Q4 2022 Rackspace Technology Inc Earnings Call

February 22, 2023

Okay.

Good afternoon, and thank you for standing by welcome to rack space Technologies fourth quarter 2022 earnings Conference call. At this time, all participants are in a listen only mode.

After the presentation, there will be a question and answer session.

Ask a question during this session you will need to press star one one on your telephone.

Please be advised that today's call is being recorded I would now like to hand, the call over to Robert Watson Vice President of corporate Finance. Please go ahead.

Thank you and good afternoon, I'm joined today by Martin <unk>, Our Chief Executive Officer, and Bobby <unk>, Our Chief Financial Officer, who recently joined in January .

Supplemental materials to todays earnings announcement as well as a replay of today's call can be found on our Investor Relations website. As a reminder, certain comments we make on this call will be forward looking these statements involve risks and uncertainties, which could cause actual results to differ a discussion of these risks and uncertainties is included in our SEC filings Rackspace technology assumes no.

The obligation to update the information presented on the call except as required by law.

Our presentation includes certain non-GAAP financial measures and adjustments to those 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 IR website I will now turn the call over to him.

For an update on the business.

Thank you Robert first I would like to quickly update you on the ransomware incident, we experienced late in Q4.

On December 2nd Rackspace detected suspicious activity in our hosted exchange email environment, which triggered our incident response team to act immediately to contain the threat.

Quickly engaged industry, leading cyber security firm crowd strike and other experts to assist us with different SEC investigation, which was completed in roughly 30 days to.

The investigation determined that this was the result of a zero day exploit which means the attack vector was not previously known and it was a sophisticated attack.

Due to our team's swift action to contain the threat. The impact was limited solely to the hosted exchange E mail environment, which makes up less than 1% of our total revenue.

<unk> enterprise customers were impacted and no other rackspace products platforms solutions or businesses that are affected as a result of this incident.

We provided our hosted exchange customers with a path to migrate their email services to Microsoft 365, and assisted many customers with both the email and data transition.

Security is extremely critical for our business and we have the right focus and investments to continue to provide our customers with a secure environment.

With that let me share what else I have been doing since taking the helm in September I believe.

Laser focused on transforming rackspace technology into our customer first cloud first company and changing the trajectory of our performance.

And just the last few months, we have achieved many significant milestones which include implementing a two business unit operating model, adding new leadership, strengthening our board and introducing new products and services.

We are now poised to drive these changes throughout the company and bring that strategy to life.

We are very focused on fixing this business for the long term, even if it requires near term disruption.

While the next few quarters may be choppy, our focus is on positioning the company for sustainable growth heading into 2024.

I am pleased to share some of the progress since our last earnings call first we delivered fourth quarter revenue and profitability above the high end of our guidance.

This is a positive step as we continue to build a track record of meeting or exceeding our commitments.

Second I am excited to welcome Bobby <unk>, our new CFO , who joined in January and has hit the ground running given its services background and broad operational finance experience.

Good.

Brian Lilly as the president of our private cloud business and.

And as previously announced DJ sooner as the precedent of the public cloud business unit.

With this we now have strong leadership for each of these two core segments, Brian deep technology experience and focus on strategy and execution will be instrumental in transforming our private cloud business.

And finally, Anthony Roberts has joined our board of Directors Anthony has extensive experience as a senior technology executive will be a tremendous asset that together with the recent elevation of Sean salmon to lead director will help define and fortify our position as the industry's leading provider of.

Multi cloud solutions.

While we're only a couple of months into our new operating model I am encouraged by the early signs of progress.

Though it will take time to fully reflect this progress and our financial results.

We believe we are headed in the right direction.

As we navigate the challenging macro environment, we are experiencing some of the same trends highlighted by others in our industry.

Growth of the product cloud market has slowed as customers are showing a heightened focus on efficiency.

We're also experiencing longer sales cycles.

The recent economic slowdown has also led many companies to take a more deliberate approach to evaluating where the workload should operate in public or private cloud to optimize for performance and cost.

The demand shifting to the right. We are taking advantage of current macro conditions to complete our transformation improve execution and launch new offerings.

In public cloud, we continue our accelerated pivot from an infrastructure retail led motion to a services led motion with deeper customer engagement as we change the mix of the business. We are experiencing some near term disruptions. We are committed to building our services backlog that will yield sustained long term growth and <unk>.

Margins were already taken several steps to accelerate our shift to a higher margin suite of services and expand our existing offerings letting.

Let me highlight a few examples.

We recently announced an expanded long term strategic partnership with Google Cloud.

As part of this partnership Rackspace will build out of Google Cloud Center of excellence with 250 certified GCB resources.

Together with GTP will drive joint business development and on rack spaces, Google Cloud services focused on areas such as application migration modernization data and AI.

We also recently launched modern operations, which is a new managed services offerings for public cloud that will provide customers across AWS Azure and GCB, a 24 by seven unified support model for a broad range of services.

Modern operations is a good example of the sticky annuity services, we are focused on expanding.

Our new operating model will ensure that we emerge from 2023 with a public cloud organization focused on the high value opportunities in this wide open market space.

The growth of public cloud has also spurred new demand for private cloud solutions public cloud is a great place for many new and emerging workloads.

Denise are now realizing however that many workloads are most efficiently operated in their existing NATO environment.

Many companies also no longer want to build or operate in house data centers and need a safe reliable partner to run mission critical workloads.

All that sums up to a significant opportunity for rack space as one of the largest scaled players in private cloud.

To address demand across a broad range of private cloud customers. We recently launched software defined data center offerings, including enterprise business and flex options.

This enhanced higher value offerings position us well to meet unmet demand in private cloud.

As Rackspace moves forward you should expect a continued focus on higher value innovations and public and private cloud, which underpin our strategy and new operating model.

In parallel we are progressing on industry specific offerings in both public and private cloud we are <unk>.

Building focused teams and solutions in verticals, such as healthcare Telecom Tech and gaming and public sector to better leverage our core multi cloud strengths and address the complex challenges facing our customers.

As an example, we recently signed an important memorandum of understanding with <unk>, the Saudi data and air quality, a government agency with a mission to unlock the value of data as a national asset.

This Mou will enable rackspace and Sudan to collaborate on strategic technology initiatives in support of Saudi Arabia vision, 2030, and ambitious blueprint for the Kingdom digital future.

This partnership is an example of rack space relevant and an exciting multi cloud market.

Before I conclude I'd like to extend my heartfelt gratitude to each and every one of our talented directors customers and partners around the world.

Over the past five months, we have accomplished a great deal and initiated critical changes within the company.

Our two business unit structure is now fully operational and we have assembled a strong leadership team to execute our strategy and plan.

2023 will be a transformational year for us as we continue to lay the foundation for long term sustained performance in the future I will now turn the call over to Bobby for an overview of our Q4 financials.

Thank you Omar before I begin I would like to say that im extremely excited to join the Rackspace team.

I strongly believe in the turnaround and look forward to being a part of the next chapter of the Rackspace story.

I'm also looking forward to meeting and talking with our investors in the coming days and weeks now onto the results.

In the fourth quarter, both revenue and core revenue exceeded the high end of the guidance that was provided on the Q3 call in November .

Total revenue was $787 million, which represents 3% year over year growth in constant currency and 1% growth on a reported basis.

We continue to experience material year over year currency headwinds from our Europe business.

Core revenue was $752 million, which grew 4% year over year in constant currency and 2% on a reported basis.

Revenue in EMEA grew 7% in constant currency driven in part by the continued ramp of the BP contract, but declined 1% on a reported basis.

Americas grew 1% and APG grew 19% on an as reported basis with minimal FX impact.

non-GAAP operating profit of $74 million also exceeded the high end of our fourth quarter guidance.

This was down 40% year over year, primarily due to reduced gross profit from the ongoing revenue to decline in our legacy open stack and private cloud businesses.

non-GAAP operating margin was 9% and non-GAAP earnings per share was <unk> <unk> in.

In the fourth quarter, we generated cash flow from operations of $40 million and free cash flow of $25 million on.

On a full year basis, we generated $259 million of cash flow from operations and $179 million of free cash flow we.

We ended the year with $241 million of cash and our $375 million revolver remained undrawn.

<unk> and over $600 million of total available liquidity.

We anticipate cash flow from operations to be negative in Q1, driven by seasonal cash outflows, but expect positive cash flow from operations in the remaining quarters.

Capex in the fourth quarter was in line with expectations with total capex of $43 million in cash capex of $15 million.

Capex intensity was 5% and 2% respectively.

For the full year, we ended at 5% total capex intensity, which was at the low end of our 5% to 7% guided range.

In the fourth quarter, we recorded $217 million of noncash impairment charges, driven primarily by $129 million of goodwill and a $75 million asset impairment.

The goodwill impairment was in our apps and cross platform segment and was driven primarily by the decline in market capitalization. Following the ransomware attack on our hosted exchange E Mail business.

The asset impairment was for our San Antonio headquarters office as we prepare for our our relocation to a smaller footprint in north San Antonio later in 2023.

Additional details of these noncash expenses can be found in our press release and SEC filings.

Now moving on to the Q1 guidance.

Our guidance for the first quarter of 2023 reflects continued caution related to an uncertain macroeconomic environment and includes impacts from the December ransomware attack.

For the first quarter, we expect total revenue in the range of $752 million to $762 million.

Core revenue in the range of $719 million to $729 million.

non-GAAP operating profit of 47 to 53 million other.

Other income and expense of $55 million to $57 million.

And non-GAAP loss per share of one to five.

Before I conclude I would like to remind everyone that beginning in Q1, we will start reporting revenue and profitability for our new operating segments public cloud and private cloud.

We will also continue to separately report our legacy open stack business as we have been doing.

We anticipate providing historical financials and the new segmentation prior to our Q1 earnings release in May.

And with that we will take your questions.

Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced.

Draw your question Press Star one again please.

Please standby, while we compile the Q&A roster.

Our first question comes from the line of Kevin Mcveigh of Credit Suisse. Your line is open.

Great. Thanks, so much and congratulations on the Q4 results.

This fee for more who but.

Can you give us a sense as we're going through the restructuring just how we're thinking about free cash flow it sounds like use of cash in Q1, but.

Any sense of how we should think about that holistically for all of 2023, because it seems like <unk> got the capital to kind of Shepherd through this.

Restructuring with just any thoughts on.

Free cash flow overall should.

<unk> up over 2023.

Yes, thanks, Kevin.

Thanks for the question so as we as Bobby mentioned in his prepared remarks.

Cash flow from operations in Q1 will be negative because of the seasonal impact that we have from two.

For two reasons one is there is a.

Bonus payments company bonus payments as well as we have a payment to one of the vendors. So this is this.

This is typically a low cash flow quarter for us in Q1.

For the full year, we do expect free cash flow as well as cash flow from operations for the full year to be positive.

And as we roll through the year, you should expect our cash flow from operations to be positive.

I would just add look cash flow generation is going to be a major focus for us major focus for me.

We are working on a number of initiatives to drive these improvements.

Let me give you a little bit of color on the status.

In terms of our cash conversion cycle, we're very focused on that on receivables and payables were focused on our capex efficiency and improving that which.

Continue.

<unk> to look for cost optimization.

<unk>.

As the CFO of the company and my Soul focus is going to be around managing cash and expenses and making sure that we're making.

Since two to drive a long term growth.

Great. Thanks, so much.

Our next question.

Which comes from the line of Ashwin <unk>.

At Barclays. Your line is now open.

Ashwin.

Yes.

Hi, Ashwin <unk> from Citi.

Hey, guys.

Good to speak with you Bobby.

Pete.

Yes, My first question is.

If you can provide maybe more granularity with regards to.

How the demand environment is.

Evolving.

What we've heard from.

Other companies is that yes, obviously pretty strong slowdown in December .

By February 18, just started picking up just a bit.

Is that similar to or different than what youre seeing any color you can provide with regards to the ability that you have.

Forward look would be great.

Thank you for the question Ashwin good to hear your voice.

So as you rightly said it'll all companies in the cloud ecosystem as you've always should be not be cautious about the demand environment and rightfully so even with tough macro outlook.

We work very closely with the Hyperscale is true and as you know a hyperscale US have also caution that the growth rates are slowing but still it's a double digit growth.

They are still reporting double digit growth.

We believe that the customers will maintain the it spend history on mission critical projects, but slow spending on lower priority less critical projects and this of course varies by customer as well as vertical but broadly customers will be more focused on cost optimization of existing high usage workloads on projects that.

Have a faster payback, we're also seeing customer such as.

As we work with them on transformation projects that they want to accelerate the transformation projects. So they can they can really realize the returns of those projects within the year. So in this kind of environment. Ashwin. We are also seeing it's not really unusual to expect some changes in the size and scope of the deals that we pursue we also.

Seeing longer sales cycle and also a slowdown in decision, making so this is.

I am sure Youll hood visit across the ecosystem.

And looking forward.

I think the demand will definitely be there.

What im seeing is that I've been talking to a lot of customers have been going around not been spending a lot of time on the road talking to our customers our partners and the demand is still there I think the demand is just shifting to the right.

Because of the slowdown in decision, making we're also seeing that as budgets are getting released.

This is the first quarter. So it takes time for the budgets that they show up.

<unk>.

So people are a bit cautious now given this backdrop.

Rack spaces prepared we will control what we can and manage what we cannot we will have a very tight control on expenses as Bobby mentioned, we'll continue to execute on our ongoing cost efficiency programs. We have lined up those programs will also make targeted investments to expand our services and solutions offerings.

To help customers optimize their costs and also deliver projects with faster payback and as I mentioned these projects are moving to the shifting to the right and we want to go capture those with the right.

Offerings that we can provide to the customers. So we believe that the demand for multi cloud will remain as it looks looking to the future.

And to be honest ashwin as we go through a transformation here in the company. We are taking advantage of the current macro conditions to complete our transformation improve our execution and also launch new offerings. So that we can continue to meet the customer demand.

So thats, what im seeing from a demand perspective, what I've seen in the last few months and what are you expecting.

Going forward.

Thank you net net that's a lot of good detail.

If I can follow up on that last part of what you said obviously.

From a personnel standpoint.

The organizations in complete now.

From from the perspective.

Investors looking to.

Figure out what the key.

Initiatives, our deliverables are there.

That we shared.

Our whole management account.

Accountable fall over the course of the year.

If you could kind of comment a bit more on.

On those.

What what Golar <unk> for yield management team.

On a full year Sam.

Yes, So let me I think that's a great question Ashwin.

I've been on the job for the last four or five months.

As I mentioned in my prepared remark. The first three four months was making sure that we have the we formalized the strategy. We created an operating model. We did a lot of heavy lifting a screen in our December quarter to re organize across the two business units. We have stopped started operating as the two business units starting Jan first.

As you have seen we are we have made the right leadership changes and very pleased with the leaders that we that have joined rack space.

And so our execution going for a focus going forward will be all about execution now you can imagine that as we do this kind of heavy lifting.

We are positioning the company for long term growth and its 2024 and beyond and as we do that and we are expecting some disruption happens when we go or reorganize the company and we would take almost 6000 people and reorganized across the two business units. So what do we expect.

There's the productivity will continue to improve.

Dk.

Brian Lilly and myself.

Very much engaged with our global market organization to make sure we drive clarity on the field on how we will go execute as a multi cloud company, although we are adding.

Private cloud and public cloud solutions to our customers. So a lot of things going on I think the key indicator ashwin.

As we.

We will a wide U b.

More.

Granularity and also visibility into the financials of the two business units. So as Bobby mentioned in his prepared remarks.

We will be reporting by essentially three segments will report by public cloud private cloud and open stack and how we report externally is how we will continue to manage internally right. So stay tuned and you will see.

We will also be looking at how we how we come and give you more color on what is net revenue versus gross revenue because as you can see we are making a real hard pivot from infrastructure resale motion to a services led motion.

And in doing so I think we are making some really tough thoughtful decision because we believe for every dollar of infrastructure that on the Hyperscale side, we have an opportunity to go and sell anywhere between three to seven or $8 of services on top of their infrastructure or the life of the infrastructure.

That's the kind of opportunity we're looking at so there'll be a lot of indicators that we will be providing that in the first one ashwin, we'll be giving you visibility on these segments with public cloud and private cloud and that is I think stay tuned for that and you will see us and talk about it now in terms of.

Indicators inside the company.

We have set up a financial plan, we have an investment thesis that we are working on for the next three years, we're lining up our operating plan. So that we can execute against those operating plans every single business unit has their kpis and opioids that are getting defined and we will manage very tightly. So we are getting into an operating rhythm. So that we can.

Execute on our strategy.

Alright, I should I would just add that.

This is a major pivot right.

We're trying to focus more on services and as you know services is a longer sales cycle. So.

It's going to take a little bit longer for that sales engine to get going and as Martin mentioned in his prepared remarks. It can be choppy for the next few quarters. So we got to understand that as we make this pivot.

And if I can just add that as a great point, Bobby that you bring up right. So we have two businesses, let's think about private cloud is an infrastructure as a service business that business has been largely sort of I would say, it's not ignored but it was it was not sort of deemphasize. Although we are seeing a lot of demand in that business coming.

Upright. So that's the reason we brought Brian Lilly, who has a great experience in the private cloud space because that's the business that we are going to transform and make sure that the business stops declining stabilized that business on the public cloud side of it is we are going to sell cloud services on top of the <unk>.

<unk> and Thats. The reason we have decreased the nalco has a lot of experience in scaling clubs.

I have experience in scaling digital services business. So stay tuned we will.

This takes time, but we are starting to see some initial.

For example last quarter, we sold one of the largest private cloud deal in the history of the company. So we are starting to see some traction there. This quarter, we signed a very strategic deal and extent expanded deal with Google on GCB that impacts our public cloud business and we also kind of.

The Mou with <unk>.

Thank you for all the detail.

Thank you.

Please.

Our next question comes from the line of Ramsey LSI of Barclays. Your line is open.

Hi, This is Ryan on for Ramsey. Thank you for taking my question today.

I was hoping for some additional color on the order book in the quarter and the backlog as you make this shift to higher value services and solutions are you being more selective with the workloads you take on and.

What strategy do you have to accelerate the percentage of the order book coming from these higher value services.

Yes, So let me first give you some color on the on the bookings itself for Q4.

Additional color on what we're doing so that we make this pivot. So that's a great question now.

In Q4 as we expected.

We are seeing a bit of a slowdown in bookings volume and this was driven by the impact of our reorganization and also the macro trends that we're seeing in the market.

As I mentioned earlier, Brian we are sealing seeing sales cycles are getting getting extended companies are reevaluating their it spend and there is a shift.

Our focus to more of a cost optimization and most critical projects are getting done. So in terms of our performance specific to fourth quarter. We saw good traction in the tip of the spear professional services for critical cloud projects as it relates to cost optimization, we continue to drive the mix shift to services in a public cloud business.

From a regional perspective, Asia Pacific and Japan, I was very pleased with the performance of a small base for us, but it did exceptionally well with very high double digit growth driven by our data business on cloud and we also had a.

A couple of large deals across both public and private cloud for example in public cloud, we signed a fairly good sized professional services deal for application modernization with the major Airlines as an example in private cloud, we renewed and expanded the contract with the mobile SaaS company to support their data platform in the private.

Cloud environment. So we are starting to see that pivot Brian . It does take time, when you make that pivot and it will.

For us the most important thing as Bobby mentioned is to bring this to build that services backlog and so in some cases, we will walk away from some of the infrastructure of.

Resale deals.

Specifically if it is in the commercial side.

In the small and the edge of the SMB, so to speak where there's no opportunity to land and expand so we'll walk away from those low margin deals, where we cannot expand with services, so that might impact our bookings and it might also impact our overall revenue.

Revenue in the short term, but those are the decisions we want to make sure that we can ship the DNA of the company to more of a high margin services led and high value.

Our sales motion.

Thank you.

Our next question.

The next question comes through the line of Frank Louthan.

Your line is open.

Great. Thank you.

Two quick questions.

Where can we expect as far as EBITDA margin sort of in Q1, and then kind of going forward.

And also on the level of capital intensity and then secondly, you made a lot of changes to the management team is that largely behind you or are there more hires that you think you need to make to get the team where it needs to be.

Yes, so I will start with the guidance question and then Rob you will definitely jump in here.

So let me start with the revenue first and I will not give you the EBITDA and EBIT margins, but ill give you enough color. So that you can you can model. It because Q1, we have already provided you the guidance on that.

<unk> continued to be a bit cautious.

<unk>.

With our guidance, we took a conservative approach to our revenue given the uncertain macro environment. We also expected lower usage in public cloud as companies focus on optimizing the workloads in our effort to reduce their overall operational cost.

You also had some revenue impact due to <unk>.

The state exchange ransomware attack.

<unk>.

And as we mentioned in my prepared remarks, we also believe that there is a potential disruption from our operating model realignment that we are undertaking right now. So these these impacts also flow through to our profit so essentially.

We expect.

Just on the guidance that we provided and we expect the EBIT margin to be in the $6 six 6.6% to 7% range, so to speak and our capex would be roughly.

And where we landed.

Q4 of 2022. So you can you can calibrate what the EBITDA margin is going to be based on that yes. The only thing I'd add there is on capex.

As we're focusing on the private cloud business.

We will see Capex increase.

Particularly if we're very successful that would be a good problem that <unk> mentioned this.

The large deal that we had signed in our in our history of the company.

There is a large capex associated that so you will see a spike in our capex in Q1.

Yes.

And on the yes, I think you had a second great frankly, any follow up on that or should I go to be on.

On the Capex with that deal are they paying for any of that upfront how should we think about that and how will that get booked and then.

What sort of a long term run rate for capital intensity of the business.

So I think the.

The contract is a long term contract.

Frank and so we make the initial capex investment is no different than what we do in any of our private cloud build and recall. This is a success based capex right success based capex means capex.

Yeah.

We only put the capex and if we have a.

<unk> order and a contract from a customer so it as I said good capex so to speak.

Then we have maintenance capex, so we're going to make sure. We we tightly manage the maintenance Capex and Bobby is all over it even on the success based Capex as we continue to drive innovation, we should see capex efficiency and that in the in the success based capex to date.

Okay great.

Yes, no thats good.

And then any future changes just any more changes to the management team or do you think you have things where you need to be for now.

Yes, listen I think.

That's a good point as noted in my prepared remarks.

Strongly that we now have the right leadership team in place Frank will drive us forward in our transformation.

We had.

B higher decay, a few months ago, we have Brian really managing our private cloud, we have Bobby Muller, who joined us as our CFO . So we now have season.

Leaders across all the functions so.

We also made some other leadership changes where necessary and so I feel confident that.

A lot of the heavy lifting is behind us.

Okay, great. Thank you very much.

Thank you.

Our next question comes from the line of Tien Shang Guang.

Okay.

J P. Morgan your line is open.

Hey, guys.

This is Brendan <unk> on her Tien tsin. Thanks, so much for the time.

Welcome Bobby.

So first off congrats great quarter nicely done.

<unk>.

Thanks for all the details on the changes just from like sort of a personnel and cultural perspective could you guys.

Opine on like the competitive environment in these new areas these new incremental areas for the business.

In services, both from competing for talent any incremental adds like in subject matter experts in private cloud and then also ex muscle.

Or.

Incremental competitive dynamics.

From winning new business, especially in a challenging macro thanks, so much.

Yes, sure. So if I got it but thank you very much for your question. If I got your question right the competitive environment in a new service offering and also competition for talent, if I got that right.

Yes, thank you very much.

I think the market and we see this all the time is definitely a lot of demand in the market of that we have to go capture that demand and then we have to execute against that demand.

So when you talk about the market opportunity there.

There is definitely competition, there, but there is enough of a level.

Market for everyone to play and we are very uniquely position. So to speak we are a pure play multi cloud company that means we do both public as well as private cloud and that's a very unique position for us. So as we go and talk to our customers.

It will be a very very neutral on where the workload needs to reside so it's all about workloads and where the workloads can be hosted so.

In terms of competition.

All three segments of the market.

We are just commercial segment of the market mid market as well as the enterprise segment, and we face off against different types of competitors in each of these segments.

In private cloud.

There was in the public cloud side and the private cloud side. It is a very fragmented market and we are one of the largest scaled player in private cloud, which means that there is a huge opportunity for us to bolt redefine the private cloud market itself given the surge in demand that we're seeing on the private cloud sites a lot of work.

Workloads in a regulated industry as an example, we believe will Dana hosted private cloud environment will move out of the data centers, our customers don't want to be in the business of running a data center. We are also seeing workloads that cannot be re factored but needs a sort of an on ramp to a public cloud private cloud becomes of.

Very good solution.

Solutions for those for those kind of workloads. So as you can see here I think we believe that we are very.

Very.

Well placed from a competitive perspective, now we need to get the right offerings and Theres a lot of work to be done so don't get me wrong.

We have a lot of work to do on the offering side on the solution side as well as on the operation side.

In terms of talent.

We are a technology and automation driven company. So unlike large system integrators, where we do not have a large staff augmentation business.

So you won't see us reporting attrition numbers are hiring numbers, because we think instead of just having a labor plus model. We want to go with an automation and IP led offering which we believe is a labor minus model, which is very compelling for our customers. So we will have to go compete with the talent don't get me wrong, we are.

<unk> talent because of <unk>.

Brand as well as a strong customer base that we havent in the solutions that we offer and.

That's not an area that we are really concerned about.

Thank you very much.

Thank you.

Next question comes from the line of.

One moment please.

Comes from the line of James Breen.

Great. Thank you. Thanks, Thanks for taking the question.

Can you talk a little bit about you touched on the margins a little bit I think it was <unk> question.

Obviously you.

Operating margin coming down sequentially in the first quarter is there seasonality to that and how do you feel about that as sort of a bottom for the year.

And then just looking at your gross margins across the three businesses as you report them now and I understand this is going to change but.

You had a pretty good step down obviously in third quarter, and then and there.

Segment again this quarter.

Any thoughts around just.

Basically.

Trying to have that attrition be quicker.

And giving up that revenue, but given also giving up all the losses that are happening there given how that gross margin continue to decline.

Let me, let me start let me talk to the sequential decline that you see there.

So there are several factors, causing that sequential decline in Q1, so from a revenue standpoint, there is a seasonality impact like you mentioned price in Q4 to Q1, we normally do see that.

There's also the impact of the December ransomware attack is now fully baked into the forecast for Q1.

And then as you've seen this statistic continues to be a decline in private cloud as well as our legacy opens back business as you mentioned.

Look the reality of that is the fact like Omar mentioned early on.

Emphasis on private clouds, so there's no surprise.

That's been declining and that's something that we're trying to arrest the decline on with the new focus on the new EU structure.

So a lot of these revenue impact also flow down to profit and then in addition on the profit side. There is also a season.

Seasonality impact from Q4 to Q1 for seasonal payroll taxes and benefits.

Look we're looking for opportunities to reduce costs and offset some of these revenue impacts and profit impacts.

But we got to still remain focused on growth.

Mario I think.

You covered it well.

So on the open stack that piece I think Thats. Another question you had James let me just jump was that business is declining I think that rate of decline has actually lowered in the in that open stack business, which is the open stack public public cloud business. So I think we had already factored that in our financial planning.

Financial model.

It continues to happen and I think the rate of decline used to be 20% plus now it's in the 15, 16% range.

And do you continue to expect is that.

Yes, I think we continue to expect that decline to continue.

As customers move away from that platform and Thats why.

We call it the legacy because thats.

Natural.

Kind of trajectory that we have seen for the last few.

For the last few years in fact.

And what we do.

As this happens we continue to take cost out and basically optimize our costs. So that we minimize the impact on the on the profit. So that's all a part of the plan.

Okay. Thank you.

Our next question comes from the line of Bradley Clark of BMO. Your line is open.

I rarely.

Alright, Thanks for taking my question I, just wanted to touch on the demand environment, a little bit more and more specifically are you seeing any difference in behavior across geography and homes.

Demand or focus on certain types of deals any more granularity you can provide on geographical demand. Thank you.

Yes, I think so listen I think I did mention on my earlier remarks earlier, our response our demand environment.

Across all the regions, especially in.

In public cloud.

On the infrastructure side has slowed down but again as I said most of the Hyperscale is reporting it but we are still printing double digit growth. So there still remains a lot of demand there.

By vertical of I can do a little bit of more color on verticals.

Especially in retail.

Technology vertical as well as.

In.

And in financial services et cetera.

Again, we don't go to go by vertical in financial services, but we have started seeing some some demand slowdown, but there are other verticals like for example, healthcare.

And we are seeing demand slowdown, but there is a huge opportunity to help transform especially on the provider side and help health care providers to accelerate their digital transformation and so we are seeing we are seeing a little bit of.

We are seeing some demand on that side. We are also in telco also we are seeing good demand. So it's a mixed bag, but generally the demand has slowed down across the board and across all geographies.

APG, we did very well as I mentioned earlier, we posted double digit growth with <unk> in a small base for us.

It is mainly driven by data services.

Which is also a focus area.

Data.

Immigration modernization and EA continues to remain a focus area across the board.

Anthony any other questions.

That's all our questions. So I would now like to turn it back to Robert Watson for closing remarks.

Yeah, just want to say, thank you everyone for joining us and I think we got all the questions, but if we didn't get to your question or you have any follow ups. Please reach out you can email us at IR at rack space Dot com or contact me directly. So thanks, everyone and have a great evening.

Thank you for your participation in today's conference. This does conclude the program and you may now disconnect.

Goodbye.

Okay.

Yes.

On the Capex.

We also began our EBIT margin.

But he didn't have the DNA did you disconnect.

I think we're still we're back.

And Roes are still on.

I think we're good to go.

[music].

Good afternoon, and thank you for standing by welcome to Rackspace Technologies fourth quarter 2022 earnings Conference call. At this time, all participants are in a listen only mode.

After the presentation, there will be a question and answer session to ask a question. During this session you will need to press star one one on your telephone.

Please be advised that today's call is being recorded I would now like to hand, the call over to Robert Watson Vice President of corporate Finance. Please go ahead.

Thank you and good afternoon, I am joined today by EMR voluntary our Chief Executive Officer, and Bobby <unk>, Our Chief Financial Officer recently joined in January .

<unk> obligation to update the information presented on the call except as required by law. Our presentation includes certain non-GAAP financial measures and adjustments to those 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 IR website I will now turn the call over to Omar for an update on the business.

Thank you Robert first I would like to quickly update you on the ransomware incident, we experienced late in Q4.

On December 2nd Rackspace detecting suspicious activity in our hosted exchange email environment, which triggered our incident response team to act immediately to contain the threat.

Quickly engaged industry, leading cyber security firm crowd strike and other experts to assist us with different SEC investigation, which was completed in roughly 30 days the.

The investigation determined this was the result of a zero day exploit which means the attack vector was not previously known and it was a sophisticated attack.

Due to our team's swift action to contain the threat. The impact was limited solely to the hosted exchange E mail environment, which makes up less than 1% of our total revenue.

No enterprise customers were impacted and no other rackspace products platforms solutions or businesses that are affected as a result of this incident.

We provided our hosted exchange customers with a path to migrate their email services to Microsoft 365, and assisted many customers with both the email and data transition.

Security is extremely critical for our business and we have the right focus and investments to continue to provide our customers with a secure environment.

With that let me share what else I have been doing since taking the helm in September .

I've been laser focused on transforming <unk> technology into our customer first cloud first company and changing the trajectory of our performance.

We are now poised to drive these changes throughout the company and bring our strategy to life.

We are very focused on fixing this business for the long term, even if it requires near term disruption.

While the next few quarters, maybe choppy our focus is on positioning the company for sustainable growth heading into 2024.

I am pleased to share some of the progress since our last earnings call first we delivered fourth quarter revenue and profitability above the high end of our guidance.

This is a positive step as we continue to build a track record of meeting or exceeding our commitments.

Second I am excited to welcome Bob <unk>, our new CFO , who joined in January and has hit the ground running given its services background and broad operational finance experience.

Good.

Hi, Brian Lilly as the president of our private cloud business.

And as previously announced <unk>.

As the president of the public cloud business unit.

And this we now have strong leadership for each of these two core segments.

Brian Deep technology experience and focus on strategy and execution will be instrumental in transforming our private cloud business.

Cloud solutions.

While we are only a couple of months into our new operating model I am encouraged by the early signs of progress. Although it will take time to fully reflect this progress and our financial results I strongly believe we are headed in the right direction.

As we navigate the challenging macro environment, we are experiencing some of the same trends highlighted by others in our industry.

Growth of the broader cloud market has slowed as customers are showing a heightened focus on efficiency.

Experiencing longer sales cycles.

The demand shifting to the right. We are taking advantage of current macro conditions to complete our transformation improved execution and launch new offerings.

<unk> margins were.

<unk> already taken several steps to accelerate our shift to a higher margin suite of services and expand our existing offerings.

Let me highlight a few examples.

We recently announced an expanded long term strategic partnership with Google Cloud.

As part of this partnership Rackspace will build out of Google Cloud Center of excellence with 250 certified GCB resources.

Together with GCB will drive joint business development around rack spaces, Google cloud services focused on areas such as application migration modernization data and AI.

We also recently launched modern operations, which is a new managed service offerings for public cloud network.

Provide customers across AWS Azure and GCB, a 24 by seven unified support model for a broad range of services.

Modern operations is a good example of the sticky annuity services, we are focused on expanding.

Our new operating model will ensure that we emerge from 2023 with the public cloud organization focused on the high value opportunities in this wide open market space.

The growth of public cloud has also spurred new demand for private cloud solutions public cloud is a great place for many new and emerging workloads companies are now realizing however that many workloads are most efficiently operated in the existing NATO environment. Many.

Many companies also no longer want to build or operate in house data centers and need a safe reliable partner to run mission critical workloads.

All that sums up to a significant opportunity for rack space as one of the largest scaled players in private cloud.

To address demand across a broad range of private cloud customers. We recently launched software defined datacenter offerings, including enterprise business and flex options.

This enhanced higher value offerings position us well to meet unmet demand in private cloud.

As Rackspace moves forward you should expect a continued focus on higher value innovations and public and private cloud, which underpin our strategy and new operating model.

In parallel we are progressing on industry specific offerings in both public and private cloud. We are building focused teams and solutions in verticals, such as healthcare Telecom Tech and gaming and public sector to better leverage our core multi cloud strengths and address the complex challenges facing our customers.

This Mou will enable rack space in Sudan to collaborate on strategic technology initiatives in support of Saudi Arabia vision, 2030, and ambitious blueprint for the Kingdom digital future.

This partnership is an example of rack space relevant and an exciting multi cloud market.

Before I conclude I'd like to extend my heartfelt gratitude to each and every one of our talented directors customers and partners around the world.

Over the past five months, we have accomplished a great deal and initiated critical changes within the company.

Our two business unit structure is now fully operational and we have assembled a strong leadership team to execute our strategy and plan.

2023 will be a transformational year for us as we continue to lay the foundation for long term sustained performance in the future.

I'll now turn the call over to Bobby for an overview of our Q4 financials.

Thank you Omar before I begin I would like to say that im extremely excited to join the Rackspace team.

I strongly believe in the turnaround and look forward to being a part of the next chapter of the Rackspace story.

I am also looking forward to meeting and talking with our investors in the coming days and weeks now onto the results.

In the fourth quarter, both revenue and core revenue exceeded the high end of the guidance that was provided on the Q3 call in November .

Total revenue was $787 million, which.

<unk>, 3% year over year growth in constant currency and 1% growth on a reported basis.

We continue to experience material year over year currency headwinds from our Europe business.

Core revenue was $752 million, which grew 4% year over year in constant currency and 2% on a reported basis.

Revenue in EMEA grew 7% in constant currency driven in part by the continued ramp of the BP contract, but declined 1% on a reported basis.

Americas grew 1% and APG grew 19% on an as reported basis with minimal FX impact.

non-GAAP operating profit of $74 million also exceeded the high end of our fourth quarter guidance.

This was down 40% year over year, primarily due to reduced gross profit from the ongoing revenue decline in our legacy open stack and private cloud businesses.

non-GAAP operating margin was 9% and non-GAAP earnings per share was <unk> <unk>.

In the fourth quarter, we generated cash flow from operations of $40 million and free cash flow of $25 million.

Full year basis, we generated $259 million of cash flow from operations and $179 million of free cash flow.

We ended the year with $241 million of cash and our $375 million revolver remained undrawn.

<unk> and over $600 million of total available liquidity.

We anticipate cash flow from operations to be negative in Q1, driven by seasonal cash outflows, but expect positive cash flow from operations in the remaining quarters.

Capex in the fourth quarter was in line with expectations with total capex of $43 million in cash capex of $15 million.

Capex intensity was 5% and 2% respectively.

For the full year, we ended at 5% total capex intensity, which was at the low end of our 5% to 7% guided range.

In the fourth quarter, we recorded $217 million of noncash impairment charges, driven primarily by $129 million of goodwill and a $75 million asset impairment.

The asset impairment was for our San Antonio headquarters office as we prepare for our relocation to a smaller footprint in north San Antonio later in 2023.

Additional details of these noncash expenses can be found in our press release and SEC filings.

Now moving on to the Q1 guidance.

Our guidance for the first quarter of 2023 reflects continued caution related to an uncertain macroeconomic environment and includes impacts from the December ransomware attack.

For the first quarter, we expect total revenue in the range of $752 million to $762 million.

Core revenue in the range of $719 million to $729 million.

non-GAAP operating profit of 47% to $53 million.

Other income and expense of $55 million to $57 million and non-GAAP loss per share of one to five.

Before I conclude I would like to remind everyone that beginning in Q1, we will start reporting revenue and profitability for our new operating segments public cloud and private cloud.

We will also continue to separately report our legacy open stack business as we have been doing.

We anticipate providing historical financials and the new segmentation prior to our Q1 earnings release in May.

And with that we will take your questions.

Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced.

Draw your question Press Star one again, please standby, while we compile the Q&A roster.

Our first question comes from the line of Kevin Mcveigh of Credit Suisse. Your line is open.

Great. Thanks, so much and congratulations on the Q4 results.

This fee for them or who but can.

Can you give us a sense as we're going through the restructuring just how we're thinking about free cash flow it sounds like use of cash in Q1, but.

Any sense of how we should think about that holistically for all of 2023, because it seems like you have got the capital to kind of Shepherd through this.

Restructuring with just any thoughts on.

Free cash flow overall.

<unk> up over 2023.

Yes, thanks, Kevin.

Thanks for the question so as we as Bobby mentioned in his prepared remarks.

Cash flow from operations in Q1 will be negative because of the seasonal impact that we have.

For two reasons one is there is a.

Bonus payments company bonus payments as well as we have a payment to one of the vendors. So this is this.

This is a this is typically a low cash flow quarter for us in Q1.

For the full year, we do expect free cash flow as well as cash flow from operations for the full year to be positive.

And as we roll through the year, you should expect our cash flow from operations to be positive.

And I would just add look cash flow generation is going to be a major focus for us major focus for me.

Yes.

We are working on a number of initiatives to drive these improvements.

Let me give you a little bit of color on this Kevin just in terms of our cash conversion cycle. We're very focused on that on receivables and payables were focused on our capex efficiency and improving that which.

Continue to look for cost optimization opportunities and look at it as a CFO .

And my Soul focus is going to be around managing cash and expenses and making sure that we're making.

Since two to drive long term growth.

Great. Thanks, so much.

Our next question.

Which comes from the line of Ashwin <unk>.

At Barclays. Your line is now open.

Ashwin.

Yes.

Hi, Ashwin <unk> from Citi.

Well.

Hey, guys.

Good to speak with you Bobby.

Sure.

Yes, My first question is.

If you can provide maybe more granularity with regards to.

How the demand environment is.

Evolving.

What we've heard from.

Other companies is that yes, obviously, a strong slowdown in December but by February things. It started picking up just a bit.

Is that similar to or different than what you are seeing any color you can provide with regards to the ability that you have.

Forward look would be great.

Thank you for the question Ashwin good to hear your voice.

Right.

So as you rightly said it'll all companies in the cloud ecosystem as it always should be not be cautious about the demand environment and rightfully so even with tough macro outlook.

We work very closely with the Hyperscale is true and as you know our Hyperscale is have also caution that the growth rates are slowing but still it's a double digit growth.

There are still reporting double digit growth.

We believe that the customers will maintain the ITC industry on mission critical projects, but slow spending on lower priority less critical projects and this of course varies by customer as well as vertical but broadly customers will be more focused on cost optimization of existing high usage workloads on projects that.

Have a faster payback, we're also seeing customer such.

Seeing longer sales cycle and also a slowdown in decision, making so this is.

Im sure Youll Hood this across the ecosystem.

And looking forward I think the demand will definitely be there ashwin, what im seeing is that I've been talking to a lot of customers have been going around not been spending a lot of time on the road talking to their customers partners and the demand is still there I think the demand is just shifting to the right.

Most of the slowdown in decision, making we are also seeing that as budgets are getting released.

This is the first quarter. So it takes time for the budgets that they show up.

<unk>.

So people are a bit cautious now given this backdrop.

Rackspace is prepared we will control what we can and manage what we cannot we will have a very tight control on expenses as Bobby mentioned, we'll continue to execute on our ongoing cost efficiency programs. We have lined up those programs will also make targeted investments to expand our services and solutions offerings.

To help customers optimize their costs and also deliver projects with faster payback because as I mentioned these projects are moving to the shifting to the right and we want to go capture those with the right.

Offerings that we can provide to the customers. So we believe that the demand for multi cloud world as I look into the future.

And to be honest ashwin as we go through a transformation here in the company. We are taking advantage of this current macro conditions to complete our transformation improve our execution and also launch new offerings. So that we can continue to meet the customer demand.

That's what I'm seeing from a demand perspective, what I've seen in the last few months and what are you expecting going forward.

Thank you.

Good detail.

If I can follow up on that last part of what you said obviously.

From a personnel standpoint.

The organization seen complete now.

But from from the perspective.

Investors looking to.

Figure out what the key.

Initiatives are delivering both our net.

That we shared.

Our whole management.

Countable fall over the course of the year.

Could kind of comment a bit more on.

On those.

What what Golar <unk> for yield management team.

Please Tim.

Yes, So let me I think that's a great question Ashwin.

I've been on the job for the last four or five months.

As I mentioned in my prepared remarks, the first three four months was making sure that we have the we formalized this strategy will create the operating model. We did a lot of heavy lifting a screen.

December quarter to re organized across the two business units.

We have started operating as the two business units starting Jan first as you have seen we are we have made the right leadership changes and very pleased with the leaders that we that have joined rack space.

And so our execution going.

Our focus going forward will be all about execution now you can imagine that as we do this kind of heavy lifting.

We are.

<unk> the company for long term.

Growth and its 2024 and beyond and as we do that and we are expecting some disruption happens when we go or reorganize the company and we would take almost 6000 people and reorganized across the two business units. So what we expect is the productivity will continue to improve decay.

Brian Lilly and myself, we are very much engaged with our global market organization to make sure we drive clarity on the field on how we will go execute as a multi cloud company, although well pad.

Private cloud and public cloud solutions to our customers. So a lot of things going on I think the key indicator ashwin.

<unk> is.

We will provide you the.

More.

Granularity and and also visibility into the financials of the two business units. So as Bobby mentioned in his prepared remarks.

We will be reporting by essentially three segments will report by public cloud private cloud and open stack.

And how we report externally is how we will continue to manage internally right. So stay tuned and you will see.

And in doing so I think we are making some really tough thoughtful decision because we believe for every dollar of infrastructure on the Hyperscale side, we have an opportunity to go and sell anywhere between three to seven or $8 of services on top of the infrastructure or the life of the infrastructure.

That's the kind of opportunity we're looking at so there'll be a lot of indicators that we will be providing I think the first one ashwin, we'll be giving you visibility on this segments, both public cloud and private cloud and that is I think stay tuned for that and you will see us come and talk about it now in terms of.

Indicators inside the company.

We have set up our financial plan, we have an investment thesis that we are working on for the next three years, we are lining up our operating plan. So that we can go execute against those operating plans every single business unit has their kpis and opioids that are getting defined and we will manage very tightly.

Getting into an operating rhythm so that we can go execute on our strategy.

Alright, I should I would just add that.

This is a major pivot right in there.

We're trying to focus more on services and as you know services is a longer sales cycle. So it's good to take a little bit longer for that sales engine to get going and as Martin mentioned in his prepared remarks and it can be choppy for the next few quarters. So we've got to understand that as we make this pivot.

And if I can just add that as a great point, Bob that you bring up right. So we have two businesses, let's think about private cloud, it's an infrastructure as a service business that business has been largely sort of I would say not ignored but it was it was not.

Sort of deemphasize, although we are seeing a lot of demand in that business coming up right. So that's the reason we brought Brian Lilly who has a great experience in the private cloud space because that's the business that we are going to transform and make sure that the business stops declining stabilize that business on the public cloud side.

It is we are going to sell cloud services on top of the infrastructure and Thats. The reason, we have <unk> <unk>, who has a lot of experience in scaling and lot of experience in scaling digital services business. So stay tuned we will.

This pivot it takes time, but we are starting to see some initial.

For example last quarter, we sold one of the largest private cloud deal in the history of the company. So we are starting to see some traction there this quarter we signed.

Strategic deal and expanded deal with Google on GCB that impacts the public cloud business and we also signed a Mou with <unk>.

Thank you for all the detail.

Thank you.

One moment please.

Our next question comes from the line of Ramsey LSI of Barclays. Your line is open.

Hi, This is Ryan on for Ramsey. Thank you for taking my question today.

Percentage of the order book coming from these higher value services.

Yes, So let me first give you some color on the on the bookings itself for Q4.

I'll give you additional color on what we're doing so that we make this pivot so thats a great question.

In Q4 as we expected.

We are seeing a bit of a slowdown in bookings volume and this was driven by the impact of our reorganization and also the macro trends that we're seeing in the market.

As I mentioned earlier, Ryan we are seeing sales cycles are getting getting extended our companies are reevaluating their spend and there is a shift.

From a regional perspective, Asia Pacific and Japan, I was very pleased with the performance, although it's small base for us, but it did exceptionally well with very high double digit growth driven by our data business on cloud and we also had a cup.

<unk> of large deals across both public and private cloud for example in public cloud, we signed a fairly good sized professional services deal for application modernization with the major Airlines as an example in private cloud, we renewed and expanded the contract with the mobile SaaS company to support the data platform and a private.

Load environment. So we are starting to see that pivot Ryan It does take time when you make that pivot.

<unk>.

For us the most important thing as Bobby mentioned is to bring this to build that services backlog and so in some cases, we will walk away from some of the infrastructure of resale.

Resale deals.

Specifically if it is in the commercial side.

Small in the edge of the SMB, so to speak where there is no opportunity to land and expand so we'll walk away from those low margin deals, where we cannot expand which services so that might impact our bookings and it might also impact our overall revenue.

In the short term, but those are the decisions we want to make sure that we can ship the DNA of the company to more of a high margin services led and high value.

Our sales motion.

Thank you.

Our next question.

The next question comes through the line of Frank Louthan.

Your line is open.

Great. Thank you.

Two quick questions.

What can we expect as far as EBITDA margin sort of in Q1, and then kind of going forward.

And also on the level of capital intensity and then secondly, you've made a lot of changes to the management team is that largely behind you are there more hires that you think you need to make to get the team where it needs to be.

Yes, so I'll start with the guidance question and then Rob you will definitely jump in here.

So let me start with the revenue first and I will not give you the EBITDA EBIT margins, but I will give you enough color. So that you can you can model. It because Q1, we have already provided you the guidance on that we continue to be a bit cautious.

Frank.

With our guidance, we took a conservative approach here to our revenue given the uncertain macro environment. We also expected lower usage in public cloud as companies focus on optimizing the workloads in the effort to reduce their overall operational cost.

We also had some revenue impact due to hosted exchange burdensome that attack and.

Based on the guidance that we provided.

The EBIT margin to be in the 666.6% to 7% range so to speak.

And our Capex would be roughly.

Where we landed.

In Q4 of 2022. So you can you can calculate what the EBITDA margin is going to be based on that yes. The only thing I'd add there is on Capex look as we're focusing on the private cloud business.

We will see Capex increase.

Particularly if we're very successful that would be a good problem to app and.

And <unk> mentioned this.

The large deal that we had signed in our in our history of the company.

There is a large capex associated that so you will see a spike in our capex in Q1.

And on the yes, I think you had the second great frankly, any follow up on that or should I go to be so.

On the Capex with that deal are they paying for any of that upfront how should we think about that and how will that get booked and then.

What sort of a long term run rate for capital intensity of the business.

So I think well.

The contract is a long term contract.

Frank and so we make the initial capex investment is no different than what we do in any of our private cloud deal and we call. This as a success based capex by its success based Capex means capex.

Yes.

We only put the capex in if we have a.

Order and a contract from a customer so it as I said good capex so to speak.

Okay great.

Yes, no that's good.

And then any future changes any more changes to the management team or do you think you have things where you need to be for now.

Yes, listen I think.

That's a good point as noted in my prepared remarks.

Strongly that we now have the right leadership team in place strength will drive us forward in our transformation.

We had.

B higher decay, a few months ago, we have Brian really managing our private cloud, we have Bobby Muller, who joined us as a CFO . So we now have season.

Leaders across all the functions.

No.

We also made some other leadership changes where necessary and so I feel confident that.

A lot of the heavy lifting is behind us.

Okay, great. Thank you very much.

Thank you.

Our next question comes from the line of Tien Tsin Huang.

Okay.

J P. Morgan your line is open.

Hey, guys.

This is Brendan <unk> on her Tien tsin. Thanks, so much for the time.

Welcome Bobby.

So first off congrats great quarter nicely done.

<unk>.

Thanks for all the details on the changes just from like sort of a personnel and cultural perspective could you guys.

Opine on like the competitive environment in these new areas these new incremental areas for the business.

In services, both from competing for talent any incremental adds.

Subject matter experts in private cloud and then also incremental competitive offer.

Mental competitive dynamics.

From winning new business, especially in a challenging macro thanks, so much.

Yes, sure. So if I got it but thank you very much for your question. If I got a question right the competitive environment in a new service offering and also competition for talent.

If I got that right exactly.

Exactly.

Yes, thank you very much.

And I think the market and we see this all the time is definitely a lot of demand in the market of that we have to go capture that demand and then we have to execute against that demand.

So when you talk about the market opportunity.

Theres definitely competition, there, but there is enough of it.

Market for everyone to play and we are very uniquely positioned so to speak we are a pure play multi cloud company that means we do both public as well as private cloud and that's a very unique position for us. So as we go and talk to our customers.

It will be a very very neutral on where the workload needs to decide so it's all about workloads and where the workloads can be hosted so.

In terms of competition.

All three segments of the market.

Commercial segment of the market mid market as well as the enterprise segment, and we faced off against different types of competitors in each of these segments.

In private cloud out there was in the public cloud side and the private cloud side. It is a very fragmented market and we are one of the largest skilled player in private cloud, which means that there is a huge opportunity for us to go redefine the private cloud market itself.

Given the surge in demand that we're seeing on the private club sites a lot of workloads in the regulated industries. As an example, we believe it will stay in a hosted private cloud environment will move out of the data centers, our customers don't want to go win the business of running a data center. We're also seeing workloads that cannot be re factored but needs.

A sort of an on ramp to a public cloud private cloud becomes a very good.

Solution for those for those kind of workloads. So as you can see here I think we believe that we are very.

Very.

Well placed from a competitive perspective, now we need to get the right offerings and Theres a lot of work to be done so don't get me wrong.

We have a lot of work to do on the offering side on the solution side as well as on the operation side.

In terms of talent.

We are a technology and automation driven company. So unlike large system integrators, where we do not have a large staff augmentation business.

So you won't see us reporting attrition numbers are hiring numbers, because we think instead of just having a labor plus model. We want to go with an automation and IP led offering which we believe is the labor minus model, which is very compelling for our customers. So we will have to go compete for talent don't get me wrong, we are at.

<unk> talent because of <unk>.

Brand as well as a strong customer base that we have and the solutions that we offer and.

That's not an area that we are really concerned about.

Thank you very much.

Thank you.

Next question comes from the line of.

One moment please.

Comes from the line of James Breen.

Please state your question.

Thanks, Thanks for taking the question.

Can you talk a little bit about you touched on the margins a little bit I think it was <unk> question.

Obviously you.

Operating margin coming down sequentially in the first quarter is there seasonality to that and how do you feel about that as sort of a bottom for the year.

And then just looking at your gross margins across the three businesses that you report them now and I understand this is going to change but.

You had a pretty good step down obviously in third quarter, and then and there.

Segment again this quarter is there any thoughts around just.

Basically.

Trying to have that attrition be quicker.

And giving up that revenue, but given also giving up all the losses that are happening there given how the gross margin continue to decline.

Let me, let me start let me talk to the sequential decline that you see there.

So there are several factors, causing that sequential decline in Q1 from a revenue standpoint, there is a seasonality impact like you mentioned right in Q4 to Q1, we normally do see that.

There's also the impact of the December ransomware attack is now fully baked into the forecast for Q1.

And then as you've seen this statistic continues to be a decline in private cloud as well as our legacy opens back business as you mentioned.

Look the reality of that is the fact like Omar mentioned early on.

Emphasis on private clouds, so theres no surprise, but thats been declining and that's something that we're trying to arrest.

A client on with the new focus on the new EU structure.

So a lot of these revenue impact also flow down to profit and then in addition on the profit side. There is also a seasonal.

Seasonality impact from Q4 to Q1 for seasonal payroll taxes and benefits.

But look we're looking for opportunities to reduce costs and offset some of these revenue impacts and profit impacts.

But we got to still remain focused on growth.

Good morning.

You've covered it well.

So on the open stack that piece I think Thats. Another question you had James let me just jump was that that business is declining I think that rate of decline has actually lowered in the in that open stack business, which is the open stack public public cloud business. So I think we had already factored that in our financial planning.

Financial model.

That continues to happen and I think the rate of decline used to be 20% plus now it's in the 15, 16% range.

And do you continue to expect is that.

Yes, I think we continue to expect that decline to continue.

As customers move away from that platform and Thats why you know.

We call it the legacy because that.

Natural.

Kind of trajectory that we are seeing for the last few.

For the last few years in fact.

And what we do.

As this happens we continue to take cost out and basically optimize our costs. So that we minimize the impact on the on the profit. So that's all a part of the plan.

Okay. Thank you.

Our next question comes from the line of Bradley Clark of BMO. Your line is open.

I barely.

Alright, Thanks for taking my question I, just wanted to touch on the demand environment, a little bit more and more specifically are you seeing any difference in behavior across geography and homes.

Demand or focus on certain types of deals any more granularity you can provide on geographical demand. Thank you.

Yes, I think so listen I think I did mention on my earlier remark earlier response.

Amanda environment.

Across all the regions, especially in <unk>.

In public cloud.

On the infrastructure side has slowed down but again as I said most of the Hyperscale are set accordingly, but we are still printing double digit growth. So there still remains a lot of demand there.

Vertical I can do a little bit of more color on verticals.

Especially in retail.

Technology vertical as well as in.

In.

And in financial services et cetera.

Again, we don't go to go by vertical in financial services, but we have started seeing some some demand slowdown, but there are other verticals like for example health care.

We are seeing some demand on that side. We are also in telco also we are seeing good demand. So it's a mixed bag, but generally the demand has slowed down across the board and across all geographies.

APG, we did very well as I mentioned earlier, we have posted double digit growth with APG and a small base for us.

It is mainly driven by data services.

Which is also a focus area.

Data.

Migration modernization and EA continues to remain a focus area across the board.

Yes, I think any other questions.

That's all our questions. So I would now like to turn it back to Robert Watson for closing remarks.

Yes, just want to say thank you everyone for joining us and I think we got all the questions, but if we didn't get to your question or do you have any follow ups. Please reach out you can email us at IR at Rackspace Dot com or contact me directly. So thanks, everyone and have a great evening.

Thank you for your participation in today's conference. This does conclude the program and you may now disconnect.

Q4 2022 Rackspace Technology Inc Earnings Call

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