Greetings and welcome to Rackspace Technology Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Joe Crivelli, Vice President of Investor Relations.

Good afternoon, everyone. Welcome to Rackspace Technology's fourth quarter 2020 earnings conference call. With me today are Kevin Jones, our Chief Executive Officer; and Amar Maletira, our President and Chief Financial Officer. The slide deck we will refer to today can be found on our Investor Relations website. On Slide 2, you'll see that certain comments we make on this call will be forward-looking. These statements are subject to risks and uncertainties, which would 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 respective and most directly comparable GAAP measures. Reconciliations are found in the tables included in today's earnings release and our slide presentation, both of which are available on our website. After our prepared remarks, we will take your questions. I'll now turn the call over to Kevin.

Good afternoon and thanks for joining us to discuss the fourth quarter financial result. It was another excellent quarter for Rackspace Technology and we are excited to share the results with you. I'll start by giving an overview of the quarter as well as additional perspective on the massive multicloud market opportunity that we are addressing and the competitive advantages that are enabling our success. And Amar Maletira, our President and Chief Financial Officer will walk you through the financial results in more detail. On that topic, please join me in welcoming Amar to his first official earnings call. He has made a huge impact on how we operate and view the Company and he will share his perspective with us. And I will make some concluding remarks before we open the call for questions. As you can see on Slide 5, it was another strong quarter for Rackspace Technology. The sales booking success we've discussed in recent quarters is positively impacting the topline. And in addition, we are seeing very strong earnings leverage and resulting growth and profitability. Revenue was $716 million in the quarter. This was up 14% compared to last year's fourth quarter and 5% compared to the third quarter of 2020. Excluding our legacy OpenStack business, core revenue growth was even stronger at 18% year-over-year and 6% compared to the third quarter. Revenue growth was driven by the strong bookings growth we've delivered over the past year as well as continued improvement in net revenue retention. As noted on the slide, our land and expand strategy is working, bookings were $293 million in the quarter and core net revenue retention increased to 101% from 100% in the third quarter. The Rackspace Technology sales engine is firing on all cylinders and I continue to be pleased with…

Thank you, Kevin. And thank you everyone for joining today. Before getting into the financials, let me share some initial observation as the incoming CFO. I've been in the technology industry for more than 25 years and I have seen multiple technology and business cycle. However, what we are experiencing today in the IT marketplace with digital transformation and shift of workloads to multicloud is truly unprecedented. And I believe we are just at the beginning of a massive multi-year cycle. Rackspace Technology is well positioned to benefit from the secular trend. We are addressing an attractive and growing market. We have the right strategy, good execution machine and an overall momentum in the business. The results we announced today are evidence of that fact. With that said, let me get into the details of our financial results. Slide 14 shows key financial metrics for the three months ended December 31, 2020. Bookings were up 27% to $293 million from $231 million last year. This is a second best quarter in the Company's history and was driven by continued strong execution by our sales and customer success organization. Total revenue in the fourth quarter at $716 million, increased 14% compared to last year's fourth quarter and core revenue increased 18% while pro forma core revenue grew 14%. This was driven by the success we have had over the past year as new bookings have converted into revenue. Multicloud revenue grew 19% and Apps and Cross Platform grew 13% year-over-year. Fourth quarter earnings growth outpaced revenue growth. Non-GAAP operating profit was up 23% compared to last year and non-GAAP EPS was up 24%. This was driven by our top line growth, cost transformation and ongoing efficiency programs. Non-GAAP EPS also benefited from lower interest expense due to repayment and refinancing of…

Thanks Amar. Before we open for questions, let me reiterate why we believe Rackspace Technology is extremely well positioned to capitalize what is estimated to be a $520 billion multicloud market opportunity by 2023. Turning to Slide 23, multicloud is arguably the hottest sector in technology today. Every company on the planet, small business, the mid-market to enterprise is evaluating a big and best supply multicloud to improve their business and drive efficiency and agility. Secondly multicloud is incredibly complex. It is not simply moving data to a new provider [technical difficulty]. There are a myriad of factors that IT department need to consider deciding which app works best on which platform, effectively migrating data, ensuring bulletproof security, managing legacy storage infrastructure in a multi-cloud environment and staying on top of the landscape that is literally changing daily. IT department needs help with all of them. So we believe, Rackspace Technology is extremely well positioned to be the partner of choice. We have the automation, the expertise and the partners to help customers of all sizes optimize their multicloud journey, all wrap and fanatical customer experience we are known for and we are the leading pure play multicloud services and solutions company. 2020 was an important proof point of our value proposition. We grew core revenue 15%, booking 61%, non-GAAP operating profit 14%, and non-GAAP earnings per share by 118%. We restructured our balance sheet to ensure yield financial flexibility and we set the stage for years of incremental revenue growth, earnings growth and enhancement of shareholder value. So I am very pleased with where Rackspace Technology stands at the beginning of 2021. We expect to deliver great results for our shareholders in the years to come. With that, we will take your questions. Operator, please go ahead.

[Operator Instructions] And our first question comes from Dan Perlin with RBC.

I just wanted to circle back to the non-GAAP operating profit guidance of $500 million to $530 million. It was little bit light of what we were expecting. It has kind of implicit margins that are actually declining a little bit year-on-year. And Amar, I know you've kind of talked about it little bit in your prepared remarks in terms of the shift? But maybe you could walk us through like what's explicitly embedded in those assumptions both from a gross margin perspective, but also just as we think about the cadence of this shift as well as the investments that are going to take place throughout the year.

So thanks, Dan. And absolutely, let me just start with saying that when you look at our guidance, so we are way ahead of our plan on the revenue side. We are guiding to a very healthy 11% growth, which is and acceleration from a 6% pro forma growth that we saw in fiscal 2020. And on the profit side, we are growing operating profit at 9% and EPS at 20%. And within that guide, we are making investments for growth. So just to be clear here, we have a huge opportunity in front of us. There is a tectonic shift happening in multicloud and we are running this business for the long haul. So we are making certain growth investments. Now I will give you some of the configurations here Dan, shortly, but let me just touch on this topic of growth investments because this is an important point that we are trying to make here. So when you think about our growth investments in the business, it's quite broad-based including our go-to-market team, operations, professional services which is the tip of the sphere. We are also launching new service offerings and I will touch on that shortly. And we expect some of these investments to be more weighted towards the first half of 2021. Now let me give you some additional color on two areas of investments which will touch on your topic about the gross margins and gross profit as well as the operating profit. So the two areas are, one is in our new services and solutions offering and second is in our land and expand strategy. So Dan at the core, we are a technology company. So we are making investments in innovative services that will clearly redefine the way these services are offered, consumed…

No, that's fantastic color, I really appreciate that. If I could just ask one other quick follow-up around, bookings in the quarter, another really successful quarter for you guys. I'm wondering can you talk a little bit about the mix kind of inside of - inside the bookings number. And then also as it pertains to kind of legacy client churn, how that's progressing and then maybe what the pipeline looks like as you sit here today? Thank you.

Very good, Amar, how about a kickoff on the bookings and churn and revenue retention and then you jump in as well. Hey, Dan, thanks very much for your questions. So yes look, we're very pleased with our sales bookings once again, fourth quarter bookings of $293 million, second best quarter in the company's history and 27% year-over-year growth. So we're pleased with that. Just to give you a little bit of color, we had over 7,000 deals closed in the quarter. So once again lots of diversity in our bookings. And bookings were broad-based across all regions. For example, in the Americas, our sales bookings were up 21% year-over-year. In EMEA, we were actually up 35% year-over-year in sales bookings. Then in Asia-Pacific and Japan, we're actually up 101% year-over-year. So, terrific acceleration of growth all over the world as multicloud continues to accelerate at different rates in different countries. So pleased with the regional kind of performance, if we look across customer segments, again very broad based. Good growth in small business customer segment, mid-market customer segment and the enterprise segment where we continue to make a lot of traction penetrating the enterprise market. The other thing, Dan, we saw substantial year-over-year increase in larger deals, right. So we're excited about that, in terms of our sales pipeline. You had asked about that, sales pipeline continues to increase, so despite continuing to put up great sales numbers, the sales pipeline is also going up. As Amar indicated, this is really our time to invest and take - capitalize on this great opportunity. So sales pipeline for the fourth quarter was up 150% year-over-year, that's 1-5-0 and 20% sequentially so really good growth in the pipeline, one last thing I'll mention. And then Amar, you might want to touch on your view on sales bookings, maybe one point there. But you'd mentioned churn and net revenue retention, but churn is a component of our net revenue retention figure that we report and very pleased here as well. Our net revenue retention as you probably remember really stepped up each quarter in 2020. We started out 2020 at 98% net revenue retention, that was in the first quarter and we exited the year at 101% core net revenue retention. So delighted with that and we expect continued movement there. Amar, any other color you want to provide?

Yes I think, just one quick comment here Kevin if I may. So on the bookings growth for Q4, we had 27% bookings growth both on a pro forma basis as well as on a reported basis. I just want to make sure I clear that. I know somewhere in the press release, it states 15%, but it's 27% both on the pro forma basis as well as on a reported basis. One more quick point I'd like to make and probably even alluded to is we - in the total for the year, we signed approximately 400 new logo. So we continue to feel good about our new logo sales motion. And as I just mentioned, I gave you some color on our land and expand strategy and if you don't land, you don't expand. And we are at this - at the very beginning of a multi-year cycle and in the very early innings and this is our opportunity to capture the wave. And I think we have so many data points that suggest this opportunity is just ahead of us. So lot of excitement there from not only bookings perspective, but the investments that we are going to make in launching new offerings to skate to where the puck is going as I mentioned earlier.

And our next question is from Amit Daryanani of Evercore.

Thanks for taking my question. I have two as well. I guess, first one, maybe just to follow-up on what Dan was talking about on bookings, Kevin, help us maybe just understand when do you see this bookings momentum eventually helping drive or accelerating the sales growth run rate that we've had so far. And is there anything you call up on a duration of booking in '21 versus '20, let's say?

Amit, yes, look, great question. We continue to be pleased with the bookings success that we've had. And also, as you've seen that booking success is translating into revenue growth. So we're pleased with that - pleased with the diversity of bookings. To come to your point, in terms of duration, we continue to see really good success in lengthening the duration of our relationships with customers. The other really exciting thing is our increase in large deals. I alluded to that a little bit earlier, just to give you a little bit more specific, we actually had a 40% year-on-year increase in signing of large deals and we define large deals as having more than $1 million of annual recurring revenue. So it's just proof that the penetration of this enterprise market continues to accelerate. So duration strong, size of deal strong, really in our sweet spot. And the 400 new logos that Amar mentioned, by far a company record, right. We're really excited about the new logos of that size that we've been able to book. So feeling very optimistic. And the other thing, Amit, is we can be very selective right about the deals that we're doing. So we want to make sure we're doing deals that line up with our strategy and customer segmentation as we find it. So terrific market, just continues to gain momentum.

So let me just - maybe, if I may, Amit that's great to hear your voice. If I may add just to net bookings to revenue growth and I think that was also part of your question. Well, first of all, our bookings is a leading indicator and captures only the new business directed in a period and through new customer acquisition and all the new services that we sell to existing customers. So additionally, the bookings are annualized number and it takes generally three quarters for a project to run and for bookings to fully materialize in the revenue run rate. If you look at our revenue guidance, you will see our bookings growth in fiscal 2020, driving the growth in fiscal 2021. As I mentioned, our core revenue growth is accelerating from a growth of 9% in fiscal 2020 to 13% at the midpoint of our guidance for fiscal 2021. So let me summarize by saying, we are seeing the revenue growth as a result of our sales bookings success that we've seen in the last couple of quarters.

Fair enough. And Amar, nice hearing your voice again as well. So if I could maybe follow-up with you. And you talked fair bit on the operating leverage business, I was wondering if you could maybe talk a little bit about how do you think about the current free cash flow generation for Rackspace and really the levers that we have at your disposal to improve this as we go forward?

Yes, I think that's a great question and thanks for asking the question, Amit. No, we have - we look at our cash flow metrics - about two cash flow metrics, one is adjusted one that I talked about during my prepared remarks and the other one is as reported in the cash flow statement. And just to be clear, I'm focused on both. The adjusted cash flow is good number to look at from a performance options perspective. End of the day, what I'm also very focused on is what lands in my bank, which is cash flow from operations and free cash flow that we report. Now our reported cash flow from operations was down in fiscal Q4 and let me give you some color there, the three things that were happening. One is there was a large one-time software license prepayment in fourth quarter related to a major customer account that we onboarded. Two, as we integrated Onica's billing system and went live in Q4, we did additional quality control checks on all the invoices for Onica customer keeping in mind a differentiate with the customers is a fanatical customer experience and we are very, very careful in making sure that we don't lose that. So we delayed this invoices. The collection was pushed up to January and we have collected all those receivables as cash in general. The third one is in addition, you can notice from our balance sheet, our account receivable is growing. And the account receivable is growing because our revenues have been sequentially growing. This is a good problem to have, Amit, but we have good opportunities and plan in place to improve our working capital metrics. Our seven-point program that have launched already, this is month three, but that's something that…

And our next question is from Ramsey El-Assal with Barclays.

Hi, thanks so much for taking my question. I wanted to ask about the Apps & Cross Platform revenues and specifically about Amar's comment about acceleration over the next few years. It exited the year quite strong accelerating quarter over quarter. That's presumably largely due to the State of Texas contract. I'm just trying to get a better sense of what is the underlying kind of normalized organic growth rate in that segment maybe once you anniversary that contract? And maybe comment on the sort of the levered - leverage and sort of timing of that acceleration.

So I will take that question. Kevin, if you'd like to jump in later. So let me just - that's a good question too though. When you look at our Apps & Cross Platform, I think it's a very critical part of our portfolio because we are trying to move up the stack in our business with multicloud environment and our customers are asking us to also move up the stack. So what you should expect at least in fiscal 2021 based on what we are guiding, we should be in high single-digit to low double-digit kind of growth in fiscal 2021, right, and some of it accelerating in the first half. Now your question is an important one. At the end of the day, this particular market is - at very early, it is greenfield. You don't find lot of companies out there who have cloud native app development at scale. And customers - as I mentioned in previous remark, customers want us to do refactoring of their applications as we move their applications from on-prem or from a private cloud environment into a more multicloud environment. They want us to write those flawless application and that's where we are - we'll be focusing our investments on and we believe that this is - this has a long tail. We're just getting started. Our customers are just moving their workload to multicloud and I think they will also start looking at how do they refactor their applications so that they can improve the performance of the application on a multi-cloud environment. So a lot of work here, lot of opportunities. I don't think if you look at the universe of service providers, no one can claim that they have it at scale and I think this is an opportunity for us and this is where we will be focused on. So stay tuned. We should expect that in the next couple of years to start growing double-digit. This is a very exciting opportunities for us.

I think that's well said. And, Ramsey, I would just say, this is really where we see the next generation of economic value is being created for customers. And I think we're innovated basket. We got a great product team. We will be talking more about some of our Internet of thing solutions, cloud native application development, moving up the stack where we've got lots more visibility and input into customers strategic IT initiatives and spending, all the work around being data that we're doing and security. So very focused here, huge area of opportunity, our early days has been really greenfield for us.

Great, that's helpful. And also wanted to ask you about just balance sheet, capital allocation and specifically M&A pipeline. Now that you guys got your balance sheet in order in terms of your debt maturities, you're paying down debt at a nice click, how should we think about M&A going forward, strategic M&A?

Yes, I'll take that one. I will start off with M&A.

Yes, you take the M&A one and I'll go with the - I'll come back with the capital allocation.

Capital allocation, yes. So look, great question. M&A has been a very important part of our strategy since the LBO in 2016. We've done five acquisitions that have really revolutionized our service offerings. So M&A strategy, very focused on enhancing growth, reach, our product capabilities. And the two acquisitions we've done since I've been here at Rackspace is Onica, which has been spectacular, right. It's been a terrific acquisition, enhanced our AWS advisory and consulting capabilities moved us up the stack. We've got some amazing engineers, architect and go-to-market teams from Onica. And then the latest one that we did at the end of last year was Bright Skies, which gave us expanded Microsoft Azure capabilities in Europe. So, really good, now what we've got, we've got this integration center of excellence and integration playbook, which is a great platform. So as we do more acquisitions, we've got a really good management system, really good playbook and make sure that we realize the synergies and the value right that we paid for these companies. So look M&A, important part of our transformation going forward. We'll be very thoughtful about the size of deals that we do particularly over the last couple of years as we deleverage, which Amar will talk about in a minute, capital allocation structure. But we will do deals. And we will do them to enhance our multicloud capabilities, our growth prospects, our geographic presence, and continue to develop the service offerings as we meant.

Let me just touch on the capital allocation priorities. So first and foremost, we even - we will make organic investments in the areas of secular growth and I did explain to that in my previous comment. The second investment we are also making is making sure that we continuously drive cost efficiency programs in the company and that's across automation, best shoring, making sure that we are right mix of resources in the right location. And that's not just in operations, but across our G&A function as an example. And I've done this before in my previous company as a huge operating leverage. The third is, we'll continue to consolidate data centers as we move to a more capital-light model. And all those things that we will - that we deliver will employed to the bottom line and lot of it will reinvested back into the business. The third is our debt repayment and deleveraging the balance sheet. That's why my earlier comment on Amit's question is focus on cash. We will generate cash, so that we can start paying down the debt very opportunistically. The fourth is targeted inorganic investments that Kevin just alluded to. And then finally, we will also try an opportunistically buyback shares to offset dilution from stock-based compensation as and when we feel that is attracted to buyback. So that's our capital allocation priorities for the company.

And our next question is from Matt Cabral with Credit Suisse.

Yes, thank you. And thanks, Amar, for all the detail on gross margin. I guess I wanted to follow-up on some of the earlier commentary on investment. You talked about two different vectors, so new services and solution and more of that land and expand model. Just wondering how we should think about the payback period across those two initiatives? And then more broadly, you talked about mid 30s gross margin, just wondering duration we should think about being in that range, I guess, the quarters, the years and how do we think about sort of the pass back to a longer-term outlook for the company?

Yes, so - great question, Matt. So, let me first start with the long-term outlook. I'm not in a position to provide a long-term outlook today. Again I am only three month on the job. I'm just looking at the exciting opportunity ahead of us and we will basically talk to you guys sometime in September and that Joe and I are finalizing that where we will launch and we’ll have an Analyst Day. And I can give you some long-term outlook at that point in time. Now in terms of how the gross margin I think, end of the day, we want to make sure that the gross margins, we make the right kind of investments. So as Kevin mentioned, we will not go and sign up for any deal that comes our way, the demand is strong. And as the demand is strong, we have an option to be selective and we will be selective from that perspective. We want to land accounts where we have an opportunity to expand. So the investments that we're making in gross margins, making sure that we get these deals ahead of time in the early stages and we will be very mindful on the investments we make. So, I do believe that mid 30% plus or minus will be for the next maybe a year or two or maybe better. I don't know at this point in time Matt, I can't say this. But definitely for this particular year in fiscal 2021, that's what we are planning for. And again, as I said, we will always plan conservatively and go and execute aggressively. But at the same time, we do not want to lose the opportunity to invest. I think that's the point we continue to make here because we are at the beginning of the cycle. If you miss this cycle, after four or five years, it's hard for us to get back into this play. And I've seen companies miss the cycle and then wait for five or six years to get back into the next cycle. I think we are very well positioned right now. So what you should be focused on is, as investors and as analysts is how do we do from an operating margin perspective. And that's where I'm saying, we will be in the mid to high teens in operating margins and where we will continue to drive an SG&A efficiency, our productivity while making investments in sales and go-to-market, et cetera. Does that help, Matt?

It does and actually it leads pretty well under the follow-up I was going to ask you anyways. I want to talk a little bit more about OpEx for the company. I guess it looks like a lot of the margin expansion you guys have seen is driven by the transformation of the cost takeout effort you put in so far? Just wondering if you could expand a little bit more about sort of the biggest efforts you've made and where you are in the program. And just how, we should think about the OpEx - the trajectory of OpEx going forward from here?

So listen, I think the way to think about OpEx and I encourage everybody to do it, is don't think about OpEx, as what’s the dollar reduction. We should think about OpEx as a percentage of revenue. When you are a growing organization, you want to grow OpEx lower and the growth in the top-line, okay. So if you think about our OpEx - in fiscal 2020, we landed at roughly about 20% or 21% as a percentage of revenue. In Q4, it was roughly about 18% and I expect that to continue in fiscal 2021. Now where are we seeing the growth? We are driving efficiencies across G&A. As I said in G&A, we have just touched the surface so to speak, in terms of best shoring. We have touched the surface in terms of automation. I've led programs in the previous company where we use bots to automate some of the processes, so that you can take labor out of the process. But more importantly, when you scale revenue, you don't have to scale OpEx at the same rate. So in that respect, we are a company that does automation to help customers. Now we can help ourselves with automation internally so that we can drive higher efficiency in SG&A. So you should expect us to be focused on that. There's a lot of runway here. And I think as I said I've won three, I see a huge opportunity in terms of not only driving efficiency, but terms of reinvesting it back into the business so that we can grow profitably.

Yes, I would just add - I think that's really well said, Matt. And I would add huge opportunities on the cost side. We mentioned best shoring, really early days there; automation, more opportunity; supply chain management. And then as these new logos that we've signed - we signed so many new logos, usually the margins are lower as soon as we sign them. They are still very good and positive. But as we add on additional workloads and additional services that will drive our profitability as well. So it's where we kind of are in the lifecycle with all these new customers that we are. So, we believe we've got really good margin expansion opportunity.

Yes so Matt, if I can just add, we are driving higher sales productivity because we made investments in go-to-market last year. Most of the sales force is becoming more productive. Number two is, we have consolidated some of the office space and we will continue to do that. We are also consolidating legal entities. We are shutting down bank accounts and this company has done a very good job from that perspective. But there are lot of opportunities that we can go after from a G&A perspective. So I have a funnel - let me put it this way, Matt. Just as a closing, like our sales leader, I have funnel of opportunities on the cost side and I look at how to fill that funnel, how to convert that funnel and then how to reinvest some of it back into the business.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back over to Joe Crivelli for closing remarks.

Well, thanks everybody for joining us today. Apologies to those we didn't get to in the queue. We'll be sure to circle back with you later this evening. And if you have any other follow-up questions or would like to take your time to speak with us, give me a shout at ir@rackspace.com. Have a great evening and we look forward to talking to you soon.

Thank you. This concludes tonight's conference. You may disconnect your lines at this time. Again, thank you for your participation and have a great evening.