Rackspace Technology, Inc. Price & Performance (RXT)

I'm Sagar Habar, Head of Investor Relations. Joining me on today's call are Amar Maleteera, our Chief Executive Officer and Mark Marino, 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 press release and presentation both of which are available on our Investor Relations website. I will now turn the call over to Umar an update on the business. Thank you, Sagar, and welcome everyone to our first quarter twenty twenty five earnings conference call. Results in the first quarter of twenty twenty five exceeded our expectations across all key metrics. Revenue was at the high end of our guidance, while profit and EPS exceeded our guidance range.

This marks the eleventh consecutive quarter in which we have either met or exceeded our guidance. Our operational turnaround is gaining steady momentum, with growth in pipeline across both business units increased bookings, and improved efficiency. Bookings measured by annual contract value grew 9% year over year in the first quarter. Driven primarily by strong performance in The Americas which saw a 13% increase. Our non GAAP operating profit grew 183% year over year, we also saw significant growth. Year over year in both cash flow from operations and free cash flow. As we drive our digital transformation agenda, for our customers enabled by cloud and AI, we are also helping them with cyber resiliency. Last week, we announced a strategic partnership with Rubrik. Together, we launched the world's first fully managed end to end isolated recovery environment called Cyber Recovery Cloud, powered by Rubrik's leading technology, and Rackspace's managed private cloud platform. This solution allows customers to recover clean data and critical business systems within hours, not weeks or months. Following a cybersecurity breach significantly improving their cyber resiliency. Both Rubrik and Rackspace anticipate solid demand for this offering, and we expect it to drive revenue for Rackspace starting in 2025.

Although DOTE's cost cutting measures have impacted federal agencies, I would like to highlight that Rackspace's exposure is minimal. With federal contracts comprising only 1% of 2024 revenue. That said, we remain cautious of the broader macroeconomic environment, which may impact onboarding timelines for recently closed deals and customer decision cycles in the short term. However, we remain well positioned to capitalize on long term secular trends in public cloud, private cloud, and AI. Now, let me get into our business performance, starting with private cloud. On the heels of a record setting fourth quarter of twenty twenty four, sales bookings in private cloud we delivered good results in the first quarter of twenty twenty five with bookings remaining flat year over year, despite slippage of a couple of large deals into the second quarter which we closed in the first two weeks in April. Factoring in these deals that subsequently closed, our private cloud bookings for the first quarter would have grown 20% year over year, Private cloud revenue for the first quarter came in at $250,000,000 right in line with guidance and down single digits year over year. After many periods of double digits decline in private cloud, we saw moderation in revenue decline for two consecutive quarters, We have made meaningful progress stabilizing private cloud, and believe it's on a path back to growth as this trend continues.

This progress is a result of consistent bookings performance and steady improvement in revenue retention. We are winning higher value, long term business, underscoring the strength of our platform and our strategic expansion into the mid and large enterprise customer segments. In the first quarter, we continued to expand in the healthcare market, by securing a new win with a healthcare provider in the Northwest that shows Rackspace Healthcare Cloud for their epic, and other clinical and nonclinical workloads. This move is designed to lower their IT cost while modernizing their IT infrastructure and improving service levels for their end users. We are also expanding across other regulated industries. Rackspace was selected to design, build and operate a customized private cloud solution for a leading European energy company. This is a long term agreement to migrate two of the six data centers onto our private cloud platform. By partnering with Rackspace, company is moving away from managing complex infrastructure internally, and embracing a flexible platform driven operating model. This win not only reflects the growing demand for private cloud solutions, but also marks a significant entry into the energy vertical. Private cloud is also pushing forward with new products and solutions.

I shared details about our strategic partnership with Rubrik. Which was largely driven by our ability to deliver the broad range of assets and operational expertise required to support cyber recovery and maintain critical business continuity in the event of a cyber attack. We also launched OpenStack Flex, an enterprise grade on demand infrastructure as a service offering that provides secure, fully supported, and monitored infrastructure. It simplifies hybrid cloud management by bridging the gap between dedicated and multi tenant environments. Additionally, we introduced UK Sovereign Secure, a next generation platform built to address the stringent compliance and security requirements of UK's healthcare, government, and public sector. This solution offers secure, reliable hosting tiers, and advanced security operations and monitoring. Purpose built to meet UK public sector standards. We are encouraged by the success of the private cloud strategy in both defending and expanding our cloud business. As we focus on execution, we are seeing strong momentum across our pipeline, bookings, and new product offerings. Reflecting growing customer demand for hybrid cloud environments. Now turning to public cloud. In the first quarter, public cloud bookings grew 16% year over year, driven by strong execution in The Americas, which delivered 26% year over year growth.

This performance reflects continued progress on our land and expand strategy. Enabling deeper customer relationships and higher value engagements. Public cloud revenue for the first quarter reached $416,000,000 exceeding our guidance range and was down low single digits year over year due to declines in lower margin infra resale and services. Public cloud delivered several notable wins this quarter. As a key highlight, we secured a significant follow on engagement with a top tier aircraft leasing company. We are designing, and implementing a modern, flexible data infrastructure to support their business growth that is projected to save them multimillion dollars over five years. Additionally, we expanded our work with one of the largest US airlines, securing new data, DevOps, and security services. On the product side, we launched an enhanced version of Rackspace managed cloud. A full stack hybrid cloud managed service built to meet the complex needs of mid market and enterprise customers. The platform now supports two flexible delivery models. A shared services option powered by a Rackspace cloud management platform and a dedicated delivery team model that integrates with customers' existing tool sets. We also expanded our modern operations portfolio with the launch of modern operations for databases.

A managed service that complements in house teams managing and optimizing cloud database environments. In summary, in public cloud, we remain focused on disciplined infrastructure resale, a pivot to services, and a lean operating model. While macroeconomic uncertainty adds complexity to forecasting, we anticipate services revenue to perform well in 2025 assuming no significant external disruptions. Turning to AI. We continue to make strong progress with FARE. With approximately 60 wins and over 200 opportunities in our pipeline. Nearly 20% of which are already in advanced stages, along with several active leads we are pursuing. This quarter, private cloud business unit launched Rackspace AI business a comprehensive AI ready platform designed to optimize enterprise AI workloads. Built on a private cloud infrastructure, the solution is engineered to support a wide range of AI use cases. Additionally, in public cloud, we introduced modern operations for data, and AI. A managed service that streamlines organization wide data pipeline management. This offering automates data preparation, analysis, and integration tasks. Before I wrap up, I want to sincerely thank our customers partners, and all our Rackers. I'm proud of what we have achieved this quarter. And encouraged to see continued momentum with new customers, and expansion with existing customers.

As we look ahead, our goal for 2025 is clear. Stay focused on our key strategic priorities and build a sustainable business model that consistently delivers revenue, profit, and cash flow growth. With that, I will turn it over to Mark to walk us through the financial results and guidance.

Thanks, Amar.

In the first quarter, total company GAAP revenue of $665,000,000 was down 4% year over year but met the high end of our guidance driven by solid performance across both business units. Non GAAP gross profit margin was approximately 20% of GAAP revenue down zero five percentage point year over year due to declines in private cloud partially offset by margin improvements in public cloud. For the quarter, non GAAP operating profit was $26,000,000 exceeding the high end of our guidance and up 83% year over year largely due to OpEx efficiencies. Non GAAP loss per share was $0.6 compared to our guided range of $0.7 to $09 loss per share. An improvement of $05 year over year, First quarter cash flow from operations was $13,000,000 and free cash flow was $4,000,000 which was a significant improvement from last year. We ended the quarter with $128,000,000 in cash on hand, and $473,000,000 of total liquidity. Turning to our segment results. For Private Cloud, GAAP revenue for the first quarter was $250,000,000 which was in line with our guidance. Total revenue decreased 7% year over year due to customers rolling off older generation offerings partially offset by revenue from new bookings.

Private cloud non GAAP gross margin was 37.1%, down 1.8 points year over year primarily due to lower revenue resulting in lower fixed cost absorption. Non GAAP segment operating margin was 24.4% a year over year decline of 2.1 points driven by lower gross margins partially offset by OpEx efficiencies. In our Public Cloud segment, GAAP revenue was $416,000,000 surpassing the high end of our guidance. Total revenue was down 2% year over year as a result of a decline in infrastructure volumes and services. Non GAAP gross margin was 9.5% up one point year over year driven by improved revenue mix. Non GAAP segment operating margin was 4.2%, up 2.3 points year over year due to improved gross margins and OpEx efficiency. Now on to guidance. We expect second quarter GAAP revenue of $653 to $665,000,000 down 4% year over year at the midpoint driven by our reduced forecast for low margin infrastructure resale volume. In private cloud, expect revenue of $247,000,000 to $253,000,000 flat sequentially and down 4% year over year at the midpoint. We expect public cloud revenue of $4.00 $6 to $412,000,000 down 2% sequentially and down 4% year over year at the midpoint. Total non GAAP operating profit is expected to be $25 to $27,000,000 and non GAAP loss per share is expected to be $04 to $06 Our non GAAP tax rate is expected to be 26%, while non GAAP other expenses will be in the $42,000,000 to $46,000,000 range.

Non GAAP share count is expected to be two forty four to $248,000,000 shares. I will 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 and one follow-up. Please go ahead.

Thank you. If you'd like to ask a question, please press 11. If your question has been answered and you'd like to remove yourself in the queue, please press 11 again. Our first question comes from Hansi Lu with Evercore. Your line is open.

Hi. Thank you. This is this is Ervin Liu actually on for Amit. I had a question on, you know, on basically what you're seeing from a macro perspective. Amar, I think you mentioned the potential for delayed customer decision cycles and onboarding timelines related to just broader macro uncertainty, sorry. And now that we're kind of one month into the current quarter, have there been any noticeable changes in customer behavior or have things been more business as usual?

Yeah, so thank you very much for your question. From a macro standpoint, let me just give you what we are seeing, right? That will give you some color the markets that we address. So starting with Q1, which is our March, you know, our bookings came in line with our expectations. In fact, the public cloud business hit their targets. Also posted double digit growth. Our private cloud business had couple of deals that actually slipped from Q1 into Q2, and we were able to close those deals in the first ten days. April. There were some services deals that also slipped in public cloud that we were able to close in the first ten days of April. So which gives us some confidence that the decisions that the customers are making, they're not delaying the decisions in terms in terms of business and from a bookings perspective for us.

I'm going to look at our funnel The funnel looks good, both the top of the funnel well as the bottom of the funnel. In fact, funnel remains very strong. And so when I combine those two facts, it seems that the customers are not delaying their decisions in terms of their transformational projects We are seeing bookings are coming in as expected just for Q1 and how we started the month of April. Now where we are a bit cautious is the from bookings to bill. To billing, means bookings conversion to revenue. We are a bit cautious that customers may make some delayed on onboarding some of these contracts that we signed. And that's the place that we are particularly cautious on. We have not seen that immediately right now. You know, we feel good about Q2. I'm just being cautious because the macro environment continues to remain quite uncertain. So our caution is on booking to billing, that cycle.

Got it. Thank you. And then for my follow-up, I think you highlighted sales execution as a driver behind recent booking strength. Can you just talk about how your pipeline has evolved over the past several quarters? And then within this, how have your win rates trended? Yeah. So the pipelines have continued to remain strong. You know, the last three or four quarters. Both the businesses have performed quite well. If you go back to the September quarter of twenty twenty four, public cloud had a record sales bookings quarter. They performed very well. Even in the December. In the December, private cloud had a record bookings quarter. And falling on the heels of two strong quarters, we delivered Q1 also remained strong. So the sales execution is working very well. I think we have been laying the foundation for this for the last two years. We spent 2023, the first half of twenty twenty three refreshing our sales organization particularly in public cloud, 70% of our go to market organization was refreshed. We improved sales enablement. We also changed the compensation And it takes time, you know, from the time you refresh salespeople to for them to get productive.

So we started, second half was very strong for us. From a bookings perspective in both the business units. And Q1 is off this year was also off to a good start. So I feel very good that, you know, the strategy we have in place and the execution against it, at least from an go to market perspective, is playing out quite well. Additionally, I think if you also see, we have launched a number of new offerings in the last two years. More offerings than we probably would have launched in the last five or six years in this company. And that's also resonating very well with our customers. We are now doing value based selling, which is mainly focused on business outcome. And so this and the mix of the pipeline is also changing to higher value, long term contracts, We are moving more into the enterprise segments, both mid as well as the high end of the enterprise, and we are winning large deals. And so that's the change that has happened in the last two years. We are starting to see the benefit of that now.

Got it. Thank you.

Thank you. And our next question comes from Ramsey El Assal with Barclays. Your line is open.

Hi, this is Ryan on for Ramsey. Thanks for taking our questions. Today. I wanted to ask a bit about public cloud. It was nice to see infrastructure resale come down a bit. I was curious to know where you're really seeing win rates for the services side and how we should think about that for the remainder of the year? Infrastructure stay at these levels or could we see a tick up as we enter the back half of the year? Thanks.

Great. Thank you very much, Ryan. Thanks for the question. So two questions there. Where are we seeing the wins? In services business? And the second is, how should the infrastructure resale trend from here on? Right? So a couple of things. On the services side, [indiscernible] have pivoted to a services led motion. And that's playing out very well. As I also mentioned, earlier, we are also pivoting to the enterprise and mid market. And that's playing out well too. As an example, if you recall, we have been giving this data to you guys for the last twelve months or so on the number of MSAs we have signed. This quarter, we with we have overall about 19 to 20 MSAs that we have already signed. And this is 2x than what we had signed by the end of Q1 of last year. We have 14 more in the funnel.

In progression right now. So which means that we are landing and expanding into these larger enterprises. In terms of services, you know, we our platform services did well this quarter. Data services also did well on the backs of AI. We are starting to see good wins in the services business on the cloud on the public cloud side. So win rates have gone up. The funnel is going up. And so I think we feel very good about how service is spanning out. What we will be focused on going forward and we already started laying the foundation for it, is focusing more on managed services, as well as on and doubling down on data services and security services. When it comes to public cloud. Infrastructure resale. Listen, we had a stated objective. We want to do business where we can drive profitable growth. We were very mindful on how we what kind of business we win on infrastructure resale, as well as what kind of business we renew when it comes up for renewal. We are walking away from deals that do not make sense. If it doesn't hit a certain profit threshold, we're just walking away from those deals when it comes to infrastructure resale.

Some cases, we are going back to the customers and asking for more services attached. And we have started seeing those pan out too. Customers are giving us more services business and those cases, we actually go and renew the infrastructure resale business. So we should you should expect business to continue to decline about, say, low to mid single digit for the year, and that's very purposeful. Should not impact our profits. In fact, profits, operating profit for owned operating profit for public cloud business is going to grow double digits year on year. So this purposeful shift from low margin inflow resale to high margin services and also being so very focused on winning the right type of infrastructure resale is panning out.

Very helpful. Thank you. Congrats on a solid quarter.

Thanks, Ryan. Thank you. Our next question comes from Frank Louthan with Raymond James and Associates. Your line is open.

Great.

Hey, guys, this is Rob one for Frank. Congrats on the quarter. Thanks for taking my question. So one of the things that you talked about last quarter that we discussed was these these larger customers who are sort of more focused on a holistic cost and so are willing to pay for some of that CapEx upfront. In exchange for lower OpEx over the life of the deal. Are you continuing to see that? Is that still a trend that you're seeing with those large customers and with those larger deal sizes? And then as a follow-up, as it pertains to the more regulated industries, and if you addressed this in your prepared remarks, and I missed it, I apologize. With respect to those more regulated industries, are you still seeing those uplift private cloud business the way you were last quarter? Thank you.

Thank you very much. Thanks for the question, Rob. So with regards to upfront CapEx payments from our large customers, yes, we continue to see interest. We have a couple of large deals that we are continuing to talk customers where customers interested in paying upfront CapEx to get a lower OpEx towards the life of the deal. That's the trend and it's good for us because we get CapEx upfront to invest into the infrastructure that we stand up for the customer. So it's a win win for both customers as well as for Rackspace. With that said, we have a lot of focus on CapEx. You know, we are we have initiatives in place to drive CapEx efficiency. Making sure that we reutilize our inventory So we have a new leader for global operations and delivery in a private club business. And he is very focused on that aspect. We also are products and solutioning team and offerings team is also focused on creating solutions and technology where the CapEx intensity goes down. So we are internally, we are launching a platform called Under Cloud, which will help us to reutilize inventory and deploy it to new engagements.

Additionally, we also launched Flex environment. Which is a multi tenant environment for our customers. So we have flex for OpenStack environment, as well as Flex for SDDC, which is Software Defined Data Center on VMware platform. And that flex environment, multi tenant environment also helps us to reduce our CapEx intensity. So one of my stated objective for the company was to optimize the capital structure and also drive CapEx efficiency. And we are working on all those fronts. So yes, seeing the trend from large customers where they want to pay upfront CapEx. And internally, we are also very focused through technology as well as operational discipline to reduce our CapEx intensity. Now talking about regulated industries, Absolutely, this is the bet that we made. And it's panning out. We said we will operate in regulated industries, which have more propensity to buy private cloud, whether it's healthcare, BFSI, sovereign, and energy. And we have seen very good traction in all those four verticals. In energy, as I mentioned in my prepared remark, we closed a large deal with an European energy company. One of our first deals in the energy sector, where we are trying to help them create a custom private cloud and modernize their infrastructure.

And that environment is very data intensive, data sovereignty is a big challenge for them, and our offering on Flex as well as Enterprise offering is very suitable for their needs. Now we'll go rinse and repeat it with other energy companies. And so we are starting to see some of that pipeline also start developing. Health care continues to remain strong. We are working on the BFSI, especially with core banking applications. And sovereign both UK sovereign as well as our business with the Kingdom Of Saudi Arabia, continues to remain strong.

Thank you. There are no further questions. I'd to turn the call back over to Sagar for any closing remarks.

Thank you, Michelle. 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 irrackspace dot com. Have a great evening, everyone.

Thank you for your participation. This does conclude the program.

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