Good afternoon, and welcome to Rackspace Technology's Third Quarter 2021 Earnings Conference Call. As a reminder, today's call is being recorded. Kevin Jones, our CEO; and Amar Maletira, our President and CFO, are joining us today. The slide deck we will refer to today can be found on our IR website. On Slide 2, 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. Rackspace Technology assumes no obligation to update the information presented on the call, except as is 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've provided a reconciliation of these measures to their respective and most directly comparable GAAP measures. These reconciliations are in the tables included in our earnings release and presentation, both of which are available on our website. After our prepared remarks, we will take your questions. [Operator Instructions]. I'll now turn the call over to Kevin.

Good afternoon, and thanks for joining us. I'll discuss quarterly highlights and touch on some customer case studies, and then Amar will go into detail on the financial results. Turning to Slide 5. As a best-in-class, pure-play cloud solutions company, Rackspace Technology is well positioned in a market that is booming. Over the past five years, our cloud partners, AWS, Google Cloud and Microsoft Azure have grown their revenues tenfold. In the third quarter alone, AWS grew 39%, Azure grew 48% and Google Cloud grew 45%. To put things in context, in 2020, incremental new cloud spending with our hyperscaler partners was $22 billion. That total is expected to grow to $34 billion in 2021. And next year, analysts estimate that new cloud spending will grow again to approximately $44 billion. As they move their business to the cloud, customers are grappling with the pace of change, especially midsized and commercial businesses, and state and local governments. They need help and Rackspace Technology is poised to be their partner of choice, wherever they are in their cloud journey. In the third quarter, we took several steps to solidify our market-leading position. The financial results reflect this. Revenue, core revenue, non-GAAP operating profit and non-GAAP EPS all grew at a healthy year-over-year clip. We delivered strong operating cash flow of over $100 million for the third quarter in a row. For the first three quarters of 2021, operating cash flow is now in excess of $300 million. We continue to introduce timely new product and service offerings that help our customers get the most out of their cloud investments. Our new elastic engineering model has seen fast adoption, and we have expanded it to several new areas. And we are very excited about the launch of Rackspace Data Freedom, a new…

Thank you, Kevin, and thank you, everyone, for joining our call today. Slide 12 recaps our financial results for the quarter. Revenue was $763 million, a 12% year-over-year increase. Core revenue grew 15% year-over-year to $718 million. Non-GAAP operating profit was $124 million, up 6% year-over-year. Non-GAAP operating margin was 16.2%, within our mid- to high-teens expected range and non-GAAP earnings per share was $0.25, up 32% from last year. Let me now touch on the third quarter bookings. As Kevin noted, bookings in the third quarter were $200 million, and we still expect to hit our $1 billion bookings target for fiscal 2021. We won a large competitive deal, which we have been working for some time early in the fourth quarter, and we expect to have it signed before year-end. Through 2021, bookings have run lower than 2020. This is because we changed our go-to-market strategy at the start of this year. Since pivoting to the fast-growing cloud market two years ago, we have followed the land-and-expand strategy. In 2020, we focused on the land part of this equation as we had a massive opportunity to establish beachheads with new customers. The deals we on-boarded in 2020 were heavily weighted towards infrastructure in the early stages of these customer relationships, which drives higher dollar bookings. At the start of 2021, we aligned our sales and incentive plans more towards the expense side of this equation to deepen and grow revenue and profitability with our new customers, while also selectively adding new logos. This has tilted the sales equation towards contracts with relatively smaller gross bookings, but higher profitability. So to put a final point on this, Slide 13 provides additional details on how we have grown our business with the new managed public cloud customers that we on-boarded…

Thanks, Amar. [Operator Instructions] Our first question comes from Kevin McVeigh at Credit Suisse; and Tien-Tsin Huang from JPMorgan. You're on deck.

Great. Thanks so much and congratulations on the results. I wonder if you could help dimensionalize the large booking deal you was awarded after quarter-end, give us a sense of how that settles into 2022 as well. And again, congratulations on the results.

Hey, thank you very much, Kevin. It's Kevin Jones here. So look, on the big deal, we said we'd be very selective in terms of which new deals we would pursue. And as a cloud solutions provider, this deal is in our wheelhouse from a product standpoint and a services standpoint and fits into our strategy. So we ran hard after it. We were awarded the business in October and beat some of our largest competitors, and we were selected for the differentiated cloud solutions that we provide. So what we're doing now, Kevin, we're working diligently with this customer to hammer out all the documentation and formally sign it by the end of the year. And we're very excited we want it, and we'll provide more details when we can formally announce the deal. But I can tell you, we believe it will be the largest deal in the history of the company.

That sounds great. And then obviously, it seems like you've made some progress, too, with some of these partnerships with Snowflake, Datadog, Cloudflare. Any sense of how that can ultimately impact and potentially translate to revenue as we think about the model going forward?

Yes. Thanks for that, Kevin. Yes, we're pretty excited about this. We want to forge partnerships that really bring best-in-class cloud solutions to the - our customers. So what we did is we strengthened our relationships with Snowflake, Datadog, Cloudflare and Platform 9. Let's talk about these for a minute. With Snowflake, we're a select partner and on our way to becoming a premier partner. We're actively hiring more Snowflake-certified engineers over the next few quarters. So that's exciting. With Datadog, we're recently named a Gold Tier Partner. And what we're doing there is we're jointly developing go-to-market sales motions. Cloudflare noted on their most recent earnings call that channel partner development is a priority for them. So really excited to be early on that front. We're developing Elastic Engineering for Cloudflare to help our customers customize, optimize and manage their security platforms. And then earlier this year, we made the equity investment in Platform 9. Platform 9 is a SaaS-managed Kubernetes platform. And what we're doing with Platform 9 is we're bringing edge, private and public cloud solutions to market to help make Kubernetes simple to operate and scale. So these are really exciting partnerships, exciting growth opportunities for Rackspace Technology. Of course, alongside our managed public cloud and private cloud solutions. So Kevin, we've had encouraging progress. I think it's a little early to forecast revenue contributions from the offerings, but we're on it.

And just to add there, Kevin, if I may. This is, again, in line with our strategy of moving up the stack. Right now, what's going on in the market is a lot of business is coming at the infrastructure layer. The next opportunity is on the cloud-native application and then data. So you can see here all this partnership is at an early stage, and this is in line with us mowing up the stack from a strategy perspective.

Congratulations again.

Thanks, Kevin.

Tien-Tsin Huang from JPMorgan, you're up. And Ramsey El-Assal from Barclays is on deck. Tien-Tsin, we have you.

I think I'm unmuted. Can you hear me?

Here you go.

Hey, Tien-Tsin.

Terrific. Thanks, Joe, for moderating. Good to talk to you, guys. So yes, the second half bookings, I'm just focusing in on that, the $500 million or so implied in your guidance. Can we annualize that as a good baseline to consider for 2022 since this captures your more selective client prospecting criteria you just talked about? Or is that dangerous to do, given the large deal you expect to close in the fourth quarter?

So why don't I just give you a little color, Tien-Tsin. Thanks for the question on bookings momentum and a little bit about the pipeline, and then I'll have Amar jump in as well. So we feel good about the bookings momentum. We're focused this year on optimizing our bookings mix for bookings dollars and profitability. We've seen good results in the sold gross margins in the third quarter were the highest level that we've seen in years. And we think $1 billion of new business bookings is the right number to go after, and we see plenty of business in the pipeline to accomplish this goal. And then in terms of our pipeline, it's healthy. We continue to refine our sales focus. And what we're seeing with customers is they're really grappling with the pace of change, right, particularly mid-sized commercial businesses and state and local governments. And we're seeing them come to Rackspace to help them on their cloud journey. The other thing is lots of interest, Tien-Tsin, our new product offerings. So Elastic Engineering delivery model is redefining how managed services are delivered in the cloud. We've got Data Freedom, which is extremely exciting. This is the offering we launched in September, and we launched that directly as a result of feedback that we're hearing from our customers, the massive pain points that they're experiencing on the cloud journey. So feeling good about bookings momentum and solid pipeline.

Great. Thanks a lot, Kevin. Just maybe for you, Amar, if you don't mind, on the SG&A leverage showing some strength there to help offset some of the gross margin pressure, as you said you would do. Is there more to go there? Anything unusual in the third quarter to call out?

No, I think it came in line with our expectation, Tien-Tsin. And so as I had indicated in the previous earning call, we are focused on making sure that we also make investments on both OpEx as well as cost of revenue as we see huge opportunity in the marketplace. So to answer your question, the SG&A came in line with our expectations.

Very good. Well done. Thank you.

Thanks, Tien-Tsin

Ramsey El-Assal from Barclays, you're up. And Amit Daryanani from Evercore, you're on deck.

Can you hear me, gentlemen?

Yes.

Hey, how are you tonight? I wanted to ask about the Apps & Cross Platform growth, excluding the nonstrategic exit. What was the impact from that in the quarter? And do you see any other pockets of the business that are similarly nonstrategic?

So we gave some details last quarter earnings call, Ramsey. The nonstrategic piece of the business, the quarterly run rate was about $3.5 million to $4 million, which is about 3 points to 4 points of growth. That we -- since we did an end of life on that, I think that was in -- that result in headwind. But within that portfolio, we have data that is growing very, very rapidly. We have security services, that's also growing very rapidly. We will continue to look at that portfolio, making sure that we retained the strategic piece of the portfolio that aligns to our cloud play. And I think we continuously look and look to rationalize the portfolio. So far, there's nothing else in that portfolio that we will deemphasize. We already did that through the restructuring exercise we did in July.

I would agree. I would just add, Ramsey, security, data service is pretty hot areas of the business right now, particularly given all the challenges that our customers are facing with high-profile hacks and ransomware and every company really needs to be hyper vigilant with regard to security. And then data, of course, as companies move to the cloud, eager to mine this data for valuable insights. And we've got a strong data services practice. And then more broadly within the app development world, we're focused on cloud native application development. A lot of companies have lifted and shifted applications to the cloud without optimizing those applications. So this is another hot area for us.

Thanks for that. And one quick follow-up for me. Can you talk about the CapEx levels in the quarter that came in a lot lower than our model? And anything to read into there in terms of a new run rate or any type of lumpiness there that we should be aware of?

Yes. So Ramsey, from a CapEx perspective, again, it is in line with our expectation. If you recall, I said for the full year, we should be in the 7% to 9% range. In Q3, it came exactly in line with what we were expecting. I expect now for the full year to be at the low end of the 7% to 9% range, in line with our -- us moving towards more capital light model. So it's going as per plan.

Okay. Thank you very much.

Thanks, Ramsey.

Amit Daryanani from Evercore, you're up. Frank Louthan from Raymond James, you're on deck.

Perfect. Hopefully, you can hear me. I have two questions as well. I guess, first off given the nice look at these investments you've talked about on the cloud solutions that you're making, accelerating them, and you've talked about Cloudflare, Snowflake, et cetera there. I'm curious, is the demand for these solutions really coming from your existing customers, existing logos to use Rackspace for infrastructure and they want to scale this into helping them build and manage the cloud data solutions? Or are these relationships actually helping you go out and get new logos that you will eventually bring on the infrastructure side?

Yes. Very good. So maybe I'll start and then Amar can talk about some of the investments. So yes, absolutely. We do see momentum with both the installed base of customers that we have on it and the new logos. If you just look at Q3 bookings, thousands of individual deals, very diversified across geos and segments, 30% bookings from international markets. And year-to-date, to your point, we've actually seen a good growth in new logos signed as we talked about, sold margin, high spend in a couple of years. So we're pleased with our new logo progress. And we've made, I think, really good progress on our installed base account planning, as we've gone forward and looked at retraining, upskilling our account executives. We've got much more sophisticated account planning. This is all three regions of the world. And so we're seeing pipeline develop from that as well. So really, it's a combination of new logos and installed base.

Got it. And then if I can just follow-up in '21, as we so far, right, we've seen gross margins have had some downside pressure. I think it's been a big focus among folks. But your free cash flow, I think on the other hand, has been remarkably consistent. You mentioned you've seen expansion of free cash flow margins and EBIT dollars, total free cash to dollars. I'm wondering as we sort of think about calendar '22, do you think we are likely to see gross margins and free cash flow both improve in a much more consistent manner? Or do you think you can continue to expand free cash flow even if you don't see gross margins move higher next year?

So Amit, I will give you more color on the 2022 when we announce our Q4 results. But just to give you a little bit more color on gross margins, our gross margins, as you know, in Q3 '20 -- in the third quarter came in line with our expectation and also my guidance that I provided to you guys. As you know, this is a transient phase, driven by all the internal mixture that is going on, not any external market dynamics. And as we transition to a cloud-centric business model, we are undergoing some necessary shifts in the business model. So we believe that the gross margins will stabilize at the end of this transition period. And we expect the profitability to inflect upwards with a favorable mix shift to the higher-value cloud services that Kevin was talking about. So we've already seen very good traction. In our prepared remarks, we talked about our land and expand motion, how sold gross margins have improved significantly, and this becomes a leading indicator and gives us confidence that margins will expand with higher margin products as the opportunity for us to expand into this installed base is just ahead of us. And that's where we are making investments, as Kevin mentioned, we were making investments in cloud native application development. We are making investments in data services. These are the up the stack opportunities as customers migrate more and more workloads, both application and data from the on-prem environment to a cloud environment, a multicloud environment. So that's -- regarding cash flow, very good progress, as you see. You rightly said, our cash flow from operations and free cash flow has significantly improved. We drove a lot of working capital improvement. And I'm a big believer of earnings quality. And I do believe that cash flow from operations should track to roughly about 70% or so to the operating profits on a non-GAAP basis. And that basically defines the quality of earnings, and that's what we are focused on.

Perfect. Thanks very much.

Rob Palmisano from Raymond James, you're up. And we have on deck, Keith Bachman from BMO. You're on deck.

This is Rob on for Frank. So how are the cost savings initiatives tracking? And can you give us an update on where you guys are at with your offshoring process?

Yes. Thanks, Rob. See the -- if you recall, we said we'll drive a savings of $95 million to $100 million of gross run rate savings. And we have taken most of those -- most of it will come from labor actions. And through Q3, the majority of those actions have been completed. And the rest, there will be non-labor stuff that will continue and will be largely done by the end of Q4 or in our fiscal Q1 2022. So we will see the -- realize the full annualized benefit in 2022. We have started seeing those savings even now, and we are reinvesting it back into the business. So that's where we are. So we are tracking to our plan, offshoring is going quite well. We are building a very good global footprint. We have accelerated that too, in line with what we had planned for. And so very pleased with the progress there.

Great. Thank you.

Keith Bachman from BMO you're up. And then our final question will come from Bryan Keane at Deutsche Bank.

Hi, thank you. I had a few, if you can hear me, okay. More I want to come to you and follow up on the gross margin question, two things on gross margins. A, could you -- last quarter, you gave a specific number for the September quarter, and I was hoping you could do the same thing for Q4, just so we all keep our models within certain parameters. And then part B of the question is again, on the last quarter call, you indicated that gross margins would bottom and perhaps you can move upward, but you needed 4 to 5 quarters. So we should be thinking about the September quarter, December quarter of '22. I'd like to see if you could just revisit that because I thought Slide 15, in particular, was interesting in that you've gotten pretty good gross margin performance on that, on the cumulative process from your cohort trends in 2020. So if you could just revisit on those gross margin trends? And then I have a follow-up.

Yes. So I would say gross margins were in line with our expectations for Q3, as you indicated. And last quarter earnings call, I provided some color on gross margins and expected trend, and have no changes from that position at this time.

Okay. But any specific gross margins you want us to think about for Q4?

So I think I gave that color last quarter, so I think I'll go with that, whatever I had mentioned last quarter.

Okay. All right. Then turning to cash flow, if I could, too. Also, you're taking some restructuring charges and whatnot this year. And so the question is really geared towards how much of that is cash? And so the reason I'm asking the question, could that be presumably lower restructuring charges in '22? Is that a potential tailwind to your reported free cash flow metrics in '22?

Yes, I think that's a great question, Keith. Yes, that will be a tailwind in fiscal '22 because some of those restructuring charges were accrued and some of those cash could also go out the door in fiscal 2021. We will have some of it in the first half of 2022, but then it should serve as a tailwind thereafter.

Okay. Any quantifications on the amount that's impacting '21 versus early '22 on a cash basis?

I don't have the numbers right in front of me, but I'll give you that color when we announce our Q4 earnings, so that you have more attractive.

Okay, I’ll jump back in queue. Thank you.

Next question comes from Bryan Keane at Deutsche Bank. Go ahead Bryan.

Hi, guys. I just want to ask about how you're measuring market share. Looking at those high-growth markets, although you guys are growing fast, I guess it's 30% to 40%, which is 70%, 75% of multicloud. Is there -- are you gaining enough of the share there? Or is there still room to grow? Because as you outlined, that area still grows significantly fast, upwards of sometimes 50%. And then secondarily, just thinking about the non-growth markets, which I think is a non-VMware private cloud and managed hosting, is that an area that's going to be relatively flattish growth while the cloud side of the business should grow the fastest?

So I will start -- I'll give you some additional color based on what we have said before. So the growth market, which is roughly about 70% to 75% of our multicloud mix is growing within 30% to 40%. And if you take a look at our competitors in this space or even the hyperscalers, we're actually growing faster than them. So you can say, based on that, we are taking market share. But again, this is such a broad market, it's so fragmented. It's hard to figure out whether we're taking market share or not. But clearly, from a growth rate, it's a good indicator that we are winning in the marketplace. Now with -- as it relates to the mature side of the product, I will not give any specific guidance. If you do the math, that business is declining and rightfully so because some of the business we are focus fully moving to the growth side of the business. We are helping the customers transition because that's where the future is. The earlier the transition to the new site, the new -- the growth side of the business, our good therapy portfolio, we have an upsell opportunity for these clients, where we can go and sell, as I said, cloud native applications, data services more migration services as more and more work towards step transferred as they develop new work towards, we will help them to build modern applications. And that's the plan. And so that's the dynamics within those two sub-portfolios within multicloud.

Yes. Because what I'm thinking about is thinking about the big picture here with the mix of business being pulled higher for those high-growth markets as they become a bigger percentage of revenue and some of the mature market shrinks in Multicloud plus OpenStack shrinks as a percentage, I think, down to 6% of mix. And it doesn't naturally the revenue growth accelerate a little bit just based on mix alone?

I would say, if you think through that rationally, that's probably the case. Now we will give you more color on that and what happens in fiscal '22 when we announce our Q4 results. But that's -- I think you're thinking the right way.

Yes, I think that's the intention of our strategy, of the company, exactly. I think you summarized it well is to move to the hyper growth areas of the market, and that's where our investment and our focus is, Bryan.

Okay, thanks guys.

Well, thanks, everybody, for joining us today. If you have follow-up questions or if you want to schedule additional time with the team, please reach out to me at ir@rackspace.com. Have a great rest of your day, and we'll talk to you soon.