Q1 2024 Rackspace Technology Inc Earnings Call

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Operator: Good day, and thank you for standing by. Welcome to Rackspace Technology's first quarter earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising that your hand is raised. To restore your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Sagar Hebbar, head of investor relations. Please go ahead.

Good day, and thank you for standing by and welcome to Rackspace Technologies first quarter earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star one on your telephone you will then hear an automated message.

Operator: Advising your hand has raised close to asking a question. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your first speaker today cigar healer head of Investor Relations. Please go ahead.

Sagar Hebbar: Thank you and welcome to Rackspace Technology's first quarter 2024 earnings conference call. I'm 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.

Sagar Hebbar: Thank you and welcome to rack based technologies first quarter 2024 earnings conference call.

Sagar Hebbar: I'm sorry go ahead, Bob I head up Investor Relations.

Sagar Hebbar: Joining me on today's call are I'm Gonna Maliki, Ross, our Chief Executive Officer, and Mark <unk>, Our Chief Financial Officer.

Sagar Hebbar: 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 filing. Rackspace Technology assumes no obligation to update the information presented on this call, except as required by law.

Sagar Hebbar: As a reminder, certain comments, we make on this call will be forward looking.

Sagar Hebbar: These statements involve risks and uncertainties, which could cause actual results to differ.

Sagar Hebbar: A discussion of these risks and uncertainties is included in our SEC filings.

Sagar Hebbar: Rackspace technology.

Sagar Hebbar: No obligation to update the information presented on the call except as required by law.

Sagar Hebbar: Our presentation includes certain non-GAAP financial measures and adjustments to these measures, which we believe provide useful information to our investors. In accordance with SEC rules, we have provided a reconciliation of these measures to their most directly comparable GAAP measures in the earnings press release and presentation, both of which are available on our investor relations website. As previously announced, we successfully closed a series of debt refinancing transactions, which we will discuss in more detail during today's call.

Sagar Hebbar: Our presentation includes certain non-GAAP financial measures and disciplines to these measures, which we believe provide useful information to our investors.

Sagar Hebbar: In accordance with SEC rules, we have provided a reconciliation of these measures with the most directly comparable GAAP measures in the earnings press release and presentation, both of which are available on our Investor Relations website.

Sagar Hebbar: As previously announced we successfully closed a series of debt refinancing transactions, which we will discuss in more detail during today's Scott.

Sagar Hebbar: As a result of the size and complexity of the transactions, we are presenting selected financial data in the earnings press release and during today's call. Full financial data for Q1 will be included in our upcoming 10Q filing, which we expect to file with the SEC on or before the extended deadline of May 15, 2024. I will now turn the call over to Amar for an update on the business.

Sagar Hebbar: As a result of the size and complexity of the transactions. We are presenting selected financial data in the earnings press release and during today's call.

Amar: Full financial data for Q1 will be included in our upcoming 10-Q filing, which we expect to file with the SEC on or before the extended deadline of may 15th 2024.

Amar: I'll now turn the call over to Omar for an update on the business.

Amar Maletira: Thank you, Sagar, and welcome everyone to our first quarter 2024 conference call. We continue to make steady progress on the turnaround. Results in the first quarter of 2024 exceeded the high end of guidance for revenue, profit, and EPS. We have now either met or exceeded guidance for the last seven quarters, a track record that speaks to our execution and commitment to transparency with the investment community. Underneath these financial results, I'm encouraged by progress on three strategic priorities.

Amar: Thank you Sandra and welcome everyone to our first quarter 2024 conference call. We continue to make steady progress on a turnaround results in the first quarter of 2024 exceeded the high end of our guidance for revenue profit and EPS.

Amar Maletira: We are now either met or exceeded guidance the last seven quarters.

Amar Maletira: Record that speaks to our execution and commitment to transparency with the investment community.

Amar Maletira: Underneath these financial results I'm encouraged by our progress on three strategic priorities.

Amar Maletira: First, implementing an operational turnaround. Second, repositioning Rackspace as a forward-leaning and innovative hybrid multi-cloud and AI solutions company. And third, right-sizing our capital structure to ensure ample liquidity to support our key objectives of driving long-term and sustainable profitable growth. Our recent debt refinancing and liquidity injection significantly improved our capital structure, giving us runway to execute our turnaround. Mark will provide more details in his comments.

Amar Maletira: First implementing an operational turnaround second repositioning rackspace as a forward leaning and an overdue hybrid multi cloud and AI solutions company.

Amar Maletira: And third right sizing our capital structure to ensure ample liquidity to support our key objective.

Amar Maletira: And long term and sustainable profitable growth.

Amar Maletira: Our recent debt refinancing and liquidity injection significantly improved our capital structure, giving us runway to execute our turnaround.

Amar Maletira: Mark will provide more details in his comments.

Amar Maletira: Our operational turnaround continues to gain momentum. We are building pipeline in both our businesses, growing bookings, and finding additional opportunities to increase efficiency across the board. While the overall market remains cautious in the near term, we are well positioned and are leaning into the opportunities being created by secular market trends in public cloud, private cloud, and AI. Now, let me get into our business performance, starting with private cloud. We had very strong double-digit year-over-year growth in first quarter bookings in private cloud with continued strength in health care. However, sequentially, bookings were down due to normal seasonality in the first quarter and an exceptional bookings performance in the fourth quarter of 2023.

Amar Maletira: Our operational turnaround continues to gain momentum we are building pipeline in both our businesses growing bookings and finding additional opportunities to increase efficiency across the board.

Amar Maletira: While the overall market remains cautious in the near term, we are well position and are leaning into the opportunities being created by secular market trends in public cloud private cloud and AI.

Amar Maletira: Now, let me get into our business performance, starting with private cloud.

Amar Maletira: We had very strong double digit year over year growth in first quarter bookings and private cloud with continued strength in health care.

Amar Maletira: Sequentially bookings were down due to normal seasonality in first quarter and an exceptional bookings performance in the fourth quarter of 'twenty critically.

Amar Maletira: PirateCloud is seeing continued success in implementing a healthcare vertical strategy. Following on the heels of strong fourth-quarter bookings in this vertical, we won several new deals in healthcare in the first quarter. Among them were marquee names, including two of the country's 10 largest health care payers, a large healthcare solutions provider, and a regional hospital and related services system provider.

Amar Maletira: <unk> clearly seen continued success in implementing our healthcare vertical strategy.

Amar Maletira: Following on the heels of a strong fourth quarter bookings in this vertical we won several new deals in healthcare in the first quarter.

Amar Maletira: Among them were marquee names, including two of the country's largest healthcare peers.

Amar Maletira: Large healthcare solutions provider and the regional hospital and related services system provider.

Amar Maletira: Many of these new engagements are for our unique and differentiated EPIC as a service offering. Rackspace holds all EPIC certifications and is the perfect partner to host, operate, and manage electronic medical record workloads.

Amar Maletira: Many of these new engagements for our unique and differentiated epic as a service offerings.

Amar Maletira: Rackspace holds all epic certifications and is the perfect partner to host operate and manage electronic medical record workloads, while the most critical workloads in the health care industry.

Amar Maletira: Towards that end, in April, we had a successful implementation of EPIC electronic medical record system with Seattle Children's Health Hospital, leveraging Rackspace's healthcare cloud solution. I'm proud of the partnership between Seattle Children's Hospital and our Rackspace team to provide a seamless migration of this workload to the Rackspace environment without impacting system availability or patient care. Target Cloud continues to launch a steady stream of new and innovative products and solutions. In the first quarter, we launched a UK sovereign solution.

Amar Maletira: Towards that end in April we had a successful implementation of epic electronic medical record system with Seattle Children's Health Hospital, leveraging rack spaces healthcare cloud solution.

Amar Maletira: I am proud of the partnership between Seattle Children's Hospital, and a rackspace team to provide a seamless migration of this workload to direct space environment without impacting system every liberty our patient cash.

Amar Maletira: Private cloud continues to launch a steady stream of new and innovative products and solutions and.

Amar Maletira: In the first quarter, we launched UK server solutions.

Amar Maletira: This is a digital servant platform with ARC branded data centers in the UK, offering a flexible number of configurations to suit varying budgets, performance, and workload sizes. All compute and storage for the Sovereign Cloud is dedicated to the UK government and healthcare. I'm encouraged by the success of the private cloud strategy to defend and expand our private cloud business. We are executing well with continued growth in pipeline, bookings, and new products and solutions.

Amar Maletira: This is a digital service platform with the arc branded data centers in the U K offering a flexible number of configurations to suit varying budgets performance and workload sizes.

Amar Maletira: All compute and storage for the sovereign cloud is dedicated to UK government and healthcare.

Amar Maletira: I'm encouraged by the success of the private cloud strategy to defend and expand our private cloud business.

Amar Maletira: We are executing well with continued growth in pipeline bookings and new products and solutions.

Amar Maletira: However, the private cloud business unit is also working through the negative impact on today's results from customer exit decisions made in prior years on legacy solutions. Fortunately, we expect that dynamic to normalize over the coming quarters and the next year, at which point revenue runoff should eventually be eclipsed by the continued new bookings and revenue conversion from that point forward.

Amar Maletira: However, the private cloud business unit is also working through the negative impact on today's results from customer exit decisions made in prior years on legacy solutions.

Amar Maletira: Fortunately, we expect that dynamic to normalize over the coming quarters and next year at which point our revenue run off should eventually be eclipsed by the continued new bookings and revenue conversion from that point forward.

Amar Maletira: As we start to leave the legacy effects behind, we expect to see private cloud performance tip decisively towards stability and then steady sequential growth in an underserved market where Rackspace brings unique capabilities, a great brand, and two decades of experience in managing and operating a variety of hybrid cloud workloads delivered through our fantastic support. Now moving to public cloud. In the first quarter, total public cloud bookings showed solid double-digit growth year-over-year and were also up sequentially. Sequential growth in the first quarter, which is seasonally the weakest quarter, is very encouraging.

Amar Maletira: As you start to lead the legacy effects behind we expect to see private cloud performance to decisively towards stability and then steady sequential growth in an underserved market with Rackspace brings unique capabilities, great brand and two decades of experience in managing and operating a variety of hybrid cloud.

Amar Maletira: Workloads delivered through a fanatical support.

Amar Maletira: Now moving to public cloud.

Amar Maletira: In the first quarter total public cloud bookings showed solid double digit growth year over year and were also up sequentially.

Amar Maletira: Sequential growth in the first quarter, which is seasonally the weakest quarter is very encouraging.

Amar Maletira: This was the result of solid execution by our go-to-market teams in two of our largest regions, Americas and the UK. The major go-to-market refresh we did in this business in the second half of last year has started yielding results. I'm pleased with the go-to-market execution, especially in a tough services market. We are in the early innings, and there's more to do to continue building on this momentum.

Amar Maletira: This was a result of solid execution by our go to market teams in two of our largest regions Americas and the U K.

Amar Maletira: The major go to market refresh we did in this business in the second half of last year has started yielding results.

Amar Maletira: I'm pleased with the go to market execution, especially in a tough services market.

Amar Maletira: We are in the early innings and there's more to do to continue building on this momentum.

Amar Maletira: Our public cloud strategic imperative is to lead with services. We offer an unparalleled ability to meet our customers' needs with a full-stack, multi-cloud solution-spanning platform, applications, data, and security. This focus has yielded a number of new wins, such as a platform services and security engagement with a large international insurance company. We also won a platform services agreement with a large media company.

Amar Maletira: Our public cloud strategic imperative is to lead with services.

Amar Maletira: We offer an unparalleled ability to meet our customers' needs with a full stack multi cloud solutions spanning platform applications data and security.

Amar Maletira: This focus has yielded a number of new wins, such as a platform services and security engagement with a large international insurance company. We also won a platform services agreement with a large media company.

Amar Maletira: And in data services, we have been engaged by another large insurance company to migrate and modernize an on-prem data warehouse to the cloud. Public Cloud also continues to develop many new innovative services and solutions. We are also being increasingly selective with infrastructure resale, including not competing with some low-profit renewals.

Amar Maletira: And in data services, we have been engaged by another large insurance company to migrate and modernize and on Prem data warehouse to cloud.

Amar Maletira: Public cloud also continues to develop many new innovative services and solutions.

Amar Maletira: We are also being increasingly selective with infrastructure resale, including not re competing some low profit renewals.

Amar Maletira: This may impact near-term revenue but will improve our overall model. While I want to make a few remarks specifically about AI, I also want to note that AI permeates the organization and is integrated into everything we do. So it is a part of both public and private cloud businesses as well as our internal functions. Our opportunity base for AI, or our FAIR offerings, continues to grow since its launch in June 2023 and is in excess of 30 opportunities.

Amar Maletira: This may impact near term revenue, but will improve our overall margins.

Amar Maletira: Well I want to make a few remarks, specifically about AI I also want to note that AI permeates the organization and is integrated into everything we do so it is a part of both public and private cloud businesses as well as our internal functions.

Amar Maletira: Our opportunity Batesville, AI or a fed offerings continues to grow since its launch in June 2023, and is in excess of 30 opportunities. These opportunities are at varying stages of implementation across the aisle and.

Amar Maletira: These opportunities are at varying stages of implementation across our ideate and incubate phases. In general, our customers are starting to turn to the hard work of making AI a reality. That usually starts with data. You can't train and fine-tune an AI model and run inference without unified, normalized data.

Amar Maletira: And incubate phases.

Amar Maletira: In general our customers are starting to turn to the hard work of making AI reality.

Amar Maletira: That usually starts with data <unk>.

Amar Maletira: <unk> train and fine tune NII model and run influencing without unified normalized data.

Amar Maletira: That data business represents a significant near-term opportunity for Rackspace but speaks to the long road ahead to full-scale AI implementation. We're also developing new capabilities. Earlier this year, Private Cloud launched Private AI Anywhere.

Amar Maletira: That data business represents significant near term opportunity for rack space, but speaks to the long road ahead to full scale implementation.

Amar Maletira: We're also developing new capabilities earlier this year private cloud, we launched private anywhere.

Amar Maletira: And on a future roadmap later this year, we'll be introducing AI Business, an AI-optimized platform for fine-tuning and inferencing AI workloads. We have broad and deep engagement with the AI ecosystem to quickly move on opportunities and help our customers on their AI journey. In summary, this quarter, we once again did a little better than expected. Our guidance shows an appropriately cautious but improving trajectory. Our goal for 2024 remains to lock in a sustainable business model that generates consistent revenue and profit growth over the long term, building momentum that will put us on a profitable growth trajectory entering 2025.

Amar Maletira: And on our future Road map later this year, we'll be introducing EA business.

Amar Maletira: And AI optimized platform for fine tuning and inferencing workloads.

Amar Maletira: We have a broad and deep engagement with the AI ecosystem to quickly move on opportunities and help our customers in the AI journey.

Amar Maletira: In summary, this quarter, we once again did a little better than expected.

Amar Maletira: Our guidance shows an appropriately cautious but improving trajectory.

Amar Maletira: Our goal for 'twenty 'twenty four remains locking a sustainable business model that generates consistent revenue and profit growth over the long term.

Amar Maletira: Building momentum that will put us on a profitable growth trajectory entering 2025.

Amar Maletira: Before we wrap up, I'd like to thank our customers, partners, and all our rackers. I'm proud of all we have achieved together already. We are heading in the right direction. I will now turn it over to Mark for an overview of our financial results and guidance.

Speaker Change: Before I wrap up I'd like to thank our customers partners and all our rockers.

Mark: I am proud of all we have achieved together already.

Mark: We're heading in the right direction.

Amar Maletira: I will now turn it over to Mark for an overview of our financial results and guidance.

Mark Marino: Thanks Amar. In the first quarter, total company gap revenue of $691 million exceeded the high end of our guidance driven by strength in public cloud. Total non-gap net revenue was $384 million, down 7% sequentially due to declines in both private cloud and public cloud. Note that Q1 typically shows seasonal weakness relative to Q4.

Amar Maletira: Thanks, Mark in the first quarter total company GAAP revenue of $691 million exceeded the high end of our guidance driven by strength in public cloud total non-GAAP net revenue was $384 million down 7% sequentially due to declines in both private cloud and public cloud.

Mark Marino: Non-GAAP gross profit margin was 20.4% of gap revenue and 36.7% of non-GAAP net revenue. For the quarter, non-GAAP operating profit was $16 million, exceeding the high end of our guidance. This was largely due to slightly better revenues and cost efficiencies; non-GAAP operating margin was 2.3% of GAAP revenue and 4.2% of non-GAAP net revenue. Non-GAAP loss per share was $0.11, which exceeded our guided range of $0.12 to $0.14 loss per share. Cash flow from operations was negative $90 million, and free cash flow was negative $118 million in the first quarter.

Mark Marino: Note that Q1, typically show seasonal weakness relative to Q4.

Mark Marino: non-GAAP gross profit margin was 24% of GAAP revenue and 36, 7% of non-GAAP net revenue for.

Mark Marino: For the quarter non-GAAP operating profit was $16 million exceeding the high end of our guidance. This was largely due to slightly better revenues and cost efficiencies non.

Mark Marino: non-GAAP operating margin was two 3% of GAAP revenue and four 2% of non-GAAP net revenue.

Mark Marino: non-GAAP loss per share is <unk> 11.

Mark Marino: Which exceeded our guided range of 12 to 14 loss per share.

Mark Marino: Cash flow from operations was negative $90 million and free cash flow was negative $118 million in the first quarter. Historically, the first quarter is typically our lowest free cash flow quarter because of a large vendor prepayments and our annual bonus payout.

Mark Marino: Historically, the first quarter is typically our lowest free cash flow quarter because of a large vendor prepayment and our annual bonus payout. This quarter, we also had one-time outflows, including certain fees related to the debt refinancing, along with fees relating to leaving our corporate headquarters. For the balance of fiscal year 2024, we expect cash flow from operations to be positive and free cash flow to be slightly negative as we continue to invest in success-based CapEx. Additionally, in the first quarter, we recorded $593 million of non-cash goodwill and intangible impairment charges. Turning to our segment results,

Mark Marino: This quarter, we also had onetime outflows, including certain fees related to the debt refinancing along with fees relating to exiting our corporate headquarters for.

Mark Marino: For the balance of fiscal year 2024, we expect cash flow from operations to be positive and free cash flow to be slightly negative as we continue to invest in success based capex. Additionally.

Mark Marino: Additionally, in the first quarter, we recorded $593 million of noncash goodwill and intangible impairment charges.

Mark Marino: For Private Cloud, GAAP revenue for the first quarter was $268 million, which was at the low end of our guidance. This includes legacy OpenStack revenue of $27 million. Total private cloud revenue was down 6% sequentially due to customers rolling off older generation private cloud offerings. Private cloud gross margin was 39%, up one percentage point sequentially, primarily due to cost efficiencies and better asset utilization. Segment operating margin was 26.7%, roughly flat quarter over quarter.

Mark Marino: Turning to our segment results.

Mark Marino: For private cloud GAAP revenue for the first quarter was $268 million, which was at the low end of our guidance. This.

Mark Marino: This includes the legacy <unk> revenue of $27 million.

Mark Marino: Total private cloud revenue was down 6% sequentially due to customers rolling off older generation private cloud offerings.

Mark Marino: Private cloud gross margin was 39% up one percentage point sequentially, primarily due to cost efficiencies and better asset utilization.

Mark Marino: Operating margin was 26, 7% roughly flat quarter over quarter.

Mark Marino: In public cloud, gap revenue was $422 million, exceeding the high end of our guidance, down 3% quarter over quarter driven by both infrastructure and services revenue declines. Infrastructure revenues are seasonally lower in the first quarter, and we continue to walk away from renewals that do not meet our profit objective.

Mark Marino: In public cloud GAAP revenue was $422 million exceeding the high end of our guidance down 3% quarter over quarter, driven by both infrastructure and services revenue declines.

Mark Marino: Infrastructure revenues are seasonally lower in the first quarter and we continue to walk away from renewals that do not meet our profit objectives.

Mark Marino: Public cloud services revenue was also down 3% sequentially, given the continued cyclical headwinds in IT services. Gross margin for our public cloud segment was 31.5% of non-GAAP net revenue, down nine percentage points sequentially, driven by revenue declines, headwinds from seasonal fringe benefits in the U.S., and lower labor utilization in services. We will continue to improve labor utilization for the rest of the year.

Mark Marino: Public cloud services revenue was also down 3% sequentially given the continued cyclical headwinds in it services.

Mark Marino: Gross margin for our public cloud segment was 31, 5% of non-GAAP net revenue down nine percentage points sequentially driven by revenue declines headwinds from seasonal fringe benefits in the U S and lower labor utilization in services.

Mark Marino: We will continue to improve the utilization for the rest of the year.

Mark Marino: Non-GAAP segment operating profit was 8% of non-GAAP net revenue, down 13 percentage points sequentially driven by the decline in gross margins, as well as a modest uptick in our go-to-market investments to drive future growth in services. Operating expenses should flatten out from here. As Amar mentioned, we closed the public debt exchange in April with positive results. We ended with over 96% of our secured creditors supporting the exchange transaction.

Mark Marino: non-GAAP segment operating profit was 8% of non-GAAP net revenue down 13 percentage points sequentially driven by the decline in gross margins as well as a modest uptick in our go to market investments to drive future growth in services.

Mark Marino: Operating expenses should flatten out from here.

Mark Marino: As Martin mentioned, we closed the public debt exchange in April with positive results, we ended with over 96% of our secured creditors supporting the exchange transaction.

Mark Marino: In 2024, we have reduced our outstanding principal by over $300 million and annual interest costs by more than $11 million. Since the end of fiscal year 2022, we have reduced our principal debt by over $800 million and annual interest costs by more than $38 million between the debt exchange and the company's open market purchases. Let me offer some key takeaways for modeling purposes.

Mark Marino: In 2024, we have reduced our outstanding principal by over $300 million in annual interest cost by more than $11 million since.

Mark Marino: Since the end of fiscal year 2022, we have reduced our principal debt by over $800 million.

Mark Marino: And annual interest cost by more than $38 million between the debt exchange and the Companys open market purchases.

Mark Marino: Let me offer some key takeaways for modeling purposes.

Mark Marino: Cash interest payments will run at about $48 million a quarter starting in 2Q24, and the aggregate principal balance of debt will be roughly $2.6 billion. Our revolver remains in place and fully available, providing an incremental $375 million of additional liquidity. And, as we mentioned last quarter, we also extended the maturities on the Revolver and other participating senior debt facilities to May of 2028. The company has no corporate maturities prior to 2028. You'll note that the reduction in the total carrying value of debt, net of premiums and discounts, is significantly less than the $300 million reduction in the principal amount of our debt.

Mark Marino: Cash interest payments will run at about $48 million a quarter starting in <unk> 'twenty for AG.

Mark Marino: <unk> principal balance of debt will be roughly $2 6 billion.

Mark Marino: Our revolver remains in place and fully available providing an incremental $375 million of additional liquidity.

Mark Marino: And as we mentioned last quarter, we also extended the maturities on the revolver and other participating senior debt facilities to may of 2028.

Mark Marino: The company has no corporate maturities prior to 2028.

Mark Marino: You'll note that the reduction of the total carrying value of debt net of premiums and discounts is significantly less than the $300 million reduction in the principal amount of our debt the.

Mark Marino: The difference in the carrying value of our debt reported on our balance sheet and the principal amount of debt is a result of applying the required debt restructuring accounting guidance to the exchange. This accounting required the company to recognize significant premiums on the newly issued debt, which are subsequently amortized over the life of the new debt, reducing quarterly gap interest expense. We are very encouraged by these results as it provides both liquidity and runway to implement our strategy. Now on to guidance.

Mark Marino: The difference in the carrying value of our debt reported on our balance sheet and the principal amount of debt as a result of applying the required debt restructuring accounting guidance to the exchange.

Mark Marino: This accounting required the company to recognize significant premiums on the newly issued debt, which are subsequently amortized over the life of the new debt, reducing quarterly GAAP interest expense.

Mark Marino: We're very encouraged by these results as it provides both a liquidity and runway to implement our strategy.

Mark Marino: We expect second-quarter GAAP revenue to be approximately $668 to $678 million. Total non-GAAP operating profit is expected to be $20 to $22 million, with a non-GAAP loss per share of $9 to $11,000. From a segment perspective, we expect private cloud revenue of $260 to $265 million and public cloud revenue of $408 to $413 million. The sequential decline in public cloud revenue is mainly attributable to declines in low-margin infrastructure resale. This decision not to pursue low-profit renewals, as emphasized by Amar in his prepared remarks, underscores our strategic focus on higher-margin service opportunities. Our non-GAAP tax rate is expected to be 26% and non-GAAP other income and expense of approximately $52 to $54 million. The non-GAAP share count is expected to be around 227 to 229 million shares.

Mark Marino: Now on to guidance, we expect second quarter GAAP revenue to be approximately $668 million to $678 million.

Mark Marino: Total non-GAAP operating profit is expected to be $20 million to $22 million and non-GAAP loss per share of 9% to 11.

Mark Marino: From a segment perspective, we expect private cloud revenue of $260 million to $265 million in public cloud revenue of $408 million to $413 million.

Mark Marino: The sequential decline in public cloud revenue is mainly attributable to declines in low margin infrastructure resell.

Mark Marino: This decision not to pursue low profit renewals as emphasized by EMR in his prepared remarks underscores our strategic focus on higher margin service opportunities.

Mark Marino: Our non-GAAP tax rate is expected to be 26% and non-GAAP other income and expense of approximately $52 million to $54 million and expenses and non-GAAP share count is expected to be around 227 to 229 million shares.

Mark Marino: I'll now turn the call over to saga.

Sagar Hebbar: I'll now turn the call over to Sagar. Thank you, Mark.

Sagar Hebbar: 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.

Speaker Change: Thank you Mark let US begin the question and answer session. We ask everyone to limit discussion to one question and one follow up.

Sagar Hebbar: Please go ahead.

Sagar Hebbar: Okay.

Sagar Hebbar: Thank you.

Operator: As a reminder, to ask a question, you'll need to press star 1-1 on your telephone. To withdraw your question, please press star 1-1 again.

Sagar Hebbar: As a reminder to ask a question you will need to press star one on your telephone.

Speaker Change: Please press Star one again, please wait for your name to be announced we ask that you. Please limit yourself to one question with one follow up please standby, while we compile the Q&A roster one moment for your first question. Please.

Operator: Please wait for your name to be announced. We ask that you please limit yourself to one question with one follow-up. Please stand by while we compile the Q&A roster. One moment for our first question, please. Our first question will come from the line of Kevin McVeigh with UPS. Your line is now open.

Kevin Damien McVeigh: Our first question will come from the line of Kevin Mcveigh with UBS. Your line is now open.

Kevin Damien McVeigh: Great, thanks so much, and congratulations on the results. Hey, I wonder, can you give us a sense of where the upside was relative to your expectations, particularly on the public side, and is there any way to dimensionalize how much of the lower margin infrastructure revenue that you walked away from just because, obviously, a terrific result on the revenue; it's trying to dimensionalize how much was also not kind of renewed just from a margin perspective?

Kevin Damien McVeigh: Great. Thanks, so much and congratulations on the results.

Kevin Damien McVeigh: I Wonder can you give us a sense of where the upside was relative to your expectations, particularly on the <unk>.

Kevin Damien McVeigh: Our side and is there any way to dimensionalize, how much of the lower margin infrastructure revenue that you walked away from just because obviously terrific results on the revenue just trying to dimensionalize. How much was also not kind of renew just from a margin perspective.

Mark Marino: Yeah, thanks for the question. A good question there.

Speaker Change: Yes, thanks for thanks for the question.

Speaker Change: Good good question there from a color perspective, I would just say that.

Mark Marino: From a color perspective, I would just say that the revenue beat was largely driven by the public cloud side of the house due to higher infrastructure resale volumes carrying into that trend from Q4. For private cloud revenue, although slightly lower, it was still within our guided range. But I think to get at your second part of the question there, you know, most of the impact from the business we're walking away from, the low margin reseller business, you'll start seeing into Q2 a little bit more than we saw into Q1, just given the timing of some of those renewals. But that'll be more pronounced as we get into the second quarter.

Speaker Change: The revenue beat was largely driven by the public cloud side of the house.

Mark Marino: Due to higher infrastructure resale volumes sort of carrying into that trend from Q4.

Mark Marino: Yes from a private cloud revenue, although slightly lower it was still within our guided range, but I think to sort of get on your second part of the question there.

Mark Marino: Most of the impact from business, we're walking away from low margin reseller business Youll start seeing it.

Mark Marino: Into Q2, a little bit more than we thought into Q1.

Mark Marino: Just given sort of the timing on some of those renewals but.

Mark Marino: That will be more more pronounced as we get into the second quarter.

Mark Marino: Okay.

Kevin Damien McVeigh: Great, and then can you just help? Kevin McVeigh.

Mark Marino: And then can you just help.

Amar Maletira: Kevin, if I can just add, those are low-margin, very low-margin businesses that we are walking away from. So I think it should improve the overall margin of that business as we walk away from this very low-margin resale business. So it's net positive from a margin perspective.

Speaker Change: Kevin if I could just add those of course it was a low margin very low margin business that youre walking away from.

Amar Maletira: So I think it should improve the overall margin.

Amar Maletira: That business as we walk away from very low margin retail business. So it's net positive from a module perspective.

Kevin Damien McVeigh: It makes a lot of sense. Thank you.

Speaker Change: It makes a lot of sense. Thank you.

Operator: Thank you. One moment for our next question, please. Our next question comes from the line of Frank Louthan with Raymond James. Your line is now open.

Speaker Change: Thank you one moment for our next question. Please.

Operator: Our next question comes from the line of Frank Louthan with Raymond James Your line is now open.

Frank Garrett Louthan: Hey guys, this is actually Rob on for Frank. So what verticals would you say that you had the most traction with during the quarter? And where do you expect to see the most traction going forward over the next couple of quarters? Thank you.

Operator: Hey, guys. This is actually Rob on for Frank.

Rob: So what verticals would you say, it's the most traction with during the quarter.

Rob: And where do you expect to see the most traction going forward over the next couple of quarters. Thank you.

Amar Maletira: So just, Rob, I just want to make sure I understand the questions you're talking about where we saw traction from a vertical perspective in the quarter. Yeah. Yes, okay.

Frank Garrett Louthan: So this is Robert just wanted to make sure I get the questions. You are talking about where we saw traction from a vertical perspective in the quarter.

Speaker Change: Yes, yes.

Amar Maletira: So thank you for the question, Rob. So clearly, you know, we are seeing very good traction in our healthcare vertical. We saw, you know, we continue to win a lot of business in Epic as a service. In my prepared remarks, I did mention that. And the funnel remains strong.

Speaker Change: Yes, okay. So thank you for the question Rob So clearly.

Amar Maletira: We are seeing very good traction in our healthcare vertical.

Amar Maletira: We saw.

Amar Maletira: We continue to win a lot of business and epic as a service in my prepared remarks, I did mention that in the funnel remains strong, but we still have.

Amar Maletira: We still have, you know, TCV in the funnel in excess of about $700 million, even after closing a lot of business in Q1. So clearly, that vertical is playing out very well for us. In public cloud, you know, we saw business across multiple verticals, but it was very broad-based. A public cloud business also did quite well. In fact, we're starting to see a lot of green shoots in our services-led motion, and our overall bookings, in fact, in services are up high double digits year-on-year. And, in fact, mid-single digits in a seasonally declining quarter.

Amar Maletira: No.

Amar Maletira: TCE in the funnel and access of about $700 million, even after closing a lot of business in Q1, So clearly that vertical is playing out very well for us.

Amar Maletira: In public cloud.

Amar Maletira: We saw business across multiple verticals, but it was very broad base of public cloud business also did quite well in fact, we are starting to see a lot of operations.

Amar Maletira: Services led motion.

Amar Maletira: Overall bookings in fact, it services grew high double digits year on year and in fact, the mid single digits.

Amar Maletira: Seasonally declining quarter, so overall bookings, but I mean in public cloud, including services. So if you recall.

Amar Maletira: So overall bookings, but I mean in the public cloud, including services. So if you recall, we did mention that we made a lot of structural changes in a go-to-market motion in the second half of fiscal 2023, including refreshing our sales talent so that we bring in services, so that we bring in services-specific skills into a go-to-market organization. We hired a lot of client partners. We also hired new leadership, and it is all now playing out quite well.

Amar Maletira: Did mentioned that we made a lot of structural changes in our go to market motion in the second half of fiscal 2023.

Amar Maletira: Including refreshing our sales talent, bringing services. So that we can service a specific skills and our go to market organization. We hired a lot of client partners. We also hired new leadership.

Amar Maletira: And that all is not playing out quite well, we have a better execution against our go to market plan.

Amar Maletira: You know, we have better execution against a go-to-market plan. We are now landing and expanding in both our installed base as well as net news, specifically in the Americas and Europe, which is one of our two largest regions. We also have increased our engagement with all three hyperscalers, and that's very important. In fact, when it comes to AI and Gen AI, you know, we are very much embedded with hyperscalers, all the three, especially AWS as well as Azure.

Amar Maletira: We're landing and expanding and bolt our installed base.

Amar Maletira: Specifically in the Americas, and Europe, which is one of our two largest regions. We also have increased our engagement with all three hyperscale us.

Amar Maletira: And that's really important in fact.

Amar Maletira: Through <unk> we are.

Amar Maletira: Very much embedded with Hyperscale is.

Amar Maletira: All the all the three especially the AWS <unk> Azure.

Amar Maletira: We, you know, continue to enable our go-to-market organization with, you know, very specific sales plays in both public cloud and private cloud, and we also started doing very good account planning, and it's sort of coordinated 360-degree account management for both mid-market and enterprise customers. So, you know, this is all working well. Again, the market remains tough, as you know. Our environment has not changed as much, but I think within that construct, I think we, from a go-to-market perspective, are doing quite well on the public cloud side, and on the private cloud side, our healthcare vertical strategy is really working well, and we feel really good about the healthcare vertical strategy.

Amar Maletira: We continue to enable our go to market organization with a very specific sales plays in both public cloud and private cloud and we also started doing very good account planning and sort of.

Amar Maletira: Coordinated 360 degree account management for both mid market and enterprise customers.

Amar Maletira: This is all working well against the market remains tough as you know macro environment is not has not.

Amar Maletira: <unk> as much but I think within that construct I think we from a go to market perspective are doing quite well in the public cloud side and on the private cloud side of healthcare vertical strategies really working well and we feel really good about that.

Amar Maletira: In fact, we're also executing well against that strategy. We implemented one of the, you know, one of our, we brought on board a healthcare customer, Seattle Children's Hospital, as I mentioned, met the bed remark, and it was a very, very good and smooth transition.

Amar Maletira: Strategy. In fact, we are also executing well against that strategy, we implemented one of the.

Amar Maletira: One of our we brought on board a health care customer <unk> Children's hospital as I mentioned, Mr. <unk> remark and it was a very very good and smooth transition or to a rack space cloud solution on the healthcare side.

Speaker Change: Great. Thank you guys.

Operator: Thank you. As a reminder, to ask a question, you'll need to press star 11 and wait for your name to be announced. Our next question will come from the line of Ramsey L. LaSalle with Barclays. Your line is now open.

Speaker Change: Thank you.

Speaker Change: As a reminder to ask a question you will need to press star one one and wait for your name to be announced and next question will come from the line of Ramsey El Lasalle with Barclays. Your line is now open.

Ramsey Clark El: Hi, thanks for taking my question this evening. You mentioned green shoots for services and good bookings. What's responding in the market for you now? And I guess kind of speak to your confidence level about seeing some level of inflection later on as we get deeper into the year.

Speaker Change: Hi, Thanks for taking my question this evening.

Ramsey Clark El: You mentioned green shoots for services and good bookings whats resonating in the market for you now and I guess kind of also speak to your confidence level about seeing some level of inflection of inflection you know later on as we get deeper into the year.

Amar Maletira: Yeah. Thanks, Ramsey.

Speaker Change: Yes, Thanks James.

Speaker Change: Question so.

Amar Maletira: In services on the services side, what I'm, saying.

Speaker Change: I mentioned, we refreshed our go to market organization in the second half of last year and we have started.

Amar Maletira: Basically looking at a lot of enterprise and mid market customers as an example, ramsey.

Amar Maletira: That's a good question. So, you know, we in services on the services side, Ramsey, as I mentioned, we refreshed our go-to-market organization in the second half of last year, and we have started, you know, basically looking at a lot of enterprise and mid-market customers. As an example, Ramsey, we have about 20 MSAs in motion right now, Master Services Agreements with large enterprises and mid-market customers. Almost 50% of those we have already signed. That gives us a license to go hunting.

Amar Maletira: About 20 Msa's in motion right now Master services agreement with large enterprises and mid market customers on those.

Amar Maletira: 50% of those we have already signed that gives us.

Amar Maletira: License to go hunt and specifically into the types of services, but I wanted to do a bigger picture here. We're also signing large strategic.

Amar Maletira: I'll come specifically into the types of services, but I want to give you a bigger picture here. We are also signing a large strategic relationship with, you know, larger customers in all three regions, in the Americas, in Europe, as well as in the Middle East. And we also have some very good frame agreements in certain verticals, in our dark region, specifically in the auto vertical. So, those are the green shoots I'm talking about.

Amar Maletira: Our relationship with.

Amar Maletira: The larger customers in all three regions in Americas, and Europe as well as in the middle East by the way.

Amar Maletira: And we also have some very good frame agreements and certain verticals and in our Doc region, specifically in the auto vertical. So those are the green shoots I'm talking about when it comes to services. What we saw AMC again I think it is.

Amar Maletira: It's also reflects what's happening in the marketplace.

Amar Maletira: When it comes to services, what we saw, Ramsey, again, I think it also reflects what's happening in the marketplace. You know, we are seeing our data services business really perform well. This quarter, our data services business grew very strongly in our data services bookings, so to speak. We also saw professional services, and consulting services across all three service lines in our public cloud platform, you know, in security, in applications, as well as in data, grew sequentially.

Amar Maletira: We are seeing a data services business really performed well this quarter our data services business grew.

Amar Maletira: Very strong growth in our data services bookings so to speak we also saw professional services consulting services across all three service lines and public cloud platform.

Amar Maletira: In security in applications as well as in data grew sequentially. So we are starting to see is I think it's more of a better go to market execution of these are all bookings number by the way as opposed to the market the macro environment still remains challenging uncertain so to speak.

Amar Maletira: So, we are starting to see, and I think it's more of a better go-to-market execution. Now, these are all booking numbers, by the way, as opposed to, you know, the market. The macro environment still remains challenging, uncertain, so to speak. And, you know, a lot of projects are more focused on cost optimization, but we are starting to see a lot of projects emerge on the AI side. And on private cloud, you know, our vertical strategy is working very well on the private cloud side. So, looking forward to the second half, Mark, you want to talk about, you know, what we are seeing from an outlook perspective.

Amar Maletira: A lot of projects that are more focused on cost optimization, but we are starting to see a lot of projects emerge on the AI side and on private cloud our vertical strategy is working very well on the private cloud site. So looking forward into the second half Mark do you want to talk about.

Mark Marino: What we are seeing from an auto perspective, yeah sure. Thanks, Marc just from a from a high level in terms of the second half of the year, we do see revenue stabilizing sequentially in Q3, and a slight uptick in sequential revenue going into Q4 across both business units and from a operating profit perspective, we see.

Mark Marino: Yeah, sure. Yeah, thanks, Amar. Yeah, just from a high level in terms of the second half of the year, you know, we do see revenue stabilizing sequentially in Q3 and a slight uptick in sequential revenue going into Q4 across both business units. And from an operating profit perspective, we see overall second half operating profit being significantly higher than the first half as we continue to see the pull through on the revenue, higher revenue, as well as driving efficiencies throughout the organization.

Mark Marino: And on efficiencies, you know, we continue to drive a lot of efficiencies through the organization, Ramsey, from the actions we took early on in the second half of 2023, as well as the actions we continue to take in 2024. And these are efficiencies across both labor as well as non-labor. And so, and so that's why we are, you know, that's why we believe the second half; we're estimating the second half operating profit should be significantly higher than the first half.

Mark Marino: Overall second half operating profit being significantly higher than the first half as we continue to see the pull through on the revenue higher revenue as well as driving efficiencies throughout the organization.

Mark Marino: And on the efficiencies, we continue to drive a lot of efficiencies throughout the organization Ramsey.

Mark Marino: From the actions actually we took early on in the second half of 2023 as well as the actions. We continue to take in 2024 and these are efficiencies across both labor as well as non labor and so.

Mark Marino: So thats Thats why we are.

Mark Marino: That's why we believe the second half we estimate in the second half operating profit should be.

Mark Marino: Significantly higher than the first half.

Speaker Change: Got it thank you.

Sagar Hebbar: Thank you. Now this concludes today's Q&A session. I will now turn the call back over to Sagar. Hebbar with closing remarks.

Speaker Change: Thank you.

Mark Marino: This concludes today's Q&A session I will now turn the call back over to Sundar.

Sagar Hebbar: <unk> with 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 at Rackspace.com. Have a great evening, everyone!

Sagar Hebbar: Thank you everyone for joining us if we did not get to your question, but if you have a follow up please email us at IR at <unk> Dot com.

Sagar Hebbar: Have a great evening everyone.

Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.

Sagar Hebbar: This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.

Operator: [music].

Operator: [music].

Operator: [music].