Good afternoon and thank you for standing by. Welcome to Rackspace Technology’s 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. [Operator Instructions] 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.

Thank you, and good afternoon. I am joined today by Amar Maletira, our Chief Executive Officer; and Bobby Molu, 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 Multicloud segment has been separated into its Public and Private Cloud components, and our prior Apps & 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. 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. 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 in 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. Let me start by sharing some of our first quarter achievements. First, we delivered revenue and profit above the midpoint of our guidance for the first quarter. Meeting our commitments remains a priority. So, I’m pleased we were able to achieve these results while navigating a challenging macroeconomic and industry environment. Second, we have now completed our first full quarter in our new two business unit operating model. We are already seeing progress with increased focus in new offerings, demand generation and targeted verticalization. We have also identified new opportunities for cost efficiencies. Third, with the creation of these new business units, today, we have published two years of quarterly financials in our new segmentation. This also fulfills another one of my commitments to provide greater transparency. Fourth, I’ve completed the buildout of my leadership team with the appointment of two talented executives, Michael Bross 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 skills and leadership required to take on this role full time. And Kellie Teal-Guess has been named our Chief Human Resources Officer. Kellie 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 have added three 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 I established upon becoming CEO, realigning the Company’s operating model to better sell the attractive markets we…

Thank you, Amar. I will cover the total company results for the first quarter, then share some details on our segment performance, followed by our Q2 guidance. Total company revenue of $759 million 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. Please refer to our Investor Relations website for more details and definitions. For the first quarter, total non-GAAP net revenue was $460 million, 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 million was 24% of total revenue and 39% of non-GAAP net revenue. Non-GAAP operating profit was $51 million, 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. 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 million and free cash flow was negative $14 million in the first quarter. 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 million and remained laser focused on cash flow generation. Total CapEx…

Thanks, Bobby. As I mentioned last quarter, 2023 is a transformation year, and we expect performance to be choppy. This is reflected in our guidance, but as Bobby noted, we do anticipate Q2 being the low point from an operating profit perspective. We are fortunate to operate in growing markets and are working hard to improve our execution across the board. We are focused on four priorities to turn around our company’s financial performance. First, grow our Public Cloud services business at or above market; second stem, the decline in Private Cloud offerings, excluding OpenStack; third, build a highly efficient cost structure; and lastly, drives 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. And with that, we’ll take your questions.

Thank you. [Operator Instructions] Your first question comes from the line of Frank Louthan from Raymond James.

Great. Thank you. Could you just give us a little more color on what’s in the Public and the Private Cloud? I assume that OpenStack and Apps & Cross Platform are in Private Cloud. 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 opportunities for Private Cloud?

Yes. Frank, thanks for the question. So, your question is around what’s in the Private Cloud segment or both, Private and Public Cloud?

Well, kind of how you divided them up and just what we should think about from -- the difference in profitability?

Yes, absolutely. So, Frank, the Private Cloud segment includes both, private cloud, which includes managed hosting, and we have also included OpenStack, which shares the infrastructure with Private Cloud and is also managed by Brian Lillie. Some of the Apps & Cross Platform that put 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 three hyperscalers and the services for Public Cloud. That includes services for infrastructure, application, data and security, both in a managed services, elastic engineering and professional services. So, those are two segments. Now from a profitability perspective, Public Cloud -- 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%. Now, the reason why we provided that metric to you so that you can really understand the underlying gross margins of the business after excluding the impact of the infrastructure resale gross margins, which basically dilutes the gross margins, as you know, gross margins for infrastructure 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 two leaders managing Public and Private Cloud. And this is how we are going to report externally to the Street.

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

Yes. Hey Frank. So, look, we’ve provided guidance here in terms of Q2 being the low point. We’re pretty confident about that because we’ve got some significant cost actions underway and in play. As we segmented the business into these to be used, 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 the macroeconomic environment kind of stall. So, we’re pretty confident -- 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 that should help us. So, that’s what gives us confidence.

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 two businesses of -- our entire business into two business units, I’m focused on three indicators as a measure of a successful turnaround of this company. First, in Public Cloud, I’m keeping a close watch on a services growth and how the mix of the business is changing from low margin in front to a high margin services business. Now, as you know, since building a services backlog typically takes around six to nine months, and that’s what process we already initiated. I expect fiscal ‘23 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 that we arrest 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. And just to give you a little bit additional color here, Frank, every percentage point of improvement in revenue growth adds roughly about $7 million to $8 million of incremental profit due to the high fixed cost 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 two business unit, we have uncovered additional operating efficiencies that we can go drive and also on the cash flow side, focused on cash flow generation and preservation. These are things that Bobby and I will be keeping a close tab on.

Our next question comes on the line of Kevin McVeigh from Credit Suisse.

Great. Thanks so much and appreciate the additional disclosures. Hey Amar 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 are pretty comfortable with the current environment, like what type of macro outlook are you assuming as you work your way through this transition?

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?

So, I think -- so on the EBITDA perspective, Kevin, we expect EBIT 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 one 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 more of services compared to infrastructure resale. So, there are a lot of moving parts here. So we will guide you one 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 cash expenses that we had in Q1.

And then from a macro perspective, just on that point there Kevin, look, 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 -- sorry, Q2 guidance, and then, as well into our full year cash flow and free cash flow guidance.

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

Yes. Look, Kevin. Look, our debt is trading at high discounts, so we do see that. And we did purchase $23 million of unsecured bonds at the $10 million that you talked about. When it comes to repurchasing debt, I mean, we will consider it, but our priority is investing the business, so that we can pivot to profitable growth going forward. That’s our priority. Our capital allocation priorities haven’t changed and our top priority remains investing in the business, so.

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

Thank you.

The next question comes from the line of Ramsey El-Assel from Barclays. Please go ahead with your question.

Hi. This is Ryan Campbell [ph] 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? And then, from a sales perspective, has your approach changed in order to accelerate the shift to higher value services?

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 will 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. 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, whereas in Private Cloud, customers are looking to move out of their 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 offerings across both public and Private Cloud. And in summary, I’d say, we are trying to take advantage of the current macro conditions to complete our transformation and improve execution, so as the customer’s spending returns to normal we’ll be prepared to capture the demand and begin to grow at our above market. So, that’s the -- that’s our strategy here and how we want to execute. Now, coming to bookings, we did expect a bit of a slowdown in bookings volume, driven by both the impact of macroenvironment as well as a reorganization. Now, as I mentioned in my…

It would appear who was on mute? Let’s move to the next question. Our next question comes from the line Abdullah Khan [ph] from Evercore.

Hi everyone. Abdullah 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 ‘22, and 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 beat or grow or stabilize going forward.

Yes. Thanks, Abdullah. I 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. Now, what is happening here are two 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 under utilization of our services resources. And that is what is key, 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 our second half, that will be partly will be to go improve our utilization there of our 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.

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

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 ‘23 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 or previous segment reporting and this segment reporting. For us it starts from now and this is how we are going to go manage. 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 between 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, so we believe that sort of low to mid 30% gross margins for -- are the right gross margins for our services business on a net basis, Public Cloud services.

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 at or above market, are you guys comfortable with giving me a range or a number? But, that would be really helpful if possible. Thank you.

Say that again. What’s the last

Range or number for the market growth that we -- for Public Cloud?

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.

[Operator Instructions] Our next question comes from the line of Puneet Jain from JP Morgan. Please go ahead with your question.

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?

Well, I think, listen, I think 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 an infrastructure resale compared to our overall. Having said that, I think the information -- you can extrapolate that information in 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.

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

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 to be honest with you, the visibility is limited in terms of the demand environment. Having said that, our internal goal is to continuously drive booking sequentially every quarter. As we start -- it takes about a couple of quarters for our sales organization to settle in, into this new model that we have created. And we are hoping that as we roll through the year, our bookings should improve sequentially. 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 of going and executing well on the go-to-market side.

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

Yes. And to add to the point, Puneet, there are -- and we have been saying 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 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.

Got it. Thank you.

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

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. I 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.

Yes. Thank you. That’s a great question. And listen, Brad, with ChatGPT going viral and each hyperscaler making significant investments in AI, customers continue to express excitement. 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. 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. To be honest, we don’t expect to see that that result in revenue or profit of any material value in 2023.

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.

Yes. Thank you, everybody, for joining us. If you have any follow up questions, please reach out to us at ir@rackspace.com. And we will speak with you all soon. Thanks. Thanks so much.

Thank you. This concludes today’s conference call. You may now disconnect.