Good afternoon and thank you for standing by. Welcome to Rackspace Technology's Fourth Quarter 2022 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. [Operator Instructions] Please be advised that today’s call is being recorded. I would now like to hand the call over to Robert Watson, Vice President of Corporate Finance. Please go ahead.

Thank you and good afternoon. I am joined today by Amar Maletira, our Chief Executive Officer and Bobby Molu, our Chief Financial Officer, who recently joined in January. Supplemental materials to today's earnings announcement as well as a replay of today's call can be found on our Investor Relations website. As a reminder, certain comments we make on this call will be forward-looking. The 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. 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 those 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.

Thank you, Robert. First, I'd like to quickly update you on the Ransomware incident we experienced late in Q4. On December 2, Rackspace detected suspicious activity in our hosted exchange email environment, which triggered our incident response team to act immediately to contain the threat. We quickly engaged industry leading cybersecurity firm CrowdStrike and other experts to assist us with the forensic investigation, which was completed in roughly 30 days. The investigation determined this was the result of a zero day exploit, which means the attack vector was not previously known, and it was a sophisticated attack. Due to a team's swift action to contain the threat, the impact was limited solely to the hosted exchange email environment, which makes up less than 1% of our total revenue. No enterprise customers were impacted and no other Rackspace products, platforms, solutions or businesses were affected as a result of this incident. We provided our hosted exchange customers with a path to migrate their email services to Microsoft 365 and assisted many customers with both the email and data transmission. Security is extremely critical for our business and we have the right focus and investments to continue to provide our customers with a secure environment. With that, let me share what else I've been doing since taking the helm in September. I've been laser focused on transforming Rackspace Technology into a customer first cloud first company and changing the trajectory of our performance. In just the last few months, we have achieved many significant milestones, which include implementing a two business unit operating model, adding new leadership, strengthening a board and introducing new products and services. We are now poised to drive these changes throughout the company and bring our strategy to life. We are very focused on fixing this business for…

Thank you, Amar. Before I begin, I would like to say that I am extremely excited to join the Rackspace team. I strongly believe in the turnaround and look forward to being a part of the next chapter of the Rackspace story. I'm also looking forward to meeting and talking with our investors in the coming days and weeks. Now, on to the results. In the fourth quarter, both revenue and core revenue exceeded the high-end of the guidance that was provided on the Q3 call in November. Total Revenue was $787 million, which represents 3% year-over-year growth in constant currency and 1% growth on a reported basis. We continue to experience material year-over-year currency headwinds from our Europe business. Core revenue was $752 million, which grew 4% year-over-year in constant currency, and 2% on a reported basis. Revenue in EMEA grew 7% in constant currency driven in part by the continued ramp of the BT contract, but declined 1% on a reported basis. Americas grew 1% and APJ grew 19% on an as reported basis with minimal FX impact. Non-GAAP operating profit of $74 million also exceeded the high-end of our fourth quarter guidance. This was down 40% year-over-year primarily due to reduce gross profit from the ongoing revenue decline in our legacy OpenStack and private cloud businesses. Non-GAAP operating margin was 9% and non-GAAP earnings per share was $0.06. In the fourth quarter we generated cash flow from operations of $40 million and free cash flow of $25 million. On a full year basis, we generated 259 million of cash flow from operations and $179 million a free cash flow. We ended the year with $241 million of cash and our $375 million revolver remained undrawn, resulting in over $600 million of total available liquidity. We anticipate cash…

Thank you. At this time, we'll conduct the question-and-answer session. [Operator Instructions] Our first question comes from the line of Kevin McVeigh of Credit Suisse. Your line is open. Go ahead.

Great. Thanks so much. And congratulations on the Q4 results. I don't know if this will be for Amar, but can you give us a sense, as we're going through the restructuring. Just how we're thinking about free cash flow? It sounds like a use of cash in Q1, but any sense of how we should think about that holistically for all of 2023? Because it seems like you've got the capital to kind of shepherd through this restructuring. But just any thoughts on how free cash flow overall should shape up over 2023?

Yeah. Thanks, Kevin. Thanks for the question. So as Bobby mentioned in his prepared remarks, cash flow from operations in Q1 will be negative because of a seasonal impact that we have for two reasons. One is there's a bonus payment, company bonus payment as well as we have a payment to one of the vendors. So this is typically a low cash flow quarter for us in Q1. For the full year, we do expect free cash flow as well as cash flow from operations for the full year to be positive. And as we roll through the year, you should expect our cash flow from operations to be positive.

And I would just add, look, cash flow generation is going to be a major focus for us, a major focus for me. We are working on a number of initiatives to drive these improvements. So let me give you a little bit of color on this, Kevin. Just in terms of our cash conversion cycle, we're very focused on that, on receivables and payables. We're focused on our CapEx efficiency and improving that. We continue to look for the cost optimization opportunities. And look, as a CFO of this company, my sole focus is going to be around managing cash and expenses and making sure that we're making the investments to drive our long-term growth.

Great. Thanks so much.

One moment for our next question, which comes from the line of Ashwin Shirvaikar of Barclays. Your line is open, Ashwin.

Yeah. It's Ashwin Shirvaikar from Citi. Amar, good to speak with you. Bobby, good to meet. Yeah, my first question is if you can provide maybe more granularity with regards to how the demand environment is evolving. What we've heard from other companies is that, obviously, a pretty strong slowdown in December, but by February, things have started picking up just a bit. Is that similar to or different than what you're seeing? Any color you can provide with regards to visibility that you have in the forward-look would be great.

Thank you for the question, Ashwin. Good to hear your voice. So as you rightly said, all companies in the cloud ecosystem, as you know, Ashwin, have been cautious about the demand environment and rightfully so, given the tough macro outlook. We work very closely with the hyperscalers, too. And as you know, hyperscalers have also cautioned that the growth rates are slowing, but still, it's a double-digit growth. They are still reporting double-digit growth. We believe that the customers will maintain the IT spend, Ashwin, on mission-critical projects but slow spending on lower priority, less critical projects. And this, of course, varies by customer as well as vertical. But broadly, customers will be more focused on cost optimization of existing high usage workloads on projects that have a faster payback. We're also seeing customers, Ashwin, as we work with them on transformation projects that they want to accelerate their transformation projects so they can really realize the returns of those projects within the year. So in this kind of environment, Ashwin, we are also seeing it's not very unusual to expect some changes in the size and scope of the deals that we pursue. We're also seeing longer sales cycle and also a slowdown in decision-making. So this is -- and I'm sure you've heard this across the ecosystem. And looking forward, I think the demand will definitely be there, Ashwin. What I'm seeing is after I've been talking to a lot of customers, I mean going around, I've been spending a lot of time on the road talking to our customers, to our partners. The demand is still there. I think the demand is just shifting to the right because of the slowdown in decision-making. We are also seeing that as budgets are getting released, this is the…

Thank you. That's a lot of good detail, Amar. If I can follow up on that last part of what you said. Obviously, from a personnel standpoint, the organization seems complete now. But from the perspective of investors looking to figure out what the key initiatives or deliverables are, that we should hold management accountable for over the course of the year, if you could kind of comment a bit more on those. What goals have you set for your management team and for yourself?

Yeah. So let me -- I think that's a great question, Ashwin. I've been on the job for the last four and half, five months. As I mentioned in my prepared remarks, the first three four months was making sure that we have the -- we formalized the strategy. We created the operating model. We did a lot of heavy lifting, Ashwin, in our December quarter to reorganize across the two business units. We have started operating as the two business units starting Jan 1. As you have seen, we have made the right leadership changes. I'm very pleased with the leaders that we -- that have joined Rackspace. And so our execution going -- our focus going forward will be all about execution. Now you can imagine that as we do this kind of heavy lifting, we are positioning the company for long-term growth, and it's 2024 and beyond. And as we do that, and we are expecting some disruption, it happens when we go -- or reorganize the company in a way where we take almost 6,000 people and reorganize across the two business units. So what we expect is the productivity will continue to improve. DK Sinha, Brian Lillie and myself, we are very much engaged with our go-to-market organization to make sure we drive clarity on the field on how we will go execute as a multi-cloud company, although we'll carry private cloud and public cloud solutions to our customers. So a lot of things going on. I think the key indicator, Ashwin, is we will provide you more granularity and also visibility into the financials of the two business units. So as Bobby mentioned in his prepared remarks, we will be reporting by essentially three segments. We'll report by public cloud, private cloud and OpenStack.…

All right. And Ashwin, I would just add that, look, this is a major pivot, right? And we're trying to focus more on services. And as you know, services is a longer sales cycle. So it's going to take a little bit longer for that sales engine to get going. And as Amar mentioned in his prepared remarks, it's going to be choppy for the next few quarters. So we've got to understand that as we make this pivot.

Yeah. And if I can just add to that. It's a great point, Bobby that you bring up, right? So we have two businesses, right? Let's think about private cloud. It's an Infrastructure as a Service business. That business has been largely sort of, I would say, not ignored, but it was not sort of deemphasized, although we are seeing a lot of demand in that business coming up, right? So that's the reason we brought Brian Lillie, who has a great experience in the private cloud space, because that's the business that we are going to transform and make sure that the business stops declining, stabilize that business. On the public cloud side, Ashwin, it is -- we are going to sell cloud services on top of the infrastructure. And that's the reason we have DK Sinha, who has a lot of experience in scaling cloud -- a lot of experience in scaling digital services business. So stay tuned. We will -- this pivot takes time, but we are starting to see some initial -- we have -- for example, last quarter, we sold one of the largest private cloud deal in the history of the company. So we're starting to see some traction there. This quarter, we signed a very strategic deal and expanded deal with Google on GCP that impacts the public cloud business. And we also signed a MoU with SDAIA.

Thank you for all the detail

Thank you. Our next question comes from the line of Ramsey El-Assal of Barclays. Your line is open.

Hi, this is Ryan on for Ramsey. Thank you for taking my question today. I was hoping for some additional color on the order book in the quarter and the backlog. As you make the shift to higher-value services and solutions, are you being more selective with the workloads you take on? And what strategy do you have to accelerate the percentage of the order book coming from these higher-value services?

Yes. So let me first give you some color on the bookings itself for Q4, and I will give you additional color on what we are doing so that we make this pivot. So that's a great question. Now in Q4, as we expected, we were seeing a bit of a slowdown in bookings volume, and this was driven by the impact of our reorganization and also the macro trend that we're seeing in the market. As I mentioned earlier, Ryan, we are seeing sales cycles are getting extended. Companies are reevaluating the IT spend, and there's a shift of focus to more of a cost optimization, and more critical projects are getting done. So in terms of our performance specific to fourth quarter, we saw good traction in the tip of the spear professional services for critical cloud projects as it relates to cost optimization. We'll continue to drive the mix shift to services in our public cloud business. From a regional perspective, Asia-Pacific and Japan, I was very pleased with the performance, although it's a small base for us, but it did exceptionally well with very high double-digit growth driven by our data business on cloud. And we also had a couple of large deals across both public and private clouds. For example, in public cloud, we signed a fairly good-sized professional services deal for application modernization with a major airline, as an example. In private cloud, we renewed and expanded the contract with a mobile SaaS company to support their data platform in a private cloud environment. So we are starting to see that pivot, Ryan. It does take time when you make that pivot. And for us, the most important thing, as Bobby mentioned, is to bring this -- to build that services backlog. And so in some cases, we will walk away from some of the infrastructure resale deals, specifically, if it is in the commercial side, which is in the small -- in the S of the SMB, so to speak, where there's no opportunity to land and expand. So we'll walk away from those low-margin deals where we cannot expand with services. So that might impact our bookings, and it might also impact our overall revenue in the short term. But those are the decisions we want to make so that we can shift the DN of the company to more of a high-margin, services-led and high-value sales motion.

Thank you. Our next question comes from the line of Frank Louthan of Raymond James. Your line is open.

Great. Thank you. Two quick questions. What -- where can we expect as far as EBITDA margin sort of in Q1 and then kind of going forward and also on the level of capital intensity? And then secondly, you made a lot of changes in the management team. Is that largely behind you? Or are there more hires that you think you need to make the team where it needs to be? Thanks.

Yeah. So I will start with the guidance question, and then -- and Bobby will definitely jump in here. So let me start with the revenue first. And I will not give you the EBITDA -- EBIT margins, but I'll give you enough color so that you can model it. Because Q1, we already provided you the guidance on that. We continue to be a bit cautious, Frank, with our guidance. We took a conservative approach here to our revenue given the uncertain macro environment. We also expected lower usage in public cloud as companies focus on optimizing the workloads in effort to reduce the overall operational cost. We also had some revenue impact due to hosted exchange Ransomware attack. And as we mentioned in my prepared remarks, we also believe that there's a potential disruption from our operating model realignment that we are undertaking right now. So these impacts also flow through to our profit. So essentially, we expect -- based on the guidance that we provided, we expect the EBIT margin to be in the 6% to 7% range, so to speak. And our CapEx would be roughly where we landed in Q4 of 2022. So you can calculate what the EBITDA margin is going to be based on that.

Yeah. The only thing I'd add there is, on CapEx, look, as we're focusing on the private cloud business, we will see CapEx increase, particularly if we're very successful. So that would be a good problem to have. And Amar mentioned the large deal that we had signed in our history of the company, there is a large CapEx associated with that. So you will see a spike in our CapEx in Q1.

Yeah. And on the -- yes, I think you have the second question -- Frank, any follow-up on that? Or should I go to the ---

Yeah. So on the CapEx, with that deal, are they paying for any of that upfront? How should we think about that? And how will that get booked? And then what's sort of a long-term run rate for capital intensity of the business?

So I think -- well, the contract is a long-term contract, Frank. And so we make the initial CapEx investment. It's no different than what we do in any of our private cloud deals. And we call this as a success-based CapEx, right? Success-based CapEx means CapEx where we only put the CapEx in if we have a firm order and a contract from a customer. So it is -- has a good CapEx, so to speak. Then we have maintenance CapEx. So we're going to make sure we tightly manage the maintenance CapEx, and Bobby is all over it. Even on the success-based CapEx, as we continue to drive innovation, we should see CapEx efficiency in that -- in the success-based CapEx, too.

Okay. Great. And then on any -- yeah. No, that's great. And any changes -- any more changes in the management team? Or do you think you have things where you need to be for now?

Yeah. Listen, I think that's a good point. As noted in my prepared remarks, I feel strongly that we now have the right leadership team in place, Frank, to drive us forward in our transformation. We had -- we hired DK a few months ago. We have Brian Lillie managing private cloud. We have Bobby Molu who joined us as CFO. So we now have seasoned leaders across all the functions. So we also made some other leadership changes where necessary. And so I feel confident that a lot of the heavy lifting is behind us.

Okay, grat. Thank you very much.

Thank you. Our next question comes from the line of Tien-Tsin Huang of JPMorgan. Your line is open.

Hey, guys. This is Brendan Biles on for Tien-Tsin. Thanks so much for your time. And welcome, Bobby. So first off, congrats on the quarter. Nicely done. Thanks for all the details on the changes. Just from like sort of a personnel and cultural perspective, could you guys opine on like the competitive environment in these new areas, these new incremental areas for the business and services both from competing for talent, any incremental adds like in subject matter experts in private cloud and then also incremental competitive dynamics from winning new business, especially in the challenging macro. Thanks so much.

Yeah, sure. So if I got it -- but thank you very much for your question. If I got your question right, it's the competitive environment in a new service offering and also competition for talent, if I got that right. Listen -- yeah, thank you very much. Listen, I think the market -- and we see this all the time. There's definitely a lot of demand in the market up there. We have to go capture the demand and then we have to execute against that demand. So when you talk about the market opportunities, there's definitely competition there, but there's enough of market for everyone to play. And we are very uniquely positioned, so to speak. We are a pure-play, multi-cloud company. That means we do both public as well as private cloud. And that's a very unique position for us. So as we go and talk to our customers, we are very, very neutral on where the workload needs to reside. So it's all about workloads and where the workloads can be hosted. So in terms of competition, we address all three segments of the market. We address commercial segment of the market, mid-market as well as the enterprise segment, and we face off against different types of competitors in each of these segments. In private cloud -- that was on the public cloud side. In the private cloud side, it is a very fragmented market, and we are one of the largest scaled player in private cloud, which means that there is a huge opportunity for us to go redefine the private cloud market itself given the surge in demand that we are seeing on the private cloud side. A lot of workloads in the regulated industries, as an example, we believe will stay in a…

Thank you very much.

Thank you. Our next question comes from the line of James Breen of William Blair.

Thanks. Thanks for taking the question. Can you talk a little bit about -- you touched on the margins a little bit. I think it was Frank's question. Obviously, operating margin coming down sequentially in the first quarter. Is there seasonality to that? And how do you feel about that as sort of a bottom for the year? And then just looking at your gross margins across the three businesses as you report them now, and I understand this is going to change, but you had a pretty good step-down, obviously, in the third quarter. And then in the -- segment again this quarter, are any thoughts around just basically trying to have that attrition be quicker and giving up that revenue, but giving up all the losses that are happening or given how the gross margin continue to decline? Thanks.

Let me start. Let me talk to the sequential decline that you see there. So there are several factors causing that sequential decline in Q1. So from a revenue standpoint, there is a seasonality impact, like you mentioned, right? So in Q4 to Q1, we normally do see that. There's also the impact of the December ransomware attack that's now fully baked into the forecast for Q1. And then as you've seen, there continues to be a decline in private cloud as well as our legacy OpenStack business, as you mentioned. And look, the reality of that is the fact, like Amar mentioned early on, there's a deemphasis on private cloud. There's no surprise that, that's been declining, and that's something that we're trying to arrest to decline on with the new focus and the new BU structure. So a lot of these revenue impacts also flowed down to profit. And then in addition, on the profit side, there is also a seasonality impact from Q4 to Q1 for seasonal payroll taxes and benefits. But look, we're looking for opportunities to reduce costs and offset some of these revenue impacts and profit impacts. But we've got to still remain focused on growth. Amar, do you want to add anything?

No, I think you covered it well. On the OpenStack piece, I think that's another question you had, James, let me just jump. Well, that business is declining. I think the rate of decline has actually lowered in that OpenStack business, which is an OpenStack public cloud business. So I think we had already factored that in our financial plan and financial model that continues to happen. And I think the rate of decline used to be 20% plus. Now it's in the 15%, 16% range.

And do you continue to expect that?

Yeah, I think we continue to expect that decline to continue as customers move away from that platform. And that's why we call it as a legacy because that's a natural kind of trajectory that we are seeing for the last few years, in fact. And what we do is, as this happens, we continue to take cost out and basically optimize our costs so that we minimize the impact on the profit. So that's all a part of the plan.

Thank you. Our next question comes from the line of Bradley Clark of BMO. Your line is open.

Hi, thanks for taking my question. I just want to touch on the demand environment a little bit more. And most specifically, are you seeing any difference in behaviors across geographies in terms of demand or focus on certain types of deals? Any more granularity you can provide on geographical demand trends?

Yeah. I think -- so listen, I think I did mention on my earlier remarks -- earlier response. Our demand environment across all the regions, especially in public cloud, on the infrastructure side has slowed down. But again, as I said, most of the hyperscalers are reporting it, but they are still printing double-digit growth. So there still remains a lot of demand there. By verticals, I can give a little bit of more color on verticals, especially retail, in technology vertical as well as in financial services, et cetera. We have -- again, we don't go by vertical in financial services, but we have started seeing some demand slowdown. But there are other verticals, like for example, healthcare. We are seeing demand slow down, but there is a huge opportunity to help transform, especially on the provider side, and help healthcare providers to accelerate their digital transformation. And so we are seeing a little bit of -- we are seeing some demand on that side. We are also -- in telco also, we are seeing good demand. So it's a mixed bag. But generally, the demand has slowed down across the board and across all geographies. In APJ, we did very well. As I mentioned earlier, we have posted double-digit growth, but APJ is a small base for us. It is mainly driven by data services, which is also a focus area. Data migration, modernization and AI continues to remain a focus area across the board.

Have any other questions?

That's all our questions. So I would now like to turn it back to Robert Watson for closing remarks.

I just want to say thank you, everyone, for joining us. And I think we got to all the questions. But if we didn't get to your question or you have any follow-ups, please reach out. You can e-mail us at ir@rackspace.com or contact me directly. So thanks, everyone. And have a great evening.

Thank you for your participation in today's conference. This does conclude the program. And you may now disconnect.