Q1 2023 Rackspace Technology Inc Earnings Call

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Yes.

Okay.

Good afternoon, and thank you for standing by.

Welcome to Rackspace technologies last quarters 23 earnings conference call.

This time all participants are in listen only mode. After the presentation there'll be a question and answer session.

To ask a question during the session you will need to press star followed by the one on your telephone.

Please be advised that today's call is being recorded.

Now, let's turn the call over to Robert Watson, Vice President of corporate Finance. Please go ahead Sir.

Thank you and good afternoon, I am joined today by EMR Mala Tara <unk>, our Chief Executive Officer, and Bobby Mailloux, Our Chief Financial Officer.

This quarter, we will begin reporting in our new operating segments public cloud and private cloud as we previously communicated our prior multi cloud segment has been separated into its public and private cloud components in our prior absent Cross platform segment has been merged into public and private cloud based on the underlying nature of the products and offerings are.

Our prior open stack segment has been collapsed into private cloud. However, we will continue to provide visibility into open stack revenue. Please refer to our Investor relations website for historical financials, and the new segment definitions of financial metrics and other supplemental materials to todays earnings announcement.

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.

Space Technology assumes no obligation to update the information presented on the call except as required by law.

The build out of my leadership team with the appointment of two talented executives Michael Braun has been named a cheap legal officer Rackspace veteran of 16 years. Michael has most recently been serving as an interim chief legal officer.

He is clearly demonstrated the skills and leadership required to take on this role fulltime.

And Kelly till gas has been named achieved human resource Officer, Kelly brings or 30 years of experience and global human resources with a strong background in strategy and execution talent management organizational design and change management.

And finally since the beginning of the year. We've added three highly accomplished technology executives, Anthony Roberts, Betsy Atkins and Tony Scott for the Rackspace Board of directors I'm very pleased that they have chosen to join our board and look forward to working with them closely.

So we continued to make progress on the objective.

Upon becoming CEO realigning the company's operating model to better serve the attractive markets we operate in.

Build a susan executed team to drive our strategy forward and strengthening our board.

In the early days of these changes so it will take time for progress to be reflected in our financial results.

Before we provide an update on the new operating segments, Let me give my perspective on the market.

There has been little improvement to the macro environment. Since we last spoke with your customers remain cautious, resulting in lengthening sales cycles and before decisions.

Other companies in our industry are reporting the same trends.

However, we still expect a market to enjoy strong growth over the long term as Multicloud is a key enabler of digital transformation and improving business outcomes.

So we're using this flattening of the market to better position our company to capitalize once growth rebounds.

Our customers know they need our help migrating and leveraging multicloud. So our focus is on building the tools and services to meet them better with the R and the digital transformation journey.

Now, let me turn to a new segments of the two business units structure in the hiring of new leadership, we are prepared to better leverage to unique competitive advantages of each business.

Are engaging more closely with our customers and developing products and solutions that are lying to the specific market needs.

We have a global footprint flexible delivery model and the depth and breadth of capabilities, all strong competitive advantages that enable us to deliver differentiated value for our customers and.

And since we addressed both public and private cloud, we can provide an unbiased point of view to ensure a customer's issue an optimal outcome.

Cloud business unit operates as a service century capitalized model.

We engage deeply with customers to manage cloud complexity in Delaware value added cloud solutions and infrastructure application data and security to manage services Rackspace elastic engineering and professional services engagements.

<unk> leader of the public club business unit joined US mid last year and has been instrumental in shifting the organization from infrastructure resale value added services with an emphasis on customer partnership.

<unk> and his team are driving a customer first approach and developing strong relationships with both current and prospective customers.

As an example, we recently helped a large north American University to Containerize.

People soft environment.

And we also partnered with a large Asian customer to unify seven disparate data systems onto the actual platform, enabling business insights for the state quarters.

Build a services oriented leadership team and a focus is to continue to flawlessly execute a strategy to deliver industry leading growth.

Turning to the private cloud this business as a technology forward capital intensive model.

We had one of the largest scale players and hosted private cloud and have a diverse set of offerings to address a broad set of customer segments and industries.

Our strategy is to help customers efficiently and effectively move workloads from in-house data centers as well as workers that means not operate efficiently in the public cloud.

<unk> solutions can help customers address these challenges.

Brian Lilly joined us to need the private club business unit last quarter and is improving our execution management focus and accountability. He.

He has already made management changes and recently hired a new chief product officer, and Chief revenue Officer.

Also delighted to see us innovating again in a business we have taken for granted for far too long.

As an example, Brian in collaboration with a CTO <unk> has.

Plans to launch a next tradition private code offering later in the year.

This would take advantage of modern open source and cloud native technologists like proven it is in containers.

This will offer customers a full suite of private dot offerings that spanned from bare metal to virtual machines to containers to civil list computing.

Our strategy supports the secular trend of customers more into a more capital like model migrating workloads all of the data centers to manage solutions environment.

And this is just one of our initiatives to provide customers with a broader set of options in areas that they lack multicloud capabilities.

Take time to show results, but Brian and his team are focused on growing the business and improving our execution.

There is a bright future ahead for private cloud with an immense market opportunity.

In summary, just four months into this new model, we are already seeing some of the benefits first each segment is more focus on identifying opportunities that they can leverage the unique competitive advantages to capitalize on that attractive growth market.

Second we uncovered potential new operating efficiencies that both the business unit and corporate levels.

And third we have increased accountability across the company.

As we have stated previously our goal is to exit 2023, with a competitive cost structure and a strong pipeline backlog to drive profitable growth heading into 2024.

I will now turn the call over to Bobby for an update on the financials before wrapping up with some closing thoughts.

Oh Dear.

Thank you Omar I will cover the total company results for the first quarter then share some details on our second performance followed by our queue to guidance.

It'll company revenue of $759 million was down 2% year over year and slightly above the midpoint of our guidance.

non-GAAP net revenue as a metric we are introducing that applies net accounting to public cloud infrastructure resale revenue for clarity non-GAAP net revenue includes all revenue from our private business unit public cloud services revenues and only the profit component of public cloud infrastructure resale.

We believe non-GAAP net revenue provide investors with the visibility to the true margin profile of our business.

Please refer to our industrial relations website for more details and definitions.

For the first quarter total non-GAAP net revenue was $460 million down 9% year over year, driven by continued declines in private cloud, which as a reminder, now includes legacy open stack.

non-GAAP gross profit of $179 million was 24% of total revenue and 39% of non-GAAP net revenue.

non-GAAP operating profit was $51 million slightly ahead of the midpoint of our guidance.

This was down 55% year over year, primarily due to revenue declines in our private cloud business unit.

non-GAAP operating margin was 7% of total revenue and 11% of non-GAAP net revenue.

And non-GAAP loss per share was two sets within our guided loss per share range of one to five sets.

Cash flow from operations was negative $2 million in free cash flow is negative $14 million in the first quarter. These.

These results were in line with expectations due to our strong working capital management, which largely offset the impact of the company bonus payout and a large tender prepayments.

We ended the quarter with cash balance of $134 million and remained laser focused on cash flow generation.

Total capex for the first quarter was $72 million, while cash Capex was $12 million Capex intensity, it was 9% and 2% respectively cat.

Capex for the quarter was higher than at least in quarters driven in part by capital requirements for a new customer we signed in Q3 2022.

With regards to this customer as we began to executing Q1, we became concerned about the viability of the arrangements and ultimately it did not materialize as anticipated.

Capital purchase is tangible and will be redeployed to other business requirements.

As such you should expect capex to be lower for the next few quarters and remain in our typical 5% to 7% total capex intensity range for the full year.

Additionally, in the first quarter, we recorded $543 million of non-cash goodwill impairment charges. As a result of the January 1st reallocation of goodwill due to the business unit realignment and the decrease in our market capitalization.

Onto our segment results now that we are operating in our new segments public cloud and private cloud, we will no longer require the multicloud apps and cross platform and open stacks segments. After this quarter.

Please refer to our Investor Relations website for historical financial information and the new site.

And our earnings presentation, an estimate of R. Q1, 2023 revenue in the prior segments.

Public cloud revenue of $445 million was up 7% year over year, driven primarily by our infrastructure restart business.

Public cloud non-GAAP net revenue again. This includes our public cloud services revenue and infrastructure resale profit was $146 million up 1% year over year.

While revenue growth and services was 3% in Q1, it will take some time for the business to reach sustained growth in line with the market as we headed to a services led motion.

Gross margin for our public cloud segment was 12% of total revenue and 37% of non-GAAP net revenue.

Segment operating profit and public cloud was $25 million, which was 6% of total segment revenue and 17% of non-GAAP net revenue.

And private cloud total revenue for Q1 was $314 million, which includes legacy open-stack revenues of $34 million and what's down 12% year over year.

The private cloud segment revenue decrease resulted from declines in our private cloud offerings and legacy opens back as well as the impact from the December hosted exchange Ransomware incident.

As a reminder, a hosted exchange E mail business represented less than 1% of the total company revenue in roughly 2% of private cloud revenue.

Private cloud gross margin was 40% and segment operating profit was $93 million at an operating margin of 30%.

Given the continued widespread attention the macro environment and financial sector disruption I would like to reiterate some important points regarding our balance sheet and capital structure.

We have a solid that structure with favorable terms, which was less impacted by the recent been up in interest rates.

70% of the desk as either fixed or hedged and the average interest rate on our total debt was five 5% for the first quarter.

We have no funded debt maturities until 2028, and we have no maintenance covenants, which gives us significant flexibility in runway as we execute our transformation plan.

Second Rackspace has nearly $550 million of liquidity comprised of $174 million of cash on the balance sheet and at 375 million dollar Undrawn revolver.

It is worth noting that hour revolver commitments are provided by some of the largest global financial institutions and we have no exposure to the us regional banks that have recently face challenges.

And finally in the first quarter Opportunistically spent $10 million of cash to repurchase $23 million of our senior unsecured notes in the marketplace at a deep discount.

These transactions were at an average price of approximately 43 cents on the dollar and will result in $1.2 million of annual interest expense savings, we will continue to monitor and assess further opportunities to deploy capital and drive shareholder value as a Martin noted in his prepared remarks, 2023 will be a transformational year and we believe our performance.

Will reflect that we will continue to focus on preserving cash optimizing our expenses. We know it will take time for the transformation to drive improved financial performance, but we expect to begin seeing sustained progress in 2024 and with that backdrop, here's the guidance for Q2 weeks.

We expect total revenue in the range of $725 million to $735 million.

From a segment perspective, we expect public cloud revenue of 430 $435 million and.

In private cloud revenue of 295 $300 million <unk>.

non-GAAP operating profit of 33 $37 million non-GAAP loss per share of seven to nine.

Additionally, non-GAAP other expense of $57 million to $59 million non.

non-GAAP tax rate of 26% non.

non-GAAP share count of 214 to 216 million.

And as we noted last quarter, we expect queue to cash flow from operation and free cash flow to be positive.

Lastly, we expect Q2 operating profit to be the trough with sequential prophet improvement anticipated for the remainder of 2023, driven primarily by cost reduction and some improvement in mix.

Will now turn the call back over to Omar for some closing comments.

Thanks, Bobby as I mentioned last quarter 2023 is a transformation and we expect performance to be choppy.

This is reflected in our guidance, but as Bobby noted, we do anticipate you to being the low point from an operating profit perspective.

We are fortunate to operate in growing markets and are working hard to improve our execution across the board.

We are focused on four priorities to turnaround the company's financial performance first grow a public cloud services business at or above market <unk>.

Second stemmed the decline in private guard offerings, excluding open-stack third build a highly efficient cost structure, and lastly drive sustained growth and profit and free cash flow.

We are making progress, but we have a lot of hard work ahead, we have a good strategy a solid plan and a strong team. So I'm confident we'll get this done.

And with that we'll take your questions.

Thank you at this time I would like to remind everyone in order to ask a question. Please press the star followed by the number one on your telephone keypad.

<unk>, just a moment to compile the queue and they will start.

Your first question comes from the line of Franklin from Raymond James. Please go ahead with your question.

Great. Thank you could you just give us a little more color on what's in the public and the private cloud I assume that open stack and ask you cross platform are in private cloud.

The relative profitability there how should we think about that and how quickly you can sort of exit those businesses and then look for other opportunities for private cloud. Thanks.

Yeah, So Frank.

Thanks for the question so in.

Your question is around what's in the private clerk segment or both private and public cloud.

What kind of how you divided them up and just what we should do about.

The difference across the profitability.

Absolutely so so so frank.

The private cloud segment includes both private cloud, which includes managed hosting and we will also included open stack, which shifts infrastructure with private cloud and it's also managed by Brian Lily some of the apps and cross platform that pertains to private cloud is also included in the private docks segments. So private.

Code segment address as the private cloud market.

Vice versa public cloud segment has infrastructure resale that we do across all the three hyperscalers and the services.

For public cloud that includes services our infrastructure.

Application data and security both in a managed services Lovesick engineering and professional services. So those are two segments.

Now from a profitability perspective in a public cloud.

Public cloud.

And when you look at gross margins and we are we are provided the gross margins.

To you in the segment financials, so it's operating at around 36% gross margins.

And public cloud on a net basis and which is.

Using gross gross profit as a percentage of net revenue and and Ah Bobby defined what net revenues in his prepared remarks.

All the gross margins on a gross this was about 12% on a net basis was about 36% now the reason why we provided that metric to you. So that you can really understand the underlying gross margins of the business update excluding the impact of the infrastructure resale gross margins, which day.

Quickly dilutes the gross margins as you know gross margins for infrastructure retail sales.

Very low.

On the private cloud side, the gross margins that we posted in Q1 is about 40%. So as you can see here, we have given a lot of transparency and our financials. Now. This is how we are going to manage the business internally. So we have two two liters managing public and private club and does it.

We are going to report externally.

To the to the street.

Alright, that's great and just follow up on the trough in the in the queue to profitability. So you said, that's going to improve sequentially, mostly from cost cutting what else can you give us.

Gives you the confidence that this is the trough and we're gonna be moving forward from there.

Yeah, Hey, Frank.

So look we provided guidance here in terms of in terms of future being below point, we're pretty confident about that cause we got some significant cost action underway and then play as we Sigma entered the business into these to be used we've talked about that we've we've uncovered some significant opportunity to take cost out which were executing on and we can.

Double down on that for the second half as we've seen kind of the macro economic environment.

Kind of stall. So we're pretty pretty confident are very confident that we will see sequential improvement in Q3 and Q4 going forward at the same time, we will see a little bit of mix improvement too that should help us.

So that's what gives us confidence.

So if I can just build on that Frank if I may right I think the other question is.

For us what are the early indicators of progress as vehicle segment of two businesses are anti business into two business units.

And I am focused on three indicators as a measure of a successful turnaround of this company.

<unk> in public cloud and keeping a close watch on our services growth and how the mix of the business is changing from low margin in front to a high margin services business as you know since the building of services backlog typically takes around six to nine months and Thats what process, we already initiated I expect physical 23 to be a very low.

Root beer for services with growth acceleration in fiscal 2024, so that's the first indicators.

In private cloud I'm very focused on making sure it'd be arrested decline in revenue excluding the impact of Open-stack. So we have initiatives in place to board grow the bookings and backlog, while also actively reducing the tune in in private cloud as you know.

Given the long sales cycle and time it takes to implement the solution I do expect better performance starting in 2024, and just to give you a little bit additional color you Frank.

Percentage point of improvement in revenue growth at roughly about $7 million to $8 million of incremental profit due to the high fixed costs and the positive operating leverage we have in the private club business.

And the final metric, both Bobby and I'm very much focused on is making sure that we go drive cost efficiencies as you know as we split the business in two business unit, we have uncovered.

<unk> operating efficiencies that we can go drive and also on the cash flow site focused on cash flow generation and preservation. This thinks that Bobby and I will be keeping a close tab on.

Alright, great. That's very helpful. Thank you.

Thanks Frank.

Thank you. Our next question comes on line of Kevin Mcvey from Credit Suisse. Please go ahead with your question.

Great. Thanks, so much I appreciate the additional disclosures eight amrapali any way to think about what free cash flow should be for 2023.

Beta associated with that and what type of macro environment, I mean, you're pretty comfortable with the current environment like what type of.

Macro allegory showing as you work your way through this transition.

Yeah.

Kind of look.

For free cash flow <unk> earnings call back in February we did anticipate Q1 cash flow to be slightly negative.

But we do expect positive cash flow from operations, we were getting quarters, and we do expect free cash flow to be marked in closet for the full year.

EBITDA perspective.

So I think so on the EBITDA perspective, Kevin.

We expect.

If it is to trough this quarter in Q2, and then from there of sequential improve now we don't want to provide the EBITDA forecasts for the full year revenue.

Focus I would like to give you an outlook one quarter at a time given the uncertain macro environment and also given the transformation that we are driving so we need some room here to go change the mix of the business, Kevin 222 more of services compared to infrastructure resale. So there are a lot of moving parts here. So.

Guide you one quarter at a time, but as Bobby mentioned, we expect free cash flow to be marginally positive and it will we will ended in a good place in Q1, given all the one time.

Cash expenses that we had in Q1.

And then from a macro perspective, just on that 0.7.

Kevin.

It's a tough macro right now right. So our assumption is there may stop.

And the market doesn't get the macro doesn't get any better either.

Okay, that's kind of our assumption going through these.

They started <unk> got it.

And then as well into our pull your cash flow and free cash flow guidance.

Great and then it looks like you took the opportunity acquire some senior notes about $23 million should we expect more of that over the course of the year or just any any thoughts around that.

Yeah.

Or that is trading at high discounts. So we do see that every.

We did purchase $23 million unsecured bonds at at the tender $10 million that you talked about.

Ah.

When it comes to when it comes to repurchasing that we will consider it but our priority is investing in the business.

<unk>.

Too profitable growth going forward, that's our priority R capital allocation parties I haven't changed in our top priority remains investing in the business. So.

And if I can just add to that the results that we also want to be prudent about maintaining liquidity.

Kevin given given the uncertain macro environment and all sort of ongoing transformation. So we will balance all those things you know investing organically as Bobby mentioned being opportunity. If you have to but also making sure that we maintain sufficient liquidity.

Given the transformation and the macro Oklahoma.

Thank you.

Thank you. The next question comes from the nine a Ramsey L. F. L for Barclays. Please go ahead with your question.

Hi, This is Ryan Campbell on for Ramsey, Thanks for taking my questions today.

I was hoping you could provide a little additional color on the bookings pipeline. What dynamics are you seeing from current clients first new logos and then.

Sales perspective has your approach changed in order to accelerate the shift to higher value services.

Yes, I would take both let me just.

Talk about the macro environment, a little bit here and take the opportunity to do that and then I'll give you some color on bookings and and then what what Ah what is changing within the go to market organization to drive higher margin mix of services, So it'd take too.

Similar to what we said last quarter.

Many many companies.

Ooh, we compete with in the cloud ecosystem remain cautious about the broader macro outlook and the fact that they seem to demand and receive different dynamics in our public cloud as well as a private club business for example in public cloud.

When we talked to our customers most of our customers are focused on optimizing the cloud spend and all the discretionary spending under heavy scrutiny.

But as in private cloud customers are looking to move out of the data centers. They want to reduce capex investments and they're also looking at moving workloads that are not operating efficiently in public cloud.

So again as Bobby mentioned, we are prepared to navigate the slowdown while preparing for a rebound. So we will continue to manage our expenses. We are also expanding our services and solutions offering across both public and private cloud and somebody I'd say, we are trying to take advantage of the current macro conditions to complete our transformation and improve.

<unk>, so as a customer spending pretends to normal and will be prepared to capture the demand and begin to grow at or above market. So that's.

R.

Strategy here, and how we want to execute upcoming to bookings.

We did expect a bit of a slowdown in bookings volume driven by both the impact of macro environment as well as a reorganization.

As I mentioned in my prepared remarks, we continue to see longer sales cycles as companies reevaluate the spending shift focus to cost optimization as I mentioned earlier. So in terms of performance specific to our first quarter. Although we do not give specific bookings number bookings split off to a slow start across all geographies.

However, as a quarter progressed, our bookings showed typical sequential improvement within the quarter and we continued to Ryan mixture of the services in a public our business I'm I'm glad we're we landed from a mixed perspective, but we still need to go make sure to restart.

Growing our services bookings at or above market. There's some work to be done there we saw a funnel in certain verticals in private cloud specifically in healthcare. It continues to improve which is very encouraging right now from a sales perspective.

There's definitely a shift in how we go to market today. So we used to have an infrastructure retail motion with services attached we are flipping it to a services led motion with infrastructure resale as an attachment Guerra recap right, we're not forcing that we're also having the right level of discussion whether it's with the cbo's.

Attributor offices for our data services are we go and talk with the business skies for application modernization services. So this is a different motion than what we had in the last couple of years. We also focusing on enterprise accounts as well as mid market Enterprise account is we are focusing on the large twenties.

By 30 accounts, so that we can selectively penetrate dose enterprise accounts using a client principal model, whereas on the mid market, which I believe is a sweet spot for for the size, we are and the biggest opportunity for us to expand his in mid market for public cloud services, where we are using a different approach. So we have original model.

We have we have an an old model by service line and we do have some sales specialists. So this this is weird really transforming the way we go through the mark to market and have a discussion with the customer but more importantly, we are keeping a customer at the center of what we do and drive more infinity to the customer that's how we believe that we can win more bit.

Fitness.

Any other question.

John .

Can you hear.

It wouldn't pay here was on mute, let's move to the next question. Our next question comes from the line of Abdullah cough from ethical. Please go ahead with your question.

I'd be one plus speaking in for.

And I wanted to ask about specifically public cloud gross margins in the corner and I noticed that at.

At about 30% as you mentioned number versus like 46 per cent in Q1 of 22, and that's based on marginally higher net revenue. So I just wanted to ask what kind of how we can expect that to be or go or stabilise going forward.

Yeah, Thanks, a pillar hope you're doing well.

Listen I think you're absolutely right, our gross margins with 36% on a net basis and it goes roughly 46% last year now what is happening here are two things. One is as we go pivot to our services business and also we are seeing a slowdown in demand in services because of the macro environment. We are seeing.

The utilization offer services resources and that is what is key in drive is key driving this gross margin compression now Bobby mentioned about cost efficiency programs that you're running and this is starting to run this quarter as well as in the second half that will be partly will be to go improve our utilization of our services.

Sources as well as making sure that we have the right opex structure as we go along.

Our services like motion in the marketplace.

I would just add this is part of the efficiencies that we've uncovered as <unk> mentioned the business and is <unk> one of the things that we are definitely looking at between a slowdown are available resource total resources and that's something that we're going to address as part of our second half cost actions.

Perfect.

Yeah, Let me just give you an additional color because this is the first time we are reporting. This this this segment inflammation.

For us reconsider fiscal twenty-three as of as of year to start pivoting the business to higher margin services. So there are a lot of things there are a lot of dynamics going on because previous years of previous segment reporting in this segment reporting for us and for US. It starts from now and this is how we are going to go manage I do believe that when you take a look at a <unk>.

Look at the the public cloud our services companies services companies typically operate within 30% to 35% gross margins.

And that's the range that we should be operating and so we are actually on the higher end of the range, but as we go drive more growth in our business will have a positive impact from the higher margin services, but more importantly will also be driving reutzel.

It's a competitive environment. So we believe that.

Sort of low to mid.

About 30% gross margins are the right gross margins for our services business on a net basis.

Public cloud services.

Okay. That's really helpful. Thank you and then just one additional follow up really quickly.

When you say you guys want to grow up the public cloud app or above market are you guys comfortable giving you arrange your number but that would be really helpful. If possible. Thank you.

Say that again, what's the last.

A range or a number for the market growth.

Yeah, So listen I think the market.

There are a lot of.

The data that we believe that this business right now in the current Macroenvironment is hard to predict what the growth rate is but long term growth rate for this for the for the public cloud services should be you know.

Low double digits right.

So that's what we are targeting high single digit too low double digits.

What we believe is a long term sustainable growth rate for public cloud services.

That should be helpful. Thank you those are all my questions.

Thank you.

Thank you as a reminder, if you'd like to ask a question today. Please press the star followed by the one on your telephone.

Our next question comes from the lineup Jane J P. Morgan. Please go ahead with your question.

Hey, Thanks for taking my question I just wanted to follow up on the prior question.

On public cloud, how nazi's reselling business within public clout.

Well I think listen I think there are a couple of good to hear your voice.

Thanks for the question.

So.

We will not be able to disclose for various competitive reasons.

Trade reasons, we are unable to disclose how big is it infrastructure resale.

Compared to our overall, having said that I think the information you can.

You can extrapolate this information and further information based on the visibility we have given on for the net revenue. Okay. So that's already there, but I'm not going to disclose what this number is for competitive reasons.

That's fair that's fair.

And if you can also talk about like the visibility you have on the second half of this year, maybe from the <unk> backlog.

Oh like colors like Howard bookings trending in how much visibility you have whole.

Second half at this point of the year.

So to be honest with you I think the visibility limited as in the macro environment remains to be very volatile.

And our customers.

Are also focused on making sure that trade rail trail and optimize their spin. So most of the projects are on cost optimization, and so I think that to be honest with you the visibility is limited.

Some sort of with the demand environment, having said that in our our internal goal is to continuously drive booking sequentially every quarter.

Restart it takes about a couple of quarters for our sales organization to settling into this new model that we have created and we are hoping that as we go.

All through the year, our booking should improve sequentially now I don't know whether demand environment is going to be but I think we have we have put a conservative plan in place because we want to get into the rhythm of going in executing well and broken on the bottle market site.

I would just say that we have a lot more confidence in the operating profit performance during the rest of your that's why we're confident that.

That we will see sequential improvement.

10-Q, three and Q4.

And I had to add to the point for it.

There are and we have been seeing this for a couple of quarters and I would like to repeat the same thing we are walking away from infrastructure resale business that doesn't have the right return on invested capital of which on a fully loaded basis will be cash flow negative.

So I.

I want to make sure that we continue that discipline. So that we can we can start building our services backlog in this business and that's the reason I say the transformation the macro outlook makes it a little uncertain for us to start predicting what the book is going to be for the second half.

Got it thank you.

Thanks, so much.

Final question of the day comes from the lineup that cloud from Bank of Montreal. Please go ahead with your question.

Hi, Thank you for taking my question I can ask a bigger picture question with all the bugs around I I am.

January .

One understand how rack space is looking at this.

In terms of opportunity for the business day, but also the potential.

10, a M on Broadway to I T services. Thank you.

Yes. Thank you that's a great question and I'll.

Listen Brentwood chat GPT going wild and each hyperscaler, making significant investments in the customer's.

Customers continued to express excitement and also we are seeing this willingness to leverage generated AI and we both talk with the customers. We have the capabilities by the way needed to achieve the business outcomes that are designed in the market place and these capabilities range from a advisory services, all the way to transformation and implementation indeed.

As well as AIG. So we have we have really a cool team of data analyst in AI specialists.

That are in all across the globe that have the capability today. So we are seeing a lot of excitement and the hype in this area.

When talking with our customers a prospective customers.

To be honest, we don't expect to see that result in revenue or profit of any material value in 2023.

Thanks for the color.

Okay.

Thank you we have no further questions at this time I would now like to turn the call back to Mister Robert Watson Finally, continuing remarks.

Yeah. Thank you everybody for joining us.

You have any follow up questions. Please reach out to us at IR at Rackspace Dot Com and we will speak with you all soon thanks. Thanks, so much.

Thank you. This concludes today's conference call you may now disconnect.

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