Rackspace Technology, Inc.

Good afternoon and welcome to Rackspace Technologies' second quarter 2021 earnings conference call. As a reminder, today's call is being recorded. Kevin Jones, our chief executive officer, and Amara Malatira, our president and chief financial officer, join us today. The slide deck we will refer to today can be found on our investor relations website. On slide two, certain comments we make on this call will be forward-looking. These statements are subject to risks and uncertainties, which could cause actual results to differ. A discussion of these risks and uncertainties is included in RSEC filings. RACS-based 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 certain further 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 respective and most directly comparable GAAP measures. These reconciliations are in the tables included in our earnings release and slide presentation, both of which are available on our website. After our prepared remarks, we will take your questions. To queue up for questions, please use the ask a question function in the Zoom portal. I'll now turn the call over to Kevin.

Good afternoon and thanks for joining us. I'll discuss quarterly highlights and touch on some customer case studies. Then Amar will go into detail on the financial results. As shown on slide five, we delivered a solid second quarter. Revenue and non-GAAP earnings per share were at the high end of our prior guidance. and non-GAAP operating profit exceeded the top end of our guidance. Our new product launches from earlier this year, Rackspace Elastic Engineering and Rackspace Services for VMware Cloud, were off to a good start with some early wins already on the board. The turnaround in cash flow resulting from our working capital and cash management transformation programs has been remarkable. And this quarter, we began paying down debt with the repayment and retirement of our accounts receivable financing facility. The strong cash flow we are now generating will enable us to continue to make progress on reducing our leverage ratio toward our stated targets. Turning to slide six, total revenue was up 13% and core revenue was up 17% compared to last year's second quarter. Non-GAAP operating profit was up 4% and non-GAAP EPS was up mid-teens at 14% in line with revenue growth. New sales bookings in the second quarter were $258 million, up 6% compared to the first quarter. This year, we are calibrating new sales bookings to drive both revenue growth and initial sold margin. We believe approximately $1 billion of new sales bookings in 2021 will enable us to drive double-digit revenue growth while optimizing profitability, and we are on track to meet that goal with just over $500 million of bookings in the first half of the year. On slide seven, I want to touch on the transformation initiatives that we announced in late July. Over the past six months, we've taken a hard look at every aspect of our business in light of the acceleration of digital transformations and continued migration of our business from mature products to growth products. Through this process, a few things became very clear. We had to free up resources and continue to invest in new solutions, We had to expand our delivery capabilities to meet demand for those new solutions. And we had an opportunity to help employees in our mature businesses develop high demand skills to meet needs in growing areas. The actions we announced in July accomplished all of these goals. As part of this initiative, we are providing our rackers, including those impacted by the restructuring, with the ability to reskill and retrain for hot new areas in cloud, including elastic engineering and cloud professional services. NetNet, we believe the transformation and restructuring initiatives announced in July position Rackspace technology extremely well to compete and win in the growing cloud technology solutions industry. As I've done in past quarters, let me share some case studies of how Rackspace technology is helping customers do innovative things in the cloud. On slide eight, let's talk about Pure Storage, a $6 billion market cap tech company. Pure Storage serves over 8,000 customers with its storage as a service offering, helping them run their operations seamlessly across multiple clouds. As containers became more practical and a proven technology, Pure took notice and looked for a world-class partner who could move fast to build reference architectures on Google Anthos and Kubernetes. A partnership with Rackspace Technology enabled Pure to hit an aggressive 90-day timeframe for initial product launch. Pure Storage now has reference architectures that can confidently take prospective customers that deliver the benefits of leveraging Pure Storage on Google Anthos. Slide nine is a case study from Bright Skies, the company we acquired in Germany in the fourth quarter of 2020. Bright Skies recently helped Dole, the international produce company, transition its European operations from company-owned data centers to the cloud. Our solution included an entire service package, starting with the cloud readiness assessment, a feasibility study and budget plan, and technical workshops to define the target architecture. On an accelerated three-month timeline, 100% of Dole's virtual machines moved to Microsoft Azure. Today, Dole benefits from having its data in the cloud with less complexity, increased productivity, and most importantly, reduced costs. Now, Amar will take you through the financials. Amar?

Thank you, Kevin, and thank you, everyone, for joining our call today. Slide 11 recaps our financial results for the quarter. Revenue was $744 million, an increase of 13% year-over-year. Our core business grew 17% year-over-year to 698 million. Non-GAAP operating profit was 119 million, up 4% year-over-year. Non-GAAP operating margin was 16.1%, down 1.5 percentage points year-over-year, but within our mid- to high-teens expected range. And non-GAAP earnings per share was 24 cents, up 4% from last year. Slide 12 shows the company's revenue mix in the first quarter by segment and by geography. Multicloud continues to represent the vast majority of our revenue at 82% of the mix, and it grew 17% year-over-year. Apps and cross-platform at 12% of total revenue grew 16% year-over-year, driven by growth in application services coupled with strength in our data and security services businesses. OpenStack, which is a legacy business, declined 20% in line with our expectations. This segment now represents only 6% of total revenue. From a regional perspective, Americas continues to represent 75% of our revenue and grew 12% year-over-year. APJ grew at 39%, while EMEA grew 13% year-over-year. As shown on slide 13, Q2 was another good quarter of cash flow. Gap cash from operations was $106 million, bringing first half cash from operations to $209 million. Free cash flow, defined as gap cash from operations minus cash capex, was $77 million, up from $66 million in Q1. This brings the total free cash flow for the first half to $143 million. As expected, total capex in Q2 was $82 million, and total capex intensity was 11%. This was due to the renewal of large enterprise license agreements. As a reminder, the accounting treatment for these renewals requires us to recognize ELAs as capex in the period the deal is signed. Cash capex was 29 million, and cash capex intensity was 4% in the first quarter. For fiscal year 2021, we expect cash capex intensity in the 4% to 6% range. Total cash at the quarter end was $215 million, and we had $375 million of unused revolving credit facility. We paid down $56 million of debt, including $50 million repayment and termination of the accounts receivable financing facility. On slide 14, we have a guidance for the third quarter. For the third quarter, we expect revenue in the range of $750 to $760 million, core revenue of $705 to $715 million, Non-GAAP operating profit of 118 to 122 million. Non-GAAP earnings per share in the range of 23 to 25 cents. Non-GAAP other expenses of 50 to 52 million. Non-GAAP tax expense rate of 26%. And we expect non-GAAP weighted average shares of 213 to 215 million. For the fourth quarter, we expect revenue to grow approximately 2% sequentially. and operating profit and EPS to be flat sequentially. With that, we'll take your questions. Joe, please go ahead and queue up the audience for Q&A.