the U S payroll taxes that impacts are first half weighted.
Towards the first half and will subside in the second half of the year. Secondly, we are also making investments as we as I mentioned earlier and the business that are going to be.
Sort of moderate in the second half third as we have opex efficiency programs that will kick in and generate additional savings from the second half compared to the first half and finally, the second half revenue growth will be higher than the first half and will also drive incremental profit on this is all baked into our full year guidance. So in summary, Phil.
Good about the full year guidance and we expect to be within the guided range for revenue for operating profit as well as EPS and as you can see in the in the first half we are exceeding Italy on the revenue side, we are exceeding the midpoint of the guidance and so I think there is there is a little bit of an upward bias to the revenue compared to.
The midpoint of the revenue guidance for the full year.
That is true.
Our next question comes from Frank Louthan from Raymond James. Please go ahead with your question.
Great. Thank you walk us through some of the cost savings initiatives that youre putting into place.
And where should we see those.
Show up and then talk to us a little bit about churn what has that been running any you expect anything different.
The <unk> churn for the remainder of the year. Thanks.
Sure. So let me let me start with the question on the cost savings.
One of the things that I keep reminding people of <unk>.
First of all of the cost Takeouts and Opex efficiencies of all embedded within our guidance. So we would encourage you to follow the guidance from that perspective, but we approach cost initiatives on all the same with the approach sales rebuild the funnel of efficiency programs, which we regularly fill and can work and that's how we look at it and so.
Just specifically on Opex side, because I do believe there is the.
It means the opportunity on Opex to continue to drive efficiency. There are for areas that we are focused on first is more automation and streamlining processes.
I would say.
Frank This is technology, driven efficiency programs and productivity improvements that will come through automation that is the first one.
Second is leveraging the G&A as revenue grows and also the increasing the leverage of partner R&D the product development of cost that they put in us for list of market development. So we can leverage that given the the the real.
Relationship we have with the partners third is driving higher offshore mix.
Cost of the company I do believe that there is a huge opportunity there well we need to continue driving debt as we grow and the fourth is on the non labor expense side. There are various ways to optimize on non labor expenses to the supply chain management, we can optimize our real estate footprint. There are legal entities that were looking at on the world to see.
How do we optimize the legal entity the better management on the vendor side. So these are all of the cost savings initiatives that we have in the funnel debt will continue driving as the business model continues to transform and we will reinvest some of it back into the business as we have done to continue driving the topline growth and also investing.
And continuous automation and productivity improvements.
Yeah, Mark do you want me to start on GAAP lease. Please go ahead.
Hey, Frank it's Kevin.
Yeah. It's a great question on churn and I'll, just give you a little a little color here I would say.
The churn, particularly for the newer offerings is coming up.
Now I would say.
Very favorably certainly compared to <unk>.
My expectations and compared to.
Some of our.
The older offerings. So that's really really encouraging that the the new product offerings that were coming out are not just growing fast, but customers are keeping them and keeping them.
On a longer than certainly.
On this area of the business has performed better than I had expected. So that's that's really.
I think I.
I think very very positive.
This is obviously a revenue lever for us that we continue to spend a lot of time.
With our management system with our leaders.
With our customer success representatives in the field, we've got a close feedback mechanism into our new product development. So I feel like we've got a really good kind of system here to drive further benefits for the company.
Alright, great. Thank you very much.
Thanks Frank.
Our next question comes from James Breen from William Blair. Please go ahead with your question.
Thanks, you talked about bookings early on in the Q&A I was wondering.
Can you just give some color around how the bookings growth sort of translates to revenue growth given some of the land and expand.
As you think about the 6% year over year again sort of the double digit growth on the revenue share. Thanks.
Yeah, Thanks, James Hubbard.
How about I start on that one of our and then you're absolutely go ahead. Please yes, a little bit more color James on the.
The bookings.
First of all 6300 deals in the quarter very diversified bookings broad based.
The strength across geographies customer segments in the industry.
We're pleased with.
The additional rigor.
Sort of resulting in.
The expansion in sold margins for deals during the quarter. So that's that's good.
We see momentum in large deals with more than $1 million recurring revenue of those were up double digits in the year.
The other thing James we signed 25% more new logos than we did in last year's first quarter ex.
<unk> continued momentum in Midmarket and enterprise as well.
Two customer segments just to name a few wins, we talked about portion of my prepared remarks, Apria healthcare was of great win TSB bank in the U K Air Max and the Middle East.
So again broad based on and Midmarket and enterprise as well so pleased with the momentum.
Yeah, Mark do you want to cover Canada.
On the translation question sure I think listen I think the way I would like trends for this question.
Why are we confident about the double digit core revenue growth. This is to enable a non and we think about this is as I've mentioned earlier.
The strong year on year bookings for the past seven quarters. It is really elevated the baseline of our bookings.
Which captures incremental business as I mentioned earlier and when we take a look at the baseline. If you are on the baseline annual baseline of roughly about $1 billion. I think you should be able to compete for this is all incremental business that comes from new logos as well as new business from the existing customers which of it.
Should be able to drive double digit growth in revenue that is that's how the model works and second also we have a high mix of recurring type revenue, which drives good visibility into the future. So we really feel good about the revenue growth sustainable in 2021 and beyond the for example, the midpoint of of 2020 on revenue guidance indicates that.
14% for revenue growth up from our pro forma growth of about 9% last year. So that shows you that the.
The baseline has gone up and the liberated that we can continuously drive double digit growth into the into credit really one and beyond.
Yeah, I would add Mark would you agree are up against some of the sustainability of our revenue growth is hasnt been with since the last time.
Good.
Absolutely.
Great. Thanks.
Our next question comes from Matt Cabral from Credit Suisse. Please go ahead with your question.
Yeah. Thank you.
Kevin you called out some rehab deal profitability metrics in your prepared remarks, you kind of alluded to from a couple of times on the answers as well just wondering if you could expand a little bit more on on what the changes are that you've made in just the that's had any impact on how you think about forming sales quotas in the different metrics that you come from the sales force on.
Hey, Matt Great question. So yeah, absolutely you know always are looking to continue to raise the bar on sales performance.
The continued just to capitalize on this I think once in a generation of opportunity here and multi cloud so Matt what we did in the first quarter, particularly in the Americas region, we sort of realigned the team.
On to kind of ensure our sales professionals, our solution architects and all of our customer success team members were aligned particularly on this land and expand strategy. The women talking about a lot when kind of enhanced our regional structure to increase accountability.
We did and.
And also improve our customer sales coverage. So we did a lot of work on that.
We also adjusted our compensation plans to support all the goals that we had for this year, including selling higher margin deals.
So we're very pleased with kind of the early signs of how those changes have.
Now the materialized here on the results and in the pipeline and we expect these changes to help US continue both winning new logos and.
Accelerate the success of the Atlanta expand strategy.
Got it and then.
Thanks for all of the additional detail you guys gave on the multi cloud business I guess, so it's pretty clear from the chart that the margin on services is higher than infrastructure, but I'm curious if you can comment on just the magnitude of the spread between the two and I guess, what I'm really trying to get out of it if I take a step back the segue.
The Houston do profitability in the low 40 percents from a gross margin standpoint, and I'm just wondering as the services mix on public cloud and matures do you think you'll be able to get back to those levels or should we start thinking about maybe re basing do of different margin structure as the mix shifts more toward the cloud going forward.
So listen I think I'm not going to do.
Specific guidance here on on the margin on the gross margins.
But.
As I mentioned earlier debt. If you think of both of gross margin profile today, we are on the transient stage.
As we are having a major the mix shift going on in the business to high growth areas. As we are onboarding, new customers and also migrating existing customers. So you have both of those headwinds from a margin perspective. Initially we do believe that the gross margins will expand as the upsell and cross sell more services.
And you saw on Mac and one of the charts. The day provided which was taking the Q1 cohort of customers, where we were able to expand the gross margins by about 200 basis points plus while growing the the bookings support 30 plus percent right now I would want you guys to focus on operating margins.
<unk>, which we will continue to our favorite in the mid to high teens because of the all the operating leverage we have in the model as well as the ongoing opex efficiency programs. So just to give you. An example, why you should be focused on that and we do believe that the gross margins will stabilize.
The if you think about gross margins, let's see our corporate averages of mid Thirty's.
Today when.
When we sell incremental business, even if the gross margins and the incremental business in the current install base of say comes in below the corporate average, let's say I'll just make up a number of hits at 30% or so.
We would spend about maybe 5% to seven percentage points of that in incremental SG&A and.
And you will see at least shrinkage of really high points actually drop to the operating profit line.
So which means it is such a high operating leverage in the model creates an upward bias for your operating margin rate. That's how you should be seeing this business. So the currently Matt the way I think of all business for the next 12 to 18 months will be in the transient phase it will stabilize but ultimately we want to drive operating margins into the mid to high teens.
And as we start selling Upselling and cross selling more services, you should see upward bias on windows operating margins and operating margins.
Have a tendency to start of spending.
So our long term goal is to grow revenue growth profit faster than revenue. The only way you do that is by expanding your margins.
Thank you.
Our next question comes from Dan Perlin from RBC Capital markets. Please go ahead with your question.
Yes. Good evening this is actually Matt on for Dan.
Following up on the on the bookings question is there any way to kind of frame sort of amount of deals that you walked away from because of the new focus on corporate profitability and then I have follow up.
Yeah, I'll I'll start there.
In terms of the.
Of the more selective.
The kind of approach that we took Dan and.
Q1, it was really as a result of.
The success that we had onboarding all of the new logos in 2019 and 2020. So he knows the result of all of that success that we had we really have a strong foundation for growth for the next decade. So we spent quite a bit of time on that land and expand strategy as we kind of talked about.
And now really our focus on is on up leveling. The initial margin of the new deals that we run after to drive profitability.
A specific figure other than to say we.
We will book the good growth in bookings.
We get it at higher margins on our margins grew so we're actually very pleased with that result, and as EMR kind of mentioned R. R.
On.
Our propensity for.
You know confidence in revenue growth just continue to increase I think we did a really nice job balancing here and it was it was because of the success that we've had with with all the new logos and in the on boarding last year and the year before so we're on a really good spot here.
Okay, and then as a follow up what are you seeing in terms of like employee costs availability et cetera.
Yeah, So it's an interesting.
<unk> here, Dan employee cost as the Maher mentioned.
We've got.
Payroll taxes and things like that the.
That make that cost heavier in the first half of the year compared to the second half of the year.
One thing to keep in mind about our of businesses, we're really more of the technology and software driven business than a heavy labor business. So in terms of the availability of <unk>.
Resources and in people.
We're in a great really great situation there.
You May remember, Dan we talked about we select fewer than 2% of our job applicants to the company, so very well positioned in terms of <unk>.
Labor Force availability, we continue to expand our labor force globally.
We've got a great workforce management system.
Aided by the fact that the core of this business.
As you know very strong because rackspace fabric the software and the IP the that automates.
75 per cent of our multi cloud workloads still we believe that the highest automation of the industry. So.
Well positioned here as well.
I can just add.
Good.
I'm sorry.
I just wanted to add to Kevin's remarks the.
In the end of the day, we have a good management system then too.
To tightly manage our labor costs and non labor costs.
And we do that.
On a very regular basis and also a very good hiring engine.
As we ramp up for example of professional services, because we are seeing a lot of opportunity for growth in the migration services and field services in general so feeling good about how we manage the labor and non labor cost of this company.
Excellent. Thank you.
Thanks, Dan.
And our next question comes from Tencent Huang from Jpmorgan. Please go ahead with your question.
Hey, Thanks, Yeah, just sort of follow up on the being more selective.
On that you just made there just is it more of your.
Hey, Dave May ask it differently.
On the initial pricing or are you just being a little bit more.
Careful with some of the deals or are you just taking a view on finding clients that meet a certain land and expand threshold just just trying to make.
Make sure I understand that.
As best as possible. Thanks.
Hey, Tien tsin, Yeah, I'll start and Omar if you want out of if you can jump in a little bit of both really.
We do have.
On a land and expand strategy and as you know we've got a very rigorous rigorous management system. When we set off on a program we want to execute on it right at rack space we.
We get we get work done and we focus so so that certainly is a big part.
Landed at all of these new logos Amar mentioned here of the strategy. If you can't land then you can expand so we landed in its time to expand so.
What that does is that is really quite beneficial for us because as you add.
The new business to existing customers, you don't have to repeat the cost or.
New account managers and.
Some of the infrastructure that we've put in place on some of that more of kind of recurring costs a lot of that fixed cost is already there. So the.
On the beauty of expanding is that you can expand the higher margin. So.
And that was certainly part of it.
Part of it as well on I'll, let amar talked to it as kind of the rigor of that he's brought in and really looking at.
The margins that we were willing to accept on new deals and really kind of raising you know we have talked about up leveling and net margin.
For initial deals so really a combination of both of them is where we saw the lift in the sole margins in the first quarter and we're pretty proud of that.
Having said that as we as we as we mentioned I think we're doing a nice job of balancing that against just a tremendous opportunity in the market and.
Our our confidence in double digit revenue growth.
I think you've covered it very well, Kevin I think of.
Just summarize by saying at the end of the day and the real focus on return on investments. We are making there is a huge demand out there and we can afford to be selective and as you mentioned earlier that.
If there is new expansion opportunity I think there is no point of making initial investments in those accounts and so we take a look at whether expansion opportunities.
Where we can make investments so that we can generate the return.
Moving on those investments by selling higher value services in the future and some of this relationship can extend for a decade.
And we want to make sure that we are for.
<unk> focused on on selecting those accounts, where we have an opportunity for expansion for the loans.
On the longer term.
Yes, thanks for that I'm confident youre being thoughtful about it just as my quick follow up staying on bookings and on the last quarter of last year second quarter, yet of the Texas contract I think that was a.
Mid 30 near 40 million.
The number so should we at least for the second quarter should we think about growth more sequentially from from the first quarter of base I think I heard Kevin you say that.
Bookings for improving month to month to month in the quarter. So.
This is why I'm thinking maybe we should look at it sequentially here going into the second quarter, given the the difficult comp.
Yeah, Great Great question, Tien Tsin, I'll start on Marty feel free to jump in so.
I'll give you some color here you know.
We do not guide on bookings, but the very confident of pipeline I believe we've got a lot of runway to continue to grow revenue you have more difficult compares given some of the you know the state of Texas deal like you said last quarter well remember.
I'll just say, we continue to see momentum we did see.
Sequential moment of monthly.
So far this year.
And we're working hard in may as well.
On.
What are kind of it just kind of point you back to us.
Our bookings.
R R.
Our bookings kind of projections internally are incorporated in the guidance for revenue and committed to revenue guidance for the year feeling strong about that committed the double digit revenue growth in 2021 and beyond.
Thank you.
I would just add.
Again as Kevin said, we are not guiding on bookings, but we are also looking at the quality of the pipeline is for this clarity of the bookings.
It's not just the bookings dollar numbers, but in all.
On the revenue will get realized what's the margin profile on the bookings the length of the contracts so the.
The multiple metrics that we use to make sure that we have the right mix of bookings and the quality of bookings that we deliver.
And we feel good about it and I think the as I mentioned, if you're operating at the very high baseline of $4 billion of bookings on an annualized basis. Since this is all net incremental bookings.
It's not we're not putting renewals on it.
For any of those things contract extensions on it so since it's all incremental bookings it really helps to drive the double digit revenue growth. If you are maintaining of the $1 billion of Marquis shown so I feel really confident I've been here now for six months.
Still a student of the business would have been a lot of analysis on how bookings should translate to revenue what kind of bookings mix to the need to make sure that we deliver continued to deliver double digit revenue growth and the right margin profile and how we will be able to expand our margins in the future and more importantly continue to generate.
The increase in free cash flow for the company.
Yes, no I appreciate it's one metric of many that's important and the new sales, but just figured I'd ask understanding that the Texas deal was quite special last year. Thank you.
Oh yeah.
Yeah very true thank you.
And ladies and gentlemen, with that we'll conclude today's question and answer session I would like to turn the floor back over to Joe Crivelli for any closing remarks.
Thanks, that's all the time, we have for Q&A. So if you would if you have follow up questions or if you'd like to schedule time with management feel free to reach out to me IR at Rackspace.
Thanks, everyone for joining us today and have a great evening.
Ladies and gentlemen, with that we'll conclude today's conference. We do thank you for attending you may now disconnect your lines.