Q2 2023 Rackspace Technology Inc Earnings Call
Good day, and thank you for standing by welcome.
Welcome to the Rackspace second fiscal quarter of 2023 earnings call.
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I would now like to hand, the conference over to your Speaker today Soccer High bar head of Investor Relations.
Please go ahead.
Thank you.
And welcome to rack based technologies second quarter 2020.
Earnings Conference call.
I am talking about Investor relations.
Joining me on today's call.
Looking at all our Chief Executive Officer, and Bobby Malone, Our Chief Financial Officer.
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.
In order to keep finding.
So I see technology assumes no obligation to update the information presented on the call except as required by law.
Our presentation includes certain non-GAAP financial measures.
Adjustments to these measures, which we believe provide useful information to our investors.
In accordance with it if it was we have provided a reconciliation of these measures to their most directly comparable GAAP measures in the earnings press release and presentation, both of which are available on our Investor Relations website.
Please note that unless stated otherwise all results are presented on a non-GAAP except revenues.
I will now turn the call over to Marc for an update on the business.
Thank you <unk> and welcome to rack space.
Fiscal second quarter 2023 exceeded our guidance for both revenue and EPS. This is the fourth consecutive quarter in which we exceeded our expectations.
As we updated last quarter, we have reorganized the company and are focusing on our two business unit operating model and strategy shifting.
Shifting to a more profitable business mix right sizing our cost structure and building our product offerings to position <unk> for long term success.
We are already seeing the benefits of organizing into two separate business units.
Our increased focus in the private club business has resulted in solid pipeline expansion and bookings growth.
Mmm and deep learning techniques to thrive driving unprecedented and exciting opportunities for businesses across all industries.
As a pure play global Multicloud solutions company Rackspace unique proposition is our expertise and experience in building and operating in a multi killed infrastructure and infrastructure.
Solutions.
Combined with our commitment to open source and the record <unk> of open innovation. We are the right company at the right time to accelerate the adoption of AI to commercial mid market and enterprise customers.
In June we launched phone <unk> <unk> <unk> <unk>.
Global spin up dedicated to accelerating the adoption of responsible solutions across all industries.
We have tapped into open innovation with our vast partner ecosystem.
For instance, we are combining forces with Google's cloud center of excellence and expanding our partnership with AWS to help our customers realise.
Tension.
You also recently announced the launch of a hosted a I referenced architecture powered by Nvidia and they'll technologies.
This partnership use rack space customers, a simplified path to build deploy and operate enterprise solutions across public clouds, and the Rackspace private cloud.
In less than two months since the launch we're already seeing significant early interest from existing customers and new prospects.
We currently have nearly 250 leads or 50 opportunities in the pipeline and executing on three global generator AI projects.
He also using fail and its capabilities to transform rackspace internal operations using AI as an example.
Launched rackspace intelligent copilot for the enterprise and engine designed to streamline and enhance the walk through of knowledge workers.
As we move into this rapidly evolving world of AI, we want to ensure we have an AI ready workforce attracts pace.
We launched fair alone and in order to electricity program that combines the power of massive open online courses are marks and digital currency willing to ensure that practice across our entire company have the skills and knowledge to capitalize on AI.
We launched <unk> in late July to get our entire workforce are ready in six months and.
In the first two weeks since the launch.
Percent of a global workforce certified as air already.
This demonstrates a key element of the agriculture.
<unk> commitment to continuous learning and the desire to deliver the best outcomes for our customers.
Now turn into second quarter updates on a business units and public cloud, we continue to implement a strategy of transitioning from low value infrastructure resale towards higher value added services.
And Q2, we launched several new capabilities. For example, we initiated a tripod collaboration with AWS and trend micro to ensure a secure and streamline AWS clubbed migration delivered by rack spaces plastic engineering offering.
We also expanded advisory offerings to help customers Jumpstart Zero Trust strategy, streamline migrations to Google cloud and expanded investment and Azure lending zones.
In addition, we released several new features supporting our modern cloud operations offerings for Multicloud that range from architectural reviews to customer service options we.
We continue to evolve go to market strategy, particularly in America with a sharper focus on a market segmentation and product offerings.
We also recently hired vivid portrait as a public cloud Chief revenue officer and experience the market leader with a strong track record of driving growth in digital and cloud services.
While the public services market remains challenging we are seeing early signs of civilization.
We recently won a cloud strategy and implementation program with a leading international insurance company as well as a cloud transformation project with the multinational beverage in retail company.
We also extended a relationship for another five years with a large Canadian government financial services agency.
Now turn into private cloud.
Demand for private guards solution remains robust, especially around workloads at me not operate efficiently and public cloud and applications requiring data 70.
Especially in vertical such as healthcare driving strong growth in both pipeline and bookings.
We significantly expanded our private cloud new product releases this quarter.
<unk>, our Vmware based software defined data center platform with enhanced management security data protection and ran somewhere prevention.
We scaled or private cloud storage and data freedom offerings to include block file and most recently objects storage.
Rolling it out to an additional six data centers and the U S and Europe .
We also published a reference architecture for AI cloud as part of our partnership with Nvidia Intel technologies.
Demand in health care has been strong and we won businesses with two leading healthcare providers.
To host a call electronic medical record the application and the other to build and operate the high performance computer environment for genomic research.
We expect the healthcare <unk> to show solid growth in the second half of the year and into 2024.
I'm pleased with a renewed focus on both innovation and go to market execution in a private club business.
As I mentioned last quarter. We also have two season technology leaders.
Hit the ground running plans we will.
Cloud cheap product and technology officer.
<unk> is the private cloud Chief revenue officer.
Now, let me wrap up by reiterating our top priorities, which we are focused on two turnaround the company's financial performance.
First grew up public cloud services business at or above market rate second there was the decline in private cloud and position this business to capitalize on growth opportunities and an attractive market.
Build a highly efficient cost structure.
And ultimately drive sustained growth and operating profit and free cash flow.
With that I'll turn it over to Bobby.
Thank you Omar <unk>.
Cover the total company results for the second quarter share. Some details on our second performance followed by R. T three guidance.
Addition to the benefits Amar described in our shipped to the to be your model.
As mentioned in the last earnings call, we have uncovered opportunities for further efficiencies in both businesses.
We've also been able to more tightly manage working capital specifically driving a more granular focus on questions. We.
We continue to pursue other cost reduction opportunities, while balancing that with investments in the market opportunity ahead of us.
Company gap revenue of $746 million was about the high end of our guidance down 3% year over year.
Total net revenue was $447 million down 10% year over year with declines in both public and private cloud.
Profit of $163 million was 22 per cent of gap revenue and 37% of net revenue.
On our last call we indicated that operating profit this year will try from the second quarter with sequential quarterly profit improvements anticipated for the remainder of 2023.
Primarily by cost reduction and some improvement in Max we are on track.
Just overhead with SG&A down, 7% year over year and 3% sequentially.
Given this operating profit was $39 million also above the high end of our guidance.
This was down 60% year over year, primarily due to revenue declines in our private cloud business unit.
Operating margin was five per cent of gap revenue and 9% of net revenue.
Loss per share was six cents, which was better than our guided range of seven to nine cents loss per share.
Cash flow from operations was $38 million in free cash flow was $14 million in the second quarter.
These results were in line with expectations due to our strong working capital management.
In second quarter redeployed $47 million of cash sourced from a revolving credit facility to opportunistically repurchase another $142 million of our senior unsecured notes in the marketplace.
Through July here today, we have repurchased a total of $222 million for senior unsecured notes using $77 million of cash.
We continue to monitor and assess further opportunities to deploy capital in accretive downside protected ways for shareholders.
Total capex for the second quarter was $45 million with a capex intensity of 6%.
We continue to expect Capex to be Laura for the next couple of quarters and end up in our typical five to seven per cent Capex intensity you branch for the full year.
Turning to our segment results for public cloud gap revenue of $435 million was up 3% year over year, driven by your infrastructure retail business, partially offset by declines in services public.
Public cloud net revenue, which includes our public cloud services revenue and infrastructure resale profit was $135 million down 7% year over year.
Services revenue was down 5% year over year, given a tightening of discretionary spending and customer optimizations.
We expect our private to a stronger services led focus to pay dividends as the macro environment improves and we mature or go to market.
Gross margin for our public cloud segment was 11 per cent of jap referencing down five percentage points year over year and 35% of net revenue.
Margin compression was driven by lower volumes across both services and infrastructure resale.
Segment operating profit in public cloud was $17 million, which was 4% of total segment revenue and 13% of net revenue.
And private cloud gap revenue for two two was $311 million, which includes legacy open-stack revenue of $32 million.
Year over year total private cloud revenue was down 11% the private cloud segment revenue decrease resulted from customers rolling off a whole generation private cloud offerings expected declining legacy open-stack offerings as well as the impact from the December hosted exchange Ransomware incident.
Private cloud gross margin was 37% down 10 percentage points a year over year and segment operating profit was $87 million at an operating margin of 28% down 10 percentage points.
Margin compression reflects the fixed costs associated with revenue runoff from this business, partially offset by cost efficiencies.
Overall, the quarter was in line with our expectations and consistent with our plan to improve our cost structure and transform our business makes a higher margin revenues over time.
During this transformation, we will continue to invest in innovative technologies and key market protocols as well as focused on cash management and continue to drive efficiencies.
Now onto our queue three guidance.
We expect the third quarter of gap revenue to be approximately 722, two $732 million.
Total operating profit is expected to be forty-three to $47 million in loss per share a four to six cents.
From a segment perspective.
We expect public cloud revenue of $428 million to $433 million and private cloud revenue of $294 million to $299 million.
Our tax rate is expected to be 26 per cent and other intimate and extent of approximately $58 million to $60 million in expenses.
The share count is expected to be around 215 to 217 million shares.
As we noted last quarter, we expect Q3 cash flow from operations and free cash flow to be positive.
Saga over to you.
Thank you Bobby.
Let us begin the question and answer session.
We ask everyone to limit discussion one question and one follow up.
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Our first question comes from the line of Kevin Mcvey with credit Suisse.
Kevin Your line is now open.
Great. Thanks, so much and really congratulations on the results given the transformation.
Hey, I.
I don't know where to start.
Talked about the general <unk>.
It seems like that's a massive opportunity is there any way to frame.
<unk> could mean to the enterprise overall and did that contribute to the beat him and I know there was a series of <unk>.
Product introductions incher quarter, but just a really really strong feet and you know maybe.
Hello frame puts and takes on the beaten if again at the general impacted that or if there's a way to think about what that can mean to the enterprise longer term.
Okay, Thanks, Kevin and thanks for the questions and Bobby will covered repeat.
In the quarter hour.
Let's say genitals.
Not contribute to the beach and Bobby will go through the details for you Kevin generally we I can be a massive opportunity for us Kevin and I will take a look at a generative AI AI in general it is all workload B R. A multi cloud solutions company and we are very <unk>.
<unk>. It does is it gives us an opportunity to go after this passive.
Massive workload.
Yeah, it's going to be very pervasive is going to impact.
All.
Businesses, all functions and the.
The amount of workload that will get created will be absolutely massive now think about generally we either way. We think about it is three layers and one is the infrastructure. The second is application or.
Data and third is application. So when you think about the infrastructure layer. It has <unk> it has storage and a test networking and when you look at compute it is what the <unk> will assist US for example, we believe that all the training models will run on Gpu's, but when it comes to influences spent most of the monetization will happen.
It'll be a combination of both Cpus as well as <unk>.
Norwich is also very important because data has to be stored and then and networking component also is critically important because they'll be ultra low latency and you have to improve the performance of the network and we.
<unk>, we have about two decades of experience and optimizing infrastructure for any workload. So we are very well positioned to build an AI aware infrastructure. Both on a private club site and also partnered with the public cloud.
Hyperscaler partners on the public cloud site data is another big opportunity for us as well as for the industry. Now you can do all the plumbing you.
The infrastructure, but if you do not have water flowing through the plumbing in this case data. It is it's useless. So we have a sizeable data practice, we can help customers to it all basically migrate data create the right data architecture. We can also have them in data reclassification. So good opportunity there.
And third of course, Kevin is application <unk>.
Taking those bright models foundation models to train and those since we have good experience in building and.
I walked road infrastructure, we can all we also have experience in building an infrastructure.
Applications. So it is really helps us from that perspective.
We have a lot of experience and multi cloud and we believe that this is a nephew workload that will not run and on prime and most of it was done in a multi cloud infrastructure, it's public or private and that's where we are going to capture it.
When you look at our strengths and we have 20000 customers and commercial mid market and enterprise that we can tap into we have a six and a half thousand employees 6000 of them are technologists.
10000, plus certification.
Mentioned in my prepared remarks re launched learn about 12% of the workforce.
Already in the last two weeks or so and we have an ambitious goal and getting everyone are ready in the next six months and more importantly, I think we also have the partner ecosystem and we continue to add to that partner ecosystem with announcements. So we feel very.
Confidence that if this takes off and which we believe will it will definitely be a positive for for rack space now we're not counting on this to turn around the business I want to be very clear.
Turnaround plans.
Based on the market opportunity, we have in public and private cloud excluding AI.
We have a very good plan that we are executing on and I'm very pleased with where we landed in queue too. So talking about the beat let me turn it over to Bobby Okay. He can go over.
Very outperformed Xmr's all Kevin defeat was primarily in our private business.
Worst icy, where we were able to run.
<unk> from customers on all generation private card offerings and then we also had a bit of conservatism built into the into the model as well the public power business came in line with our estimates even though as a macro environment was pretty much constant from Q1. So overall I'd say, we are pleased with our execution in the corner and the quarter and the beach.
<unk>.
Okay, Great and then just one quick follow up because you've just done a really really opportunistic shopper returned some of that debt, but if I look at the <unk>. If my match right. It looks like your <unk>.
Committed about 10 million in the first quarter retired.
10 million you committed $23 million cap at all in the first quarter of $142 million in the second and then 57 million.
After the second quarter.
<unk> way to think about what the potential capacity is to take down even more of those senior unsecured just again.
That'd be nice use of capital, particularly given where and it looks like your average is somewhere around 35 to 30 to 43 cents.
His worry been taken that data.
Correct correct.
We are optimistic with that right. So our priorities are capital allocation Fridays remain unchanged as.
As more information right are are parties around investing the business with radically and therefore, we're focused on.
We were opportunistic and what we did this quarter, we saw the the decorating it very attractive rates and so we executed an exact what you just talked about.
Could we could be doing that again in the future you know, possibly but we're more focused on the operations. If if the deck continues to trade that those levels.
Attractive.
Look at it but we also want to maintain our liquidity right. It's a tough macro so we wanted to be conscious of that want to make sure. We have dollars to invest back in the business and turnaround the business. So that's that's really our focus and that's that's kind of what we're we're lucky without looking for the rest of the year.
Congrats again.
Thank you Kevin.
Our next question comes from the line of Bradley Clarke with piano.
Hi, yes. Thank you for taking my question I know you discuss that Janet.
<unk> contributed to revenue in the quarter, but is there anything you can talk about related to booking a customer conversation.
And specifically what are you thinking in terms of timing of obstacles that organizations have to go through particularly on the data side before that can really start implementing a large scale.
Yes. Thank you.
Sure. Thank you very much value I think listen as I said I mentioned to Kevin.
We are very optimistic about the opportunity.
<unk> no the deals that we have been closing our modest in size from both revenue and bookings perspective, but that's what we expect right <unk>. It is at its infancy involving very rapidly.
Very early fees, which we call us at discovery and the incubation face fairly victorious as.
<unk> face will be basically have consulting services and workshop with our customers identify the use cases be about we have identified and all what finally 1200 13 use cases and in the last two months across multiple functions and and and.
Across multiple industries roughly around 12 domains. So that's the early fees. Once we identify the use cases 40 customers. The second phase we call as the incubation fees, maybe help the customers and I'll look at different foundational models look at whether they have the right data architecture.
And help them also a walk out the integration with the with the current processes. So that's the information based on most of the projects that we have seen are in those early phases of discovery for education and information I can win this moves into what we call is industrialization, which is more into the <unk>.
Tax and fees, that's where we will start seeing the scaling in terms of the deal sizes et cetera, and that's that's the area, where there's a lot of monetization. That's why we are so excited about it because ultimately these workload solid workers and workers have to run on infrastructure and there'll be a massive requirement of infrastructure <unk> story.
And networking and that's what we are very good at doing so.
We we have in less than two months just to give you a little bit of more color here as I mentioned my prepared remarks, we have roughly about 250 leads in the pipeline.
Qualified opportunities or 50, and we are closed three deals across multiple industries and in fact, we are closing two more deals by the end of this week. So very good traction I think the key hurdle for any customer is identifying just use cases and <unk>.
His foundation as it is it is going to impact.
Every single function, so there'll be massive number of use cases, so identifying those use cases.
The biggest challenges too they have the date already and the third challenges where are they going to run <unk> and the trading models Aeschylus and Princess and that's where we believe it's going to be on multi cloud infrastructure.
Public cloud as well as private cloud.
I appreciate that thank you.
As a reminder, if you'd like to ask a question at this time that is star one one.
Our next question comes from the line Frank Luthern with Raymond James.
Great. Thank you very much I just wanted to check was there anything sort of one time in a quarter of that helped the revenue.
Just just curious about that you know relative to the sequential guide.
And and then separately can you give us an idea of what sort of <unk> number of bookings or the percentage of bookings from new logos and and where are you as far as bookings coming in that are more AI eccentric. These days is that is that a material part of your your bookings you guys. Thank you.
Let me take the the one time question no. There were no maternal one time. This was really around what I just sat around private client business or we were essentially be able able to flush out the runoff from customers. They're on some of our whole generation private cloud offerings and then we did have a little bit of conservatism built in that I mentioned, so that's essentially what drove that day there was nothing material.
Terms of the a one timer yep.
Yep.
So in terms of bookings Frank.
I'm quite pleased with how the quarter panned out we had a good quarter given the macro backdrop as well as with all the changes we are making internally from a <unk> perspective.
And if you look at a second quarter bookings to be up sequentially in both the businesses private cloud as well as public cloud in private cloud and increased focus to distribute structure is also resulted in a strong sequential growth and bookcase and it's mainly coming in from international but we do expect that trend to continue.
Nine Q3, we also saw strong growth in private cloud pipeline and if I could have a significant growth in.
Particularly we're experiencing solid interest in it and one of our keyboard cause such as health care.
Now in public cloud, we did improve bookings sequentially. So we did see double digit growth ultra and bookings and the second order.
With an uptick in services bookings as you know we are moving towards the higher margin services business and shifting away from infrastructure.
All it takes time, but I know, we remain focused on on making that shift and our customers.
Many of our customers and the public cloud side are also focused on cost optimization. So mmm.
We as you'd think about Q3, we expect another quarter next quarter to be a sequentially gross order for us in bookings across the company.
Cause I can find with that yeah.
Yeah with that on the cost optimization are are you seeing are you seeing anything go in the other direction where are any any segments of your business looking to cost optimized pull back on some services or the or is it more coming to you to to try and and and save money that way.
Yeah, I think cost optimization also plays to our strength, we have cost optimization offerings that are helping public cloud customers in the cost optimization, where 2000, plus a bit of customers. Good view of the usage.
We can predict the usage, but we know where they are using the infrastructure. So b do helping cost optimization and so that is also helping but let me give you an aural color on the demand environment I think when we look at the demand environment across it's.
It has not gotten worse, it's consistent with the first half of the year Ah different dynamics and public versus private cloud Frank and public cloud.
We talked about customers continue to optimize the infrastructure spin cloud services spend typically lag infrastructure. So we continue to see softness and services demand and we are not the only company seeing that every company and the services ecosystem is seeing the same challenge. However, you started seeing and.
Better engagement from our customers, we believe that demand will recover in the next two to three quarters and when it does we will we will be there to capture it as we as we are continuing to see an increase in engagement. We also find to the go to market specifics specifically in the Medicare.
Nine private cloud the dynamics, a little bit different Frank you know customers are looking to move out of the data centers reduce.
Reduce capex and Opex investments and also looking at moving workers that are not operating efficiently in public cloud and this is created.
Little bit of sort of a momentum for us and it's it's a tailwind and given the focus we are showing up in many opportunities that we never had before so so this this is all good for a private cloud business. So two different dynamics I can also give you some color on what it goes because you know.
We are focused on three verticals as we reorganized the business and will expand it in the future.
Those three <unk> healthcare, specifically as I mentioned solid momentum and healthcare.
Customers are grappling with you know.
The reduction in the revenue per patient and the cost per patient going up so they're trying to do more with less and these are mainly regulated workloads, which are moving out of the data centers and capturing it in a private hostile environment.
We also have a vertical in private equity.
Basically so about 18 funds about 150 portable companies and we are seeing good traction and momentum in the private equity <unk> well most of the private equity firms are driving value acceleration and the third word vertical which has been a positive surprise for us is.
A public sector vertical in the U S. That's the vertical that peak their bookings target for first half they grew their bookings you're on year, and we expect that bookings actually two actually sequentially grow from Q2 223.
Great. That's a good color I really appreciate it thank you.
Our next question comes from the line of Red Alpha Yomi with bank of hope.
Yeah. Good afternoon, congratulations good quieter I have two questions one really to the the overland overall amount of debt.
Wanted to get some color on on your finances nieces and on your operating system <unk>.
If that exposure still about the same as if.
Q when it was about $534 million for both of those.
<unk> eyes, right and I was just.
If that if that was reduced at all.
That is that is about the same those are the the right estimates.
Nah not materially reduced from Q1 with respect to that.
Thank you my my other question is a little.
Hypothetical <unk> I'm just wondering if if you if you ever expect.
Further equity support from some of the lead.
Owners say a caller.
Do you ever factor that in as far as far as.
Your ongoing planning.
So it all <unk> I cannot disclose that print or listen to the end of the day, we are a public.
Perfect. Your credit company. So your question is whether we will get any further equity support from our sponsors is that a question.
Can you hear us.
Yeah.
Alright, let's go to the next question.
We can take the next question is there any other questions.
We have no further questions in queue at this time.
Thank goodness.
If not if he did not get to your question, but if you are a follow up please email us at <unk> at <unk> Dot com.
Everyone for joining us and have a great evening.
This concludes today's conference call.
Thank you for participating you may now disconnect.
Mmm.
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