Q2 2021 Rackspace Technology Inc Earnings Call
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Meeting is being recorded.
Good afternoon, and welcome direct space Technologies second quarter 2021 earnings Conference call. As a reminder, today's call is being recorded.
Evan Jones, our Chief Executive Officer, and a more mellow Jouret, 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 slide two 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 Brac space Technology assumes no obligation to update the information presented on the call except as required by law.
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 SEC rules. We have provided a reconciliation of these measures to their respective and most directly comparable GAAP measures. These reconciliations are in the tables included in our earnings release and slides.
Orientation, both of which are available on our website.
After our prepared remarks, we will take your questions to queue up for questions. Please use the ask a question function in zoom portal I'll now turn the call over to Kevin.
Good afternoon, and thanks for joining us I'll discuss quarterly highlights and touch on some customer case studies and tomorrow will go into detail on the financial results.
As shown on slide five we delivered a solid second quarter revenue and non-GAAP earnings per share were at the high end of our prior guidance and non-GAAP operating profit exceeded the top end of our guidance.
Our new product launches from earlier this year Rackspace elastic engineering and Rackspace services for Vmware cloud, we're off to a good start with some early wins already on the board.
The turnaround in cash flow, resulting from our working capital and cash management transformation programs has been remarkable and this quarter, we began paying down debt with the repayment and retirement of our accounts receivable financing facility.
Our strong cash flow, we are now generating will enable us to continue to make progress on reducing our leverage ratio toward our stated targets turning to slide six total revenue was up 13% and core revenue was up 17% compared to last year's second quarter.
Non-GAAP operating profit was up 4% and non-GAAP EPS was up mid teens at 14% in line with revenue growth to.
New sales bookings in the second quarter were $258 million up 6% compared to the first quarter. This year, we are calibrating new sales bookings to drive both revenue growth and initial sold margin.
We believe approximately $1 billion of new sales bookings in 2021 will enable us to drive double digit revenue growth, while optimizing profitability and we're on track to meet that go with just over $500 million of bookings in the first half of the year.
On slide seven I want to touch on the transformation initiatives that we announced in late July.
Over the past six months, we've taken a hard look at every aspect of our business in light of the acceleration of digital transformation and continued migration of our business from mature products to growth products through.
Through this process a few things became very clear we.
We had to free up resources and continue to invest in new solutions, we had to expand our delivery capabilities to meet demand for those new solutions.
And we had an opportunity to help employees in our mature businesses developed high demand skills to meet needs and growing areas.
The actions, we announced in July accomplish all of these calls.
As part of this initiative, we are providing a rackers, including those impacted by the restructuring with the ability to reskill and retrain for hot new areas in cloud, including elastic engineering and cloud professional services.
Net net we believe the transformation and restructuring initiatives announced in July.
<unk> Rackspace technology extremely well to compete and win in the growing cloud technology solutions industry.
As I've done in past quarters, let me share. Some case studies of how Rackspace technology is helping customers do innovative things in the cloud.
On slide eight let's talk about pure storage, a 6 billion dollar market cap Tech company here.
Tier storage serves over 8000 customers with its storage as a service offering helping them run their operations seamlessly across multiple clouds.
As containers became more practical and a proven technology pure tech notice and look for a world class partner, who can move fast to build reference architectures on Google Anthos and kubernetes.
Partnership with Rackspace technology enabled pure hidden aggressive 90 day timeframe for initial product launch.
Pure storage now has referenced architectures that can confidently take prospective customers that deliver the benefits of leveraging pure storage on Google Anthos.
Slide nine is a case study from bright skies. The company, we acquired in Germany in the fourth quarter of 2020 right.
Bright skies recently helped Dol the international produce company transition its European operations from company owned data centers to the cloud.
Our solution included an entire service package, starting with the cloud readiness assessments, a feasibility study and budget plan and technical workshops to define the target architecture.
On an accelerated three months timeline, 100% of dole's virtual machines move to Microsoft Azure.
Day dull benefits from having this data in the cloud with less complexity increase productivity and most importantly reduced costs.
Palomar will take you through the financials Amar.
Thank you Kevin and thank you everyone for joining our call today.
11, recaps, our financial results for the quarter revenue was $744 million, an increase of 13% year over year.
Our core business grew 17% year over year to $698 million non.
Non-GAAP operating profit was $119 million up 4% year over year.
Non-GAAP operating margin was 16, 1% down one five percentage points year over year, but within our mid to high teens expected range.
And non-GAAP earnings per share was 24 cents up 4% from last year.
<unk> shows the company's revenue mix in the first quarter by segment and by geography.
Multi cloud continues to represent the vast majority of our revenue at 82% of the mix and it grew 17% year over year apps.
Apps and cross platform at 12% of total revenue grew 16% year over year driven by growth in application services, coupled with strength in our data and security services businesses.
Open stack, which is a legacy business declined 20% in line with expectations. This segment now represents only 6% of total revenue.
From a regional perspective Americas continues to represent 75% of our revenue and grew 12% year over year.
P. J grew at 39%, while EMEA grew 13% year over year.
As shown on slide 13, Q2 was another good quarter of cash flow.
GAAP cash from operations was 106 million, bringing first half cash from operations to $209 million.
Free cash flow defined as GAAP cash from operations minus cash Capex was $77 million up from 66 million in Q1.
This brings the total free cash flow for the first half to $143 million.
As expected total Capex in Q2 was 82 million and total capex intensity was 11%.
This was due to the renewal of large enterprise license agreements.
As a reminder, the accounting treatment for these renewables requires us to recognize Elis as capex in the period the deal is signed.
Cash Capex was $29 million and cash Capex intensity was focusing 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 $215 million and we had 375 million of unused revolving credit facility.
We paid down $56 million of debt, including $50 million repayment and termination of the accounts receivable financing facility.
On slide 14, we have our guidance for the third quarter for the third quarter, we expect revenue in the range of $7.50 million to $760 million.
Core revenue of $75 million to $715 million.
Non-GAAP operating profit of $118 million to $122 million non-GAAP earnings per share in the range of 23 to 25 cents non-GAAP other expenses of $50 million to $52 million non-GAAP tax expense rate of 26%.
And we expect non-GAAP weighted average shares of $230 million to $215 million.
For the fourth quarter, we expect revenue to grow approximately 2% sequentially.
And operating profit and EPS to be flat sequentially.
With that we'll take your questions. Joe. Please go ahead in Europe, the audience for Q&A.
Thanks, Omar as a reminder to ask a question. Please use the Q&A function in the zoom portal. Our tech team will promote you to a speaker on the webcast when you're up in the queue.
Our first question comes from Dan Perlin at RBC.
Hey, guys can you hear me, sorry, I want to make sure I'm on mute.
We can hear you Dan great. Thanks.
So I had a question you know you're targeting $1 billion of bookings for the for the full year that kind of sudden Jess.
Kind of absolute dollar flattish for the second half of the next two quarters.
Two questions I think one.
Can you just remind us how that is going to translate into double digit revenue growth for the second half of the year because it looks like the midpoint guidance looks like it's decelerated, a little bit third quarter fourth quarter.
And then secondly, you clearly have refined the strategy of what youre leading into that funnel. So maybe you can remind us.
Some of those changes and why that's beneficial to you guys a longer term. Thank you.
Sure, Let me get started here and Kevin can add some color here.
And when you take a look at our revenue growth revenue growth is driven by multiple factors.
We have a high base of recurring type revenue, which drives a good visibility into the future and thats, what we are factoring into our guidance secondary.
Second we are also executing revenue related initiatives that are less visible to the street, which are mainly focused on things like exploration of revenue utilization shown reduction in contract renewals.
And third of course is the bookings that you alluded to so we need to roughly deliver a $1 billion of bookings to continue driving double digit revenue growth in 'twenty, one and 'twenty two and if you look at our fiscal 'twenty one guidance, we called for a double digit growth in revenue now in Q3 based on our guidance our core revenue will grow.
Roughly about 13% and in in Q4, it will grow about 10 plus percent depending on what your model for your open stack business. So.
I think when you take a look at $1 billion you will see that the revenue growth continues I think we are looking at or below revenue growth for the full year and for the full year. You will expect you should expect us to continue delivering above 14.
14% growth, which is much higher than what we delivered last year.
Yeah, and I would just add to that Dan you know when you kind of look at the second half or bookings.
Would expect third quarter bookings to be.
Lighter than the $250 million run rate.
To get to that $1 billion total number that's because of seasonality and summer holidays in certain parts of the world, but then.
Go up again in Q4 to kind of balance out at that.
Sort of $1 billion number then that as Amar mentioned, we need to.
Sustain.
You know double digit revenue growth and that's what's built into our guidance as well.
And then in terms of.
Your second the second part of the question.
About okay, what kind of business you know, we're calibrating you know we basically been calibrating.
You know new business bookings along with initial sold margin and now it's been a really I think a positive development in the company.
And what that really.
Is doing is it's allowing us to be more selective there is a big market out there and we can be more selective in the and the actual deals that we take and you know as we continue to grow our professional services business, our cloud native application development development business.
Multi cloud managed services such as the elastic engineering that we recent recently released and those types of offerings. So that's kind of kind of where the focuses more anything else to add on that one I think you said it better than the focuses.
There's a lot of demand out there as we have said previously we want to focus on good quality bookings bookings that will continue driving.
Not just double digit revenue growth, but also more importantly, driving the right margin profile for the business and expansion opportunities within those accounts.
Yes excellent. Thank you guys.
Thanks, Dan Thanks, Dan.
Europe next and then Jim Breen.
Who are on deck.
Hum.
Hopefully I made it now can you guys hear me is terrific I. Appreciate the question here like format just on the on the margin side I figured I'd ask you know we've been focusing on the supply side of the equation I think a lot of the industry is talking about a war for talent and wage inflation I'm curious if you're seeing that now.
Much of that is a factor in some of your.
Your margin outlook I know you're in some hot areas around cloud and whatnot. So I just want to check if that is.
Our focus area, that's influencing some of your thinking on the margin versus EMEA things, we've talked about in the past.
Okay.
Do you want to start with that one or more on the margin and I'll pick up a little bit yeah.
The comment on the the war on talent absolutely so.
Tien Tsin I think though what we're seeing is when you look at our margin.
Gross margins have been declining.
And continues to do so purely because of the result of mix shift in our business.
And.
It has two components, we talked about one is the ongoing decline in our legacy open stack business, which we are no longer actively marketing and second is a mix shift within our multi club segments, where you're seeing from mature to growth products. So both products have a lower initial gross margins, but also have as you know lower capex and Opex intensity now I know your question was about.
How are the gross margins getting impacted because of the war on talent I think for us that is already baked into our guidance. We have made room in our in our model.
To continue to make investment in the business, but what youre seeing right now from a gross margin perspective, I want to give you guys more color and broader color on gross margins.
We are in a transition phase right now and we believe it will continue for another four to five quarters.
And during that time, we do expect our gross margins will bottom out in the low 30% reach and once the gross margins bottom out at the end of the transient phase, we expect to inflect with a favorable mix shift to a higher value of cloud services and we are already seeing some very good traction in our land and expand motion and that.
It gives us a lot of confidence that the margins can start expanding with high margin products. In fact, if you look at our second half 'twenty or first half 2021 quarter of customers, where we saw managed public cloud engagements. We are seeing a cumulative bookings are growing double digits and they sold gross margins have been expanding significantly.
And that gives us a confidence that this higher value expansion with higher value services will play out in the next four to five quarters now just to give you more color. Because this also leads into my guidance question have you more color on guidance later, but in Q3, we do expect gross margins in the $32, 5% to 33% range.
And we basically modeled it prudently for the reasons that I just mentioned.
Looking at the mix shift that is bring onto the business. We're onboarding more managed public cloud customers.
In fact, our new logos continue to grow we actually grew 21%.
The first half of 2021 compared to first half of 2020, which is that there's a massive acceleration in the public cloud.
And the Onboarding of customers and Thats also resulting in some gross margin decline. So we have factored that all into our model.
As we provided the guidance for the for the second half with specifically with regards to the gross margins because of talent I think that is that is already factored into our guidance at all.
And we plan to continue investing in the business into the high growth areas of the market. One more thing I will add in El Limn C. Deferred to Kevin is we are managing this mix shift and expect to deliver operating margins in the mid teens during this transition phase.
Because as you can see we announced a restructuring on July 21st.
We have.
Make sure that the opex structure aligns to the new gross margin profile of the business and that should continue to help us deliver this.
Mid teens operating margins in the next.
Our four to five quarters.
Seven onto the tangible common yes in terms of the war for.
No talent, yeah, we're definitely seeing an increase in activity kind of across our industry and across our customer.
Customers mentioned the same thing that.
You know, they're seeing lots of activity from their competitors in terms of the yeah. The war for talent I think we continue to be really well positioned to.
You know to be able to manage through that.
And we still.
You have to kind of look at our business, it's really a technology and automation driven business with fewer employees in the big systems integration companies and global managed services providers.
Yeah, we still except you know Oh.
Less than 2% of the applicants to the company.
<unk> said all that like Amar said, we we've taken investments here and we are monitoring this kind of industry wide.
Trend closely.
And being very proactive here.
Okay. Thanks for that and Amar you answered my operating margin and gross margin question as well so I'll cede the floor. Thank you.
Thanks, Tim.
Thanks, Tien tsin.
Jim Breen from William Blair Europe next and then.
Ramsey El <unk> from Barclays is on deck.
Yeah.
Yeah.
Great can you hear me yes.
Yes, we can hear you Jeff thanks.
Thanks, just so can you just give us some a little bit more color on the guidance for profitability. If you look at your full year guidance you gave last quarter is over $500 million.
And I'm not GAAP operating profit it seems like youre going to be a little bit below that so just wondering sort of what's changed.
Over the course of the last quarter. So and then just any thoughts on the App Cross platform revenue was down sequentially this quarter.
Just can you just talk about the Lumpiness there. Thanks, Yeah sure Jim So let me start with the guidance question first and I know I did answer some of it in my previous answer, but let me start with the revenue guidance versus what you've seen the revenue guidance as we expect continued sequential growth in our revenue in both Q3 is less.
Q4.
And a double digit core revenue growth purposes, particularly one that's what we have basically baked into our revenue guidance for revenue guidance for.
For the full year is roughly.
At the midpoint of the overall guidance for fiscal 2021.
Now what do you see enough profit guidance is appropriate guidance reflects lower gross margins in the second half 'twenty one.
As Ed and I may be repeating this but I want to make sure that we give you more transparency into this is we are seeing a mix shift happening the business that's impacting our gross margins I talked about the ongoing decline in the legacy open stack business, which we are no longer actively marketing. The second is the mix shift within Ams.
As the cloud segment from mature business, two HIFU business that we've talked about and mainly managed public cloud as I mentioned, we are onboarding, a large number of retail customers and this transition is happening very rapidly with accelerated growth in public cloud and could see that from the announcements of the <unk>.
<unk> announcements by hyper cloud operators. So what we've done. This we are prudently model gross margins in the second half and the 32% to 33% range.
Also with the restructuring that we announced on July 21, we have aligned our opex to this new gross margin profile to continue delivering operating margins in the mid teens in the second half of 'twenty, one while we continue to make investments in growth offerings and local market definition earlier. So all this is baked into our guidance now.
Now if you take the if I just have two extended a little bit and go forward and give you more color related next four to five quarters. We believe that we are in this transition phase with this mix shift that is happening in the business and our projections indicate that will this will continue for the next four to five quarters and during this challenging challenging phase.
We do expect our gross margins to bottom out in the low 30% and by the end of fiscal 'twenty to reduce expected to start inflicting with a favorable mix shift to higher cloud all higher value cloud services for three reasons, one our legacy open stack product.
Is becoming a smaller and smaller part of our revenue mix is already down to 6% of our revenue secondaries, we expect the mix shift in multi cloud to be largely complete.
And it's expected to be more than 80% of the mix and food is more meaningful expansion in our newer accounts with higher margin services and this expansion is typically take some time.
But this is a long term play for us. So those are few reasons why we believe that it will stabilize and then we have an inflection point points starting the end of fiscal 2022.
Does that help them.
Yeah.
Yeah, that's great and then just on the apps and cross platform side, you saw the revenue down a little bit this quarter sure. Yes, what are your thoughts are there.
Right so in Q2.
When you look at our absolute cross platform. It did grow about 16% year on year. So it was a healthy growth, but it was down about 5% sequentially.
And also as a part of our restructuring we did exit a small line of business in application services that we.
We figure that's non strategic for us. So we evaluated we continuously evaluate our portfolio and there was a non strategic parcel part of the business that we exited and this explains most of the sequential decrease in absolute cross platform.
Going from say Q1 to Q2 now we think that this segment will continue to deliver revenue in the 90% to $93 million range in Q3, and Q4 and continue to grow.
At a healthy clip.
Yes.
Thanks, Jim.
Our next question comes from Ramsey El <unk> with Barclays.
Okay.
Ramsey are you there.
Hum.
I think we've lost Ramsey so.
There are no further questions in the queue. So we'll that will oh call. It a wrap.
And then if you have follow up questions you can reach out to me after the fact at IR.
At Rackspace Dot com and have a good evening.
Yes.
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