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Rackspace Technology beats earnings estimates as customers double down on cloud computing

Rackspace Technology reported third quarter earnings that beat expectations. Rackspace Technology CEO Kevin Jones joins Yahoo Finance Live to discuss.

Video Transcript

ZACK GUZMAN: Welcome back to Yahoo Finance Live. It is, of course, still Q3 earnings season here. Getting some important updates in the cloud space. Rackspace one of the latest companies to report there showing revenue in the third quarter jumped up to $682 million. That's up 13% year over year. The company also slightly upped its full year guidance, projecting about 10% to 11% growth versus the prior guidance of 9% to 10%.

Here to discuss the boost we're seeing in the cloud space joining us right now is the CEO of Rackspace. Kevin Jones joins us. And Kevin, it's good to be chatting with you. First up, one of the things we've been discussing here, particularly in the cloud, is this boost, the shift to a lot of companies interacting with customers here on the internet in the wake of all the shutdowns we've seen here. So talk to me about where you saw the biggest gains in the quarter in Rackspace's businesses here.

KEVIN JONES: Well, thanks, Zack. Thanks for having me back. Look, things are fantastic here at Rackspace Technology. As you mentioned, we just announced our third quarter results. We had the highest revenue in the history of the company, the highest sales in the history of the company, and our best quarterly cash flow since 2017.

So you're exactly right. We've got lots of momentum in the business. Customers using more and more cloud than ever. This is now five consecutive record sales quarters in a row for us. And we raised guidance across the board, as you mentioned, for 2020 revenue cash flow and profitability.

So really, what we're seeing in the market is this tectonic shift in the industry to cloud. And we don't see any signs of it slowing down. It's a $400 billion market opportunity. Lots of secular tailwinds. So we're super excited and optimistic and helping our customers get to the cloud every day.

AKIKO FUJITA: Kevin, it's been really interesting to hear so many of these companies that have talked about their digital strategy really being accelerated as a result of this. Also surprising to hear how many had not necessarily put in the investment prior to the pandemic. There seems to be a sense in the market right now that maybe even if there is growth, that momentum could be slowing a bit if things start to open up when the vaccine comes to market.

Where are some of these areas that you see more runway for? You talked about growth as a whole. But what in particular are you optimistic about even if things start to open back up again?

KEVIN JONES: Yeah, thanks, Akiko. So it's a great question. And you know we were one of those companies that doubled down when the pandemic started, right? You know, we kind of foresaw that demand would pick up, particularly in the cloud, with the pandemic. So we invested ahead of the curve. And obviously you've seen our record results, so we're really glad we did that.

Now, here's kind of how I see the future as it relates to a vaccine and what that would do to the cloud market. Obviously, we all hope for a vaccine. I mean, that's very exciting news. But look, whether we're all working from home or going back into the office, we're in a great spot in this particular market because of this tectonic shift in the industry to the cloud.

Cloud was already accelerating before the pandemic. It further accelerated with the pandemic. And we actually strongly believe the momentum will only build as the world emerges out of the COVID-19 situation. And it's because COVID-19 really accelerated years of digital transformations. Companies cannot roll that back, right?

You know, for example, you don't go from digital to analog. Customers don't like to go backwards. So digital transformation is about businesses saving money. That's fairly timeless. And being agile, and protecting their data. And that's where we come in at Rackspace Technology. We help customers move to the cloud and enable that transformation.

ZACK GUZMAN: Yeah, and Kevin, we were talking with Orlando Bravo, the founder of Thoma Bravo, on the show yesterday. One of the largest PE firms focused on the cloud. I think that even acquired a spinoff from Rackspace in the email space last year. But he said cybersecurity, cloud infrastructure, some of the most overlooked opportunities in cloud.

I mean, even after the quarter you guys were talking about or reported here, your shares are still below where they priced in the IPO at $21 here. So do you feel-- do you get the sense that investors right now are overlooking the opportunity you're describing?

KEVIN JONES: So look. You know, it's a great question, Zack. You know, as CEO, I don't focus on the short-term market ups and downs. We're just going to continue to execute. And we just announced a sensational third quarter. We're raising our guidance for 2020. So I'm confident the market is fantastic.

And I'm also confident if we keep our eye on the ball, we keep executing, taking care of our customers, and delivering quarters like the one that we just announced, the market will recognize the value we're creating here.

AKIKO FUJITA: And Kevin, you've got some good visibility on a lot of these companies and how they're looking at their 2021 strategy right now. From an investment standpoint, what are you hearing in terms of the outlook? Are they a bit more optimistic? Are you seeing more investments coming out, especially in this space? Or do you think that momentum has kind of slowed down as we've seen this uneven recovery?

KEVIN JONES: Yeah, look, great question. No, we're seeing more momentum, right? And we're seeing more investments from customers pretty much because the cloud is really a secular trend, right? It's not dependent upon short-term market fluctuations. It's really something-- in a great market, it's terrific because customers enact digital transformation programs. And in slow markets, customers want to save money. So kind of both sides of the coin for the cloud. You continue to see growth and investment.

So we're actually really optimistic. Our partners are optimistic, as well. So we're really excited about 2021.

ZACK GUZMAN: Kevin, lastly, I mean, when we talk about this, particularly in the cloud, it's interesting to see the breakdown for a lot of these companies and how big of a share of revenue some of these bigger tech companies comprise here. How has that looked at Rackspace as you guys have grown over the years to kind of diversify and bring on some smaller clients here, and to kind of, I guess, build out your customer portfolio?

KEVIN JONES: Yeah, it's a great question. Of course, we love our customers here at Rackspace Technology. It's a fascinating question because, you know, our company has 120,000 customers. And where the company really for the last-- you know, we've been in existence 22 years. The first 18 or so years were really in the small and medium sized business segment. And those customers continue to demand Rackspace Technology services. And now where we're seeing a lot of growth is in the enterprise part of the market.

So we definitely have kind of a much different profile of customers than you'll see in a lot of our competitors in the market. Extremely diversified, right? We don't have any large customer concentration at all. And what that allows us to do is it gives us great revenue visibility. Allows us to continue to invest ahead of the curve, like we talked about, and be there for our customers.

ZACK GUZMAN: All right. The CEO of Rackspace, Kevin Jones. Appreciate the latest there, and Congrats again on the quarter.

KEVIN JONES: Thank you.