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Rackspace Technology, Inc. (NASDAQ:RXT) Q3 2023 Earnings Call Transcript

Rackspace Technology, Inc. (NASDAQ:RXT) Q3 2023 Earnings Call Transcript November 7, 2023

Rackspace Technology, Inc. beats earnings expectations. Reported EPS is $-0.04, expectations were $-0.05.

Operator: Good day and thank you for standing by. Welcome to Rackspace Technology Third Quarter 2023 Earnings Webcast. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today. Please go ahead.

Sagar Hebbar: Thank you. And welcome to Rackspace Technology's third quarter 2023 earnings conference call. I am Sagar Hebbar, Head of Investor Relations. Joining me on today’s call are Amar Maletira, our Chief Executive Officer, and Bobby Molu our Chief Financial Officer. As a reminder, certain comments we make on this call will be forward-looking. These statements involve risks and uncertainties, which could cause actual results to differ. A discussion of these risks and uncertainties is included in our SEC filings. Rackspace Technology assumes no obligation to update the information presented on the call, except as required by law. Our presentation includes certain non-GAAP financial measures 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 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 revenues. I'll now turn the call over to Amar for an update on the business.

Amar Maletira: Thank you, Sagar. Fiscal third quarter 2023 results exceeded the midpoint of our revenue, operating profit and EPS guidance. Our two business unit operating model is now fully implemented and our leadership teams are executing to their plans. Additionally, we remain committed to aligning our cost structure with our current needs. These measures continue to improve our operating efficiency and execution. As has been widely noted the overall economic and demand environment remains uncertain. Organizations of all sizes and spanning various industries remain cautious on IT spending Hence we continue to see extended sales cycles and delays in customers' new initiatives. In response, we continue to focus on fine-tuning our organization aiming for more effective execution of our current operations.

We are strengthening and preparing Rackspace Technology to capitalize on an uptick in demand as and when it occurs. As mentioned in the last earnings call, we launched foundry for AI by Rackspace or FAIR. Since launching in June we have announced offerings with all three hyperscaler partners AWS, GCP and Azure. Among the offerings is AWS FAIR Secure Landing Zone a solution that assists our customers across diverse industries in securely harnessing this platform's native AI services. We also showcased our AI capabilities at the Google Cloud Next event to a positive response from customers. In addition, we continue to work with Dell and NVIDIA in implementing our private cloud AI reference architecture for customers requiring secure performant private cloud landing zones.

I'm pleased with the progress we have made. AI is a long-term secular trend. Gen AI is set to revolutionize every facet of companies and their operations. Its implementation promises to elevate business performance improving productivity enhancing business agility and enriching customer experiences. Companies are presently navigating the initial phase of AI adoption, prioritizing the security safety and reliability of their deployments. Our FAIR initiative is distinctive in that it caters to both service and infrastructure requirements for AI allowing for a safe, secure and responsible deployment. We are confident in our strong position within this fast-evolving market. Now turning to updates on our business units. In Private Cloud, we continue to see traction in our vertical market strategy in industries such as healthcare and financial services across all regions.

We maintained a sharp focus on building our pipeline with approximately one-third of it consisting of new prospective clients. In healthcare, we won a multiyear contract to host and manage the industry-leading electronic health record application in a Private Cloud for a prominent children's hospital in the US Northwest. We won this new client due to our differentiated high availability solution, fanatical customer support and years of experience in hosting and managing mission-critical workloads. We also entered into a multiyear contract with a leading US provider of home/medical equipment, consolidating the two data centers into a Rackspace Data Center. This consolidation involves AS400 and other virtualized workloads, migrated and managed in Rackspace's Managed Hosted Private Cloud.

In Financial Services, we signed a multiyear contract with a leading Asian bank to advance their cloud transformation initiative and support their growth agenda. Rackspace is enabling this complex transformation by providing a comprehensive private cloud solution that delivers business agility and financial flexibility for the bank. We also signed a deal, with a leading payment technology company in the Americas for custom disaster-recovery-as-a-service, enabling full data replication and rapid recovery of their critical systems in the event of an outage of breach. In addition, we had nine product launches and enhancements across the Private Cloud portfolio in the third quarter, including Disaster Recovery Solutions and SAP HANA certifications for software-defined data center business and enterprise environments.

We're also excited about multiple innovative offerings in our Private Cloud roadmap that are slated for release over the next two quarters. Here are a few examples. First is the Software-Defined Data Center anywhere offering. This is Rackspace VMware-based, Turnkey Edge Solution for enterprise and mid-market customers that have sensitive applications and data locality and compliance needs. This solution allows customers to deploy compute where they need them, on-premises, custom color or in any data centers globally. Second offering is called Spot. Spot is a true compute market exchange service perfectly suited for a developer and cloud-native customer base. It is a Kubernetes cluster suited for preemptible workloads. This solution provides real-time market pricing empowering customers to use compute capacity on demand.

Now turning to Public Cloud, despite a challenging environment in Public Cloud, we saw good traction in pipeline and bookings in the third quarter. We continue to focus towards more high-value services making notable strides in attracting a wide range of customers and introducing new innovative offerings. On the customer front, we have established a partnership with a leading Fortune 500 biotech company committed to propelling medical innovation and enhancing patient outcomes across 100 countries worldwide. Serving as their preferred cloud infrastructure partner in AWS, we've expanded our involvement to encompass advisory and professional services focusing on their multi-cloud strategy technology modernization and application migration utilizing our advanced global delivery model.

A futuristic multi-server data center, symbolizing the advanced multicloud services.
A futuristic multi-server data center, symbolizing the advanced multicloud services.

This collaborative initiative is point them to address customer needs more efficiently and expedite the implementation of digital products and services ultimately leading to improved patient outcomes. For two of the largest multinational transportation logistics and warehousing companies operating out of Asia Pacific and the U.K. we are offering a broad range of cloud modernization services including modern operations. These new clients were a competitive win against some of the leading global system integrators. What differentiated Rackspace Technology was a business outcome-focused solution that drove business agility and operational efficiency for our customers. On the offerings front we also launched nine Public Cloud offerings in the third quarter including full stack managed services for hybrid multi-cloud allowing customers to manage their entire workload life cycle in hybrid and multi-cloud environments.

A comprehensive managed security solution combining cloud native detection and response with 24/7 cybersecurity experts. We also partnered with Google to launch Google accelerated cloud migration and exclusive rapid and cost-effective path for migrating virtual workloads to Google Cloud. Overall it was a good quarter for both our Private Cloud and Public Cloud businesses on multiple fronts. We recently had a successful Industry Analyst Day in Boston. We presented our strategy and showcased our full suite of private cloud and public cloud products and services offerings. This was well received and positions us strongly as a hybrid multi-cloud and AI solutions company. Before I wrap up I would like to welcome Thomas Cole as the newest member of our Board of Directors.

Thomas has over 37 years of experience in banking. This is another example of how we are strengthening our organization with highly skilled and accomplished professionals. Now let me wrap up by reiterating our top four priorities we outlined at the start of the year which we are focused on to turn around our company's financial performance. First, reverse the decline in Private Cloud and position this business to capitalize on the growth opportunities in an attractive market; second grow our Public Cloud services business at or above market rate; third build a highly efficient cost structure and ultimately drive sustained growth in operating profit and free cash flow. With that, I will turn it over to Bobby.

Bobby Molu : Thanks Amar. I will cover the total company results for the third quarter then share some details on our segment performance followed by our Q4 guidance. We maintain our commitment to enhancing the efficiency of both businesses as part of our disciplined financial strategy. We've effectively managed working capital and bolstered liquidity notably through a more detailed focus on collections and the implementation of a new accounts receivable securitization program. Additionally, we will continue to identify additional cost reduction opportunities in areas that do not align with our current strategy. Now looking at the results for the quarter. Total company GAAP revenue of $732 million was at the high end of our guidance down 2% sequentially and down 7% year-over-year driven by declines in both private cloud and public cloud.

Total net revenue was $430 million, down 4% sequentially and down 12% year-over-year. Gross profit of $162 million was 22% of GAAP revenue and 38% of net revenue. We remain on track, with our prior guidance for sequential quarterly operating profit improvement for the remainder of 2023 off of the second quarter trough. For the quarter, operating profit was $46 million at the high end of our guidance, up 17% sequentially. This was down 43% year-over-year primarily due to revenue declines in our private cloud business unit, operating margin was 6% of GAAP revenue and 11% of net revenue. Loss per share was $0.04, which was within our guided range of $0.04 to $0.06 loss per share. In the third quarter, we recorded approximately $214 million of noncash impairment charges primarily as a result of the decrease in our market capitalization.

Additional details of these noncash expenses can be found in our SEC filings. Cash flow from operations was $267 million and free cash flow was $239 million in the third quarter. Our reported cash flow includes, cash received through the new AR securitization. Normalizing for the AR securitization, cash flow from operations would have been $61 million and free cash flow would have been $34 million, in line with our expectations. Let me provide a little more insight on the AR securitization, we executed at the end of September. The primary objective of this securitization was to bolster our already solid liquidity position and allow us to opportunistically, take advantage of the dislocation in our debt pricing. In the third quarter, we deployed $30 million of cash to opportunistically repurchase another $85 million of our senior unsecured notes in the marketplace.

Through October year-to-date, we have repurchased a total of $274 million of senior unsecured notes using $96 million of cash at an average price of $0.34 on the dollar. We believe the combination of this facility and these buybacks is positive for shareholders, allowing substantial discount capture on our debt and increasing our available liquidity to $653 million including, $278 million of cash on our books. We continue to monitor and assess further opportunities to deploy capital, in accretive downside protected ways for shareholders. Total CapEx for the third quarter was $28 million, with a CapEx intensity of 4%. We continue to expect CapEx in our typical 5% to 7% CapEx intensity range for the full year. Turning to our segment results. For Private Cloud, GAAP revenue for the third quarter was $300 million, which was at the high end of our guidance.

This includes legacy OpenStack revenue of $31 million. Total Private Cloud revenue was down 4% sequentially due to customers rolling off old generation private cloud offerings. Private Cloud gross margin was 38% up one percentage point sequentially driven by cost reductions offsetting the impact of revenue declines. Segment operating profit was $85 million at an operating margin of 28% essentially flat quarter-over-quarter. In Public Cloud, GAAP revenue of $433 million also at the high end of our guidance was essentially flat quarter-over-quarter primarily due to consumption-driven growth on infrastructure resale volumes, offset by declines in services. Public Cloud services revenue was down 4% sequentially given the tightening of discretionary spending.

We expect our pivot to a stronger services-led focus to pay dividends as the macro environment improves and our go-to-market strategy matures. Public Cloud net revenue which includes our Public Cloud Services revenue and infrastructure resell profit was $130 million, down 4% sequentially. Gross margin for our Public Cloud segment was 11% of GAAP revenue up one percentage point sequentially. Gross margin was 37% of net revenue, up three percentage points sequentially, driven by utilization and efficiencies from cost savings. Segment operating profit in Public Cloud was $22 million, which was 5% of total segment revenue, up one percentage point sequentially and 17% of net revenue, up four percentage points sequentially. Now on to our Q4 guidance.

We expect the fourth quarter GAAP revenue to be approximately $710 million to $720 million. Total operating profit is expected to be $46 million to $48 million and loss per share of $0.03 to $0.05. From a segment perspective, we expect Private Cloud revenue of $284 million to $289 million and Public Cloud revenue of $426 million to $431 million. Our tax rate is expected to be 26% and other income and expense of approximately $57 million to $59 million in expenses. The share count is expected to be around 221 million to 223 million shares. We expect full year cash flow from operations and free cash flow to be positive on both a reported and normalized basis. I will now turn the call over to Sagar.

Sagar Hebbar: Thank you, Bobby. Let us begin the question-and-answer session. We ask everyone to limit discussion to one question and one follow-up. Please go ahead.

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