Q2 2022 Rackspace Technology Inc Earnings Call
We have no obligation to update the information provided 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 SEC rules. We have provided a reconciliation of these measures to their most directly comparable GAAP measures in the earnings release and presentation, 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 Q&A function in June I will now turn the call over to Kevin.
Good afternoon, and thanks for joining us I'll discuss quarterly highlights and the strategic direction of our business than EMR will go into detail on our financial results.
On slide five hyper growth in the cloud market shows no signs of abating in.
In the second quarter year over year cloud growth for the hyper scaler was impressive.
AWS grew 33%, Google cloud grew 36% and analysts estimate that Microsoft Azure grew 40%.
This represents $10 billion of additional public cloud revenue compared to last year's second quarter.
So rackspace technology benefits from overall secular cloud growth and this growth is expected to continue for the foreseeable future.
In the second quarter, we executed well with non-GAAP operating profit and non-GAAP earnings per share both at the high end of our guidance.
In the current market Tech investors are extremely focused on cash flow.
And in the second quarter, both operating and free cash flow were very strong for Rackspace technology for the sixth quarter in a row.
We are proud of the fact that we've delivered $365 million of free cash flow over this 18 month period.
Testament to the underlying cash generating power of our business we.
We made solid progress on the strategic initiatives, we announced last quarter and we also continue to expand and enhance our partnerships more on these accomplishments in a moment.
On slide six you see a snapshot of key financial metrics for the quarter revenue.
Revenue growth was solid with total revenue up 4% and core revenue up 5% compared to last year's second quarter.
non-GAAP operating profit was $99 million and non-GAAP EPS was <unk> 17.
As with most U S based global companies revenue in the quarter was impacted by foreign currency headwinds as tomorrow will discuss in a moment.
As noted on this slide we had a very strong quarter for bookings and through the first six months bookings were relatively flat compared to the first half of 2021.
On slide seven last quarter, we previewed changes we're executing in our business. These included aligning and repositioning the company into two separate lines of business public cloud and private cloud to capitalize on the immense market opportunity we see today.
We are pleased with the progress we made on this front across a number of facets people organization structure reporting and go to market.
<unk> is working overtime to finalize this transformation.
As we've met with customers partners and other stakeholders to preview. These changes we received very positive feedback in particular from our key Hyperscale partners, Amazon, Google and Microsoft as well as Vmware.
We're nearing the point, where we can provide additional details on our go forward game plan, including any additional decisions regarding the structure of the company later this fall.
On slide eight we announced that Dk centre join Rackspace technology as President public cloud business unit <unk>.
K as an entrepreneurial business leader with a strong growth focus in three decades of global expertise in technology and digital transformation services.
Most recently he was president of North America for cognizant, where he spearheaded the short and long term growth strategy and execution per region that represented approximately 75% of cognizance revenue.
While there. He also built and led a global go to market team encompassing key functions of sales field marketing partnerships and industry alliances dike.
TK also previously worked for Tata consulting services and thrilled to have decay on the team as we accelerate our public cloud strategy. He is the perfect leader to help us capitalize on this amazing market opportunity and has already made an impact on our business.
On slide nine in the second quarter, we announced several exciting new product offerings.
We introduced elastic engineering for government now.
Now this offering extends our successful and innovative elastic engineering service delivery model to the government sector for Rackspace technology government solutions has been a leader for over 20 years.
We're also proud that Rackspace technology government solutions was named a leader in the 2020 to ISG provider lens report for the U S public sector.
We believe this recognition will positively impact our sales efforts in this important vertical we expanded service offerings from our recent acquisition just analytics to target the AWS markets with data analytics machine learning and AI. This complements just analytics strong set of offerings on Azure.
We enhanced our cloud data services portfolio to incorporate the data cloud capabilities provided by Snowflake and data bricks and finally, we have announced a new security service to architect design implement and Operationalize Zero Trust access with our partner cloud flare.
On slide 10, our unique corporate culture and employee value proposition continues to receive acknowledgement in the way of awards and recognition this quarter in the form of two inspiring workplace awards.
In the second quarter, we received the inspiring workplaces award for 2022 in both EMEA and North America.
In addition, we were certified as a most loved workplace because of our commitment to fostering a culture, where team members can develop and sharpen their skills.
So in their careers and feel valued for their expertise.
These awards are strong validation of our company, our corporate culture, and our value proposition for our rockers and will help us continue to win in the market.
We also invested in our team members, who earned 894 certifications across various cloud disciplines in the second quarter through Rackspace University.
On slide 11, we made a great deal of progress with our Hyperscale partners in the second quarter.
We were recognized as one of the top AWS partners in the Mexico market.
We joined the Microsoft Intelligent Security Association ecosystem of independent software vendors and managed security services providers.
And we completed and received formal validation of our capabilities on Google cloud and renewed our designation as a Google cloud managed services provider in the Latin American market.
Let's look at a few case studies of Rackspace technology customers, who are benefiting from our cloud expertise.
On slide 12 BMG.
PMG rights management strives to be the best business partner for song writers and artists and the digital age.
The transition to digital streaming platforms like Spotify and Apple music has transformed the music industry. One stream is roughly 1500 times more data intensive than the sale of physical media such as a CD.
So with digital music consumption at an all time high BMG had to enhance its data management expertise to ensure it received the correct royalties honest music portfolio.
Within six months of our engagement.
<unk> space technology helped BMG migrate most of its applications to Google cloud, including the business critical applications behind supply chain management royalty calculation and data analytics.
Ultimately, we helped BMG migrate 70% of its applications to Google cloud generating significant cost savings. In addition, we're exceeding bmg's targets for migration speed due to our in depth knowledge of on premise environments application modernization best practices, Google cloud architecture and around the clock.
<unk>.
On Slide 13, we also strengthened our relationship with Vmware when we were selected as their strategic partner for the secure access service edge or SaaS platform.
Vmware will leverage the rack space technology data center in a box solution to deploy Vmware SaaS solution that includes cloud networking cloud security and edge compute services.
So more SaaS it will be initially deployed in 15 Rackspace technology data centers with another five data centers planned for additional phases.
This supplements, our broad and deep end to end portfolio of managed services for Vmware, such as Rackspace services for Vmware cloud, which was launched in 2021.
This was also another proof point of the potential in our private cloud business now.
Omar will take you through the financials Omar.
Thank you Kevin and thank you everyone for joining our call today.
Slide 15, recaps, our financial results for the second quarter.
Revenue was $772 million of 4% year over year increase.
Core revenue was $733 million up 5% compared to the second quarter of 2021.
Revenue was slightly below guidance due to foreign currency fluctuations as well as the slower ramp for the British telecom deal.
non-GAAP operating profit was $99 million at the high end of our guidance for the second quarter.
This was down 18% year over year, primarily due to the impact to gross profit and revenue decline in legacy open stack and our mature managed hosting.
non-GAAP operating margin was 13% and non-GAAP earnings per share was <unk> 17.
Slide 16 shows the company's revenue mix in the second 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 5% year over year.
Absent cross platform at 13% of total revenue was up 8% year over year.
<unk> declined 16% in line with our expectations and represented just 5% of total revenue today.
From a regional perspective Americas represented 75% of our revenue.
As you can see on the chart regional growth rates were materially impacted by foreign currency fluctuations in the second quarter.
On a constant currency basis Americas growth would have been a point higher at 5%.
<unk> growth would have been two points higher at 29% and EMEA would have flipped from a 3% decline to 3% growth.
Six stream.
On slide 17, <unk> technology continues to drive strong cash flow.
In the second quarter operating cash flow was $84 million and free cash flow was $57 million up from $65 million and $45 million respectively in the first quarter.
This is the sixth consecutive quarter of positive operating and free cash flow.
Four to six quarters, we have delivered accumulative $365 million of free cash flow.
This demonstrates the tremendous cash generation ability of the business.
Total Capex was 37 million and cash Capex was $27 million with capex intensity of 5% and 4% respectively.
We expect total capex intensity of 5% to 7% and cash capex intensity of 3% to 5% for the full year in line with our previous guidance.
At June 30, cash was $261 million compared to $215 million at the end of last year's second quarter.
On slide 18, I want to remind investors that we have a strong balance sheet with no material debt maturities until 2028.
In addition, all of our debt was refinanced in late 2020, and early 2021 at historically low rates.
With minimal financial covenants.
At quarter end total debt was $3 4 billion and net debt was $3 1 billion.
Our net leverage is very manageable for a company with our growth and profit profile.
On slide 19, we have a guidance for the third quarter third quarter. We expect total revenue in the range of $769 million to $779 million 9 million core revenue in the range of 733 million to $741 million non-GAAP operating profit of 73 to 77 million and non-GAAP EPS.
Eight to 10.
Now let me provide some additional color on our outlook on an outflow.
Third quarter revenue guidance is impacted by the shift in our sales focus away from resale revenue towards higher margin offerings offering as well as expectations for continued foreign currency headwinds headwinds.
The third quarter operating profit guidance is impacted by three primary factors.
The continued and expected decline of our higher margin managed hosting and legacy open stack businesses.
Investments were making in people this includes retaining <unk>.
Retraining and hiring additional resources to drive growth in our cloud services business and support our long term strategy strategy and third although our pulp costs are partially hedged.
We are seeing increased data center costs per cost.
This is in part driven by record high temperatures around the world and we expect the impact to moderate over the intermediate term.
As you know we spent the last few quarters, establishing our go forward strategy and designing the best operating model to execute on it.
The opportunity is clear.
But we need to better position the company to address it.
Job one in this regard is re aligning the company to sharpen our sales.
Development and operational focus on two key markets public cloud and private cloud and higher margin opportunities within them.
We have our executive leadership team identified and we are accelerating this transition.
Which we expect will create some near term disruption over the next few quarters.
We are moderating our outlook.
We believe the end result will be a better and stronger expertise technology focused on high margin products in growing markets.
Before we open for questions I want to reiterate that.
But our cash flow is strong with six quarters of positive free cash flow and we have ample liquidity and a strong balance sheet that enables flexibility.
All told we believe we are well positioned to win in the fast growing cloud market in the years to come.
And excited to share the go forward plan with you this fall.
With that we'll take your questions Robert please queue up the audience for Q&A.
Okay.
The Q&A session.
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Our first question comes from Brian Deutsche Bank Deutsche Bank Deutsche Bank.
Okay.
Yeah.
Let's go to the next.
We can come back around later.
Alright, so are.
Our next question comes from.
Randy.
Barclays capital equity capital.
Ironically family.
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Brian are you on the line.
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Good to go.
Okay.
Hi, guys can you hear me Hey, Brian Finn there, we are narrowing now they're ago I'm doing well I'm doing well thanks for taking my questions.
Can you guys help us a little bit.
Just with the the piece of the business, that's kind of you're focusing away, which is kind of the re sale how much of the business is that kind of the resale business and then you know that the push towards that the obviously the higher margin business like what kind of components is that just trying to figure out the mix of business and what <unk>.
Percentage of revenues those mixes makeup.
So so Brian .
It all.
We are going to give you all the details that's what we are actually doing right now.
Real ending realigning the company across the two business units public cloud and private cloud and I'll be able to give you more details on what's in the public cloud business unit.
This fall.
So that's in the works right now and I'll be more than happy to give you all the details now.
To answer your question specifically.
As we mentioned on our previous call. We are in the public cloud business segment. We have we are putting more focus and emphasis on driving higher margin cloud services business compared to reshape and even on the resale side. If there are certain retail business that are lower margin and leave.
Come support renewal, we do a thorough assessment.
Too early to understand whether we can actually expand our services in those accounts and if it meets certain profit thresholds or objectives and if not we are letting those are lower margin.
Our public cloud resale business shrunk so that's what we're doing within the public cloud.
And the overall public cloud segment that business is growing double digits I.
I think we are we see a good demand environment in the public cloud business and I will let Kevin talk about a little bit on the demand environment. We are seeing on the public cloud right.
Sounds great Hey, Brian .
So look I would say we're excited about this yeah organization.
Organization into two business units, we see really strong demand.
And on.
On the public side about the public cloud side of things and also.
Also strong demand on the private cloud.
Side of things if you look at the overall market opportunity it's.
It's enormous right. We believe customers really only started the shift to move their workloads to the cloud. So we've got many years of growth potential ahead of us.
And you know very strong desire from customers scale driving demand for multi cloud, causing them to become the default architecture or modern workloads. So we see demand in both public cloud and private cloud and this is going to result in lots of opportunities for migrations for integrations for managed services is of course, great businesses in.
Good good margin businesses for expertise technology.
And the hyper scaler Sirona roll right. They continue.
To innovate to progressing now at such a pace that customers have lots of options and customers need help to handle the massive complexity of the multi cloud environment. So we're certainly continuing to double down on public cloud.
And we need to do it certainly at the right margin, which says what Tamara mentioned before now the other thing that I'll mention that we're seeing this is going to help with our strategy is theres a trend.
Toward customers wanting help beyond the infrastructure layer right into apps and data layers of the stack in particular.
So that's usually very high value business for us and then industry specialization is gaining traction as a defined need in the market and then from a geographic perspective looking at multi cloud continues to play a huge factor in what I'll call. The technical Revolution around the world right, we're seeing strong demand in Europe , and Asia and the South Pacific.
<unk> in Latin America and.
In North America.
So from a such kind of the market, Brian I mean from a customer perspective, I talked a lot of customers were Sampson some fascinating trends there customers need talent you know customers are really struggling.
Find people with the skills they need to complete these complex dot cloud transitions.
And we keep hearing from customers over and over their short for talent.
They need expertise they need help to augment the staff and they are seeing value and offerings like Frac space elastic engineering Rackspace professional services.
We saw that in action with a recent win that we have with a large technology and media company, providing our cloud expertise of the service and we had another big win with the U K banking firm leveraging rack space.
To supplement resource through exceptional services agreement.
And from other conversations, particularly in this economic environment and our customers are trying to cut costs. So they need help.
<unk> space to optimize their spend and we've got.
Financial spend optimization tools and practices that yet.
Age of our expertise to help customers actually reduce a lot of costs and then finally.
Go back to your question about public cloud from a partnership perspective.
<unk> for the Hyperscale with products as is very.
It's going very fast and the demand for multi cloud strong.
New public cloud business.
Business unit leader Teekay Senate and I would just visited the West Coast, we met our partners out there and I can tell you AWS, Google, Microsoft or continuing to see massive increases in sales and revenue every quarter.
At another $10 billion of new revenue in the second quarter alone. So this is exciting new growth for us and our partnerships on the private cloud side with Dell and Vmware.
The Dell and Vmware continue to take a center customers big demand from customers for private cloud and multi cloud as well. So partners continue to tell me and we value bring in rack space into the customer conversations early right. If they're early so we can shape the.
The technical dialogue, and then help customers getting to execution mode. So overall, Brian strong demand environment very encouraged by the opportunity.
Got it and just as a follow up when you talk about the division into public and private cloud, there's going to be near term disruption are you talking specifically about sales disruption or what exactly you're talking about in the analyst day that was planned I think for September maybe October or are we still on for that or.
Is this just going to be kind of an update on the on the segments. Yeah. Thanks, Bryan so somewhat in terms of.
The disruptions that we talked about you know anytime you see a shift.
You know you shipped the sales organization structuring skulls youre going to see some near term disruption for long term benefit right and.
With our restructure we are realigning the go to market organization. So we think it's prudent to plan for a little bit of disruption in the back half of the year as the teams get to kind of work through these changes.
Now with that said you know our leadership team has experience and we're confident that we're driving the company towards the right operating model. So as you know is the go to market teams.
The changes business will stabilize will then accelerate.
And as I talked about in our partners' expressed very strong support for the transformation, we're making ultimately now we're excited about these changes are going be great correct space technology and aligning the company into two business units with clear accountability and ownership end to end.
Settle a bit about the transformation and on yes, yes I'll.
I'll take the analyst take question Bryan.
No listen we look forward to sharing more details on the financial profiles of both the public cloud and private cloud businesses.
And currently we are deep into the detailed planning of this realignment that Kevin talked about and we'll begin the early stages of implementation of the new operating model in our fiscal Q3. So as we speak I think Lee we'd like to we'd like to accelerate that transformation and once we have completed the planning phase where we can we can more.
Accurately forecast of revenue and profit expectations of each of those business units and I'll tell you. We are committed to providing the investors with more granularity on our performance and we'll communicate more in the coming months.
Thanks for taking the questions. Thanks, Brian .
Alright, just as a reminder, sorry for the technical difficulties. If you want to ask a question. Please click on the Q&A.
Q&A abundant lagoon portal and rollout queue up your question that way.
Question comes from Bradley Clark from BMO, and then we'll go to our urban problem.
After that.
Okay.
Hi can you hear me okay, yes.
Yes, Hey, Bradley.
Taking my question I wanted to ask a question about.
You mentioned that you're being a little bit more strategic.
Cloud.
Deals youre going after it typically it has been made of margin.
Better margin profile I, just want to understand are you, leaving deals on the table.
And the pipe you're sort of walking away from or are you being more granular about what has gone into the pipeline.
And if so how can we think about that being different band.
Sort of passion deal that rack space.
Thank you.
Hey, good hey, yeah. Thanks for that Bradley I'll start and then Amar can add some color. So like the first thing I should mention is we've.
We've created this public cloud business nearly from scratch over the last several years and we scaled it to a point now.
We're seeing a lot of success across all three Hyperscale is right, we're growing fast with Microsoft with Google with AWS.
And what that's allowed us to do is to continue.
You know to go to market in different parts of the world with all three.
Hyper scaler.
And it is allowing us to be more selective right and to make sure that we are.
Pursuing deals said make the most sense for our customer.
And for the Hyperscale or infer and Frac space.
And this is the right time to shift that strategy you know for the last three years, we've been building the business.
And we had and still have a land and expand strategy and and look if we've landed in a particular customer account for.
And with a more of an infrastructure resale deal and we've had it for a couple of years and we don't see a lot of opportunity to get into higher margin service offering incentives prudent for us.
So look for other places to grow if that makes sense.
And this isn't this is possible now because we are scale and scaling with with all three hyperscale, which is a great place today, but tomorrow, let you comment no I think that gives you said it really well I think we are very very focused on changing the mix of the business even within the public cloud business unit and as Kevin mentioned more focus on services and agency.
Given the customer journey is moving from more infrastructure as it will modernize their applications is the more data they have modernized data security offerings and that's what we are focused on so it's all about selling higher margin services and solutions into a public cloud installed base and also capturing new revenue stream. So.
It was very very thoughtful and mindful on how we do that and sort of leading with infrastructure, which services is in the patch actually now leading with services with infrastructure isn't attached. We're it makes a lot of it makes sense. So that's the focus and Thats a change of focus is the demand environment groups remains rich I do believe that there is a lot of opportunity going forward as we move.
Up the stack so I'll move we're moving up the stack and we acquired this company just analytics, which has been a huge benefit for our global data business.
We're continuing to expand into as Amar mentioned absent security layers.
Leading with our tip of the spear professional services business, which performed really quite well and in Q2.
So that's that's a little bit of the shift if that makes sense Bradley now as we as we go through this badly and just take this question and take it a little bit for rights. So we are changing the mix of the business. You are looking at managed hosting business and open stack business declining.
And we have a private cloud business is in a growth market as Kevin mentioned, we see good demand in private cloud we have to capture the demand and public cloud of course, and this is a cyclical market. So as we make August shifts, we are going to balanced growth and profitability.
So if you look at our guidance for four.
Q3, it reflects some of those clusters ethics and a headwind that we saw plus we also saw a slower ramp in BT deal, but if I look forward into Q in Q4 as well as our next few quarters. We do expect the core revenue growth trends that you see in Q3.
Basically continuing so we should see low single digit core revenue growth for the next few quarters as we make the shift happened. So ultimately for US you know we will be focused on revenue growth, but revenues Vanity profit is sanity and cashes reality and that's the reason we are very focused on generating good cash flow input prop.
Profitable growth for the company.
Alright. Our next question comes from Irvin Liu from Evercore, and then Frank Louthan from Raymond James Europe after that.
Moving to the Earth.
It is not opening as Mike.
Alright, let's go to the frankly with them and then we'll circle back.
Hi, Frank all right there we go <unk> sorry about that.
Thanks, I've lost audio for Matt you May have gone through this but as you go through this transition can you be clear kind of what areas are being restructured.
The change to the sales organization and is are there any key positions you need to add to.
Two as you're as you're making this transition thanks.
Hey, Ken Hey, Thanks for the question Frank I'll start on a mark in front of us and the investments we're making in divisions were adding et cetera. So so look we're excited about this we're on track with our reorganization across public cloud and private cloud.
We've talked about received really good feedback from our partners and our stakeholders.
Amazon, Google, Microsoft Vmware Dell technologies, good feedback there.
So where we are.
We've completed the blueprinting phase and we'll be wrapping up the detailed design work and begin implementation this quarter and a big milestone was the hiring of our public cloud services leader <unk> and Dk, Scott three decades of experience and scaling technology businesses in digital transformation. So that was a big milestone.
And we've made excellent progress I would say overall on the transformation and we're on track.
But let me just take a step back and just talk a little bit about why this transformation is so important for our company and our stakeholders.
Now first of all if you just look at the fundamentals of our business. They are very strong right and we will be uniquely positioned to win in two great markets public cloud and private cloud businesses.
Businesses are more agile when they're operating end to end right and that's where we're moving to a move into an end to end model in public cloud ended model of private cloud. When you end to end you can have faster decision, making and you can accelerate progress across the board quite frankly, we scaled our public cloud business. So fast it demands having its own business unit now.
So.
What this means is every employee in the company is going to be laser focused on being the best in class for public cloud and the best in class private clouds. So this means we're gonna have dedicated product teams, which leads to higher expertise across both portfolios.
A simple clear go to market model with accountability aligned each business unit.
And then another thing I'm really excited about is the collaboration and the goal alignment we're gonna get between what the market wants our sales teams our product and service delivery teams sharp and have that closed loop feedback process between those organizations, including as you mentioned, our sales and go to market teams. So overall yeah.
Pleased with the progress, we're making and I get more excited about this transformation everyday Mario and talk about our investment via the investments that we're making you Frank just in the last quarter. If you recall I did mention that we are planning a $15 million to $20 million of investments in the quarter to support both the growth acceleration in cloud services as well as the <unk>.
Carnival for BT partnership.
And as I noted in my prepared remarks, <unk> is ramping slower than we initially expected. So some of the planned investments in Q2 US I also slightly delayed.
But we did execute on most of our planned investments.
Includes.
As I mentioned in my prepared remark, retaining retraining and hiring delivery resources to support our public cloud services as well as some of the sales investments, we're making in Americas region.
So based on the strong demand that we're seeing are we also have planned approximately about $5 7 million of additional investments that are already baked in my Q3 guidance and.
Needless to say, we'll continue to manage investments more judiciously as we balance both profitability and growth given the strong market opportunity we have in cloud.
And are those investments you are making in personnel.
Yes, Frank that is mainly in personnel.
Alright, great.
Alright, Thank you very much alright. Thanks.
Irvine or you are either still in ask a question if not we'll move we'll move I am here.
You hear me.
Yeah, if I could tack on another question related to the overall realignment of your business around public cloud and private cloud.
What percentage of your customers are both public cloud and private cloud customers and then which of these two businesses do you see.
More prone to disruption.
So that's a great question actually.
We did a very thorough analysis to see the overlap between the two.
Segments and the overlap is not big today right, but it can be tomorrow. So the way we are designing the organization is.
So.
If we see opportunities for a multi cloud.
In a particular customer so one of the business unit will be the hosting business unit and we bring the other business units in the beauty of this model is ultimately we will be selling multi cloud to our customers, but we will be doing that with very focused solutions across both public cloud and private cloud and that's clearly.
Big advantage when we take the solution to the market the price that's really well said.
At her then we're getting the best of both worlds with this reorganization right I mean on one hand, we're able to offer.
Multi cloud solutions to customers. So we're going to have one salesperson for customers. So our salespeople will be incentives to sell both public cloud and private cloud.
But their laser focus is going to be you know on their primary business unit, where we want to make sure that we grow and grow profitably.
So we've done lots of these reorganizations in our careers and I think we found the perfect model for US that's made a little easier because really only have two businesses here.
As opposed to some of the size, which got over 100 different types of service offerings. So very strict straightforward execution from a go to market perspective, we will be offering multi cloud offering one face to the customer.
But we're going to have.
As a result of the focus we're going to have the best in class and private cloud offerings and the best in class and public cloud offerings. Therefore, the best in class and multi cloud.
Just add to this.
As we realign the company.
And in particular, the sales organization that can be profitable tomorrow.
From a planning perspective, it's very prudent to plan for some near term disruption. So our leadership has a runway to make the required changes and we can accelerate our transformation and hence we expect to grow moderately over the next few quarters as we pivot to this new operating model and execute our long term strategy again to drive profitable growth.
Okay.
Thanks, and I wanted to ask another question on Q2 I may have missed this on the prepared remarks, but can you talk about how your bookings performance trended in the quarter and just can you provide color on how overall bookings linearity.
And it as well.
Sure sure absolutely urban I'll give you a little bit of color on our bookings performance for the second quarter.
So look first of all.
It was the third highest bookings quarter in the history of the company.
Gains in the quarter continue to be highly diversified by geography by industry by market segment drove a 5600 individual deals closed in the second quarter we.
We saw strong performance in our tip of the sphere.
Special services business in both the Americas, and EMEA regions, and we had good traction with sales in our public sector business.
Our managed public cloud service offerings year, they continue to be well received in the market supported by these new offerings that we've launched and.
The other thing that we're seeing Irvin as we're signing bigger deals right, we're seeing increased deal sizes as.
As customers are bringing larger workloads and purchasing multiple services and our focus on higher margin deals you know dry balancing revenue and profitability in our focus there is driving good results. So overall very pleased with the quality of the bookings.
Okay.
Yeah.
Yes.
Okay. Thanks, Kevin Our next question comes level.
Thanks, Evan Thanks, Evan.
Our next question comes from Ryan Campbell from Barclays. Bryan Go ahead, Iran. Hi, Thank you for taking my question today.
No problem would you be able to provide us some additional color on how pricing is structured and your contracts and how you are seeing wage inflation in the market right now.
So frankly, I think one of the things that because of the demand environment remains rich.
We are not seeing any kind of pricing pressure so to speak and I think this is a good market to operate from that perspective, and when it comes to Libre I will.
I'll, let Kevin talk about we don't our model is not a labor intensive model. We don't operate on the labor plus model, we operate mainly on the labor minus model by that I mean, we basically embedded technology automation with labor and so from that perspective, we are not seeing a labor.
Inflation or cost inflation actually hedge our.
Sure.
Have any pressures on the pricing side of such and so yes, I think thats well said, yes. This this is an interesting yeah. This is a great business because there's not a heavy labor model here.
If you think about how we go to market, we go to market with our technology.
Specifically rackspace fabric, which is our software and IP platform, where automated 75% of the multi cloud transactions right. So that makes us at the highest automation in the industry. So we don't have a lot of them.
Heavy heavy labor.
<unk> cost in our solutions and in terms of pricing.
Because our solutions are standardized we we don't have a lot of pricing complexity. So it's a pretty straightforward type.
Type of.
Pretty straightforward type of pricing model, we standardized said, we've got an excellent.
CFO organization that make sure that we are.
Pricing at the right margins and price to win.
So very prepared to the industry and certainly my three decades of experience in this industry very standardized pricing.
Not very labor intensive.
Automated kind of base platform that we use to differentiate and to win.
So run out I'll take this opportunity also hate them because the pricing typically in some other areas.
Look at our competitors, what really labor focused or labor intensive pricing does impact gross margins in our case, we do not have an impact from pricing on our gross margins is mainly mix related.
Sample in in Q2, we are very pleased with the 30% gross margins at the language.
It was because we manage the mix of the business. It was a very favorable mix in Q3, we expect that gross margins to be around 27% because we are seeing the impact of mix as well as the investments, we're making and one time.
Especially on the datacenter side that is impacting our gross margin, it's nothing to do with pricing right. So this is about 27% gross margins, we expect that gross margins to be around 26% in Q4 and in fiscal 'twenty three even though we are making this mix shift to.
Two from low margin to high margin, where it will be in a transition phase and we expect our gross margins to be mid 20%. So a low single digit core revenue growth with mid 20% gross margin and a plus or minus a percentage point for 2023 or 20 basis.
Great. Thank you very much.
Alright.
Other questions.
No. Thank Nomura, there's no more question Tomorrow alright, Thank you very much everyone for joining our call today.
Okay.