Q4 2023 Rackspace Technology Inc Earnings Call
Operator: Good afternoon, and thank you for standing by. At this time, all participants are in a listen-only mode.
Speaker Change: Good afternoon, and thank you for standing by at this time, all participants are in a listen only mode.
Speaker Change: 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.
Speaker Change: You asked a question during this session you will need to press star one on your telephone.
Speaker Change: Please be advised that today's conference is being recorded. I'd now like to hand the call over to Sagar Hebbar, Head of Investor Relations. You may begin.
Speaker Change: I'd now like to hand, the call over to the Guy High Bar head of Investor Relations you may begin.
Sagar Hebbar: Thank you and welcome to Rackspace Technology's fourth quarter 2023 earnings conference call.
Speaker Change: I am Sagar Hebbar, Head of Investor Relations. Joining me on today's call are Amar Maletira, our Chief Executive Officer, and Mark Marino, our Chief Financial Officer.
Bob: I don't Investor Relations. Joining me on today's call. Maliki, Ross, our Chief Executive Officer, and Mark <unk>, our Chief Financial Officer.
Bob: Joining me on today's call. Maliki, Ross, our Chief Executive Officer, and Mark <unk>, our Chief Financial Officer.
Bob: Maliki, Ross, our Chief Executive Officer, and Mark <unk>, our Chief Financial Officer.
Bob: 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 obligation to update the information presented on the call, except as required by law.
Bob: 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. Technology assumes no obligation to update the information presented on the call except as required by law.
Bob: A discussion of these risks and uncertainties is included in our SEC filings. Technology assumes no obligation to update the information presented on the call except as required by law.
Bob: Technology assumes no obligation to update the information presented on the call except as required by law.
Bob: Our presentation includes certain non-GAAP financial measures and adjustments to these measures, which we believe provide useful information for investors. In accordance with SEC rules, 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 as non-GAAP except for revenues.
Bob: In accordance with SEC theaters, you 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.
Bob: Please note that unless stated otherwise all results are presented as non-GAAP except for revenues.
Bob: I'll now turn the call over to Amar for an update on the business.
Amar Maletira: Thank you Sagar. First of all, I'd like to introduce our new CFO, Mark Marino. Having worked with Mark since I joined Rackspace, I've witnessed firsthand what a strong asset he is to our company.
Omar: Mark's comprehensive understanding of the business and extensive financial leadership experience will continue to be instrumental as we strengthen our position in an attractive and growing hybrid multi cloud and AI market. I look forward to collaborating with Mark as we continue to execute our strategy and deliver value to our customers and our shareholders.
Speaker Change: I look forward to collaborating with Mark as we continue to execute our strategy and deliver value to our customers and our shareholders.
Speaker Change: I would also like to thank our former CFO, Bobby Malone for his contributions to this past year. I'm also pleased to welcome Mark Gross to our board of directors. Mark succeeds Thomas Cole, who unexpectedly passed away over the holidays. We are grateful for Tom's significant contributions in the short time on the board. Mark comes to Rackspace with extensive business and executive leadership experience and with deep insight in leading business transformations. I look forward to working with Mark.
Speaker Change: I'm also pleased to welcome Mark gross to our board of directors. Bob succeeds Thomas School, who unexpectedly passed away it would be holidays, we are grateful for Tom significant contributions in the short time on the board.
Speaker Change: Bob succeeds Thomas School, who unexpectedly passed away it would be holidays, we are grateful for Tom significant contributions in the short time on the board.
Speaker Change: Mark comes to Rex piece, with extensive business and executive leadership experience and with deep insight and leading business transformations. I look forward to working with Mark.
Speaker Change: I look forward to working with Mark.
Speaker Change: Before we get to our results, let me cover the three strategic priorities I presented the board and the progress we have made against them. First, [inaudible] the operational turnaround. In 2023, we made major structural changes needed for a turnaround. We set a clear vision, direction, and strategy for the company, operationalized our two business unit structure, and refreshed leadership and talent at various levels in the company. I am happy with our progress and confident we have the right strategy, team, and operating model in place to ensure our turnaround succeeds.
Speaker Change: First Greg the operational turnaround.
Speaker Change: In 2023, we made major structural changes needed for the turnaround we. We set a clear vision direction and strategy for the company.
Speaker Change: We set a clear vision direction and strategy for the company.
Speaker Change: <unk>, our two business unit structure, and refreshed leadership and talent at various levels in the company and.
Speaker Change: I am happy with our progress and confident we have the right strategy team and operating model in place to ensure our turnaround succeeds.
Speaker Change: Second, we positioned Rackspace as a forward-leaning, innovative, hybrid multi cloud and edge solutions company that makes informed bets in new technology trends. We called the cloud wave, which is still in its infancy. We believe we are now well positioned to catch the next big wave of AI. This is why we set aside resources to launch foundry for AI by Rackspace [inaudible] in June 2023 and we are seeing early success.
Speaker Change: We called the cloud, which is still in its infancy. We believe we are now well positioned to catch the next big wave of AI. This is why we set aside resources to launch foundry for EA Barak space are fair in June 2023, and we are seeing early success.
Speaker Change: This is why we set aside resources to launch foundry for EA Barak space are fair in June 2023, and we are seeing early success.
Speaker Change: And third, right sized our capital structure and ensure ample liquidity to support our profitable growth strategy. As you may have seen, we announced the transaction that will significantly strengthen our balance sheet and position our business for continued growth, enhancing Rackspace's competitive position, while we'll accelerate our operational and strategic plan. I'll walk through some of the high level outcomes of this transaction and Mark will go into more detail later in the call.
As you may have seen we announced the transaction that will significantly strengthen our balance sheet and position our business for continued growth enhancing <unk> competitive position, while we'll accelerate our operational and strategic plan.
Speaker Change: I'll walk through some of the high level outcomes of this transaction. And Mark will go into more detail later in the call.
Speaker Change: And Mark will go into more detail later in the call.
Speaker Change: The private debt exchange transaction and assuming the public debt exchange is fully subscribed, when combined with the company's open market purchases over the past year will result in total debt reduction of over $800 million and net debt reduction of over $900 million from the start of 2023, shortly after I took over as the CEO. Following the transaction, which included $275 million of new cash infusion, we expect to have approximately $330 million of cash net of all transaction expenses on the books compared to $197 million as of year end 2023. With access to over $375 million revolver extended to 2028, current available liquidity is over $700 million. This transaction demonstrates the strong confidence of our key financial partners in the future of the business for which I'm extremely appreciative.
Speaker Change: Following the transaction, which included $275 million of new cash infusion, we expect to have approximately $330 million of cash net of all transaction expenses on the books compared to $197 million as of year end 2023. With access to a $375 million revolver extended to 2028. Available liquidity is over $700 million. This transaction demonstrates the strong confidence of our key financial partners in the future of the business for which I'm extremely appreciative.
Speaker Change: With access to a $375 million revolver extended to 2028. Available liquidity is over $700 million.
Speaker Change: Available liquidity is over $700 million.
Speaker Change: This transaction demonstrates the strong confidence of our key financial partners in the future of the business for which I'm extremely appreciative.
Speaker Change: Now, let me get into our business performance, starting with private cloud. Today, private cloud is tracking towards a turnaround in the second half of 2024. In the fourth quarter of 2023, private cloud bookings were up 86% sequentially and 96% year over year. Bookings for full year 2023 were up 20% year over year with fourth quarter posting the strongest finish in eight quarters.
Speaker Change: Today private cloud is tracking towards a turnaround in the second half of 2024. In the fourth quarter of 2023, private cloud bookings were up 86% sequentially and 96% year over year. Bookings for full year, 2023 were up 20% year over year with fourth quarter, posting the strongest finish in eight quarters.
Speaker Change: In the fourth quarter of 2023, private cloud bookings were up 86% sequentially and 96% year over year. Bookings for full year, 2023 were up 20% year over year with fourth quarter, posting the strongest finish in eight quarters.
Speaker Change: Bookings for full year, 2023 were up 20% year over year with fourth quarter, posting the strongest finish in eight quarters.
Speaker Change: In addition, our backlog at the start of the new year is up 188% compared to the start of last year. Our private cloud strategy is to defend and expand our private cloud business. We're expanding our offerings and bringing compelling new solutions to the market. We're accelerating our go-to market motion with both vertical and horizontal strategies and we are creating high potential opportunities in attractive markets such as health care, banking financial services, and insurance, sovereign and private AI.
Speaker Change: Our private cloud strategy is to defend and expand our private cloud business. We're expanding our offerings and bringing compelling new solutions to the market. We're accelerating our go to market motion, but both vertical and horizontal strategies and we are creating high potential opportunities in attractive markets such as health care. Banking financial services, and insurance sovereign and private AI the.
Speaker Change: We're expanding our offerings and bringing compelling new solutions to the market. We're accelerating our go to market motion, but both vertical and horizontal strategies and we are creating high potential opportunities in attractive markets such as health care. Banking financial services, and insurance sovereign and private AI the.
Speaker Change: We're accelerating our go to market motion, but both vertical and horizontal strategies and we are creating high potential opportunities in attractive markets such as health care. Banking financial services, and insurance sovereign and private AI the.
Speaker Change: Banking financial services, and insurance sovereign and private AI the.
Speaker Change: This strategy is paying off. For example, in our healthcare vertical, we won approximately 225 million PCB business in 2023, including several new logos and $100 million PCB long term contract with a large hospital system. There's another nearly $700 million of potential PCB in a healthcare funnel. To capitalize on the success, we have brought in new talent with deep expertise in health care and a big hosting. We'll continue to press on and broaden our vertical strategy in 2024. In private cloud, we also launched over 30 new offerings in the past 12 months, including software defined data center across enterprise business and flex. We also deployed AI anywhere. This is an on premise enterprise grade are optimized platform with flexible architecture. It allows deployment in private data centers or in third party co-location facilities.
Speaker Change: There's another nearly $700 million of potential PCB in a healthcare funnel.
Speaker Change: To capitalize on the success, we have brought in new talent with deep expertise in health care and a big hosting. We'll continue to press on and brought in a vertical strategy in 2024. In private cloud, we also launched over 30, new offerings in the past 12 months, including software defined data center across enterprise business and flex we also deployed anywhere.
Speaker Change: We'll continue to press on and brought in a vertical strategy in 2024. In private cloud, we also launched over 30, new offerings in the past 12 months, including software defined data center across enterprise business and flex we also deployed anywhere.
Speaker Change: In private cloud, we also launched over 30, new offerings in the past 12 months, including software defined data center across enterprise business and flex we also deployed anywhere.
Speaker Change: This is an on premise enterprise grade are optimized platform with flexible architecture. It allows deployment in private data centers or in third party co-location facilities. And spot, as its name implies, a spot market for compute capacity based on the robust kubernetes platform, this caters to a growing market for quick, reliable, enterprise grade, container cloud infrastructure. It is a natural fit for enterprise developer environments and startups and we see good early interest. [inaudible] allows us to monetize reserve capacity and leverage our existing product offerings at attractive incremental margins.
This is an on premise enterprise grade are optimized platform with flexible architecture. It allows deployment in private data centers or in third party co-location facilities.
And spot, as its name implies, a spot market for compute capacity based on the robust kubernetes platform, this caters to a growing market for quick, reliable, enterprise grade, container cloud infrastructure. It is a natural fit for enterprise developer environments and startups and we see good early interest. [inaudible] allows us to monetize reserve capacity and leverage our existing product offerings at attractive incremental margins.
Speaker Change: Great container cloud infrastructure. It is a natural fit for enterprise developer environments, and startups and we see good early interest. Forex piece part allows us to monetize reserve capacity and leverage our existing product offerings at attractive incremental margins.
Speaker Change: It is a natural fit for enterprise developer environments, and startups and we see good early interest. Forex piece part allows us to monetize reserve capacity and leverage our existing product offerings at attractive incremental margins.
Speaker Change: Forex piece part allows us to monetize reserve capacity and leverage our existing product offerings at attractive incremental margins.
Speaker Change: In addition to new offerings, we have solid program in place to help customers with their go-forward architectural decisions and renew the business. In the near term however, private cloud continues to work through the consequences of customer decisions made 12 to 18 months ago when Rackspace was not focused on this business. Hence, we expect to see some revenue runoff over the next two to three quarters, including the current quarter from customer decisions made more than 12 months ago. However, we expect our recent strong bookings and backlog entering 2024 to start converting to revenue in the second half of 2024. Thus, we expect quarterly revenue for private cloud to stabilize in the second half of this year.
Speaker Change: Hence, we expect to see some revenue runoff over the next two to three quarters, including the current quarter from customer decisions made more than 12 months ago. However, we expect our recent strong bookings and backlog entering 2024 to start converting to revenue in the second half of 2024. Thus, we expect quarterly revenue for private cloud to stabilize in the second half of this year.
Speaker Change: From customer decisions made more than 12 months ago. However, we expect our recent strong bookings and backlog entering 2024 to start converting to revenue in the second half of 2024. Thus, we expect quarterly revenue for private club to stabilized in the second half of this year.
Speaker Change: However, we expect our recent strong bookings and backlog entering 2024 to start converting to revenue in the second half of 2024. Thus, we expect quarterly revenue for private club to stabilized in the second half of this year.
Speaker Change: Thus, we expect quarterly revenue for private club to stabilized in the second half of this year.
Speaker Change: Now moving to public cloud, our strategy here is to ride the secular growth wave in the cloud market. We are focused on meeting customers wherever they are in their cloud journey, offering a full stack, multi cloud solution spanning platform, applications, data and security.
Speaker Change: We walked through a tough transition last year as we made a deliberate strategic pivot to lead with services and sort of low margin infrastructure resale. This meant refreshing nearly 40% of our overall go to market book force, including over 70% of our sales team. We replace them with sales professionals with services centric experience and added similarly qualified go to market resources, including client partners. We have started seeing some early signs that the pivot is working with fourth quarter 2023 services bookings growing 13% sequentially after a tough start to the year. Public cloud continues to also develop innovative new services and solutions [inaudible] managed [inaudible] is an industry-leading vulnerability services offering, a complete turnkey service to enable visibility and remediation of software vulnerabilities and MS configurations of hybrid and cloud environments.
Speaker Change: This meant refreshing nearly 40% of our overall go to market book force, including over 70% of our sales team. We replace them with sales professionals with services centric experience and added similarly qualified go to market resources, including client partners. We have started seeing some early signs that the pivot is working with fourth quarter 2023 services bookings growing 13% sequentially. After a tough start to the year. Public cloud continues to also develop innovative new services and solutions. <unk> managed to be M. Dr is an industry, leading vulnerability services offering.
Speaker Change: We replace them with sales professionals with services centric experience and added similarly qualified go to market resources, including client partners. We have started seeing some early signs that the pivot is working with fourth quarter 2023 services bookings growing 13% sequentially. After a tough start to the year. Public cloud continues to also develop innovative new services and solutions. <unk> managed to be M. Dr is an industry, leading vulnerability services offering.
Speaker Change: We have started seeing some early signs that the pivot is working with fourth quarter 2023 services bookings growing 13% sequentially. After a tough start to the year. Public cloud continues to also develop innovative new services and solutions. <unk> managed to be M. Dr is an industry, leading vulnerability services offering.
Speaker Change: Public cloud continues to also develop innovative new services and solutions. <unk> managed to be M. Dr is an industry, leading vulnerability services offering.
Speaker Change: <unk> managed to be M. Dr is an industry, leading vulnerability services offering.
Speaker Change: a complete turnkey service to enable visibility and remediation of software vulnerabilities and MS configurations of hybrid and cloud environments. We also developed cloud BB ops, the managed services part of Rackspace managed cloud that provides regular health checks along with many other advanced monitoring and analysis services. And we updated modern operations with version two that adds new enhancements such as an increased level of services per tier and improved [inaudible].
a complete turnkey service to enable visibility and remediation of software vulnerabilities and MS configurations of hybrid and cloud environments.
We also developed cloud BB ops, the managed services part of Rackspace managed cloud that provides regular health checks along with many other advanced monitoring and analysis services. And we updated modern operations with version two that adds new enhancements such as an increased level of services per tier and improved [inaudible].
Speaker Change: And we updated modern operations with version two that adds new enhancements such as an increased level of services per tier and improve this release.
Speaker Change: In 2023, the disruptions arising from our structural changes and cyclical headwinds of the macro environment slowed the pace of the turnaround in services. It has taken longer than I originally expected. However, as we enter 2024, I am confident we have the right foundation in place and are headed in the right direction. I expect to see services start to report sequential growth in the second half of 2024 as our go to market organization matures and overall market demand for cloud services improves.
Speaker Change: It has taken longer than I originally expected. However, as we enter 2024 I am confident we have the right foundation in place and are headed in the right direction. I expect to see services start to report sequential growth in the second half of 2024 as a go to market organization matures and overall market demand for cloud services improves.
Speaker Change: However, as we enter 2024 I am confident we have the right foundation in place and are headed in the right direction. I expect to see services start to report sequential growth in the second half of 2024 as a go to market organization matures and overall market demand for cloud services improves.
Speaker Change: I expect to see services start to report sequential growth in the second half of 2024 as a go to market organization matures and overall market demand for cloud services improves.
Speaker Change: As I noted, Rackspace is catching the next wave of market growth. We did that with cloud and are doing it with AI. For the course of the past year, we have transformed Rackspace into an AI ready organization. Since introducing [inaudible] in June of 2023, we have several active AI projects in progress. We continue to see growth in AI with nearly 30 customers, including more than 10 new logos at varying stages of implementation across our ideas and incubate phases.
We did that with cloud and are doing it with AI. For the course of the past year, we have transformed <unk> into an AI really organization. Since introducing fill in June of 2023, we have several active projects in progress.
Speaker Change: For the course of the past year, we have transformed <unk> into an AI really organization. Since introducing fill in June of 2023, we have several active projects in progress.
Speaker Change: Since introducing fill in June of 2023, we have several active projects in progress.
We continue to see growth in AI with nearly 30 customers, including more than 10, new logos at varying stages of implementation across our ideas and incubate phases.
Speaker Change: We also have a robust and growing offerings. In private cloud, we launched AI anywhere as a landing zone for customers, who want to move the application into production. In public cloud, we are integrating with all three hyperscalers. Recently, we announced a partnership with Microsoft Copilot to guide customers through their AI journey. We also achieved the Amazon Web services generative AI competency in the categories of consulting services, generative AI application, infrastructure and data.
Speaker Change: In public cloud, we are integrating with all three Hyperscale is recently, we announced a partnership with Microsoft Copilot to guide customers to the AI journey. We also achieved the Amazon Web services generally do a competency in the categories of consulting services generative AI application infrastructure and data.
Speaker Change: We also achieved the Amazon Web services generally do a competency in the categories of consulting services generative AI application infrastructure and data.
Speaker Change: This specialization recognizes Rackspace technology as an AWS partner that helps customers drive the advancement of services, tools, and infrastructure pivotal for implementing generative AI technologies. We're taking a realistic and measured approach to help our customers use AI to build useful, economically viable and ethical services. There is a tremendous opportunity ahead. I'm happy with the plan we have developed and our first steps on this journey.
Speaker Change: We're taking a realistic and measured approach to help our customers use AI to build useful economically viable and ethical services. There is a tremendous opportunity ahead. I'm happy with the plan, we have developed and are first steps on this journey.
Speaker Change: There is a tremendous opportunity ahead. I'm happy with the plan, we have developed and are first steps on this journey.
Speaker Change: I'm happy with the plan, we have developed and are first steps on this journey.
Speaker Change: In summary, we made significant progress in 2023. Instead of opting for a quick fix, we made the difficult decision to focus on our turnaround, invest for the long term, restructure the organization and bring in new leadership. I expect 2024 to get off to a slow start but given the strong backlog in private cloud and the typical six to nine months lag between bookings and revenue realization, we anticipate improving revenues and margins in the second half of 2024 with continued solid execution. Our goal for 2024 is to lock in a sustainable business model that generates consistent revenue and profit growth over the long term. We want to build momentum throughout 2024 that will put us on a growth trajectory entering 2025. Recent bookings trends and improved customer engagement tell me we are on the right track and today's debt refinancing gives us the financial flexibility to stay the course.
In summary, we made significant progress in 2023. Instead of opting for a quick fix, we made the difficult decision to focus on our turnaround, invest for the long term, restructure the organization and bring in new leadership. I expect 2024 to get off to a slow start but given the strong backlog in private cloud and the typical six to nine months lag between bookings and revenue realization, we anticipate improving revenues and margins in the second half of 2024 with continued solid execution.
I expect 2024 to get off to a slow start but given the strong backlog in private cloud and the typical six to nine months lag between bookings and revenue realization, we anticipate improving revenues and margins in the second half of 2024 with continued solid execution. Our goal for 2020 for us to lock in a sustainable business model that generates consistent revenue and profit growth over the long term. We want to build momentum throughout 2024 that will put us on a good trajectory entering 2025.
Speaker Change: Our goal for 2020 for us to lock in a sustainable business model that generates consistent revenue and profit growth over the long term. We want to build momentum throughout 2024 that will put us on a good trajectory entering 2025.
Our goal for 2024 is to lock in a sustainable business model that generates consistent revenue and profit growth over the long term. We want to build momentum throughout 2024 that will put us on a growth trajectory entering 2025. Recent bookings trends and improved customer engagement tell me we are on the right track and today's debt refinancing gives us the financial flexibility to stay the course.
Speaker Change: We want to build momentum throughout 2024 that will put us on a good trajectory entering 2025.
And bookings trends and improved customer engagement tell me we are on the right track and today's debt refinancing gives us the financial flexibility to stay the course.
Before I wrap up, I would like to thank our customers, partners and all our rackers. I am proud of all we have achieved together during this year of change. I will now turn it over to Mark Marino for an overview of our financial results and guidance.
Speaker Change: I am proud of all we have achieved together during this year of change. I will now turn it over to Mark Marino for an overview of our financial results and guidance.
Speaker Change: I will now turn it over to Mark Marino for an overview of our financial results and guidance.
Mark Marino: Thanks Amar. Having been with Rackspace over the past few years, I have seen and participated in many of the strategic changes Amar has initiated. The changes happening throughout the organization are transformational, so I'm excited to have stepped into this role at this important inflection point and I look forward to continuing to support the vision and become an even more integral part of the future of Rackspace.
Mark Marino: As Amar mentioned, we closed a very positive transaction with a group of lenders and financial partners. Specifically Rackspace closed a private debt exchange with an AD hoc group, representing more than 72% of our first lien term loan holders and more than 64% of our first lien note holders as well as 100% of our revolving credit facility lenders. In connection with this transaction, we plan to launch a public debt exchange offer to the rest of our outstanding lenders and first lien note holders in the coming days and close that in the next month.
Mark Marino: <unk> credit facility lenders in connection with this transaction, we plan to launch a public debt exchange offer to the rest of our outstanding lenders and first lien note holders in the coming days and close that in the next month.
Mark Marino: Through the private exchange, we eliminated more than $375 million of net debt and received $275 million of new money that will come to the balance sheet as additional liquidity to advance our key strategic initiatives. We are extremely encouraged by this injection of new money as it reinforces our financial partners' conviction in our turnaround strategy and continued momentum in our execution.
Mark Marino: Momentum in our execution.
Mark Marino: Through full participation in the public debt exchange, we have the opportunity to eliminate more than $600 million in total debt, reducing annual interest expense by more than $45 million. Since the end of fiscal year 2022, assuming full participation in the public debt exchange and when combined with the company's open market purchases over the past year would result in a total debt reduction of over $800 million and net debt reduction of over $900 million and reduction in annual interest expense by more than $70 million. Additionally, the maturities on the revolver and other participating senior debt facilities have been extended to May of 2028. The company has effectively no funded corporate maturities prior to 2028.
Mark Marino: debt reduction of over $800 million and net debt reduction of over $900 million and reduction in annual interest expense by more than $70 million. Additionally, the maturities on the revolver and other participating senior debt facilities have been extended to May of 2028. The company has effectively no funded corporate maturities prior to 2028. Notably, none of the exchange transactions have any impact on the equity capitalization of the company. Overall, this transaction strengthens the company's financial flexibility, extends maturities, and deleverage our balance sheet, while providing Rackspace with ample runway to accelerate our strategic growth initiatives.
debt reduction of over $800 million and net debt reduction of over $900 million and reduction in annual interest expense by more than $70 million. Additionally, the maturities on the revolver and other participating senior debt facilities have been extended to May of 2028. The company has effectively no funded corporate maturities prior to 2028.
Mark Marino: <unk> the maturities on the revolver and other participating senior debt facilities have been extended to May of 2028. The company has effectively no funded corporate maturities prior to 2028. Notably none of the exchange transactions that have any impact on the equity capitalization of the company. Overall this transaction strengthens the company's financial flexibility extends maturities and deleverage our balance sheet, while providing rackspace with ample runway to accelerate our strategic growth initiatives.
Notably, none of the exchange transactions have any impact on the equity capitalization of the company. Overall, this transaction strengthens the company's financial flexibility, extends maturities, and deleverage our balance sheet, while providing Rackspace with ample runway to accelerate our strategic growth initiatives.
Mark Marino: Notably none of the exchange transactions that have any impact on the equity capitalization of the company. Overall this transaction strengthens the company's financial flexibility extends maturities and deleverage our balance sheet, while providing rackspace with ample runway to accelerate our strategic growth initiatives.
Mark Marino: Overall this transaction strengthens the company's financial flexibility extends maturities and deleverage our balance sheet, while providing rackspace with ample runway to accelerate our strategic growth initiatives.
Now onto the results. Fiscal fourth quarter 2023 results exceeded the midpoint of our revenue, operating profit and EPS guidance. In the fourth quarter, total company GAAP revenue of $720 million was at the high end of our guidance driven by strength in public cloud. Total net revenue was $413 million, down 4% sequentially and down 14% year over year due to declines in both private cloud and public cloud. We are more focused on net revenue as it represents the true growth of our business.
Mark Marino: Down 14% year over year due to declines in both private cloud and public cloud. We are more focused on net revenue as it represents the true growth of our business.
Mark Marino: Gross profit margin was 22% of GAAP revenue and 38% of net revenue. For the quarter operating profit was $48 million at the high end of our guidance and up 6% sequentially. Operating margin was 7% of GAAP revenue and 12% of net revenue. Loss per share was 3 cents, which was within our guided range of three to five loss per share cash. Cash flow from operations was $72 million and free cash flow was $38 million in the fourth quarter.
Mark Marino: Operating margin was 7% of GAAP revenue. 12% of net revenue loss per share was <unk>, which was within our guided range of three to five loss per share cash. Cash flow from operations was $72 million and free cash flow was $38 million in the fourth quarter.
Mark Marino: 12% of net revenue loss per share was <unk>, which was within our guided range of three to five loss per share cash. Cash flow from operations was $72 million and free cash flow was $38 million in the fourth quarter.
Mark Marino: Cash flow from operations was $72 million and free cash flow was $38 million in the fourth quarter.
Mark Marino: Turning to our segment results. For private cloud, GAAP revenue for the fourth quarter was $285 million, which was at the low end of our guidance. This includes legacy open stack revenue of $29 million. Total private cloud revenue was down 5% sequentially due to customers rolling off older generation private cloud offerings. Private cloud gross was 37%, down one percentage point sequentially, primarily due to revenue declines. Segment operating margin was 27% down two percentage points quarter over quarter and public cloud GAAP revenue of $435 million exceeded the high end of our guidance and was up 1% quarter over quarter, primarily due to consumption driven growth on infrastructure resale volumes offset by declines in services.
Mark Marino: was 37%, down one percentage point sequentially, primarily due to revenue declines. Segment operating margin was 27% down two percentage points quarter over quarter and public cloud GAAP revenue of $435 million exceeded the high end of our guidance and was up 1% quarter over quarter, primarily due to consumption
Mark Marino: driven growth on infrastructure resale volumes offset by declines in services. Public cloud services revenue was down 5% sequentially given the continued cyclical headwinds in IT services and the structural changes we implemented in our go to market organization. Gross margin for public cloud segment was 40% of net revenue, up three percentage points sequentially driven by cost savings. Segment operating profit was 21% of net revenue, up five percentage points sequentially.
driven growth on infrastructure resale volumes offset by declines in services.
Public cloud services revenue was down 5% sequentially given the continued cyclical headwinds in IT services and the structural changes we implemented in our go to market organization. Gross margin for public cloud segment was 40% of net revenue, up three percentage points sequentially driven by cost savings. Segment operating profit was 21% of net revenue, up five percentage points sequentially.
Mark Marino: Public cloud services revenue was down 5% sequentially given the continued cyclical headwinds in it services and the structural changes we implemented in our go to market organization. Gross margin for public cloud segment was 40% of net revenue up three percentage points sequentially driven by cost savings segment operating profit was 21% of net revenue up five percentage points sequentially.
Mark Marino: Gross margin for public cloud segment was 40% of net revenue up three percentage points sequentially driven by cost savings segment operating profit was 21% of net revenue up five percentage points sequentially.
Mark Marino: Now turning to the full year 2023 results. Total company GAAP revenue was down 5% year over year, driven by declines in private cloud, while total net revenue was down 11% year over year due to declines in both private and public cloud. Gross profit was 22% of GAAP revenue and 38% of net revenue, while operating margin was 6% of GAAP revenue and 11% of net revenue.
Mark Marino: Total company GAAP revenue was down 5% year over year, driven by declines in private cloud, while total net revenue was down 11% year over year due to declines in both private and public cloud. Gross profit was 22% of GAAP revenue and 38% of net revenue, while operating margin was 6% of GAAP revenue and 11% of net revenue.
Mark Marino: Gross profit was 22% of GAAP revenue and 38% of net revenue, while operating margin was 6% of GAAP revenue and 11% of net revenue.
Mark Marino: Demonstrating strong cash flow management, cash flow from operations was $375 million and free cash flow was $278 million per year. Normalizing for the impact of our AR securitization full year 2023 cash flow from operations would have been $159 million and free cash flow would have been $63 million.
Mark Marino: Total capex for 2023 was $181 million with the capex intensity of 6% within our full year guided range of 5% to 7%. For full year 2023 segment results, private cloud GAAP revenue was down 12% compared to 2022 due to customers rolling off older generation private cloud offerings. Private cloud gross margin was 38%, down seven percentage points year over year, driven by declines in revenue with a relatively fixed cost structure. Segment operating margin of 28% was down eight percentage points year over year.
For full year 2023 segment results private cloud GAAP revenue was down 12% compared to 2022 due to customers rolling off of older generation private cloud offerings. Private cloud gross margin was 38% down seven percentage points year over year, driven by declines in revenue with a relatively fixed cost structure segment operating margin of 28% was down eight percentage points year over year.
Mark Marino: Private cloud gross margin was 38% down seven percentage points year over year, driven by declines in revenue with a relatively fixed cost structure segment operating margin of 28% was down eight percentage points year over year.
Mark Marino: In public cloud, 2023 GAAP revenue was essentially flat year over year, while net revenue was down 8% year over year, given a tightening of discretionary spending. Gross margin for our public cloud segment was 37% of net revenue, down seven percentage points driven by declines in revenue. Operating profit was 17% of net revenue, down five percentage points year over year.
Mark Marino: Gross margin for our public cloud segment was 37% of net revenue down seven percentage points driven by declines in revenue. Operating profit was 17% of net revenue down five percentage points year over year.
Mark Marino: Operating profit was 17% of net revenue down five percentage points year over year.
Mark Marino: Now onto our guidance. As Amar mentioned, we are still managing through residual private cloud revenue runoff that will impact the first half of 2024 and do not expect a major financial contribution from our new bookings in backlog until later in the year due to the typical six to nine months lag between bookings and revenue realization. Also, the first quarter costs
Now onto our guidance. As Amar mentioned, we are still managing through residual private cloud revenue runoff that will impact the first half of 2024 and do not expect a major financial contribution from our new bookings in backlog until later in the year due to the typical six to nine months lag between bookings and revenue realization.
Also, the first quarter costs will reflect investments in areas that are aligned to our strategy as well as the headwind from seasonal fringe benefits in the U.S. For these reasons, we expect first quarter GAAP revenue to be approximately $680 million to $690 million. Total operating profit is expected to be $12 million to $14 million and loss per share of 12 to 14 cents.
Mark Marino: will reflect investments in areas that are aligned to our strategy as well as the headwind from seasonal fringe benefits in the U.S. For these reasons, we expect first quarter GAAP revenue to be approximately $680 million to $690 million. Total operating profit is expected to be $12 million to $14 million and loss per share of 12 to 14 cents.
Mark Marino: From a segment perspective, we expect private cloud revenue of $268 million to $273 million in public cloud revenue of $412 million to $417 million. Our tax rate is expected to be 26% and other income and expense of approximately $50 million to $52 million in expenses. The share count is expected to be around 221 to 223 million shares. We expect profits to trough in the first quarter and improve throughout the year. We anticipate second half 2024 profits to be higher than the first half led by private cloud revenue stabilization and growth in public cloud services, setting us up for solid momentum exiting 2024. I will now turn the call over to Sagar. Thank you Mark. Let us begin the question and answer session.
From a segment perspective, we expect private cloud revenue of $268 million to $273 million in public cloud revenue of $412 million to $417 million. Our tax rate is expected to be 26% and other income and expense of approximately $50 million to $52 million in expenses. The share count is expected to be around 221 to 223 million shares. We expect profits to trough in the first quarter and improve throughout the year. We anticipate second half 2024 profits to be higher than the first half led by private cloud revenue stabilization and growth in public cloud services, setting us up for solid momentum exiting 2024. I will now turn the call over to Sagar.
Mark Marino: Share count is expected to be around 221 to 223 million shares we expect profits to the trough in the first quarter and improve throughout the year. We anticipate second half 2020 for profits to be higher than the first half led by private cloud revenue stabilization and growth in public cloud services, starting a separate solid momentum exit. 2024, I will now turn the call over to summer.
Mark Marino: 2024, I will now turn the call over to summer.
Operator: Thank you Mark let us begin the question and answer session.
Sagar Hebbar: Thank you Mark. Let us begin the question and answer session. We ask everyone to limit discussion to one question and one follow up. Please go ahead.
Summer: We ask everyone to limit discussion to one question and one follow up. Please go ahead.
Summer: Please go ahead.
Operator: Thank you. Ladies and gentlemen, as a reminder, to ask a question, please press star one, one on your telephone and then wait to hear your name announce. To withdraw your question, please press star one, one again. Please standby while we compile the Q&A roster.
Summer: And then wait to hear your name announced to withdraw your question. Please press star one again, please standby, while we compile the Q&A roster.
Summer: Our first question comes from line of Frank Louthan with Raymond James. Your line is open.
Unknown: Hey, guys. This is Rob on for Frank. So beyond what you shared with us already as it pertains to the debt deal, are there any other significant covenants we should know about such as say restricted payments baskets. And then my follow up is, is the new debt callable and if so when and at what rate? Thank you.
Rob: So beyond what you shared with us already as it pertains to the debt deal. Are there any other significant covenants, we should know about such as you know say restricted payments baskets.
Rob: Are there any other significant covenants, we should know about such as you know say restricted payments baskets.
Rob: And then my follow up is, is the new debt callable and if so when and at what rate? Thank you.
Speaker Change: So I think we didn't follow the first one, it was not very clear. Can you repeat the question? I'm sorry, it was not very clear. Yes, so other than what you've shared with us so far about the debt deal, are there any other significant covenants we should know about such as any restricted payments baskets.
Amar Maletira: So I think we didn't follow the first one, it was not very clear. Can you repeat the question? I'm sorry, it was not very clear.
Speaker Change: Yes, yes, so so other than what you've shared with us so far about the debt deal are there any other significant covenants, we should know about such as any restricted payments baskets.
Unknown: Yes, so other than what you've shared with us so far about the debt deal, are there any other significant covenants we should know about such as any restricted payments baskets. And then my follow up was about the debt being callable or not and if so when and at what rate.
Speaker Change: And then my follow up was about the debt being callable or not and if so when and at what rate.
Mark Marino: Hi. So just relative to the your first question there about the restricted basket is right. Obviously in a transaction like this some of our covenants and baskets to get tightened up throughout the transaction, but in no way is there any restriction that will impair our ability to operate the company moving forward. So I think from that perspective, we've got latitude and flexibility with those baskets and covenants. And then your second question.
Speaker Change: Yeah, Hi, guys. So just relative to the your first question there about the restricted basket is right. Obviously in a transaction like this some of our covenants and baskets to get tightened up throughout the transaction. But in no way is there any restrictions that will impair our ability to operate the company moving forward. So I think from that perspective, we've got.
Speaker Change: But in no way is there any restrictions that will impair our ability to operate the company moving forward. So I think from that perspective, we've got.
Speaker Change: So I think from that perspective, we've got.
Speaker Change: latitude and flexibility with those baskets and covenants. And then your second question. Is new debt callable? No. The answer is no. Did that answer your question?
latitude and flexibility with those baskets and covenants. And then your second question. Is new debt callable? No.
latitude and flexibility with those baskets and covenants. And then your second question. Is new debt callable?
latitude and flexibility with those baskets and covenants. And then your second question.
And then your second question this new debt callable. No. No. The answer to your question.
Sagar Habber: Is new debt callable?
Speaker Change: No. No.
Speaker Change: No.
Mark Marino: No.
Amar Maletira: The answer is no. Did that answer your question?
Speaker Change: The answer to your question.
Unknown: Yes, thank you guys very much.
Operator: Thank you. Please standby for our next question. Our next question comes from the line of Ramsey [inaudible] with Barclays. Your line is open.
Speaker Change: Thank you.
Speaker Change: Please standby for all next question.
Speaker Change: Our next question comes from the line of Ramsey El <unk> with Barclays. Your line is open.
Ryan Campbell: Hi, this is Ryan Campbell on for Ramsey. Thank you for taking my question today. In your prepared remarks, you mentioned the six to nine month lag between bookings and revenue realization and I was curious to see how that compared to a more normalized demand environment and what are you seeing today that gives you confidence that this lag won't elongate any further? Thank you.
Ryan Joseph Campbell: In your prepared remarks, you mentioned the six to nine month lag between bookings and revenue realization and I was curious to see how that compared to a more normalized demand environment and what are you seeing today that gives you confidence that this lag one elongate any further thank you.
Amar Maletira: So thank you very much for the question Ryan. The six to nine months lag, that commentary was mainly on our bookings converting to revenue. So the bookings is what builds the backlog. Our private cloud business did very well from a bookings perspective in Q4 in fiscal Q4 where we grew sequentially 86%, grew 96% year on year. It was the highest quarter in the last eight quarters and we entered the year with a huge backlog. And the backlog actually grew 188% year on year compared to what we saw when we entered fiscal '23.
Speaker Change: The six to nine months lag.
Speaker Change: Does that commentary was mainly on our bookings converting to revenue. So the bookings is what builds the backlog. Private cloud business did very well from a bookings perspective in Q4. In our fiscal Q4. Where we grew sequentially, 86% grew 96% year on year. It was the highest quarter in the last eight quarters, and we entered the year, but a huge backlog and the backlog actually grew 188% year on year compared to what we saw when we entered fiscal 'twenty three so of that backlog.
Speaker Change: Private cloud business did very well from a bookings perspective in Q4. In our fiscal Q4. Where we grew sequentially, 86% grew 96% year on year. It was the highest quarter in the last eight quarters, and we entered the year, but a huge backlog and the backlog actually grew 188% year on year compared to what we saw when we entered fiscal 'twenty three so of that backlog.
Speaker Change: In our fiscal Q4. Where we grew sequentially, 86% grew 96% year on year. It was the highest quarter in the last eight quarters, and we entered the year, but a huge backlog and the backlog actually grew 188% year on year compared to what we saw when we entered fiscal 'twenty three so of that backlog.
Speaker Change: Where we grew sequentially, 86% grew 96% year on year. It was the highest quarter in the last eight quarters, and we entered the year, but a huge backlog and the backlog actually grew 188% year on year compared to what we saw when we entered fiscal 'twenty three so of that backlog.
Speaker Change: So that backlog to convert to revenue typically takes six to nine months, because we have to stand up the environment, we have to migrate the application and once the application migrates to our data center and we manage and operate it then that application and workload stays with us for the next five to 10 years. So that six to nine month lag is mainly for backlog converting to revenue.
Speaker Change: Now in terms of sales cycles, I think that's where your question is, I think the demand environment continues to remain uncertain. Entering 2024, we saw similar to what we saw in 2023. We believe customers will continue to spend on digital transformation, mainly enabled by cloud and AI. However, we continue to see slower decision cycles and the sales cycles are getting extended. In a public cloud service business, as you know that it's a very cyclical business. Many companies in the services ecosystem are reporting that they are facing some cyclical headwinds and so are we, but when you talk about our private cloud business, the dynamics are really different and our customers are looking to move out of the data centers and reduce both their capex and opex investments and so we see relatively better demand in private cloud. And the very fact that we grew our overall bookings in 2023 at 20% year on year is basically a proof point that the private cloud demand is pretty strong.
Speaker Change: During 2023 24. Yes. A similar what we saw in 2023, we believe customers will continue to spend on digital transformation. Enabled by cloud and AI. However, we continue to see slower decision cycles. And the sales cycles are getting extended. Public cloud services business as you know that it's a very it's a cyclical business of many companies in the services ecosystem are reporting that they are facing some cyclical headwinds and so RV, but when you talk about our private cloud business. The dynamics are really different and our customers are looking to move out of the data centers and reduced board.
Speaker Change: Yes. A similar what we saw in 2023, we believe customers will continue to spend on digital transformation. Enabled by cloud and AI. However, we continue to see slower decision cycles. And the sales cycles are getting extended. Public cloud services business as you know that it's a very it's a cyclical business of many companies in the services ecosystem are reporting that they are facing some cyclical headwinds and so RV, but when you talk about our private cloud business. The dynamics are really different and our customers are looking to move out of the data centers and reduced board.
Speaker Change: A similar what we saw in 2023, we believe customers will continue to spend on digital transformation. Enabled by cloud and AI. However, we continue to see slower decision cycles. And the sales cycles are getting extended. Public cloud services business as you know that it's a very it's a cyclical business of many companies in the services ecosystem are reporting that they are facing some cyclical headwinds and so RV, but when you talk about our private cloud business. The dynamics are really different and our customers are looking to move out of the data centers and reduced board.
Speaker Change: Enabled by cloud and AI. However, we continue to see slower decision cycles. And the sales cycles are getting extended. Public cloud services business as you know that it's a very it's a cyclical business of many companies in the services ecosystem are reporting that they are facing some cyclical headwinds and so RV, but when you talk about our private cloud business. The dynamics are really different and our customers are looking to move out of the data centers and reduced board.
Speaker Change: And the sales cycles are getting extended. Public cloud services business as you know that it's a very it's a cyclical business of many companies in the services ecosystem are reporting that they are facing some cyclical headwinds and so RV, but when you talk about our private cloud business. The dynamics are really different and our customers are looking to move out of the data centers and reduced board.
Speaker Change: Public cloud services business as you know that it's a very it's a cyclical business of many companies in the services ecosystem are reporting that they are facing some cyclical headwinds and so RV, but when you talk about our private cloud business. The dynamics are really different and our customers are looking to move out of the data centers and reduced board.
Speaker Change: and so we see relatively better demand in private cloud. And the very fact that we grew our overall bookings in 2023 at 20% year on year is basically a proof point that the private cloud demand is pretty strong.
Speaker Change: is pretty strong.
Ron: Was that helpful Ryan?
Ryan Campbell: Yes. Thank you.
Operator: Thank you. I would now like to turn the call back over to Sagar for closing remarks.
Speaker Change: I would now like to turn the call back over to Scott for closing remarks.
Sagar Hebbar: Thank you everyone for joining us. If we did not get to your question or if you have a follow up, please email us at ir@rackspace.com. Have a great evening everyone.
Scott: We did not get to your question or if you have a follow up please email us at IR at <unk> Dot com have a great evening everyone.
Operator: Ladies and gentlemen that concludes today's conference call. Thank you for your participation. You may now disconnect.
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