Rackspace Technology, Inc.

Good afternoon and welcome to Rackspace Technologies' second quarter 2022 earnings conference call. My name is Robert Watson, Vice President of Corporate Finance. As a reminder, today's call is being recorded. I am joined today by Kevin Jones, our Chief Executive Officer, and Amar Malatira, our President and Chief Financial Officer. The slide deck we will reference during the call 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 our SEC filings. RAC space technology assumes no obligation to update the information provided 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 most directly comparable gap measures in the earnings release and 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 Q&A function in Zoom. I will now turn the call over to Kevin.

Good afternoon, and thanks for joining us. I'll discuss quarterly highlights and the strategic direction of our business. Then Amar will go into detail on the financial results. On slide five, hypergrowth in the cloud market shows no signs of abating. In the second quarter, year-over-year cloud growth for the hyperscalers was impressive. AWS grew 33%, Google Cloud grew 36%, and analysts estimate that Microsoft Azure grew 40%. This represents $10 billion of additional public cloud revenue compared to last year's second quarter. So Rackspace technology benefits from overall secular cloud growth, and this growth is expected to continue for the foreseeable future. In the second quarter, we executed well with non-GAAP operating profit and non-GAAP earnings per share, both at the high end of our guidance. In the current market, tech investors are extremely focused on cashflow. And in the second quarter, both operating and free cashflow were very strong for Rackspace Technology for the sixth quarter in a row. We are proud of the fact that we've delivered $365 million of free cashflow over this 18 month period, a testament to the underlying cash generating power of our business. We made solid progress on the strategic initiatives we announced last quarter, and we also continue to expand and enhance our partnerships. More on these accomplishments in a moment. On slide six, you see a snapshot of key financial metrics for the quarter. Revenue growth was solid, with total revenue up 4% and core revenue up 5% compared to last year's second quarter. Non-GAAP operating profit was $99 million, and non-GAAP EPS was 17 cents. As with most US-based global companies, revenue in the quarter was impacted by foreign currency headwinds, as Ammar will discuss in a moment. As noted on this slide, we had a very strong quarter for bookings, and through the first six months, bookings were relatively flat compared to the first half of 2021. On slide seven, last quarter we previewed changes we're executing in our business. These included aligning and repositioning the company into two separate lines of business, public cloud and private cloud, to capitalize on the immense market opportunity we see today. We are pleased with the progress we made on this front across a number of facets, people, organization structure, reporting, and go-to-market. The team's working overtime to finalize this transformation. As we met with customers, partners, and other stakeholders to preview these changes, we received very positive feedback, in particular from our key hyperscaler partners, Amazon, Google, and Microsoft, as well as VMware. We're nearing the point where we can provide additional details on our go-forward game plan, including any additional decisions regarding the structure of the company later this fall. On slide eight, we announced that DK Sena joined Rackspace Technology as president public cloud business unit. DK is an entrepreneurial business leader with a strong growth focus and three decades of global expertise in technology and digital transformation services. Most recently, he was president of North America for Cognizant, where he spearheaded the short and long-term growth strategy and execution for a region that represented approximately 75% of Cognizant's revenue. While there, he also built and led a global go-to-market team encompassing key functions of sales, field marketing, partnerships, and industry alliances. DK also previously worked for Tata Consulting Services. I'm thrilled to have DK on the team as we accelerate our public cloud strategy. He is the perfect leader to help us capitalize on this amazing market opportunity and has already made an impact on our business. On slide nine, in the second quarter, we announced several exciting new product offerings. We introduced Elastic Engineering for Government, Now, this offering extends our successful and innovative elastic engineering service delivery model to the government sector, where Rackspace Technology Government Solutions has been a leader for over 20 years. We are also proud that Rackspace Technology Government Solutions was named a leader in the 2022 ISG Provider Lens Report for the US public sector. We believe this recognition will positively impact our sales efforts in this important vertical. We expanded service offerings from our recent acquisition, JustAnalytics, to target the AWS markets with data analytics, machine learning, and AI. This complements JustAnalytics' strong set of offerings on Azure. We enhanced our cloud data services portfolio to incorporate the data cloud capabilities provided by Snowflake and Databricks. And finally, we've announced a new security service to architect, design, implement, and operationalize zero trust access with our partner Cloudflare. On slide 10, our unique corporate culture and employee value proposition continues to receive acknowledgement in the way of awards and recognition. This quarter in the form of two inspiring workplace awards. In the second quarter, we received the Inspiring Workplaces Award for 2022 in both EMEA and North America. In addition, we were certified as a most loved workplace because of our commitment to fostering a culture where team members can develop and sharpen their skills, grow in their careers, and feel valued for their expertise. These awards are strong validation of our company, our corporate culture, and our value proposition for our Rackers, and will help us continue to win in the market. We also invested in our team members who earned 894 certifications across various cloud disciplines in the second quarter through Rackspace University. On slide 11, we made a great deal of progress with our hyperscaler partners in the second quarter. We were recognized as one of the top AWS partners in the Mexico market. We joined the Microsoft Intelligence Security Association ecosystem of independent software vendors and managed security services providers. And we completed and received formal validation of our capabilities on Google Cloud and renewed our designation as a Google Cloud Managed Services Provider in the Latin American market. Let's look at a few case studies of Rackspace Technology customers who are benefiting from our cloud expertise. On slide 12, BMG Rights Management strives to be the best business partner for songwriters and artists in the digital age. The transition to digital streaming platforms like Spotify and Apple Music has transformed the music industry. One stream is roughly 1500 times more data intensive than the sale of physical media, such as a CD. So with digital music consumption at an all-time high, BMG had to enhance its data management expertise to ensure it received the correct royalties on its music portfolio. Within six months of our engagement, Rackspace technology helped BMG migrate most of its applications to Google Cloud, including the business-critical applications behind supply chain management, royalty calculation, and data analytics. Ultimately, we helped BMG migrate 70% of its applications to Google Cloud, generating significant cost savings. In addition, we're exceeding BMG's targets for migration speed due to our in-depth knowledge of on-premise environments, application modernization best practices, Google Cloud architecture, and around-the-clock support. On slide 13, we also strengthened our relationship with VMware when we were selected as their strategic partner for the Secure Access Service Edge or SASE platform. VMware will leverage the Rackspace Technology Data Center in a Box solution to deploy VMware SASE, a solution that includes cloud networking, cloud security, and edge compute services. VMware SASE will be initially deployed in 15 Rackspace technology data centers with another five data centers planned for additional phases. The supplements are broad and deep end-to-end portfolio of managed services for VMware, such as Rackspace services for VMware Cloud, which was launched in 2021. This is also another proof point of the potential in our private cloud business. Now, Ammar will take you through the financials. Ammar?

Thank you, Kevin, and thank you everyone for joining our call today. Slide 15 recaps our financial results for the second quarter. Revenue was 772 million, a 4% year-over-year increase. Core revenue was 733 million, up 5% compared to the second quarter of 2021. Revenue was slightly below guidance due to foreign currency fluctuations, as well as a slower ramp for the British telecom deal. Non-GAAP operating profit was $99 million at the high end of our guidance for the second quarter. This was down 18% year over year, primarily due to the impact to gross profit from revenue decline in legacy OpenStack and our mature managed hosting. Non-GAAP operating margin was 13%, and non-GAAP earnings per share was $0.17. Slide 16 shows the company's revenue mix in the second quarter by segment and by geography. Multicloud continues to represent the vast majority of our revenue at 82% of the mix, and it grew 5% year over year. Apps and cross-platform at 13% of total revenue was up 8% year over year. OpenStack declined 16% in line with our expectations and represent just 5% of total revenue today. From a regional perspective, Americas represents 75% of our revenue. As you can see on the chart, regional growth rates were materially impacted by foreign currency fluctuations in the second quarter. On a constant currency basis, America's growth would have been a point higher at 5%, APJ growth would have been two points higher at 29%, and EMEA would have flipped from a 3% decline to 3% growth, a six-point swing. On slide 17, crack space technology continues to drive strong cash flow. In the second quarter, operating cash flow was 84 million and free cash flow was 57 million, up from 65 million and 45 million respectively in the first quarter. This is the sixth consecutive quarter of positive operating and free cash flow. Over those six quarters, we have delivered a cumulative 365 million of free cash flow. This demonstrates the tremendous cash generation ability of the business. Total capex was $37 million and cash capex was $27 million with capex intensity of 5% and 4% respectively. We expect total capex intensity of 5% to 7% and cash capex intensity of 3% to 5% for the full year in line with our previous guidance. At June 30th, cash was $261 million compared to $215 million at the end of last year's second quarter. On slide 18, I want to remind investors that we have a strong balance sheet with no material debt maturities until 2028. In addition, all of our debt was refinanced in late 2020 and early 2021 at historically low rates with minimal financial covenants. At quarter end, total debt was 3.4 billion and net debt was 3.1 billion. Our net leverage is very manageable for a company with our growth and profit profile. On slide 19, we have a guidance for the third quarter. We expect total revenue in the range of 769 million to 779 million, core revenue in the range of 733 million to 741 million, non-GAAP operating profit of 73 million to 77 million, and non-GAAP EPS of eight to 10 cents. Now let me provide some additional color on our outlook. Third quarter revenue guidance is impacted by the shift in our sales focus away from resale revenue towards higher margin offerings, as well as expectation for continued foreign currency headwinds. The third quarter operating profit guidance is impacted by three primary factors. First, the continued and expected decline of our higher margin managed hosting and legacy OpenStack businesses. Second, investments we are making in people. This includes retaining, retraining, and hiring additional resources to drive growth in our cloud services business and support our long-term strategy. And third, although our power costs are partially hedged, we are seeing increased data center costs. This is in part driven by record high temperatures around the world, and we expect the impact to moderate over the intermediate term. As you know, we spent the last few quarters establishing our go-forward strategy and designing the best operating model to execute on it. The opportunity is clear, but we need to better position the company to address it. Job one in this regard is realigning the company to sharpen our sales, product development, and operational focus on two key markets, public cloud and private cloud, and higher margin opportunities within them. We have our executive leadership team identified and we are accelerating this transition, which we expect will create some near-term disruption over the next few quarters. Hence, we are moderating our outlook. We believe the end result will be a better and stronger Rackspace technology focused on high margin products in growing markets. Before we open for questions, I want to reiterate that our cashflow is strong with six quarters of positive free cashflow and we have ample liquidity and a strong balance sheet that enables flexibility. All told, we believe we are well positioned to win in the fast-growing cloud market in the years to come and excited to share the go-forward plan with you this fall. With that, we'll take your questions. Robert, please queue up the audience for Q&A.