Rackspace Technology, Inc.

Good day and thank you for standing by. Welcome to the RAC Space Fourth Quarter 2024 earnings webcast. At this time, all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1-1 on your telephone. You will then hear automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I'll now extend the conference over to your first speaker today, Sagar Habar, head of Investor Relations. Please go ahead.

Thank you and welcome to RAC Space Technologies Fourth Quarter 2024 earnings conference call. I am Sagar Habar, head of Investor Relations. Joining me on today's call are Amar Malatira, 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. RAC Space 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 Amar for an update on the business.

Thank you, Sagar. Our fourth quarter results exceeded guidance for revenue, profit, and EPS, marking the 10th consecutive quarter of meeting or beating expectations. We also achieved a record-breaking quarterly sales booking, reaching the highest level since early 2023 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 -to-market execution in a strengthening demand environment. I'm also pleased with our sales execution in fiscal 2024. 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 reaffirms that our strategy and -to-market execution are driving tangible results. We initiated this approach two years ago and made 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 a 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 2024 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 -to-market segments. For full year of 2024, private cloud sales bookings were up 4% year over year. Bookings in the second half of 2024 grew 42% compared to the first half, highlighting significant acceleration towards the end of the year. In the fourth quarter, we also signed a transformative multi-year managed cloud agreement with Seattle Children's Hospital. Under this 10-year multimillion dollar deal, Rackspace will deliver an -to-end managed cloud solutions designed to revitalize the hospital's data center operations and modernize its infrastructure for both clinical and non-clinical workloads. This strategic partnership will enable Seattle Children's to seamlessly transition to Rackspace's -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 gap revenue was 269 million for the quarter, exceeding our guided range and rising 4% sequentially. This growth was driven by the successful onboarding of a major healthcare customer secured in 2023. Our private cloud segment is making significant progress, particularly in the healthcare and sovereign markets. In fiscal 2024, 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 OpenCloud, our next-generation cloud platform targeting customers across large enterprises, sovereign organizations, and other cloud service providers. Leveraging a deep open-source expertise, OpenCloud unifies its existing silos into a single operational platform, simplifying internal cloud operations while delivering hyperscale capabilities to end users. In fiscal 2025, we expect a modest -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 2025, our annualized sales bookings for new offerings are expected to be in line or outpaced the runoff 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 2024, our public cloud gap revenue was $417 million, 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 -over-year, driven by robust performance in both our services and infrastructure resale. For the full fiscal year, public cloud bookings grew 22% -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, though other factors also contributed to this growth. This result underscores 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 refreshing over 70% of our sales team, revamping our -to-market strategy, and building a strong services value proposition. In the fourth quarter, Rackspace was recognized by ISG as a leader in the AWS ecosystem partners category in the US. 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 to 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 service 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 organizations 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 customer engagements positions as 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 a pipeline at various stages. In the fourth quarter, we successfully deployed multiple customer solutions leveraging multimodal, GenAI 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 are making steady progress on our operational turnaround. This is reflected in our bookings growth and efficiency improvements in 2024. Second, we 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 circular 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 term. We have ample liquidity and flexibility to focus on our operational priorities. Finally, I would like to thank our customers, Rackers, 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, Omar. In the fourth quarter, total company gap revenue was $686 million above our guided range, driven by solid performance across the board. For the quarter, non-gap gross profit margin was .6% of gap revenue, down 50 basis points sequentially. For the full year 2024, non-gap gross profit margin was 20.6%, down 172 basis points year over year. Non-gap operating profit was $39 million in the fourth quarter, exceeding the high end of our guidance range. Non-gap operating margin for the quarter was .7% of gap revenue, an increase of 94 basis points sequentially. For the full year 2024, non-gap operating margin was 3.9%, down 146 basis points versus prior year. Non-gap loss per share was two cents higher than our guided range, driven by better than expected operating profit. Cash flow from operations was $54 million, and free cash flow was $34 million in the fourth quarter. For the full year, cash flow from operations was $40 million, and free cash flow usage was $71 million. We ended the year with $144 million in cash on hand, and $519 million of total liquidity, including 375 million of undrawn commitments. Turning to our segment results. For private cloud, gap revenue for the fourth quarter was $269 million above our guided range. This includes legacy open stack revenue of $27 million. Total private cloud revenue was up 4% sequentially due to strength in our healthcare segment. Private cloud non-gap gross margin was 39.8%, up 120 basis points sequentially due to higher revenue and cost efficiencies. Non-gap 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, gap revenue was $417 million above our guided range, driven by higher cloud infrastructure volumes, partially offset by a slight decline in services. Non-gap gross margin was 8.2%, down 210 basis points sequentially, driven by an increase in infrastructure revenue mix. Non-gap 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 gap revenue to be $653 to $665 million, consistent with normal seasonality. From a segment perspective, we expect private cloud revenue of $247 to $253 million, and public cloud revenue of $406 to $412 million. Total non-gap operating profit is expected to be $19 to $21 million, and non-gap loss is expected to be from seven to nine cents per share. Our non-gap tax rate is expected to be 26%, while non-gap other expense will be in the $46 to $50 million range. Non-gap share count is expected to be approximately 245 million 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. At this time, we'll conduct the question and answer session. As a reminder to ask a question, you will need to press star one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. And our first question comes from a line of Kevin McVey of UBS. Your line is now open.

Great, thank you so much, and team congratulations on the strong results that you continue to really execute well. So we appreciate that. Like maybe, Amar, can you maybe talk to, I think you talked about some of the trends within, you know, the private business, and did you say you expected that to be down for the year in 25? And, you know, if that is the case, it sounds like there was a lot of momentum in the second half of 24, as opposed to the first half of 24. So maybe help us understand that a lot, because it seems like that business is really starting to lack.

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 will give you some color on the outlook for 2025 for private cloud, the way we look at it right now. But, you know, 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 2024, we did see not only an improving demand environment for our hybrid cloud solutions, but we also started seeing some, you know, some faster decision cycles coupled with a great execution from our -to-market teams. So in private cloud, you know, 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, you know, the S of SMB 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 a couple of years of double digit declines to show modest decline in fiscal 2025, 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 2025, I expect revenues in private cloud to be flatish year over year, given the deal that we signed in 2024. So I think you're spot on with your question. There's a lot of static in the, on the line operator.

Got it. And then any thoughts on free cashflow in 2025? You think we'll be able to hold that break even in 2025?

Yeah, so I'll let Mark talk about it. Hey, Kevin.

Yeah, look, I anticipate

both

positive operating cashflow

and free cashflow in 2025. I hope that's all. Kevin, did you hear

that? So positive operating cashflow and free cashflow in 2025. Yeah. On the backs of operating profit growth of say low double digits, mainly driven by margin improvements because a mix of the business is changing and also ongoing efficiency improvements.

Very clear. Thank you both. Thank you.

Thank you. One moment for our next question. Our next question comes from line of Ramsey El-Asad of Barclays, your line is now open.

Hi, this is Ryan on for Ramsey. Thanks for taking my questions and 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 30 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.

Yeah, so I think the visibility has definitely improved a bit, 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 was a record quarter for public cloud. They continued the momentum into Q4, which is our December quarter. And we are hoping that we can continue this momentum into fiscal 2025. 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 a solid foundation in our public cloud business in the last year and a half where we refreshed 70% of our sales force, enabled the sales organization, came up with new offerings. You know, our relationship with hyperscalers have become very strong. And we have also led with services and that's also starting to be dividend here. So I think it's more of a value play as opposed to an infrastructure resale led motion, which still happens because, you know, we still sell a lot of infrastructure, but at the same time, our attached rate, a services attached rate on the infrastructure has really gone up. So in terms of visibility, yes, I think the visibility is a bit improved and we feel that in fiscal 2025, customers are typically looking to go try 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 too. Our private cloud business, you know, we are starting to see a lot of green shoots in private cloud. You know, private cloud business of two, three years ago, you know, people assume that all the workloads will move to public cloud. Well, 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 doing a lot of data center transformation deals in private cloud. The deal sizes have gone up significantly. So larger mix of large deals, multi-year deals, which also helps us to build a good and duty base in this business. And so that's what's happening. So I think pretty pleased with some of these, you know, 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. The infrastructure resale picked 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 25?

Yeah, so let me just give some color and Mark, please jump in here with additional color here. So the infrastructure volumes, you know, 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 guy. Of course, it comes in at lower margins. So we'll take it any day as long as the margins are okay. Now, going into fiscal 2025, first of all, Q1 is a seasonally low quarter. So you typically see in 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. Now, 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 24, as well as in 23. So we'll continue that in 25. So it's a little hard for me to predict whether the 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,

Ryan. Thank you, one moment for our next question. Our next question comes from a line of Frank Luton of Raymond James & Associates. The line is now open.

Great, thank you. Can you walk us through the new logo growth in Q4? Where have you seen that in 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?

Yeah, 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 250 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 multi-year, multi-million dollar agreement that we signed with Seattle Children's Hospital. We had actually landed this logo in early 2024 or late 2023, if I recall, and that was with 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 we continue to hunt for new logos and land in these new logos, and then we'll have specific plans and execution plans to go expand into these new logos going forward. Now your second question is regarding deal cycles and what the deal cycles are. So the deal cycles in private cloud continue to remain the same, Frank, because we are now closing really large deals. 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 definition, 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, et cetera. So those cycles are shorter, and it continued to remain short compared to say private cloud. So no change as such. Same as what we are seeing in the second half of 2024.

Okay, all right, great, thank you.

Thank you, one moment for our next question. Our next question comes from a line of Irvin Liu of Evercore SI, the line is not open.

Hi, thank you for letting me on. I also have two related to your strong bookings performance. I 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?

Yeah, 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 managed services offerings and we are infrastructure service providers, so it is not as labor intensive as you could typically that you'd see within service SIs. Now, public cloud business has a labor play, but the way we differentiate ourselves against the SIs is we are a labor minus model. We bring in more automation to deliver our services and it is exactly opposite and what you will find in some Indian SIs where 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 you some color on public cloud. So in public cloud, just to tell you 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 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 were real standout. 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 resources.

Got it. Thank you for that. I 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? And if so, can you help us quantify the overall AI contribution?

Yeah. So it is... Yes, it did contribute to some of the bookings in data. As I said, data was primarily driven by AI, although there are other factors that contributed to the data services bookings. But let me give you how we look at the AI world and how we play in that AI lifecycle. So there are three phases in any AI lifecycle, that's the way we look at it. 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 what we call an implementation or a production phase. And the third phase is the manage and operate, which is the managed services phase, which is the long tail. Now, where we play right now is in phase one and a little bit in phase two. 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 will be in training, in inferencing as well as fine-tuning. And that's where our hybrid AI 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, a 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. Does it help, Brian? Hello?

Thank you. This concludes the question and answer session. I would now like to turn it back to Sagar Hibar 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 IR at Rackspace.com. Have a great evening, everyone. Thank you, Marvin.

Thank you for your participation in today's conference. To just conclude the program, you may now disconnect.