Rackspace Technology Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2023

There are 9 speakers on the call.

Operator

Afternoon, and thank you for standing by. Welcome to Rackspace Technologies First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the presentation, there will be a question and answer session. Followed by the one on the telephone.

Operator

Please be advised that today's call is being recorded. I would now like to turn the call over to Robert Watson, Vice President of Corporate Finance. Please go ahead, sir.

Speaker 1

Thank you, and good afternoon. I am joined today by Amar Malatira, our Chief Executive Officer and Bobby Malue, our Chief Financial Officer. This quarter, we will begin reporting in our new operating segments, public cloud and private cloud. As we previously communicated, our prior multi cloud segment has been separated into its public and private cloud components and our prior apps and cross platform segment has been merged into public and private cloud based on the underlying nature of the products and offerings. Our prior OpenStack segment has been collapsed into private cloud.

Speaker 1

However, we will continue to provide visibility into OpenStack revenue. Please refer to our Investor Relations website for historical financials in the new segments, definitions of financial metrics and other supplemental materials to today's earnings announcement. 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.

Speaker 1

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 and the earnings release and presentation, both of which are available on our IR website. I will now turn the call over to Amar for an update on the business.

Speaker 2

Thank you, Robert. Let me start by sharing some of our Q1 achievements. First, we delivered revenue and profit about the midpoint of our guidance for the Q1. Meeting our commitments remains a priority, so I'm pleased we're able to achieve these results while navigating We're already seeing progress with increased focus in new offerings, demand generation and targeted verticalization. We have also identified new opportunities for cost efficiencies.

Speaker 2

3rd, with the creation of these new business units, Today, we have published 2 years of quarterly financials in a new segmentation. This also fulfills another one of my commitments to provide greater transparency. Fourth, I've completed the build out of my leadership team with the appointment of 2 talented executives. Michael Bros has been named our Chief Legal Officer, A Rackspace veteran of 16 years, Michael has most recently been serving as an Interim Chief Legal Officer, where he has clearly demonstrated the skills and leadership to take on this role full time. And Kelly Teelgas has been named our Chief Human Resource Officer.

Speaker 2

Kelly brings over 30 years of experience in Global Human Resources with a strong background in strategy and execution, talent management, Organizational design and change management. And finally, since the beginning of the year, we've added 3 highly accomplished technology executives, Anthony Roberts, Betsy Atkins and Tony Scott to the Rackspace Board of Directors. I'm very pleased that they have chosen to join our Board and look forward to working with them closely. So we continue to make progress on the objectives established upon becoming CEO, Realigning the company's operating model to better serve the attractive markets we operate in, build a seasoned executive team to drive our strategy forward and strengthening our Board. We are still in the early days of these changes, so it will take time for progress to be reflected in our financial results.

Speaker 2

Before we provide an update on the new operating segments, Let me give my perspective on the market. There has been little improvement to the macro environment since we last spoke with you. Customers remain cautious resulting in lengthening sales cycles and deferred decisions. Other companies in our industry are reporting the same trends. However, we still expect our market to enjoy strong growth over the long term as multi cloud is a key enabler of digital transformation and improving business outcomes.

Speaker 2

So we're using this flattening of the market to better position our company to capitalize once growth rebounds. Our customers know they need our help migrating and leveraging multi cloud. So our focus is on building the tools and services to meet them wherever they are in their digital transformation journey. Now let me turn to our new segments. With the 2 business unit structure and the hiring of new leadership, We are prepared to better leverage the unique competitive advantages of each business.

Speaker 2

We are now engaging more closely with our customers And developing products and solutions that align to the specific market needs. We have a global footprint, flexible delivery model And the depth and breadth of capabilities, all strong competitive advantages that enable us to deliver differentiated value for our customers. And since we address both public and private cloud, we can provide an unbiased point of view to ensure our customers achieve an optimal outcome. The Public Cloud Business Unit operates as a service centric, capital light model. We engage deeply with customers to manage cloud complexity and deliver value added cloud solutions in infrastructure, application, data and security through managed services, Rackspace Elastic Engineering and Professional Services Engagements.

Speaker 2

D. K. Sinha, leader of the Public Cloud Business Unit joined us mid last year and has been instrumental in shifting the organization from infrastructure resale to value added services with an emphasis on customer partnership. DK and his team are driving our customer first approach and developing strong relationships with both current and prospective customers. As an example, we recently helped a large North American university to containerize their PeopleSoft environment And we also partnered with a large Asian customer to unify 7 disparate data systems onto the Azure platform, enabling business insights for their stakeholders.

Speaker 2

We have built a services oriented leadership team and our focus is to continue to flawlessly execute our strategy to deliver industry leading growth. Turning to the Private Cloud, this business is a technology forward capital intensive model. We are one of the largest scale players in hosted private cloud and have a diverse set of offerings to address a broad set of customer segments and industries. Our strategy is to help customers efficiently and effectively move workloads from in house data centers as well as workloads that may not operate efficiently in the public cloud. Rackspace Private Cloud Solutions can help customers address these challenges.

Speaker 2

Brian Lilly joined us to lead the Private Cloud Business Unit last quarter and is improving our execution, management focus and accountability. He has already made management changes and recently hired a new Chief Product Officer and Chief Revenue Officer. I'm also delighted to see us innovating again in a business we have taken for granted for far too long. As an example, Brian in collaboration with our CTO, Srini Kaushik, has plans to launch a next generation private cloud offering later in the year. This will take advantage of modern open source and cloud native technologies like Kubernetes and containers.

Speaker 2

This will offer customers a full suite of private cloud offerings that Our strategy supports the secular trend of customers moving to a more capital light model, migrating workloads out of the data centers to a managed solutions environment. Hence, this is just one of our initiatives to provide customers with a broader set of options in areas where they lack multi cloud capabilities. It will take time to show results, but Brian and his team are focused on growing the business and improving our execution. There is a bright future ahead for private cloud with an immense market opportunity. In summary, just 4 months into this new model, we are already seeing some of the benefits.

Speaker 2

First, each segment is more focused on identifying opportunities that they can leverage the unique competitive advantages to capitalize on their attractive growth market. 2nd, we uncovered potential new operating efficiencies at both the business unit and corporate levels. And third, we have increased accountability across the company. As we have stated previously, our goal is to exit 2023 with a competitive cost structure and a strong pipeline backlog to drive profitable growth heading into 2024. I will now turn the call over to Bobby

Speaker 3

I will cover the total company results for the Q1, then share some details on our segment performance, followed by our Q2 guidance. Total company revenue of $759,000,000 was down 2% year over year and slightly above the midpoint of our guidance. Non GAAP net revenue is a metric we are introducing that applies net accounting to public cloud infrastructure resale revenue. For clarity, non GAAP net revenue includes all revenue from our private cloud business unit, public cloud services revenues and only the profit component of public cloud infrastructure resale. We believe non GAAP net revenue provides investors with the visibility to the true margin profile of our business.

Speaker 3

Please refer to our Investor Relations website for more details and definitions. For the Q1, total non GAAP net revenue was $460,000,000 down 9% year over year driven by continued declines in private cloud, which as a reminder now includes legacy OpenStack. Non GAAP gross profit of $179,000,000 was 24% of total revenue and 39% of non GAAP net revenue. Non GAAP operating profit was $51,000,000 slightly ahead of the midpoint of our guidance. This was down 55% year over year, primarily due to revenue declines in our private cloud business unit.

Speaker 3

Non GAAP operating margin was 7% of total revenue and 11% of non GAAP net revenue and non GAAP loss per share was $0.02 within our guided loss per share range of $0.01 to $0.05 Cash flow from operations was negative $2,000,000 and free cash flow was negative 14,000,000 in the Q1. These results were in line with expectations due to our strong working capital management, which largely offset the impacts of the company bonus payout and a large vendor prepayment. We ended the quarter with a cash balance of $174,000,000 and remain laser focused on cash flow generation. Total CapEx for the Q1 was $72,000,000 while cash CapEx was $12,000,000 CapEx intensity was 9% and 2% respectively. CapEx for the quarter was higher than recent quarters, driven in part by capital requirements for a new customer we signed in Q3 2022.

Speaker 3

With regards to this customer, As we began to execute in Q1, we became concerned about the viability of the arrangement and ultimately it did not materialize as anticipated. The capital purchase is fungible and will be redeployed to other business requirements. As such, you should expect CapEx to be lower for the next few quarters and remain in our typical 5% to 7% total CapEx intensity range for the full year. Additionally, the Q1, we recorded $543,000,000 of non cash goodwill impairment charges as a result of the January 1st Reallocation of goodwill due to the business unit realignment and the decrease in our market capitalization. Onto our segment results.

Speaker 3

Now that we are operating in our new segments, public cloud and private cloud, we will no longer report the multi cloud, Apps and Cross Platform and OpenStack segments after this quarter. Please refer to our Investor Relations website for historical financial information In the new segment and our earnings presentation were an estimate of our Q1 2023 revenue in the prior segments. For public cloud, revenue of $445,000,000 was up 7% year over year driven primarily by our infrastructure resale business. Public cloud non GAAP net revenue, again, this includes our public cloud services revenue and infrastructure resale profit was $146,000,000 up 1% year over year. While revenue growth in services was 3% in Q1, It will take some time for the business to reach sustained growth in line with the market as we pivot to a services led motion.

Speaker 3

Gross margin for our Public Cloud segment was 12% of total revenue and 37% of non GAAP net revenue. Segment operating profit in public cloud was $25,000,000 which was 6% of total segment revenue and 17% of non GAAP net revenue. In private cloud, total revenue for Q1 was $314,000,000 which includes legacy OpenStack revenues of $34,000,000 and was down 12% year over year. The Private Cloud segment revenue decrease resulted from declines in our private cloud offerings and legacy OpenStack as well as the impact from the December hosted exchange ransomware incident. As a reminder, the hosted exchange email business represented less than 1% of the total company revenue and roughly 2% of private cloud revenue.

Speaker 3

Private cloud gross margin was 40% And segment operating profit was $93,000,000 at an operating margin of 30%. Given the continued widespread attention on the macro environment We have a solid debt structure with favorable terms, which was less impacted by the recent run up in interest rates. Over 70% of the debt is either fixed or hedged And the average interest rate on our total debt was 5.5 percent for the Q1. We have no funded debt maturities until 2028 We have no maintenance covenants, which gives us significant flexibility and runway as we execute our transformation plan. 2nd, Rackspace has nearly $550,000,000 of liquidity comprised of $174,000,000 of cash on the balance sheet a $375,000,000 undrawn revolver.

Speaker 3

It is worth noting that our revolver commitments are provided by some of the largest Global Financial Institutions and we have no exposure to the U. S. Regional banks that have recently faced challenges. And finally, in the Q1, we opportunistically spent $10,000,000 of cash to repurchase $23,000,000 of our Senior unsecured notes in the marketplace at a deep discount. These transactions were at an average price of approximately $0.43 on the dollar and will result in $1,200,000 of annual interest expense savings.

Speaker 3

We will continue to monitor and assess further opportunities to deploy capital and drive shareholder value. As Amar noted in his prepared remarks, 2023 will be a transformational year and we believe our performance will reflect that. We will continue to focus on preserving cash and optimizing our expenses. We know it will take time for the transformation to drive improved financial performance, But we expect to begin seeing sustained progress in 2024. And with that backdrop, here's the guidance for Q2.

Speaker 3

We expect total revenue in the range of $725,000,000 to $735,000,000 From a segment perspective, we expect Public cloud revenue of $430,000,000 to $435,000,000 and private cloud revenue of $295,000,000 to $300,000,000 Non GAAP operating profit of $33,000,000 to $37,000,000 non GAAP loss per share of $0.07 to 0 point 0 $9 Additionally, non GAAP other expense of $57,000,000 to $59,000,000 non GAAP tax rate of 26%, Non GAAP share count of 214,000,000 to 216,000,000. And as we noted last quarter, We expect Q2 cash flow from operations and free cash flow to be positive. Lastly, we expect Q2 operating profit to be the trough with sequential profit improvement anticipated for the remainder of 2023, driven primarily by cost reduction and some improvement in mix. I will now turn the call back over to Amar for some closing comments.

Speaker 2

Thanks, Bobby. As I mentioned last quarter, 2023 is a transformation year and we We are fortunate to operate in growing markets and are working hard to improve our execution across the board. We are focused on 4 priorities to turn around our company's financial performance. 1st, grow our public cloud services business atorabovemarket. 2nd, stem the decline in private cloud offerings, excluding OpenStack.

Speaker 2

3rd, build a highly efficient cost structure. And lastly, drive sustained growth in profit and free cash flow. We are making progress, but we have a lot of hard work ahead. We have a good strategy, a solid plan and a strong team. So I'm confident we'll get this done.

Speaker 2

And with that, we'll take your questions.

Operator

Thank you. Your first question comes from the line of Frank Louthan from Raymond James. Please go ahead with your question.

Speaker 4

Great. Thank you. Can you just give us a little more color on what's in the public and the private cloud? I assume that OpenStack and And the relative profitability there, how should we think about that and how quickly you can sort of exit those businesses and then look for other For Private Cloud. Thanks.

Speaker 2

Yes. So, Frank, thanks for the question. So in So your question is around what's in the private cloud segment or both private and public cloud?

Speaker 4

Well, kind of how you divided them up and just

Speaker 2

Yes, absolutely. So Frank, The private cloud segment includes both private cloud, which includes managed hosting and we also included OpenStack, which shares the infrastructure with private cloud and is also managed by Brandlily. Some of the apps and cross platform that pertains to private cloud Is also included in the Private Cloud segment. So Private Cloud segment addresses the Private Cloud market and vice versa, Public Cloud segment has infrastructure resale That we do across all the 3 hyperscalers and the services for public cloud that includes services for infrastructure, Application, data and security, both in the managed services, Elastic Engineering and Professional Services. So those are 2 segments.

Speaker 2

Now from a profitability perspective, public cloud, when you look at gross margins and We have provided the gross margins to you in the segment financials. So it's operating at around 36% gross margins In public cloud, on a net basis, which is using gross profit as a percentage of net revenue. And Bobby defined what net revenue is in his prepared remarks. Overall, the gross margins on a gross basis was about close to 12%. So on a net basis was about 36%.

Speaker 2

Now the reason why we provided that metric to you so that you can really understand the underlying gross margins of the business Excluding the impact of the infrastructure resale gross margins, which basically dilutes the gross margins as you know gross margins for infrastructure resale Resale is very low. On the private cloud side, the gross margins that we posted in Q1 is about 40%. So as you can see here, we have given a lot of transparency in our financials now. This is how we are going to manage the business internally. So we have 2 leaders managing public and private cloud and this is how we are going to report externally to

Speaker 5

the market to the street. All

Speaker 4

right. That's great. And just a follow-up on the trough in the Q2 profitability. So you said it's going to improve sequentially From cost cutting, what else can you give us that what gives you the confidence that this is the trough and we're going to be moving forward from there?

Speaker 3

Yes. Hey, Frank. So look, we provided guidance here in terms of Q2 being below point. Pretty confident about that because we've got some significant cost actions underway in implementing. As we segmented the business into these 2 BUs, we've talked about that, We've uncovered some significant opportunities to take cost out, which we're executing on and we've kind of doubled down on that for the second half as we've seen kind of a macro Economic environment kind of stall.

Speaker 3

So we're pretty confident or very confident that we will see sequential improvement in Q3 and Q4 going forward. At the same time, we will see a little bit of a mix improvement too that should help us. So that's what gives us confidence.

Speaker 2

So if I can just build on that Frank, if I may, right? I think the other question is, for us, what are the early indicators of Progress, right. And as we go segment the 2 businesses our entire business into 2 business units, Sis and I'm focused on Three indicators as a measure of a successful turnaround of this company. 1st, in public cloud, I'm keeping a close watch on our services growth and how the mix of the business is changing from low margin infra to a high margin services business. As you know, since Building a services backlog typically takes around 6 to 9 months and that's what process we already initiated.

Speaker 2

I expect fiscal 2023 to be a very low growth year for Services with growth acceleration in fiscal 2024. So that's the first indicator. The second, in private cloud, I'm very focused on making sure We addressed the decline in revenue, excluding the impact of OpenStack. So we have initiatives in place to both grow the bookings and backlog, while also actively reducing the churn. And in private cloud, as you know, given the long sales cycle and time it takes to implement the solution, I do expect better performance starting in 2024.

Speaker 2

And just to give you a little bit additional color here, Frank, Every percentage point of improvement in revenue growth adds roughly about $7,000,000 to $8,000,000 of incremental profit due to the high fixed costs and the positive operating leverage we have in the private cloud business. And the final metric both Bobby and I are very much focused on Is making sure that we go drive cost efficiencies. As you know, as we split the business into 2 business units, we have uncovered Additional operating efficiencies that we can go drive and also on the cash flow side focus on cash flow generation and preservation. These are things that Bobby and I will be keeping a close tab on.

Speaker 4

All right, great. That's very helpful. Thank you.

Speaker 2

Thanks Frank.

Operator

Thank you. Our next question comes from the line of Kevin McVeigh from Credit Suisse. Please go ahead with your question. Great.

Speaker 6

Thanks so much and appreciate the additional disclosures. Amor or Bobby, any way to think about What free cash flow should be for 2023 and the EBITDA associated with that? And what type of macro environment? I mean, You're pretty comfortable with the current environment, like what type of macro outlook are you assuming as you work your way through this transition?

Speaker 3

So Kevin, look, for free cash flow, like we said in our Q4 earnings call back in February, We did anticipate Q1 cash flow to be slightly negative, but we do expect positive cash flow from operations in the remaining quarters And we do expect free cash flow to be margin positive for the full year. From an EBITDA perspective?

Speaker 2

So I think so on the EBITDA perspective, Kevin, we expect EBITDA to trough this quarter in Q2 and then from there sequentially improve. Now we don't want to provide the EBITDA forecast for the full year, both revenue and EBITDA forecast, I would like to give you an outlook 1 quarter at a time given the uncertain macro environment and also Given the transformation that we are driving. So we need some room here to go change the mix of the business, Kevin, to do more of Services compared to infrastructure resale, so there are a lot of moving parts here. So we'll guide you 1 quarter at a time. But as Bobby mentioned, we expect Free cash flow to be marginally positive and we landed in a good place in Q1 given all the one time in our cash expenses that we had in Q1.

Speaker 3

And then from a macro perspective, just on that point there, Kevin, Look, we it's a tough macro right now, right? So our assumption is it remains tough and the market doesn't get the macro doesn't get any better either. That's kind of our assumption going to these into our Q2 guidance and then as well into our Full year cash flow and free cash flow guidance.

Speaker 6

Great. And then it looked like you took the opportunity to acquire some senior notes about $23,000,000 Should we expect more of that over the course of the year or just any thoughts around that?

Speaker 3

Yes. So Kevin, look our debt is trading at high discounts, so we do see that. But And we did purchase $23,000,000 of unsecured bonds at the $10,000,000 that you talked about. When it comes to repurchasing debt, I mean, we will consider it, but our priority is investing in the business, so that we can Pivoted to profitable growth going forward. That's our priority.

Speaker 3

Our capital allocation priorities haven't changed and our top priority remains investing in the business. So And if I

Speaker 2

can just add to that, Bobby, very well said, we also want to be prudent about maintaining liquidity, Kevin, given Given the uncertain macro environment and also our ongoing transformation. So we will balance all those things, investing organically, as Bobby mentioned, Opportunities if we have to, but also making sure that maybe maintain sufficient liquidity given the transformation and the macro outlook.

Speaker 7

Thank you.

Operator

Thank you. The next question comes from the line of Ramsey El Assal from Barclays. Please go ahead with your question.

Speaker 4

Hi. This is Ryan Campbell on for Ramsey. Thanks for taking my questions today. I was hoping you could provide a little additional color on the bookings pipeline. What dynamics are you seeing from current clients versus new logos?

Speaker 4

And then From a sales perspective, has your approach changed in order to accelerate the shift to higher value services?

Speaker 2

Yes, I'll take both. Let me just talk about the macro environment a little bit here and take the opportunity to do that and then I'll give you some color on bookings. And then what is changing within this go to market organization to drive higher margin mix of services? So when you take similar to what we said last quarter, many companies Who we compete with in the cloud ecosystem remain cautious about the broader macro outlook and the impact that they're seeing to demand. We see different dynamics in our public cloud as well as the private cloud business.

Speaker 2

For example, in public cloud, when we talk to our customers, most of our customers are focused on optimizing their cloud spend And all the discretionary spend is under heavy scrutiny. But as in private cloud, customers are looking to move out of the data centers, They want to reduce their CapEx investments and they're also looking at moving workloads that are not operating efficiently in public cloud. So again, as Bobby mentioned, we are prepared to navigate the slowdown while preparing for a rebound. So we'll continue to manage our expenses. We are also expanding our services and solutions offering across both public and private cloud.

Speaker 2

And in summary, I'd say, We're trying to take advantage of the current macro conditions to complete our transformation and improve execution. So as the customer spending Returns to normal, we'll be prepared to capture the demand and begin to grow at or above market. So that's our strategy here and how we want to Now coming to bookings, we did expect a bit of a slowdown in bookings volume, driven by both the impact of macro environment as well as a reorganization. No, we as I mentioned in my prepared remarks, we continue to see longer sales cycles as companies reevaluate their spending, Shift focus to cost optimization, as I mentioned earlier. So in terms of performance specific to our Q1, although we do not give specific bookings number, Bookings were off to a slow start across all geographies.

Speaker 2

However, as the quarter progressed, our bookings showed typical sequential improvement within the quarter. And we continue to drive mix shift to services in our public cloud business. I'm glad where we landed from a mix perspective, but we still need to go make sure that we Start growing our services bookings at or above market. So there's some work to be done there. We saw our funnel in certain verticals in private cloud, Specifically in Healthcare, it continues to improve, which is very encouraging, right?

Speaker 2

Now from a sales perspective, there's definitely a shift And how we go to market today, right? So we used to have an infrastructure resale motion with services attached. We are flipping into a services led motion with infrastructure resale as an attach wherever we can, right. We are not forcing that. We're also having the right level of discussion whether it's with the CDOs or Chief Data Officers for our data services or we go and talk with the business guys for So this is a different motion than what we had in the last couple of years.

Speaker 2

We're also focusing on enterprise accounts as well as mid market. Enterprise account is we're focusing on the large 25, So that we can selectively penetrate those enterprise accounts using a client principal model, whereas on the mid market, which I believe is a sweet spot for the size we are and the biggest opportunity for us to expand is in mid For public cloud services, where we are using a different approach. So we have a regional model. We have a model by service line, And we do have some sales specialists. So this is we are really transforming the way we go to market and have a discussion with the customer.

Speaker 2

But more importantly, we are keeping customer at the center of whatever we do and drive more affinity to the customer. That's how we believe that we can win more business. Any other question? John? Can you hear us?

Operator

It would appear who is on mute. Let's move to the next question. Our next question comes from the line of Abdoula Khar from Evercore. Please go ahead with your question.

Speaker 5

Hi, everyone. I'm Bhullar speaking in for Amit Daryanani. And I wanted to ask about Specifically, public cloud gross margins in the quarter, and I noticed that they're at about 36% as you mentioned number versus like 46% in Q1 of 2022, That's based on marginally higher net revenue. So I just wanted to ask what drove the decline and how we can expect that to be or grow or stabilize going forward?

Speaker 2

Yes. Thanks, Atul. Hope you're doing well. Listen, I think you're absolutely right. Our gross margins were 36 on a net basis and it was roughly 46% last year.

Speaker 2

Now what is happening here are 2 things, right. One is, as we go pivot to our services business And also we are seeing a slowdown in demand in services because of the macro environment. We are seeing underutilization of our services resources. And that is what is key in driving this gross margin compression. Now Bobby mentioned about Cost efficiency programs that we are running in this starting to run this quarter as well as in the second half that will be partly will be to go improve our utilization there Services resources as well as making sure that we have the right OpEx structure as we go align our services led motion in the marketplace.

Speaker 3

I would just add that this is part of the efficiencies that we've uncovered as we've segmented the business. And as Maher said, one of the things that we are definitely looking at We've seen the slowdown in our billable resources and that's something that we're going to address as part of our second half cost actions.

Speaker 2

Yes. Let me just give you an additional color because this is the first time we are reporting This segment information. For us, we consider fiscal 2023 as a year To start pivoting the business to higher margin services. So there are a lot of things there are a lot of dynamics going on between previous years of previous segment reporting and this segment reporting. For us, it starts from now and this is how we are going to go manage.

Speaker 2

I do believe that when you take a look at Abdullah take a look at The public cloud or services companies, services companies typically operate within 30% to 35% gross margins. And That's the range that we should be operating in. So we are actually on the higher end of the range. But as we go drive more growth in our business, we'll have a positive impact from The higher margin services, but more importantly, will also be driving growth. So it's a competitive environment.

Speaker 2

So we believe that sort of low to mid 30% gross margins are the right gross margin For our services business on a net basis, public cloud services.

Speaker 5

Okay. That's really helpful. Thank you. And then just one additional follow-up really quickly. When you say you guys want to grow the public cloud app or above market, Are you guys comfortable with giving me a range or a number?

Speaker 5

But that would be really helpful if possible. Thank you.

Speaker 2

Say that again. What's the last

Speaker 3

The range or number for the market growth that we've

Speaker 8

spoken about?

Speaker 2

Yes. So listen, I think the market again, there are a lot of Data out there, we believe that this business right now in the current macro environment is hard to predict what the growth rate is, But long term growth rate for this for the public cloud services should be low double digits, right? So that's what we are targeting, high single digit to low double digit. That's what we believe is a long term sustainable Growth rate for public cloud services.

Speaker 5

That's really helpful. Thank you. Those are all my questions. Thank you, Abdul.

Operator

Thank you. Our next question comes from the line of Puneet Jain from JPMorgan. Please go ahead with your question.

Speaker 7

Hey, thanks for taking my question. I just Wanted to follow-up on the prior question on public cloud. How large is reselling business within public cloud?

Speaker 2

Well, I think listen, I think there are a couple of Puneet, good to hear your voice and thanks for the question. So Puneet, we will not be able to disclose for various competitive reasons and trade reasons. We are unable to disclose How big is the infrastructure resale compared to our overall. Having said that, I think the information you can You can extrapolate that information and further information based on the visibility we have given on for the net revenue, Okay. So that's already there, but I'm not going to disclose what that number is for competitive reasons.

Speaker 7

That's fair. That's fair. And if you can also talk about like the visibility you have on the second half This year, maybe from the bookings or backlog, like how are bookings trending and how much visibility you have on second half at this point of the year?

Speaker 2

So Puneet, to be honest with you, I think the visibility is limited. I think the macro environment remains to be very volatile, and our customers are also focused on Making sure that they also drive and optimize their spend. So most of our projects are on cost optimization. And so I think that to be honest with you, It is limited in terms of the demand environment. Having said that, our internal goal Is to continuously drive bookings sequentially every quarter.

Speaker 2

As we start it takes about a couple of quarters for sales organization Now I don't know where the demand environment is going to be, but I think we have put a conservative plan in place because we want to get into the rhythm Off going and executing well in go to on the go to market side.

Speaker 3

I would just say that we have a lot more confidence in the operating Pop performance during the rest of the year. That's why we're confident about saying that we will see sequential improvement in Q3 and Q4.

Speaker 2

Yes. And I have to add to the point, Puneet, there are and we have been seeing this for a couple of quarters and I would like to repeat the same thing. We are walking away from infrastructure resale business that doesn't have the right return on invested capital or which on a fully loaded basis will be cash flow negative, Right. So I want to make sure that we continue that discipline so that we can start building a services backlog in this business. And that's the reason, I'd say the transformation, the macro outlook makes it a little uncertain for us to start predicting what the outlook is going to be for the second half.

Speaker 7

Got it. Thank you.

Speaker 2

Thanks so much. Our final question

Operator

of the day comes from the line of Brad Clark from Bank of Montreal. Please go ahead with your question.

Speaker 8

Hi, thank you for taking my question. I just want to ask a bigger picture question with all the buzz around AI and more specifically generative AI. Want to understand how Rackspace is looking at this space in terms of opportunities for the business, but also potential risk Sort of with Gen AI and AI more broadly to IT services. Thank you.

Speaker 2

Yes. Thank you. That's a great question. And Listen, Brett, with chat GPT going viral and each hyperscaler making significant investments in AI, customers continue to And also we are seeing this willingness to leverage generative AI as we go talk to the customers. We have the capabilities by the way needed to achieve the business outcomes that are designed in the marketplace.

Speaker 2

And these capabilities range from say advisory services All the way to transformation and implementation in data as well as AI. So we have really a cool team of data analysts and AI specialists that are across the globe that have the capability today. So we are seeing a lot of excitement and the hype in this area when talking with our customers or prospective customers. But to be honest, we don't expect to see That result in revenue or profit of any material value in 2023.

Speaker 8

Thanks for the color.

Operator

Thank you. We have no further questions at this time. I would now like to turn the call back to Mr. Robert Watson for any concluding remarks.

Speaker 3

Thank you everybody for joining us. If you have any follow-up questions, please reach out

Speaker 1

to us at irrackspace.com and we will speak with you all soon. Thanks.

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Earnings Conference Call
Rackspace Technology Q1 2023
00:00 / 00:00