Rackspace Technology, Inc.

Good afternoon, and thank you for standing by. Welcome to Rackspace Technologies' third quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the presentation, it will be a question-and-answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. Please be advised that today's call is being recorded. I would now like to hand the call over to Robert Watson, Vice President of Corporate Finance. Please go ahead.

Thank you and good afternoon. I'm joined today by Amar Malatira, our Chief Executive Officer. Please note that we have made some changes to the supplemental earnings materials we provide, including a revised presentation and an Excel fact sheet. These materials, as well as a replay of today's call, can be found on our investor relations website. 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. 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 most directly comparable GAAP measures in the earnings release and presentation. both of which are available on our website. I will now share our third quarter financial results and then turn the call over to Amar for an update on the business. In the third quarter, both revenue and core revenue exceeded the high end of the guidance we provided on our Q2 call in August and reiterated on September 26th with the CEO announcement. Total revenue was $788 million, which represents 3% year-over-year growth on a reported basis and 5% growth in constant currency. We continue to experience material currency headwinds from our year of business. Core revenue was $751 million, which grew 5% year-over-year on a reported basis and 7% in constant currency. Revenues in EMEA grew 8% in constant currency, driven in part by the continued ramp of the BT contract, but declined 1% on an as-reported basis. Americas grew 3% and APJ grew 24% on an as reported basis and experienced minimal FX impacts. Non-GAAP operating profit of $80 million also exceeded the high end of our third quarter guidance. This was down 36% year over year, primarily due to reduced gross profit from the ongoing revenue decline in our legacy OpenStack and managed hosting private cloud businesses. Non-GAAP operating margin was 10% and non-GAAP earnings per share was 10 cents. Operating cash flow of $71 million and free cash flow of $52 million were positive for the seventh consecutive quarter, driven in part by our continued focus on managing working capital. As a reminder, Q4 is a seasonally low cash flow quarter for the company. CapEx in the third quarter was in line with expectations, with total CapEx of $31 million and cash CapEx of $19 million. CapEx intensity was 4% and 2%, respectively. For the full year, we expect to be within our target capex intensity range of 5 to 7%. We ended the third quarter with $249 million of cash, and our $375 million revolver remained undrawn, resulting in total available liquidity of $624 million at quarter end. Also note that the company recorded $464 million of non-cash impairment charges in the third quarter. The primary driver of these charges was a goodwill impairment in our multi-cloud segment. Additional details of these non-cash expenses can be found in our pressure lease and SEC filings. And lastly, I will provide our guidance for the fourth quarter. This guidance reflects some caution related to an uncertain macroeconomic environment and continued foreign currency exchange headwinds. We expect total revenues in the range of $772 to $782 million, core revenue in the range of 738 to 746 million, non-GAAP operating profit of 65 to 69 million, and non-GAAP earnings per share of 4 to 6 cents. I will now turn the call over to Amar.

Thank you, Robert. I'm excited to lead Rackspace Technology into its next chapter as a customer-first, cloud-first company. Since being appointed CEO, I've been focused on having an honest dialogue with our customers, partners, and employees. It is clear that our customers need our help and they want us to win. And we have a world-class partner ecosystem and talented employee base who is ready to serve them. I remain confident in our strategy and firmly believe we are implementing the right operating model to execute on the market opportunity in front of us. As I shared during my September 26th investor update, it is critical that we quickly improve our execution focus and accountability across the organization. So let me share some early actions and progress. First, I know we need to rebuild our credibility as a team. I'm pleased that in the third quarter, we delivered revenue and profitability above our guidance. Looking ahead, we followed our normal guidance process but we are adding some caution to reflect the uncertain macro outlook. We intend to build a track record of meeting and beating expectations. Second, I've made a few changes to my executive leadership team and will continue to evaluate additional adjustments to position our organization for success and ensure alignment with our go forward operating model and priorities. Third, I'm pleased that Shashank Samant will be stepping up as the lead director for our board. Shashank is a dynamic seasoned executive who specializes in the digital technology services business and the cloud market. Shashank most recently served as president and chief executive officer of GlobalLogic, a Hitachi Group company. Under his leadership, GlobalLogic scaled to $1.5 billion in sales as a leading brand in the digital transformation space. In early 2021, Globalogic was acquired by Hitachi at an enterprise value of $9.6 billion. Prior to Globalogic, he held leadership positions at Ness, IBM, and HP. The entire company will benefit from his increased engagement and broad experience in cloud and digital businesses. And lastly, we continue to make good progress on our realignment into a two business unit structure and are on track to begin operating in this new structure on January 1st, 2023. Looking ahead, we know that 2023 will be a transition year with a lot of heavy lifting. We've already realized significant cost efficiencies over the last two years. We'll continue to streamline expenses where we can. but we are now repositioning Rackspace for profitable growth. This is my mandate from the board. To Rackspace's advantage, we address two distinct markets with strong unmet demand for the innovative solutions and services we provide. As we have stated many times before, we expect the demand across our multi-cloud offerings to remain strong, but we have to step up our execution and focus so we can seize it. Public cloud operates in a hyper growth market with significant white space. For Rackspace to achieve our goals in this market, we must sharpen our solutions development focus by launching value added and operationally scalable services. We are making progress. We'll continue to make organic investment so we can move even faster. Going forward, we will not lead with infrastructure resale. We lead with higher value solutions and services in public cloud and with a deeper customer engagement. Our new operating model will ensure that we emerge from 2023 with a public cloud organization focused on the high value opportunities in this wide open market space. In hosted private cloud, including bare metal managed hosting, the market opportunity is more significant than many may appreciate today. We estimate that over 60% of workloads are still in customer data centers, and many will move to either public cloud or hosted private cloud over the next few years due to cost advantages, reduced operational complexity, and fewer resource constraints, among many other factors. We find that many of these workloads are better suited for hosted private cloud. Examples include workloads in regulated industries, such as government and healthcare, legacy applications that are too expensive to be refactored for public cloud, and data and performance intensive workloads. And Rackspace is uniquely positioned to win in the private cloud market. We have a well-known brand with deep experience in private cloud, a global data center footprint, cutting edge technology, and IP and strong partnerships with key ecosystem players such as Dell and VMware. And while we are still in the early innings of a push to revitalize and arrest the declines in our managed hosting and private cloud business, we are seeing early signs of progress. For instance, we recently signed one of the largest hosted private cloud deals in the history of the company. This is a multi-year commitment that provides a glimpse into the promising market opportunity in private cloud. We're also launching industry-specific private cloud offerings, for example, in healthcare, which are already driving good pipeline generation. And finally, in September, we launched the Rackspace Accelerated Migration Program. This industry-leading program is designed to help customers move their workloads from on-prem or colo facilities into Rackspace private cloud. It has been several years since we've seen this much activity and traction in private cloud. It's an encouraging trend which we are working hard to capitalize on with new and innovative solutions. Before I conclude, I just want to remind everyone on what gives me the confidence that will turn this company around. First, we operate in two multi-billion dollar markets, private cloud and public cloud, and both are growing. As I often say, We are in a great neighborhood. Second, our core revenue base is over 90% recurring. It includes a large diverse customer base with more than half of the Fortune 100 companies. We truly have a phenomenal base of customers who need our help and want us to succeed. Third, we have roughly 7,000 dedicated Rackers with more than 11,000 technical certifications who collectively make up our unique Racker culture. Rackspace is truly a great place to work, and we will continue to invest in our people. Fourth, we have strong, deep relationships with world-class partners in both public and private cloud. We continue to strengthen our long-standing relationships while also developing partnerships in new cutting-edge cloud technologies. And finally, we have a well-respected brand in the tech market based on our long history of innovations. In closing, there's a lot of work ahead of us, and the path will certainly not be easy. But I truly believe the actions we are taking will position a business for sustained growth, profitability, and success in the years to follow. I look forward to sharing more on our strategies and financial aspirations in the future. And with that, we'll take your questions.