Q4 2021 Rackspace Technology Inc Earnings Call
<unk> market for cloud data and analytics is large and growing rapidly with expectations that spend in this area will increase significantly for the next several years.
So on slide eight.
We also announced in January that we've acquired just analytics, a leading provider of cloud based data analytics and artificial intelligence services and the PGA region.
And a gold partner for Microsoft Azure.
Founded in 2011, just analytics has grown from a small startup company to 100 employees with headquarters in Singapore, and 65 employees in Vietnam and India.
Just analytics helps customers design and create scalable data pipelines using its proprietary data platform guzzle.
That coupled with cloud based data and analytics services that transform data into insights.
Gives customers a unified view of their information assets.
Data services aligned with our intent to build and innovate our public cloud business and help our customers move up the stack.
Acquiring a market leading company like just analytics as a fast way to build our capabilities and regional presence.
This acquisition is similar to the successful bright skies tuck in acquisition, we completed in Q4 2020.
In that it strengthens both our capabilities and geographic presence.
On slide nine.
In addition to the release of our first ESG report during the fourth quarter, we continue to improve our profile from an ESG standpoint.
For the first time, we made our carbon disclosure project or CDP environmental disclosures accessible to investors.
This will allow ESG investors to monitor and track our progress as we continued to March towards our goal of a carbon neutral profile five years ahead of the Paris accord deadline.
We continue to win accolades for our record culture.
In the fourth quarter, we were named a top workplace for the next generation of talent in the Nextgen 100 survey.
These differentiators matter and the current war for talent and we believe this one in particular will help and recruiting with millennials and Gen Z or <unk>.
We were also named the number two best place to work and in Mexico by Great place to work Mexico.
From a governance standpoint, we added an additional independent director Shashank <unk> to our board.
Shenk, who is the CEO of global logic has over 30 years of technology services industry experience and brings a passion for technology and innovation to our company.
He will bring a truly global perspective, deep industry expertise and cloud and digital transformation experience.
As I've done in past quarters, I'd like to share some case studies, demonstrating the value that rackspace technology delivers for its customers.
On slide 10, we have a case study of a customer that fits well with our ESG sustainability initiatives.
Both the grids mobile micro grids provide power in remote locations.
But their customer facing applications also provides life emissions tracking carbon intensity and ESG reporting to users on a centralized database.
Ultra grid needed a complete solution that incorporated machine learning AI, Iot and edge computing, along with the portal through which clients can access and track real time operations and emissions data.
They tap into Rackspace technologies expertise for cloud native development Internet of things and security to build the both the grid AI ecosystem portal.
This entire project, including deployment of remote Iot technology building, the entire cloud infrastructure and creating the application was completed in less than a year.
And as a result, both the grid was able to launch its service and enhance its product offering quicker than had initially been predicted.
I will note that in December volt grid completed a $100 million capital raised funded by ESG investors, such as Canada pension plan investment Board Longbow Capital pilot company and Walter Ventures.
On slide 11.
<unk> is a global provider of SaaS software, that's considered to be a unit corn in the eastern European market.
<unk> needed to scale at CRM sales and marketing platform to meet the requirements of its global customer base, especially those outside of the EU.
By deploying Rackspace private cloud solutions pipe drive was able to minimize customer response times, while addressing the EU stringent security compliance and data sovereignty requirements.
The addition of a private cloud environment type drives overall output print also reduced business risks in the unlikely event of a data center or connectivity issues.
Furthermore, we have one additional follow on business from pipe drive and we will be expanding its AWS public cloud environment as our customers' needs continue to grow.
<unk> will take you through the financials.
Mark.
Thank you Kevin and thank you everyone for joining our country.
Slide 13, recaps, our financial results for the fourth quarter.
Revenue was 777 million, a 9% year over year increase.
Core revenue grew 11% year over year to $734 million.
non-GAAP operating profit was $122 million non-GAAP operating margin was 16% and non-GAAP earnings per share was 25.
All of which were on the high end of our range of expectations for the quarter.
On slide 14, you'll see our financial results for the full year.
Revenue was 3 billion up 11% from 2020 coolers.
<unk> revenue grew 14% for the year.
non-GAAP operating profit was 484 million and non-GAAP operating margin was 16% for the year.
non-GAAP earnings per share was <unk> 90, <unk> up 17% compared to fiscal 2020.
As shown on slide 15, the actions we took to improve cash flow in 2021 delivered strong results all throughout the year.
In the fourth quarter operating cash flow was $60 million and free cash flow was $38 million.
Both of these metrics were negative in last year's fourth quarter.
For the full year operating cash flow nearly tripled.
Free cash flow, which was essentially zero in 2020 accelerated to $262 million in 2021.
In addition, we continued to make progress to reduce the capex intensity of the business.
Total capex intensity was down a point from 8% last year to 7% this year and total capital expenditures were down 10% compared to 2020.
As a result of the strong cash flow, we ended the year with $273 million of cash on the balance sheet and $648 million of total liquidity.
On slide 16, I want to wrap up the beta we have been providing on our 2020 managed public cloud cohorts.
This data continues to validate the success of our land and expand strategy.
With every quarterly call of 2020 managed public cloud customers, we have seen consistent cumulative bookings growth.
Representing fall on sales to these customers.
Importantly, these follow on sales are expanding the overall cumulative.
<unk> gross margins with these customers.
In fact, the oral reach for the solid gross margin expansion for these cohorts has increased to 300 to 500 basis points from 200 to 400 basis points previously reported.
So while Rackspace technologies corporate gross margins have been diluted by the mixed shift to managed public cloud over the past two years.
We believe that as we continued to successfully cross sell and upsell higher margin services to these customers our gross margins will stabilize.
Slide 17 shows the progression of our multi cloud revenues two good businesses for the full year 2021.
Multi cloud represents the vast majority of our revenue at 81% of the mix and it grew 14% year over year.
Absent cross platform at 13% of total revenue grew 12% year over year driven by growth in our application data and security services businesses.
The 12% growth includes the negative impact of the CRM business, we de emphasized earlier this year.
Open stack, which is our legacy business declined 20% and this segment represented only 6% of total revenue in 2021.
Good market offerings are now in the 75% to 80% range of the multi cloud segment and are growing over 30% year over year.
On slide 18, we have our guidance for the first quarter.
We expect total revenue in the range of $768 million to $778 million grew revenue in the range of 737 $38 million non-GAAP operating profit of $1 8 million to $112 million and non-GAAP EPS of 'twenty to 'twenty two.
Note that we are gearing up for the Onboarding of the BT business in the first half of 2022.
However, we do not expect revenue to begin ramping until the second quarter.
And there will be expenses ahead of revenue as we prepare for the transition and transformation of BT customers to Rackspace technology.
To help our investors model our business going forward, we will be providing specific quarterly guidance and color on the full year.
In fiscal 2022, we expect revenue growth to accelerate through the year and anticipate double digit revenue growth in our core business for the full year.
The cloud market backdrop, and the BT deal, obviously point to a solid revenue growth trajectory and Forex This technology.
The cloud market is taking off.
As Kevin noted AWS sees the cloud market at 5% to 15% penetrated.
Now it is at or past the point of the ESCO, where markets cross the chasm and accelerate.
We spent much of the last year working on various priorities and initiatives for growth.
Operational efficiencies and the right mix of business.
We plan for solid growth entering 2022, but the demand we are actually seeing is even stronger and is accelerating even faster.
And so we continue working through a number of strategic choices in particular, how quickly can we ramp the recently won BT deal and drive cloud transformation for Bt's customers.
The mix of land versus expand activity at the time of accelerating market growth.
And investments to build capabilities to capture long term growth opportunities.
We have multiple paths forward and are in the process of evaluating several important strategic decisions.
We plan to provide more details on our strategy and investments along with the three to five year financial plan later this year.
In closing we are pleased with our results and accomplishments in 2021.
We delivered solid double digit core revenue growth strong mid teens operating margins and double digit EPS growth, while significantly improving the cash generating ability of our business.
More importantly, we did this while continuing to execute our pivot from mature two good businesses with multi cloud and bring our higher margin services attach driving solid gross margins to the highest level in two years, reducing our cost to serve with significant change in our global workforce footprint and investing in new product.
Offerings and service delivery.
All told we believe 2021 was a successful year and we look forward to 2022 and beyond.
With that we'll take your questions. Joe. Please go ahead and drop the audience for Q&A.
Thanks, Omar as a reminder to ask a question. Please use the Q&A function and the <unk> portal our tech team will promote a speaker on the webcast when youre up in the queue.
First question comes from Ramsey, El <unk> with Barclays Capital and Ashwin sure Vikar Europe next.
Hi, Thanks for taking my questions, Hi, gentlemen, I wanted to ask about.
<unk>.
The deep <unk>.
Q1 guidance and the core revenue growth it looks like it slowed down a little bit maybe eight 4% is where we calculated it out a little bit slower than we anticipated can you give us your updated thoughts on the sort of normalized growth profile of the business I know, we can see there.
Full year guide at this point, but I'm just curious in terms of has your thinking changed since the IPO in terms of the normalized kind of core growth profile of the business.
So thanks, Tim let.
Let me just let me just start with the Q1 guidance and give some color on the Q1 guidance and I will also give you a color on the full year.
As I mentioned in my prepared remarks, we believe that the full year the growth trajectory, we will accelerate as we go to the full year. So when you look at our Q1 guidance specifically.
The revenue is going down sequentially from Q4 to Q1 and this is as a result of typical seasonality Ramsey.
First in a multi cloud business volumes are the highest in calendar Q4 in certain verticals like we have what it goes like gaming retail and financial services and this is typically normalizes in calendar Q1.
Second as I, probably mentioned this even last year. There is always some yearend budget flush and our enterprise and mid market customers and these two factors typically makes Q4, the strongest revenue quarter of the year. So we are off to a strong revenue quarter. In fact, we saw similar seasonality from Q4 2020 to Q1 2021.
And this seasonal impact in Q1 of last year cover was masked by the ramping of the large enterprise deals that we signed in the second half of 2020.
Just to stay out of that Q1 guidance is in line with the typical seasonality.
Now, let me give you some color on.
You talked about revenue deceleration in Q1.
Couple of things that I wanted to point out yet right. So we have been consistently growing double digits. There are two things. One is if you look at our absolute cost Satcom business I'd say, it's up against some very tough compares in Q1 for example, <unk> deals are revenue lapped in Q3 of fiscal 2021.
And also remember we deemphasize.
<unk> business, starting Q2 of fiscal 2021, so those two things are sort of a headwind from a year on year growth perspective for the absolute cross platform business. The second aspect of it is around our multi cloud segment. This is growing really double digits, but.
But we do have some mixed dynamics within the segment to empty. If you look at the growth business within the multi cloud is growing solid double digits. Although it also up against some tougher compares but we feel that given the market momentum that business will continue to grow but the mature business within that mix is declining and it has negatively impacted the overall growth.
Right of a multi cloud segment.
But it's also important to note when you look at the slide that I presented.
The growth business is now more than 75% of the multi cloud revenue mix and so we're sort of nearing an inflection point in that.
So looking ahead into fiscal 2022, we do anticipate that the core revenue growth to accelerate through the year and we do expect double digit core revenue growth for the year and now let me give you some more color on this and why we feel confident about one is we did see strong bookings momentum in Q4 Q4.
Was one of our record quarter.
From a bookings perspective, even excluding the BTG deal we saw strong bookings towards the end of the quarter in December compared to let's say over a longer and it takes time for the bookings to realize into revenue. It takes about two to four months.
Number two ramping of the BG deal that I talked about in my prepared remarks number three we saw continued strong growth in managed public felt supported by the rapid growth in the <unk> market and Youre seeing that in all of the.
Printed by our Hyperscale us all posting about 35% to 45% growth.
And then before I also want to point out that our growth will accelerate in our absolute cross platform with strength in both data services as less cloud native applications. Our data services business today is small, but it has been growing consistently high double digits. We then also added through just analytics we.
<unk> added more capability in this space and be able to expand it globally. So I would say in summary, we do believe that our core revenue of all of those sort of slowing down from a growth perspective, it's temporary and we expect the growth rates to improve in the later half of the year.
Yes.
That's very very helpful. Thank you.
One follow up for me I was just wondering if you could give us an update on your view of the competitive environment out there. It seems like the demand environment is pretty robust.
Curious if youre seeing any intensification of competition or any other factors that could impact your impair your ability to kind of accelerate that core growth.
Yes, Hey, Ramsey, it's Kevin Jonas I'll I'll take that one so what I'll do I'll give you my impressions of this from a market perspective, and then I'll tell you a little bit about what I'm hearing.
Yeah from our customers and our partners so yeah from a market perspective, yes.
Yes, we are a pure play on the cloud one of the fastest growing segments of tech.
And as we talked about in our prepared remarks that market is absolutely taking off okay.
<unk> the cloud market at $5, 15% penetrated and this is at or past the point on the S curve, where yes markets really crossed the chasm and accelerate so great potential we see in multi cloud both on the private outside and on public outside.
The thing about the demand environment for MTS in the multi cloud workloads that we have.
We've migrated they are going up.
Difficultly, so all the workloads that.
We migrated over we're seeing growth there and then also additional migration work is.
Accelerating.
And then some of the demand that we have in our emerging areas like data services cloud native apps.
We're planning to make additional investments in 2022, because we see those areas accelerating so in terms of demand environment.
We continue to feel very good about it and we're really well positioned in the SaaS growing cloud market now when I talk to customers I've traveled all over the world talking to customers in 2021.
Lots of milestones in 2022, so far and regardless of industry ramps I'm hearing the same thing from Ceos are customer CEO say, they want to transform to the cloud. It's one of their top priorities. They have to do it they've got a mandate from the board.
But these customers need our help because they don't have the people to do it in house. They don't have the technology to manage multi cloud or the processes to do it. So we're really seeing strength across all the industries, we serve public sector Airlines healthcare automotive financial services you name it.
Even actually even sophisticated tech companies need our help one of our large deals in Q4 was to help a major IFC customer migrates to multiple cloud platforms, including AWS and Azure.
So as our go to market approach continues to evolve we think theres, even more industries are all open up to us.
And then ill end with our partners right I mean.
We've got some amazing partners and if I just focus on the public cloud Hyperscale is for a minute you also on the West coast of the U S last week meeting with them. So it's really top of mind.
We've got thousands of joint customers with the Hyperscale is right we sell together.
We're lined up with our go to market teams our sales teams all over the world and if you just look at the Hyperscale there's growth they added over $30 billion of new revenue in 2021. They are expected to add nearly $50 billion of new revenue on top of that this year. So that's accelerated growth even off a very large base.
An environment remains very strong we continue to enjoy a secular tailwind in the business.
At a meeting with Ceos of our other partners such as Vmware cloud player data dog Snowflake and others, we're right there with them.
Long side, they're amazing technology, and we're reinventing the future cloud services. So.
And are they kind of wrap up here demand environment strong markets strong customers have a mandate to move to the cloud and we're there to service this unprecedented demand.
Alright, Thanks, Brian Thank.
Thank you.
Our next question comes from Ashwin, <unk> with Citi Research and <unk> on a year on deck.
Okay.
Okay, Thanks, Joe Hi, Kevin Hi.
Mark.
Hey.
So you guys had previously said you needed to achieve a billion in bookings in 'twenty, one to get double digit.
Organic core revenue growth in 'twenty, two so check.
The box on both of those.
Could you clarify if the double digit growth expectation that you mentioned in 'twenty two.
Is it reliant on additional.
22 bookings performance or is it.
Tom in the bag, but is it sort of done.
So is there a quarter you sort of need to hit for bookings in 'twenty two to continue double digit beyond.
Beyond 'twenty one.
I will start the Sri and thanks for your question and Kevin will jump in with other additional comments so absolutely, though I think we did say at the outset.
Outset of the year that if we get to $1 billion of bookings plus or minus we should be able to continue.
We were double digit core revenue growth and that's that's.
That's the reason we are confident of hitting the double digit core revenue growth in fiscal 'twenty two as the growth will accelerate.
The year.
<unk> to look the beauty of this business. The positive as you know you have a lot of recurring revenue base in this business. So we expect a revenue base could be anywhere between 85% to 90% recurring base, which stated that if it just to the mat to offsetting some of that with some bookings et cetera, you really need to both celebrate available.
About 15% of that revenue every year right. So.
That gives us confidence that since you're starting with a good backlog, we can go and hit the double digit core revenue growth for the focus for 2020.
Our next question is a very important one and this is where I think we as management team. We are looking at the market opportunity for us the market opportunity is just its rapidly growing.
And we believe that if we can continue to deliver the $1 billion of.
<unk> bookings, we can continue to deliver double digit core revenue growth in fiscal 'twenty, three and beyond we can do better than that shrink and thats valuable strategic choices and decisions to mean for US right. So we wanted to push the pedal down and make certain investments because the market is really exploding in data services as an example, and.
Cloud native applications can vehicle.
Deliver that bookings growth so that we can create a good backlog going into fiscal 'twenty. Three so that those are the those are some of the decision speeds continue to make it's a dynamic market and we want to make sure that we make a very deliberate and thoughtful decisions as we go through this process.
Got it got it.
And on the strategic choice.
One of the strategic choices is.
Is the type of clients you pursue.
Obviously, your science BT, which is a large client when I look at the just analytics client base. Some of the clients mentioned are also large.
But you do have.
Sort of a preference for mid market as you've indicated in the past so could you sort of.
Clarify that push pull and particularly the impact it can have on something you did well this year, which was to turn that out on the cash flow front and capital intensity.
Yes, so I think I will stop here and see if I can address this issue and that's a great question actually.
Our model has always been to move towards more capital light model. If you look at our Capex intensity and Capex intensity has actually gone down significantly in the last few years and we believe our capex intensity to be between say, a 5% to 7% in fiscal 'twenty two.
<unk> from.
The 827% to between 5% of the central roughly in the midpoint at that 6% or so.
We did a lot of things this year as I mentioned in my prepared remarks first is pivoted the business to growth site of a mature. So you saw the mix of mature business now is less than 25% of the total mix. This is outside of the legacy Open-stack business I'm talking both as a mid Atlantic Gulf segment, the mix is less than 25.
So we pushed forward on the growth side, we very selectively landed deals because which was important for us to re expand.
In the accounts that we land. So we can do about it and that was also very thoughtful strategy and.
<unk> was one of our customers, but you can also expect that as an expansion from lending because this is a major deal that.
Atlanta, and we've been working on it for more than a year.
So I think what you should expect US as continued on this path continuing to push forward into the growth areas of the business reached on the cloud side at the same time, we have also launched new offerings in a private cloud.
Including Rackspace services for Vmware, which is which is a multi tenant offering which gives the same flexibility to the customer that they would get in a public cloud environment. We went to when Dr. White spaces like data freedoms by making those investments early on we want to expand those offerings again.
You should expect us to really play a part in the multi cloud segment, both on the public cloud as well as the private club side, Yes, I think that's really well said and I'll just add a few points here Ashwin I think.
About mid market enterprise I think is a good one we consider to see.
Continue to see a lot of opportunity in the mid market. We think that's a really good sweet spot for us.
As you noted we're having success in the enterprise market, we only been calling on the enterprise market for the last several years.
We won the state of Texas deal there was a poor Steele we talked about.
On the last earnings call and then the BG deal and the <unk> is interesting because it brings with it bt's enterprise customers, which will further accelerate our capabilities in enterprise, but we'll be selective debt right. We want to pick our spots and I think we've proven because of all the competitive advantages we've got.
But we can win there so multi cloud.
Particularly in enterprise and mid market is a huge area of focus for us.
Alright, Thanks Ashwin. Thank you. Thanks.
Thanks.
And our next question comes from Amit <unk> with Evercore, ISI, and Tien Tsin Huang Youre on deck.
Yeah.
Perfect. Thanks for taking my question I guess I wanted to go back to the box, what our guide a bit.
I guess, if I look at it on a sequential basis, you're guiding revenues to be flat, maybe down a few million dollars, but the EPS guidance down for a high teens as a percent a sequence to be down can you just talk about what is driving the drop in EPS on a sequential basis.
The BP deal from a cost perspective that you would like to call out that would be helpful as well.
Sure.
Thanks for the question. So there are two there are two drivers one is the sequential revenue decline that is happening.
From Q4 to Q1 that I explained earlier, so that shows as a headwind and secondly in our business. We also see cost go up fringe benefit <unk> from calendar Q4 to Q1.
And this happens every every every every year.
Especially because we have a large footprint.
And in the U S and also we are making some incremental investments.
In line with what we had mentioned.
All the way back in Q3 of last year that we will continue to make investments in go to market et cetera. So those are the three factors that are resulting in a sequential decline in operating profit and also EPS.
Got it that's really helpful. And then maybe just wanted to go back to the Capex and free cash flow discussion you've had a really good calendar 'twenty one on free cash flow how should we think about any markers of metrics around the capex and free cash flow as I think about calendar 'twenty. Thank you yes.
Yes sure so.
So as I've mentioned before we are very focused on generating cash for this company and we have proven that we went from $117 million of cash flow from operations zero free cash flow up to $371 million with significantly improved it Amit as you know very good working capital management across the company.
I believe that.
We should be tracking our operating cash flow as about maybe it was 70% of our operating profit at 70% of operating.
Profit conversion profit and cash flow that is a good metric to go with right now keep in mind that there will be seasonal impact during the year.
Q1, and Q4 are typically lower cash flow quarters for us for example in Q Q1.
There is this bonus payment.
The annual bonus payout and in Q4, we had some big cash prepayments to some of our big vendors. So typically Q1 and Q4 are lower Q2, and Q3 are relatively stronger from a cash flow perspective, now let me give you some color on the free cash flow because you asked me. This question as I mentioned eschmann in my response to Michigan.
Our Capex intensity continues to go down and if you recall at the beginning of the year in fiscal 'twenty, one I guided to 7% to 9% Capex intensity. So capex as a percentage of revenue we landed about six 7% at the low end of that page I believe will be between 5% to 7% capex intensity in fiscal <unk>.
2022, right. So if you take this models, let's say, 70% of our operating profit turning around.
And to cash flow from operations.
Capex intensity remained within 5% to 7% you will see our free cash flow margin will be continue to remain healthy. So just as a reference we went from zero percent free cash flow margins in 2022, 9% in fiscal 2021 and given the.
Part of our guidance, we are providing here it will be lower than the 9%, but it will be still heavily.
Perfect. Thank you.
Thomas.
And along with J P Morgan Europe , and Keith Bachman Youre on deck.
Hey, Thanks for taking my question. This is plenty sitting in for Tenzing.
And Tim I said gross margins on some of the high growth multi cloud revenue.
You are generating and can that segment margins to be at least flat on an year on year basis. This year.
So let me let me make sure.
When we are talking about.
Our higher margin segments within multi cloud.
And what the follow on sales for this or I am talking about the auto.
And then like the high growth like that 75 target.
Got it and the effect of cloud business that grew up with any debt, yes, so listen I think at all.
On the mix of business.
At this point in time, given our internal plans, we are assuming that the mix of business amongst the same infrastructure and services within that portfolio. So we expect gross margins to be in that particular business would've been sort of stable, but again it depends on the on the on the mix of infrastructure and services. So that mix can change if we decide.
To go after more lending.
Because there's a land grab if a counseling on so if you decide to push forward and acquire more accounts that mix might change.
Gotcha. Thank you.
Thanks <unk> next question comes from Keith Bachman, with Piedmont, and Frank Louthan Yandex.
Keith are you there.
Yeah.
Alright, let's circle back to Keith.
And we promote Frank Louthan to speaker please.
Alright, great. Thank you maybe I missed this but can.
Can you quantify how much the BTG deal was in the bookings for the quarter that'd be great and then where are we on the offshoring with the labor.
In terms of sort of the percentage of the of the shift in the total cost savings to date and when do you think that'll be completed thanks.
Hey, Frank it's Kevin here, So I'll start with some color on the <unk> deal. So BT deal was the largest deal in company history were not disclosing the exact dollar amount, but I'll I'll give you a bit of detail here.
It brings significant value to both parties and could be worth several hundred million dollars over multiple years and we're looking at migrating a large number of beachy enterprise customers to Rackspace technology.
This deal gives us the opportunity to expand our presence in 180 countries and we're excited about this.
As Bt's hybrid cloud offerings will be based on the rack space private cloud solution, namely Rackspace services for Vmware cloud right.
That's a new offering we introduced last year.
And this deal validates several things for us it validates our new private cloud offering <unk> services for Vmware cloud.
Validates our multi cloud strategy our growth potential in the enterprise market as I mentioned earlier, our geographic expansion strategy and I think this deal also shows our competitive advantages against some of the largest competitors in the industry. So so were pleased and excited about our relationship with BT.
Marty you want to talk about offshore.
Yes, sure I think to Frank.
When we announced the restructuring program mid of next year last year.
One of the key tenants of the program was to change our footprint.
Just take a look at our offshore onshore mix at the end of fiscal 'twenty, there are less than about 25% offshore.
We improved that by more than 20 points exiting fiscal 2021 .
This was a significant change in our offshore mix and we expect by the middle of fiscal 2022 to be closer to 50% of that mix now.
Now within that this is across the company. So it's not just the delivery organization our operations.
Is this across G&A functions. So we did a massive heavy lifting in the last couple of quarters.
I'll just add to that I am pleased with.
The transformation.
That we're undertaking at the company and the progress. So far is still more to do of course, Frank I'm also very pleased with the quality of delivery that we're getting from our onshore centers and our offshore centers and how we're working together.
Around the around the clock.
For customers one of the things that the BT customer mentioned as one of the reasons. They selected us because of our reputation for service quality and this fanatical customer experience that we're known for all over the world. So you know as we transform the business.
Look daily at Citi.
Statistics regarding our customer service quality and we continue to be amongst the best there. So we're pleased with that.
Alright, great. Thank you very much.
Alright.
Back to Keith Bachman from BMO, and then we'll wrap things up with Bryan Keane from Deutsche Bank.
Hi can you hear me Okay. Yes, we can hear you now. Thank you okay, yeah, sorry, I'm not sure what happened last time, but I wanted to maybe I wanted to go back to margins for a second.
And you are guiding operating margins to call at 14, 2%, which is down.
Well over 200 basis points year over year.
And you mentioned some incremental.
BT expense, but I was wondering if you could carve it out and more specifically and more broadly you've alluded to choices and so.
As you look at calendar year 'twenty two so I was hoping you could give some context about how you're thinking about margins in 'twenty two in the past what you've said is gross margins will experience some pressure because of mix through I think sort of the December the September December quarter, but operating margins.
We'll stay flattish.
In these ranges certainly doesn't seem like Q1 margins expect to be flattish. So I was just wondering if you could review.
If not specific numbers for the <unk> 'twenty. Two then philosophically, how we should be thinking about margins.
Yes, so thanks Keith.
So we'll keep based argue color on the on the gross margins as well as the operating margins for the year.
And again with southern assumption CSO I'll see if I can give you more transparency and clarity on the margin profile of the business as we look to fiscal 'twenty two so.
Based on our current internal plan that we're working with.
We expect gross margins to stabilize around 30% in fiscal 2022.
Our operating margins to be in the range of 14% to 15% and I'll give more color on that shortly okay. Now our internal plan assumes keeps a certain mix of business.
It also assumes certain level of investments and more importantly, the rate of ramp of the BT deal. So.
So if these assumptions change during the year, we may have a different outcome. For example, I mentioned in my prepared remark keep that the demand is even stronger than what we had planned for in 2022 by the way we had planned for a solid double digit growth in 2022 more court perspective so.
If you see this demand increasing which we are we may decide to put the pedal down and go after additional long term growth opportunities, which may change the mix and the level of investments in 2022 versus our internal plan, but as I said I'm very committed to update you every quarter on the strategic decisions.
We may make around that and in any changes to that.
Material changes to the financial model.
That's that's roughly be.
What we have seen and we.
You have baked in some level of investments in the plan and our internal plan and we wanted to go after growth of Keith I'm sure you're hearing this from all of the cloud providers and the cloud ecosystem.
Everyone is seeing across to go after.
And.
When we started onboarding some of these deals it might impact our margins.
In the short term, but these are the right things to do because we have strong based on our 2020 cohort of customers that we can expand the solid gross margins. Once we land. These days, Okay, and then sorry.
Sorry, Kevin did you want to see some.
No I think thats good okay, and so if I think about that I mean, I think those margins 14 to 15 is a little bit lower than what investors are thinking you said previously.
OTF would be 70% of the operating dollars of profit.
I honestly haven't run through my model, yet, but I mean that suggests some pressure on free cash flow as well I would think.
Yes, I think I think you're right from that Directionally you are right.
Keith that.
That will put some pressure on free cash flow, but also keep in mind that there is.
A sort of a tailwind from the restructuring cash charges that you saw in fiscal 2021, we won't see that kind of restructuring cash charges in fiscal 'twenty. Two so I think those two my balance sheet, but you're absolutely right as a as a percentage of revenue.
<unk> free cash flow margins to be below the eight 7% that we delivered in fiscal.
2021, Okay do you mind, just sneak one in where those cash charges in 'twenty. One just so everybody knows how to model that yes. So.
I don't have specific data here, but it was I would say net net it was in the <unk>.
I would say again I'll give more color on that and the call backs for sugar levels.
$40 million to $50 million.
Okay, Yes.
So I will give you more color to look at the data for you during the call backs. Okay. Thank you.
And our final question comes from Bryan Keane with Deutsche Bank, Brian Go ahead.
Brian looks like you might be muted.
Can you hear me now yeah. There you go thank you.
Hey, guys. So most of my questions have been asked and answered just I guess two clarifications.
Kevin on the BT deal the when you sell into their enterprise customers. How does that relationship work is it a rev share agreement and just trying to think about the economics and margin implications.
That business takes off and a lot of BT enterprise customers start to use Rackspace and then <unk>.
Secondly, I guess for Mark the cost savings it wasn't clear to me with that massive move to offshore that you had this year is there a cost benefit to the model and are we seeing that yet.
Yes, so I'll start with a little bit about how.
The BT.
Kind of a relationship or Brian and then ill, let them or provide some color and then the second question. So yes. So we're excited about this I mean, basically <unk> got great relationships with some of the largest enterprise customers not just in Europe , but all over the world and so we are a <unk> hybrid cloud partner.
And what's going to be happening is for a good section of those customers will be migrating.
Those customers to our private cloud environment, and our hybrid cloud environment.
Space services for Vmware cloud, which is kind of a combination of kind of private private cloud with public cloud attributes and it'll have margin profiles similar to.
The rest of that part of the business for us So it's something thats.
Omar mentioned is kind of ramping up throughout 2022 were already very engaged with BP as we speak and.
Not only do we have a chance to work and modernized these enterprise customers of BT MDT itself, but then we have the opportunity.
To introduce them to our applications offerings, our data offerings given the acquisition that we just did.
And then further public cloud offerings dependent upon where some of these enterprise customers need their workloads, so it's pretty exciting.
And we will keep you updated as we progress.
Omar I.
I think that's it on the cost savings side.
We have baked into all the cost savings in our model and we've moved very fast in the second half of 2021.
To execute on most of the cost actions and the cost savings that we had laid out on a net basis.
<unk> is already baked into our fiscal 2020 to plan, our internal plan and Thats, how we deferred some of the investments that we're making the business.
Is there a way to quantify the different types of investments youre, making our margins. So we can.
Trying to get a sense of how much of this is ongoing it could be additional one time those kinds of charges yes.
So I think most of the investments are.
Let me give you a bit too.
Two big buckets of three or four big buckets of investments and it all depends on.
For example, we continue to make investments in.
Launching new product offerings, and data freedom and private cloud et cetera, that's one big bucket, the second and Thats across.
Our product groups.
<unk>.
And also across service delivery as an example, this is the second big bucket is around clock right. So we as Kevin mentioned, we have opportunities in data services and cloud native application development across all of the three platforms. We haven't done very well on the AWS side, because we acquired arnica and we got a lot of skills and capabilities in the AWS.
The scaling that and at the same time, we'll also be stocked with also stops getting GC in Azure and those investments show up either in cost of revenue because you have to.
You have to get ahead of the demand so we will be hiring resources.
In our cloud architecture as an example professional services for migration as well as Florida.
Data services and we will also be investing in sales and go to market very selectively because we do have we are also improving the productivity of our sales people. So we will be we will be selectively investing in those areas. So those all investments are baked into the plan.
And if in case of Youtube and we see more growth in the market. We may go ahead and make some changes in those investments. So that's so it's not one time. It's some of it is onetime startup investments that flows through as an ongoing but it is supported by our revenue.
Thanks, Brian . Thanks, Thanks for taking my questions you bet alright, well thanks, everyone for joining us if we didn't get to your question or if you have a follow up please give me a shout at IR at rack space Dot com and with that thanks for joining us and have a great evening everyone.
Okay.