Good afternoon, and welcome to Rackspace Technology's Fourth 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, join us today. The slide deck we will reference during the call 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 required by law. Our presentation includes certain non-GAAP financial measures and certain further adjustments to these measures, which we believe provide useful information to our investors. In accordance with SEC rules, we have provided a reconciliation of these measures to their most directly comparable GAAP measures in the earnings release and presentation, both of which are available on our website. After our prepared remarks, we'll take your questions. [Operator Instructions]. And 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, 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. Our cloud partner, AWS, Google Cloud and Microsoft Azure, grew revenue by 40% to 50% year-over-year in the fourth quarter. In addition, at the annual AWS re:Invent User Conference in December, AWS CEO, Adam Selipsky, stated that by their estimates, the market in cloud is only 5% to 15% penetrated at present. So we are very early in the growth trajectory of the cloud market. Every company, whether large enterprise or small or medium-sized business, is wrestling with the move to the cloud. Customers need help modernizing and automating, and they are choosing their partners for their cloud journey. In the fourth quarter, Rackspace Technology continued to solidify our position as the partner of choice wherever our customers are on their transition to the cloud. The financial results reflect this. Revenue and core revenue exceeded our expectations and non-GAAP operating profit and non-GAAP EPS grew year-over-year. We delivered strong operating cash flow for the fourth quarter in a row. And for the full year, operating cash flow was over $370 million, a threefold increase in just 1 year. We continue to introduce new product and service offerings to help customers get the most from their cloud investment and to address unmet white spaces in the cloud market. As an example, over 70% of SAP and Oracle ERP applications still sit in customers' data centers, and these companies know they have to modernize, move or upgrade their solutions in the coming years. So in the fourth quarter, we introduced Rackspace…

Thank you, Kevin, and thank you, everyone, for joining our call today. Slide 13 recaps our financial results for the fourth quarter. Revenue was $777 million, a 9% year-over-year increase. Core revenue grew 11% year-over-year to $734 million. Non-GAAP operating profit was $122 million, non-GAAP operating margin was 16% and non-GAAP earnings per share was $0.25, all of which were on the high end of a range of expectations for the quarter. On Slide 14, you see our financial results for the full year. Revenue was $3 billion, up 11% from 2020. Core revenue grew 14% for the year. Non-GAAP operating profit was $484 million, and non-GAAP operating margin was 16% for the year. Non-GAAP earnings per share was $0.97, up 17% compared to fiscal 2020. As shown on Slide 15, the actions we took to improve cash flow in 2021 delivered strong results all throughout the year. In the fourth quarter, operating cash flow was $60 million, and free cash flow was $38 million. Both of these metrics were negative in last year's fourth quarter. For the full year, operating cash flow nearly tripled. Free cash flow, which was essentially 0 in 2020, accelerated to $262 million in 2021. In addition, we continue to make progress to reduce the CapEx intensity of the business. Total CapEx intensity was down a point from 8% last year to 7% this year, and total capital expenditures were down 10% compared to 2020. As a result of the strong cash flow, we ended the year with $273 million of cash on the balance sheet and $648 million of total liquidity. On Slide 16, I want to wrap up the data we have been providing on our 2020 managed public cloud cohorts. This data continues to validate the success of our land-and-expand strategy. With…

[Operator Instructions]. Our first question comes from Ramsey El-Assal with Barclays Capital. And Ashwin Shirvaikar, you're up next.

I wanted to ask about -- the Q1 guidance and the core revenue growth looks like it slowed down a little bit, maybe 8.4% is where we calculated it. That's a little bit slower than we anticipated. Can you give us your updated thoughts on the sort of normalized growth profile of the business? I know we can't see a full year guide at this point, but I'm just curious in terms of has your thinking changed since the IPO in terms of the normalized kind of core growth profile of the business.

So thanks, Ramsey. Let me just start with the Q1 guidance first and give you some color on the Q1 guidance, and I will also give you color on the full year. As I mentioned in my prepared remarks, we believe that the growth trajectory will accelerate as we go to the full year. So when you look at our Q1 guidance, specifically, revenue is going down sequentially from Q4 to Q1, and this is as a result of typical seasonality, Ramsey. The first, in our Multicloud business, volumes are the highest in calendar Q4 in certain verticals. Like we have verticals like gaming, retail and financial services, and this typically normalizes in calendar Q1. Second is, I probably mentioned this even last year, there's always some year-end IT budget flush in our enterprise and mid-market customers. And these 2 factors typically makes Q4 the strongest revenue quarter of the year. So we are off to a strong revenue quarter. In fact, we saw similar seasonality going from Q4 2020 to Q1 2021. And this seasonal impact in Q1 of last year, however, was masked by the ramping of large enterprise deals that we signed in the second half of 2020. So just to square off that, Q1 guidance is in line with the typical seasonality, okay? Now let me give you some color on -- you talked about revenue deceleration in Q1. Now there are a couple of things that I wanted to point out here, right? So we have been consistently growing double digits. There are 2 things that are playing here. One is if you look at our Apps & Cross Platform business, Ramsey, it's up against some very tough compares in Q1. For example, our Texas DIR deal, revenue lapped in Q3 of fiscal 2021. And…

That's very, very helpful. One follow-up for me. I was just wondering if you could give us an update on your view of the competitive environment out there. It seems like the demand environment is pretty robust. I'm just curious if you're seeing any intensification of competition or any other factors that could impact or impair your ability to kind of accelerate that core growth?

Yes. Hey, Ramsey, it's Kevin Jones. Yes, I'll take that one. So what I'll do, I'll give you my impressions of this from a market perspective. And then I'll tell you a little bit about what I'm hearing from our customers and our partners. So from a market perspective, we're a pure play on the cloud, one of the fastest-growing segments in tech. And as we talked about in our prepared remarks, cloud market is absolutely taking off. AWS sees the cloud market at 5% to 15% penetrated. And this is at or past the point on the S-curve where markets really cross the chasm and accelerate. So great potential we see in multicloud both on the private cloud side and on the public cloud side. The other thing about the demand environment, Ramsey, is the multicloud workloads that we've migrated, they are going up significantly. So all the workloads that we migrated over, we're seeing growth there. And then also additional migration work is accelerating. And then some of the demand that we have in our emerging areas like data services, cloud native apps, we're planning to make additional investments in 2022 because we see those areas accelerating. So in terms of demand environment, we continue to feel very good about it, and we're really, I think, well positioned in this fast-growing cloud market. Now when I talk to customers, I've traveled all over the world, talking to customers in 2021 and have logged lots of miles in 2022 so far. And regardless of industry, Ramsey, I'm hearing the same thing from CEOs. Our customer CEOs say they want to transform to the cloud. It's one of their top priorities. They have to do it. They've got a mandate from the Board. But these customers need our help because…

Our next question comes from Ashwin Shirvaikar with Citi Research and Amit Daryanani, you're on deck.

So you guys have previously said you needed to achieve $1 billion in bookings in '21 to get double-digit organic core rev growth in '22. So you checked the box on both of those. Could you clarify if the double-digit growth expectation that you mentioned in '22, is it reliant on additional '22 bookings performance? Or is it, I hate to use a term like in the bag, but is it sort of done? Also is there a quota you sort of need to hit for bookings in '22 to continue double-digit beyond '21?

Okay. I will start, Ashwin, and thanks for your question, and Kevin will jump in here with additional comments. So absolutely, I think we did say at the very outset of the year that if we get to $1 billion of bookings, plus or minus, we should be able to deliver double-digit core revenue growth. And that's the reason we are confident of hitting the double-digit core revenue growth in fiscal '22 as the growth will accelerate through the year. In '22, the beauty of this business, the positive is you have a lot of recurring revenue base in this business. So we expect our revenue base to be anywhere between 85% to 90% recurring base, which says that if you just do the math, offsetting some of the churn with some bookings, et cetera, you really need to go sell, build, deliver about 15% of that revenue every year, right? So that gives us confidence that since you started with a good backlog, we can go and hit the double-digit core revenue growth for fiscal '22. Now your next question is a very important one. And this is where I think, as a management team, we are looking at the market opportunity. For us, the market opportunity is rapidly growing. And we believe that if we can continue to deliver $1 billion plus of bookings, we can continue to deliver double-digit core revenue growth in fiscal '23 and beyond. We can do better than that, Ashwin. And that's where the whole strategic choices remain and decisions remain for us, right? Do we want to go push the pedal down and make certain investments because the market is really exploring in data services, as an example, and cloud-native applications? Can we go outdeliver that bookings growth so that we can create a good backlog going into fiscal '23? So those are some of the decisions we continue to make. It's a dynamic market, and we want to make sure that we make a very deliberate and thoughtful decision as we go through this process.

Got it. And on the strategic choice part of it, one of the strategic choices is the type of clients you pursue. Obviously, you signed BT, which is a large client. When I look at the Just Analytics client base, some of the clients mentioned are also large. But you do have sort of a preference for mid-market, as you've indicated in the past. So could you sort of clarify that push-pull? And particularly, the impact it can have on something you did well this year, which was the turnaround on the cash flow front and capital intensity?

Yes. So I think I will start here and see if I can address the question. It's a great question actually. So our model has always been to move towards more capital-light model, right? So if you look at our CapEx intensity, that CapEx intensity has actually gone down significantly in the last 3 years. And we believe our CapEx intensity will be between, say, 5% to 7% in fiscal '22, right? So it went from 8% to 7% to between 5% to 7%, so roughly in the midpoint of the 6% or so. We did a lot of things this year, Ashwin, as I mentioned in my prepared remarks. First is we pivoted the business to growth side from mature. So you saw the mix of mature business now is less than 25% of the total mix. This is outside of the legacy OpenStack business I'm talking about. This is within Multicloud segment. The mix is less than 25%. So we pushed forward on the growth side. We very selectively landed deals because it was important for us that we expand in the accounts that we land, so we were very strict about it, and that was also a very thoughtful strategy. And BT was one of our customers, but you can also expect that as an expansion from landing because this is a major deal that we landed. And we've been working on it for more than a year. So I think what you should expect is continue down this path, continue to push forward into the growth areas of the business, which is on the cloud side. At the same time, we have also launched new offerings in our private cloud, including Rackspace Services for VMware, which is a multi-tenant offering, which gives the same flexibility to the customer that they would get in a public cloud environment. We went after white spaces like Data Freedom, by making those investments early on. We want to expand those offerings again. So you should expect us to really play hard in the Multicloud segment both on the public cloud side as well as the private cloud side.

Yes. I think that's really well said, and I'll just add a few points here, Ashwin. I think your question on mid-market and enterprise, I think, is a good one. We continue to see a lot of opportunity in the mid-market. We think that's a really good sweet spot for us. Now as you noted, we're having success in the enterprise market. We've only been calling on the enterprise market for the last several years. We won the State of Texas deal. There was a Porsche deal we talked about on the last earnings call and then the BT deal. And the BT deal is interesting because it brings with it BT's enterprise customers, which will further accelerate our capabilities in enterprise. But we'll be selective there, right? We want to pick our spots. I think we've proven, because of all the competitive advantages we've got, that we can win there. So Multicloud, particularly in enterprise and mid-market, is a huge area of focus for us.

Thanks, Ashwin. Our next question comes from Amit Daryanani with Evercore ISI. And Tien-Tsin Huang, you're on deck.

I guess I want to go back to the March quarter guide a bit. And I guess if I look at it, on a sequential basis, you're guiding revenues to be flat, maybe down a few million dollars, but the EPS guide is down $0.04 or high teen as a percent, sequentially down. Can you just talk about what is driving the drop in EPS on a sequential basis? And is there anything on the BT deal from a cost perspective that you would like to call out there, it would be helpful as well.

Sure. Thanks for the question. So there are 2 drivers here, right? One is the sequential revenue decline that is happening from Q4 to Q1 that I explained earlier, so that serves as a headwind. And secondly, Amit, in our business, we also see costs go up, fringe benefit go up, from calendar Q4 to Q1. And this happens every year, especially because we have a large footprint in the U.S. And also, we are making some incremental investments, Amit, in that market in line with what we had mentioned way, way back in Q3 of last year that we will continue to make investments in go-to-market, et cetera. So those are the 3 factors that are resulting in a sequential decline in operating profit and also EPS.

Got it. That's very helpful. And maybe just want to go back to the CapEx and free cash flow discussion. You've had a really good calendar '21 free cash flow. How should we think about any markers or metrics around CapEx and free cash flow as I think about calendar '22?

Yes, sure. So as I've mentioned before, we are very focused in generating cash for this company. And we have proven that we went from $117 million of cash flow from operations, 0 free cash flow, up to $371 million. We significantly improved it, Amit, as you know, very good working capital management across the company. I believe that we should be tracking our operating cash flow at about maybe 70% of our operating profit. That's the 70% of operating profit conversion to operating cash flow. That is a good metric to go with, right? Now keep in mind that there will be seasonal impact during the year. I mean Q1 and Q4 are typically lower cash flow quarters for us. For example, in Q1, there's bonus payment, that annual bonus payout. And in Q4, we had some big cash prepayments to some of our big vendors. So typically, Q1 and Q4 are lower, Q2 and Q3 are relatively stronger from a cash flow perspective. Now let me give you some color on free cash flow because you asked me this question. As I mentioned in my response question to Ashwin, our CapEx intensity continues to go down. If you recall, at the beginning of the year in fiscal '21, I guided to a 7% to 9% CapEx intensity, so CapEx as a percentage of revenue. We landed about 6.7% at the lower end of that range. I believe we'll be between 5% to 7% CapEx intensity in fiscal 2022, right? So if you take these models, let's say, 70% of our operating profit turning around into cash flow from operations, CapEx intensity remaining within 5% to 7%, you will see our free cash flow margin will continue to remain healthy. So just as a reference, we went from 0% free cash flow margins in 2020 to 9% in fiscal 2021. And given the sort of guidance we have provided here, it will be lower than the 9%, but it will be still healthy.

Tien-Tsin Huang with JPMorgan, you're up. And Keith Bachman, you're on deck.

This is Puneet sitting in for Tien-Tsin. What are the incremental gross margins on some of the high-growth Multicloud revenue that you are generating? And can that segment's margins be at least flat on a year-on-year basis this year?

So let me make sure the -- when we are talking about high-margin segment within Multicloud, are you talking about the follow-on sales, Puneet? Or are you talking about the overall?

I meant like the high growth, like that 75% growth in Multicloud business that you are giving there.

Yes. So you know what, listen, I think it all depends on the mix of business, Puneet. At this point in time, given our internal plans, we are assuming that the mix of business remains the same between infrastructure and services within that growth portfolio. So we expect the gross margins to, in that particular business, to remain sort of stable. But again, it depends on the mix of infrastructure and services. So that mix can change if we decide to go after more landing because there's a land grab of accounts going on. So if we decide to push forward and acquire more accounts, that mix might change.

Next question comes from Keith Bachman with BMO. And Frank Louthan, you're on deck. Keith, are you there? All right. Let's circle back to Keith. Can we promote Frank Louthan to speaker, please?

Maybe I missed this, but can you quantify how much the BT deal was in the bookings for the quarter? That would be great. And then where are we on the offshoring with the labor in terms of sort of the percentage of the shift and the total cost savings to date? And when do you think that will be completed?

Frank, it's Kevin here. So I'll start with some color on the BT deal. So BT deal was the largest deal in company history. We're not disclosing the exact dollar amount, but I'll give you a bit of detail here. It brings significant value to both parties and could be worth several hundred million dollars over multiple years. And we're looking at migrating a large number of BT enterprise customers to Rackspace Technology. This deal gives us the opportunity to expand our presence in 180 countries, and we're excited about this as BT's hybrid cloud offerings will be based on the Rackspace private cloud solution, namely Rackspace Services for VMware Cloud. Frank, that's a new offering we introduced last year. And this deal validates several things for us. It validate our new private cloud offering, Rackspace Services for VMware Cloud. It validates our Multicloud strategy, our growth potential in the enterprise market, as I mentioned earlier. Our geographic expansion strategy. I think this deal also shows our competitive advantages against some of the largest competitors in the industry. So we're pleased and excited about our relationship with BT. Amar, do you want to talk about offshore?

Yes, sure. I think, Frank, when we announced the restructuring program mid of last year, one of the key tenets of the program was to change approval for footprint. So if we just take a look at our offshore/onshore mix at the end of fiscal '20, we were less than about 25% offshore, right? We improved that by more than 20 points exiting fiscal 2021. So this was a significant change in our offshore mix. And we expect by mid of fiscal 2022 to be close to 50% of that mix. Now within that, this is across the company. So it's not just the delivery organization or operations, this is across G&A functions. So we did a massive heavy lifting in the last couple of quarters.

I'll just add to that. I'm pleased with the transformation that we're undertaking at the company and the progress so far, still more to do. Of course, Frank, I'm also very pleased with the quality of delivery that we're getting from our onshore centers and our offshore centers and how we're working together around the clock for customers. One of the things that the BT customer mentioned is -- one of the reasons they selected us was because of our reputation for service quality and this fanatical customer experience that we're known for all over the world. So as we transform the business, I look daily at statistics regarding our customer service quality, and we continue to be amongst the best there. So we're pleased with that.

We're going to circle back to Keith Bachman from BMO, and then we'll wrap things up with Bryan Keane from Deutsche Bank.

Can you hear me okay?

Yes, we can hear you now, Keith, thank you.

Okay. Sorry, I'm not sure what happened last time. But Amar, I wanted to go back to margins for a second. And you're guiding operating margins to, call it, 14.2%, which is down well over 200 basis points year-over-year. And you mentioned some incremental BT expense, but I was wondering if you could carve that out. And more specifically, and more broadly, you've alluded to choices. And so as you look at calendar year '22, so I was hoping you could give some context about how you're thinking about margins in '22. In the past, what you said is gross margins will experience some pressure because of mix through, I think, sort of the September to December quarter, but operating margins will stay flattish in these ranges. It certainly doesn't seem like Q1 margins expected to be flattish. So I'm just wondering if you could review, if not specific numbers for the CY '22 then, philosophically, how we should be thinking about margins?

Yes. So thanks, Keith. So Keith, I'll give you color on the gross margins as well as the operating margins for the year. And again, with certain assumptions here, so I'll see if I can give you more transparency and clarity on the margin profile of the business as we roll through fiscal '22. So Keith, based on our current internal plan that we are working with, we expect gross margins to stabilize around 30% in fiscal 2022, and our operating margins to be in the range of 14% to 15%. And I'll give you more color on that shortly, okay? Now our internal plan assumes, Keith, a certain mix of business. It also assumes a certain level of investments and, more importantly, the rate of ramp of the BT deal. So if these assumptions changed during the year, we may have a different outcome. For example, I mentioned in my prepared remarks, Keith, that the demand is even stronger than what we have planned for in 2022. By the way, we had planned for a solid double-digit growth in 2022 from a core perspective. So if you see this demand increasing, which we are, we may decide to put the pedal down and go after additional long-term growth opportunities, which may change the mix and the level of investments in 2022 versus our internal plan. But as I said, I'm very committed to update you every quarter on the strategic decisions we may make around that and any material changes to the financial model. So that's roughly what we are seeing, and we have baked in some level of investments in the plan, in our internal plan. And we want to go after growth, Keith. I'm sure you're hearing this from all the cloud providers in the cloud ecosystem, everyone is seeing good growth to go after. And when we start onboarding some of these deals, it might impact our margins in the short term, but these are the right things to do because we have shown, based on our 2020 quote of customers, that we can expand the sold gross margins once we land these deals.

Okay. And so if I think about that, I mean, I think those margins, 14% to 15% is a little bit lower than what investors are thinking. You said previously OCF would be 70% of the operating dollars of profit. Obviously, I haven't run through my model yet, but I mean that suggests some pressure on free cash flow as well, I would think.

Yes, I think you are right from that. Directionally, you're right, Keith, that, that will put some pressure on free cash flow. But also keep in mind that there is a sort of a tailwind from the restructuring cash charges that we saw in fiscal 2021. We won't see that kind of restructuring cash charges in fiscal '22, so I think those 2 might balance out. But you're absolutely right, as a percentage of revenue, I expect free cash flow margins to be below the 8.7% that we delivered in fiscal 2021.

Okay. Do you mind just if I sneak one in, what were those cash charges in '21, just so everybody knows how to model that?

Yes. So I don't have a specific data here. But I would say, net-net, it was in the, I would say -- again, I'll give you more color on that in the callbacks -- which should be about $40 million to $50 million, net-net. So I will give you more color and look at the data for you during the callbacks.

Our final question comes from Bryan Keane with Deutsche Bank.

Can you hear me now?

Yes, there you go. Thank you.

So most of my questions have been asked and answered. Just I guess 2 clarifications. Kevin, on the BT deal, when you sell into their enterprise customers, how does that relationship work? Is it a rev share agreement? And just trying to think about the economics and margin implications if that business takes off and a lot of BT Enterprise customers start to use Rackspace. And then secondly, I guess for Amar, the cost savings, it wasn't clear to me, that massive move to offshore that you had this year. Is there a cost benefit to the model? And are we seeing that yet?

Yes. So I'll start with a little bit about how the BT kind of relationship with work, Bryan, and then I'll let Amar provide some color on the second question. So yes, so we're excited about this. I mean, basically, BT has got great relationships with some of the largest enterprise customers not just in Europe but all over the world. And so we are BT's hybrid cloud partner. And what's going to be happening is, for a good section of those customers, we'll be migrating those customers to our private cloud environment and our hybrid cloud environment, Rackspace Services for VMware Cloud, which is kind of a combination of kind of private cloud with public cloud attributes. And it will have margin profiles similar to the rest of that part of the business for us. So it's something that, as Amar mentioned, is kind of ramping up throughout 2022. We're already very engaged with BT as we speak. And not only do we have a chance to work and modernize these enterprise customers of BT and BT itself, but then we have the opportunity to introduce them to our applications offerings, our data offerings, given the acquisition that we just did, and then further public cloud offerings depending upon where some of these enterprise customers need their workloads. So it's pretty exciting, and we'll keep you updated as we progress. Amar, anything to add?

On the cost savings side, we have baked in all the cost savings in our model. We have moved very fast in the second half of 2021 to execute on most of the cost actions. And the cost savings that we have laid out on a net basis is already baked into our fiscal 2022 plan, our internal plan. And that's how we deferred some of the investments that we are making in the business.

Is there a way to quantify the different types of investments you're making, Amar, just so we can try to get a sense of how much of this is ongoing, could be additional onetime those kinds of charges?

Yes. So I think most of the investments are -- let me give you -- there are 3 or 4 big buckets of investments. And it all depends on, for example, we continue to make investments in launching new product offerings in Data Freedom, in private cloud, et cetera, that's one big bucket. And that's across our product groups and also across those delivery, as an example. The second big bucket is around 12, right? So as Kevin mentioned, we have opportunities in data services, in cloud native application development across all the 3 platforms. We have done very well on the AWS side because we acquired Onica and we got a lot of skills and capabilities in AWS. We'll be scaling that. And at the same time, we'll also start scaling GCP and Azure. And those investments show up either in cost of revenue because you have to get ahead of the demand. So we will be hiring resources and cloud architects, as an example, professional services for migration as well as for data services. And we will also be investing in sales and go-to-market very selectively because we are also improving the productivity of our salespeople. So we will be selectively investing in those areas. And all investments are baked into the plan. But in case we need to -- if we see more growth in the market, we may go ahead and make some changes in those investments. So that's all -- it's not onetime, some of it is onetime start-up investments that flows through as an ongoing, but it's supported by revenue.

All right. Well, thanks, everyone, for joining us. If we didn't get to your question or if you have a follow-up, please give me a shout at ir@rackspace.com. And with that, thanks for joining us, and have a great evening, everyone.