Rackspace Technology, Inc. Price & Performance (RXT)

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 press release and presentation both of which are available on our Investor Relations website.

I will now turn the call over to Mark for an update on the business. Thank you, Sagar. Our fourth quarter results exceeded guidance for revenue, profit EPS marking the tenth consecutive quarter of meeting or beating expectations. We also achieved a record breaking quarterly sales booking reaching the highest level since early twenty twenty three and the formation of our two business units. Bookings as measured by annual contract value for the fourth quarter grew high double digits both sequentially as well as year over year, reflecting excellent go to market execution in a strengthening demand environment.

I'm also pleased with our sales execution in fiscal twenty twenty four.

Full year sales bookings grew by 14% fueled by strong performance in The Americas and the increasing adoption of hybrid cloud solutions across multiple industries. Notably, second half bookings grew 32% over the first half, underscoring the accelerating momentum across both business units. This three of folks that are strategy and go to market execution are driving tangible results.

We initiated this approach two years ago with significant market uncertainty and today both market conditions and customer demand validate our direction. As we move into 2025, we are leveraging this momentum and with our strategic focus optimized operating model and a strong team I'm confident we will accelerate our progress With that, let's dive into the performance of our business units starting with private cloud. Fourth quarter of twenty twenty four was a record sales booking quarter for private cloud.

Private cloud bookings in the fourth quarter more than doubled sequentially and grew high double digits year over year driven by the strong performance across most of our go to market segments. For full year of 2024, private cloud sales bookings were up 4% year over year.

Bookings in the second half of twenty twenty four grew 42% compared to the first highlighting significant acceleration towards the end of the year. In the fourth quarter, we also signed a transformative multiyear managed cloud agreement with Seattle Children's Hospital.

Under this ten year multimillion dollar deal, Rackspace will deliver an end to end managed cloud solutions designed to revitalize the hospitals data center operations and modernizes infrastructure for both clinical and non clinical workloads.

This strategic partnership will enable Seattle Children's to seamlessly transition to Rackspace's state of the art healthcare cloud ensuring enhanced performance, efficiency and security. Overall, on the sales front, we are consistently gaining market traction by leveraging our strong install base and attracting new customers. Private cloud GAAP revenue was $269,000,000 for the quarter, exceeding our guided range and rising 4% sequentially. This growth was driven by the successful onboarding of a major healthcare customer Our private cloud segment is making significant progress particularly in the healthcare and sovereign markets. In fiscal twenty twenty four, healthcare revenue grew 34% year over year, while sovereign revenue surged by 59%. Within the sovereign segment, we are expanding our footprint in The UK, and The Kingdom Of Saudi Arabia, and we are seeing interest from other nation states driven by rising data, sovereignty, security and compliance requirements. For the past two years, our value proposition in private cloud has evolved from an infrastructure as a service provider into a specialized high value solutions partner. In 2024, we launched several innovative solutions and platforms. Notably, we expanded our Rackspace Anywhere offerings to capture new and incremental workloads in customers' data centers. Delivering unparalleled flexibility and enabling true hybrid cloud environments.

We're also excited to announce the upcoming release of Open Cloud, our next generation cloud platform targeting customers across large enterprises sovereign organizations and other cloud service providers. Leveraging our deep open source expertise, Open Cloud unifies its existing silos into a single operational platform simplifying internal cloud operations, while delivering hyperscale capabilities to end users In fiscal twenty twenty five, we expect a modest year over year decline in private cloud revenues.

With a leveling effect by year end as we onboard a large deal signed in 2024. We are seeing strong momentum in our bookings driven by an increasing mix of large deals that will underpin a sustainable recurring revenue base. Moreover, in fiscal twenty twenty five, our annualized sales bookings for new offerings are expected to be in line or outpace that are now from legacy private cloud products highlighting a shift from a turnaround to a more resilient growth focused business model beyond 2025. Given the rapid expansion of the private cloud market, we are exceptionally well positioned to emerge as one of the world's largest private cloud providers. Now turning to public cloud. In the fourth quarter of twenty twenty four, our public cloud GAAP revenue was $417,000,000 surpassing our guided range due to an uptick in higher cloud consumption. Building on record third quarter bookings, we sustained strong sales momentum into the fourth quarter with the fourth quarter bookings growing in the high double digits year over year driven by robust performance in both our services and infrastructure resale. For the full fiscal year, public cloud bookings grew 22% year over year.

With both services, and infrastructure resale posting double digit growth.

Notably, data services bookings more than doubled driven in part by AI related projects So other factors also contributed to this growth. This results underscore a significant progress in 2024 as we strategically shifted our focus to a services led sales motion rather than low margin infrastructure resale, This transformation has been propelled by the refreshing over 70% of our sales team revamping our go to market strategy and building a strong services value proposition. In the fourth quarter, Brackspace was recognized by ISG as a leader in the AWS ecosystem partners category in The U. S. We also earned the AWS Small and Medium Business Competency differentiating us as a partner with expertise and commitment to enable small and medium businesses leverage AWS Cloud.

Throughout 2024, we strengthened our partnership with key hyperscalers by focusing on high demand areas with significant revenue potential. We signed 16 new master services agreements creating fresh growth opportunities to our land and expand strategy. These initiatives have fostered deeper collaboration, bolstered partner support and increased sales leads demonstrating our ability to deliver tailored solutions that meet customer needs. Our public cloud segment continued to innovate with the introduction of new services. This quarter, we launched Edge Security, a cloud native managed security services designed to protect online applications, remote workers and networks from cyber threats. We also unveiled our AWS Accelerated Migration Analysis offerings which helps organization build data driven business cases for cloud migration by emphasizing cost optimization, licensing flexibility and enhanced performance. In summary, 2024 marked a significant inflection point for a public cloud business.

Driven by improving IT budgets, growing interest in our solutions and outstanding sales execution in the latter half of the year. As we look to 2025, our focus is on solidifying a sustainable business model centered on managed cloud services migration, modernization and data services, setting the stage for consistent revenue and profit growth. Recent booking trends and stronger positions us well to accelerate that momentum in 2025.

Turning to AI, we continue to be optimistic with the progress made with more than 50 customers and close to 200 opportunities in the pipeline at various stages.

In the fourth quarter, we successfully deployed multi Gen AI and Agentic AI enabling them to process, and analyze text, images, videos and structured data simultaneously.

This delivered richer, more contextual insight that enhanced operational efficiency, decision making compliance and automation.

In private cloud, we launched a solution which accelerates the deployment and management of AI tools, frameworks and applications as well as a high performance platform optimized for AI workloads enabling organizations to leverage hybrid AI capabilities. Before wrapping up, I want to highlight a consistent execution and a focus on three key strategic priorities. First, we're making steady progress on our operational turnaround. This is reflected in our bookings growth and efficiency improvements in 2024. Second, continue to position Rackspace as a forward leaning innovative hybrid cloud and AI solutions company we're launching new products, solutions and offerings that target the next big secular waves of growth in both hybrid cloud and AI. And third, we remain focused on improving our capital structure to support and sustain profitable growth over the long We have ample liquidity and flexibility to focus on our operational priorities. Finally, I would like to thank our customers, RACUS, partners and suppliers I'm proud of all we have achieved together during this year of change I will now turn the call over to Mark Marino, for an overview of our financial results and guidance.

Thank you, Amar.

In the fourth quarter, total company GAAP revenue was $686,000,000 above our guided range driven by solid performance across the board. For the quarter, non GAAP gross profit margin was 20.6% of GAAP revenue down 50 basis points sequentially For the full year 2024, non GAAP gross profit margin was 20.6%, down 172 basis points year over year. Non GAAP operating profit was $39,000,000 in the fourth quarter exceeding the high end of our guidance range. Non GAAP operating margin for the quarter was 5.7% of GAAP revenue, an increase of 94 basis points sequentially. For the full year 2024, non GAAP operating margin was 3.9% down 146 basis points versus prior year. Non GAAP loss per share was $0.02 higher than our guided range driven by better than expected operating profit. Cash flow from operations was $54,000,000 and free cash flow was $34,000,000 in the fourth quarter. For the full year, cash flow from operations was $40,000,000 and free cash flow usage was $71,000,000 We ended the year with $144,000,000 in cash on hand and $519,000,000 of total liquidity, including $375,000,000 of undrawn commitments. Turning to our segment results.

For private cloud, GAAP revenue for the fourth quarter was $269,000,000 above our guided range. This includes legacy OpenStack revenue of $27,000,000 Total private cloud revenue was up 4% sequentially due to strength in our Healthcare segment. Private cloud non GAAP gross margin was 39.8%, up 120 basis points sequentially due to higher revenue and cost efficiencies. Non GAAP segment operating margin at 30% was up 130 basis points sequentially driven by gross margin expansion, and improved cost management. In our Public Cloud segment, GAAP revenue was $417,000,000 above our guided range driven by higher cloud infrastructure volumes, partially offset by a slight decline in services. Non GAAP gross margin was 8.2% down two ten basis points sequentially driven by an increase in infrastructure revenue mix. Non GAAP segment operating margin was 2.4% down 130 basis points sequentially due to lower gross margins partially offset by operational efficiencies. Now on to guidance. We expect first quarter GAAP revenue to be $6.53 $665,000,000 consistent with normal seasonality. From a segment perspective, expect private cloud revenue of $247,000,000 to $253,000,000 and public cloud revenue of $4.00 $6,000,000 to $412,000,000 Total non GAAP operating profit is expected to be $19,000,000 to $21,000,000 and non GAAP loss is expected to be from $0.07 to $0.09 per share.

Our non GAAP tax rate is expected to be 26% while non GAAP other expense will be in the $46,000,000 to $50,000,000 range.

Non GAAP share count is expected to be approximately $245,000,000 shares.

I'll now turn the call back over to Sagar.

Thank you, Mark. Let us begin the question and answer session.

We ask everyone to limit discussion to one question Please go ahead.

And our first question comes from the line of Kevin MacPhee of UBS. Your line is now open. Great.

Thank you so much and Jim, congratulations on the strong results. You continue to really execute well. So we appreciate that. Maybe Amar, can you maybe [indiscernible] I just think you talked about some of the trends within the private business. And did you say you expected that to be down for the year in 2025? And if that is the case, it sounds like there was a lot of momentum in the second half of twenty twenty four as opposed to the first half of 'twenty four.

So maybe help us understand that a lot seems like that business is really starting to get flack Hey, Kevin. Thank you very much. I really appreciate your question here. Hope you're doing well. So yes, Kevin, you heard it right. I think we saw some and I'll give you some color on the outlook 2025 for private cloud the way we look at it right now. But I'm really, really pleased with the overall sales bookings performance Kevin. And it was a combination of both improving demand environment as well as very good sales execution And you're spot on. In the second half of twenty twenty four, we did see not only an improving demand environment for our hybrid cloud solutions, but we also started seeing some some faster decision cycles coupled with a great execution from our go to market teams. So in private cloud, we are seeing increased interest for our custom cloud solutions. Specifically around data center transformation, resulting in higher mix of larger deals. So private cloud bookings did grow 4%. The Americas sales bookings within private cloud grew more than 20%, Healthcare grew more than 60%, Commercial segment which is the S and P also grew up probably 8%.

So overall, I think it was a very good booking spotter. So you heard it right.

We expect private cloud revenues after couple of years of double digit declines to show modest decline in fiscal twenty twenty five, which is definitely a good indicator of a turnaround in this business. Now it's still early to say, but in the second half of twenty twenty five, I expect revenues in private cloud to be flattish year over year, given the deals that we signed in 2024. So I think you're spot on just question there's a lot of static noise on the line. Operator?

Got it. And then, Amar, real any thoughts as free cash flow 1.25 think we'll be able to hold that breakeven in 2025? Yes. So I'll let Mark talk about it. Hey, Kevin.

Yes, look, I anticipate both positive operating cash flow and free cash flow in 2025.

Kevin, did you hear that? So positive operating cash flow and free cash flow in 2025. On the backs of operating profit growth, of, say, low double digits, mainly driven by margin improvements because of mix of the business is changing. Also ongoing efficiency improvements.

Very clear. Thank you both.

Thank you. Our next question comes from the line of Ramzi Elafald of Barclays. Your line is now open. Hi, this is Ryan on for Ramsey. Thanks for taking my questions.

Congrats on a strong quarter.

I wanted to ask on visibility a bit more. Have you seen any changes in the demand environment over the last thirty days It seems like bookings are coming in well, but are deals actually converting on time? And are you seeing any additional green shoots as 2025 budgets are being finalized? Thank you.

Yes.

So I think the visibility is definitely Ryan. That's a very good question. So we closed the year on a very high note, both Q3 and Q4. Let me talk about the public cloud business first. Q3 and Q4 was a record quarter for public cloud. They continued the momentum into Q4. Which is our December quarter. And we we continue we are hoping that we can continue this momentum into fiscal twenty twenty five. Now that's on the backs of multiple things. I believe that We are I would say, outperforming the market when it comes to sales bookings, especially in the markets that we play in.

Compared to our competitors. Now there are several reasons for that. Number one, of course, good execution. Number two, we laid solid foundation in our public cloud business in the last year and a half, we refreshed 70% of our sales force, enabled the sales organization, came up with new offerings. Our relationship with hyperscalers have become very strong. And we have also led with services. And that's also starting to pay dividend here. So I think it's more of a value play as opposed to infrastructure resale led motion, which still happens because we still sell a lot of infrastructure, but at the same time, our attach rate, our services attach rate on the infrastructure has really has really gone up. So in terms of visibility, yes, I think the visibility is a bit improved. And we feel that in fiscal twenty twenty five, customers are typically looking to go drive more of their transformational projects they were keeping on hold for the last couple of years. And we should benefit from that, plus we should benefit from better execution in the public cloud business. And you can see that also show up on the growth numbers for the Hyperscalers two.

Our private cloud business, we are starting to see a lot of green shoots in private cloud.

Private cloud business of two, three years ago, people assume that all the workloads will move to public cloud. But that's not happening clearly. Hybrid is the way to go. And we are starting to see a lot of workloads now landing in private cloud. So we are we are doing a lot of data center transformation deals in private cloud The deal sizes have gone up significantly, so larger mix of large deals, multiyear deals, which also helps us to build a good annuity base in this business. And so that's what's happening. So I think pretty pleased with some of these strategy and execution that we have in place.

And if the market improves, I think we should be doing better.

Great. Thanks. And just a quick follow-up for me. Infrastructure resale ticked up just a bit in the quarter. Is there anything specific that drove that or any seasonality? And how should we think about it into Yes. So let me just give some color and Mark please jump in here with additional color here. So the infrastructure volumes, we have limited visibility to be honest with you. So we always plan a bit conservative because of that. And the infrastructure volumes because of seasonality, Q4 is typically pretty strong going into the month of December.

And so we saw an uptick in infrastructure volumes. So that was good. Good guy. Of course, it comes in at lower margins. So we'll take it any day as long as the first of all, Q1 is a seasonally low quarter. So you typically see a public cloud business as well as in a private cloud business, the revenues and the volumes decline going from December quarter to the March quarter. So that's going to happen. When it comes to infrastructure resale for Rackspace, I think the market will continue to grow. So for Rackspace, it's a little hard for us to predict because we are going to make some very informed decisions when it comes when some of these deals come up for renewal, whether we want to renew these contracts, or walk away if it doesn't hit certain profitability threshold. And that's something that we've been doing all along even in fiscal twenty twenty four as well as in 2023. So we'll continue that in 2025. It's a little hard for me to predict that infrastructure business is going to grow. I expect it to be flattish to slight decline depending on what we do when these big contracts come up for renewal.

But overall, the market, I think the market will continue to grow.

Great. Thank you and congrats again.

Thank you very much, Brent. Thank you. One moment for our next question. And our next question comes from the line of Frank Louthan of Raymond James and Associates. Line is now open.

Great. Thank you. Can you walk us through the new logo growth in Q4? Where have you seen that? Any particular segments that were better or worse there? And then with the booking success, how should we think about the time for book to bill? Is that elongated at all? How should we think about that?

Yes. So Frank, thank you for the question. So new logos, we continue to sign new logos across multiple industries. In both public cloud as well as private cloud. In private cloud, we are focusing on specific verticals, healthcare, BFSI, sovereign, public sector, energy, and we also have horizontal place.

Okay. So we saw about over two fifty new logos in our private cloud business. So some of these might be small, some might be sizable, but it's mainly important for us to expand in these accounts. As an example, we announced Seattle Children's, which is a multiyear, multimillion dollar agreement that we signed with Seattle Children's Hospital, we actually landed this logo in early twenty twenty four or late twenty twenty three if I recall, and that was a it's an epic workload. And eight, nine months after that, we actually expanded to go and do an entire data center transformation for this customer. So this so we continue to hunt for new logos, and land in these new logos and then we will have specific plans and execution plans to go expand into these new logos going forward. Your second question is regarding deal cycles and whether deal cycles are so the deal cycles in private cloud continue to remain the same, Frank.

Because are now closing really large deals. This The last couple of years, the mix of business that we are winning are pretty large compared to what we have done in the history of this company. So by definitions, those the deal cycles are longer In the public cloud business, it is relatively shorter. Because we go after a very high value added services deals like migration services, advisory services, etcetera. So those cycles are shorter and they continue to remain short compared to say, private cloud. So no change as such. It's same as what we have seen in the second half of twenty twenty four.

Okay.

All right, great. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Erwin Liu of Evercore ISI. Your line is now open.

Hi. Thank you for letting me on. I also have two related to your strong bookings performance. Think it's good to see broader booking strength, but can you just talk about your overall headcount utilization and whether there's a need to increase headcount to deliver on some of your recent bookings?

Yes, I think that's a great question. Thank you very much for joining the call. So first of all, let me continue with this bookings because I gave you color on private cloud. Let me give you some color on public cloud because your headcount related question is more related to public cloud than to private cloud. Because in private cloud, we have a managed services offerings and we are infrastructure as a service provider. So it is not as labor intensive. As you could typically that you'd see within a service Now public cloud business has a labor play, but we are the way we differentiate ourselves against the SIs is we are a labor minus model. We're bringing more automation to to deliver our services and it is exactly opposite and what you will find in some Indian SIs where they they will basically give you the headcount growth numbers attrition numbers, so on and so forth. We actually are exactly opposite. So with that said, let me give some color on public cloud. So in public cloud, just doubt telling what I just said, on the private cloud side, Our interest in Elastic Engineering, our platform support application and data continues.

And data interest is mainly driven through AI. In public cloud, we saw bookings also grow 22%. I did mention that in my prepared remarks. But when I look at it from a geography perspective, Americas actually grew more than 30%. EMEA grew mid single digit, although in a very tough macro environment. We have three horizontal market segments that we go go and attack enterprise, mid market and commercial. And sales bookings in all those three segments grew high double digits. And from an offerings perspective, our professional services and data wareial stand out And both of these businesses, in fact data grew high triple digits. So in terms of labor and headcount, I think it's in professional services and in data is where we will see an increase in headcount. But very, very surgically and also increase in the current utilization of our Got it. Thank you for that. Wanted to ask about public cloud, but specifically the topic of AI Can you just help us or talk about whether this was a meaningful contributor or driver of your booking strength? [indiscernible] if so, can you help us quantify the overall AI contribution?

Yes. So it is yes, it did contribute to some of the book primarily driven by AI, although there are other factors that contributed to the data services bookings. But let me give you our how we look at the AI world and how we play in that AI lifecycle. So there are three phases in an AI any AI lifecycle. One is the design build and the re architect phase, which is mainly services related, where you do POCs and pilots, that's where most of our 50 plus engagements are in the POC and pilot phase. The second phase is mainly around creating landing zones on an hybrid AI environment, whether it's public cloud or private cloud, that's we call as an implementation or a production phase.

And the third phase is the manage and operate, which is the managed services space which is the long tail. Now where we play right now is in Phase one and a little bit in Phase two. That's where the reason why we are there today is because we are very early days from an enterprise adoption perspective in AI.

So I'm not surprised that we are in those two phases. But given the strength we have with a hybrid AI approach, both on public as well as private, I feel that we are very well positioned when customers start moving from a training phase training their models into inferencing and fine tuning because that's where we believe 90% of the workload should be in training in inferencing as less fine tuning. And that's where our hybrid AI in our solutions will play very strongly. So today, just to size it probably it's less than 2% of our revenue today in AI. It was almost zero a year ago. It's less than 2%. And I expect in the next couple of years to be probably 5% plus conservative estimate, so to speak. So there is still early cycles, there's a long way to go. Especially in enterprise and that's where we play. And I think I feel very strongly in our offerings as well as approach to actually capture this AI market when it starts taking off in enterprise.

Thank you. This concludes the question and answer session. I would now like to turn it back to Sibar Habar for closing remarks.

Thank you, everyone, for joining us. If we did not get your question or if you have a follow-up, please email us at irlaxdales dot com. Have a great evening, everyone.

Thank you, Marvin. Thank you for your participation in today's conference. To this conclude the program, You may now disconnect. [indiscernible]