Good day, and thank you for standing by. Welcome to the Rackspace Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Sagar Hebbar, Head of Investor Relations. Please go ahead.

Thank you, and welcome to Rackspace Technology's Second Quarter 2025 Earnings Conference Call. I'm Sagar Hebbar, Head of Investor Relations. Joining me on today's call are Amar Maletira, our Chief Executive Officer; and Mark Marino, our Chief Financial Officer. 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 press release and presentation, both of which are available on our Investor Relations website. I will now turn the call over to Amar for an update on the business.

Thank you, Sagar, and welcome, everyone, to our second quarter 2025 earnings conference call. Results for the second quarter met our expectations across all key metrics. Revenue and operating profit exceeded the midpoint of our guided range, while EPS was within our guided range, marking our 12th consecutive quarter of meeting or exceeding guidance. Sales pipeline generation remains strong across both the business units with bookings, as measured by annual contract value, growing 2% sequentially and 16% year- over-year. The outperformance was primarily driven by Private Cloud, which secured several key wins. Non-GAAP operating profit grew 34% year-over-year, and we delivered positive cash from operations of $8 million for the quarter, reflecting our operational and financial discipline. Now let me get into our segment performance, starting with Private Cloud. Private Cloud bookings in the second quarter of 2025 grew 24% sequentially and 42% year-over-year, driven by several large, long-term deals across key industries, including health care, BFSI and telecom. We also saw double-digit year-over-year bookings growth across both the Americas and EMEA, underscoring the broad- based strength of our go-to-market efforts. This solid bookings performance was despite a large health care deal that got pushed, and we expect this opportunity to close within the third quarter. Revenue for the Private Cloud segment came in at $250 million, in line with guidance and down 4% year-over-year. We are seeing continued revenue stabilization as prior year bookings convert into revenue, reflecting the strength of our underlying business. Our disciplined focus on revenue retention and growing bookings momentum continues to lay a solid foundation for our long-term, sustainable growth. We are also making strong progress in our strategic expansion into the mid-market and enterprise segments, positioning us to capture new opportunities and drive future scale. In April, we signed a long-term agreement with…

Thanks, Amar. In the second quarter, total company GAAP revenue of $666 million was down 3% year-over-year and slightly up sequentially, beating our guidance, driven by solid performance across both business units. Non-GAAP gross profit margin was 19.8% of GAAP revenue, slightly down year-over-year, driven by lower cost absorption in Private Cloud, while it remained flat sequentially. For the quarter, non-GAAP operating profit was $27 million, exceeding the high end of our guidance and up 34% year-over-year. The improvement was largely due to OpEx efficiencies in Public Cloud and in corporate overhead, partially offset by lower cost absorption in Private Cloud. Non-GAAP loss per share was $0.06 at the lower end of our guided range of $0.04 to $0.06 loss per share. This was primarily due to higher expenses within the other income and expense line, driven by accruals related to data center leases as well as lower-than- expected diluted share count. Second quarter cash flow from operations was $8 million and free cash flow was negative $12 million. We ended the quarter with $104 million in cash on hand and $414 million of total liquidity. Turning to our segment results. For Private Cloud, GAAP revenue for the second quarter was $250 million, which was in line with our guidance. Private Cloud revenue decreased 4% year-over-year due to customers rolling off older-generation offerings, partially offset by revenue from new bookings. Sequentially, Private Cloud revenue was relatively flat. Private Cloud non-GAAP gross margin was 36.8%, down 50 basis points year-over-year and 30 basis points sequentially, primarily due to lower fixed cost absorption on lower revenue. Non-GAAP segment operating margin was 24.6%, a year-over-year decline of 190 basis points, driven by lower gross margins and higher OpEx. Sequentially, non-GAAP segment operating margin was up 20 basis points, driven by lower OpEx, partially…

Thank you, Mark. Let us begin the question-and-answer session. [Operator Instructions] Please go ahead.

[Operator Instructions] Our first question will come from Kevin McVeigh with UBS.

Congratulations on the results. I don't know whether it's for Amar, but maybe both. Maybe talk about the guidance. It looks like a little bit of uptick sequentially, but definitely more outpaced success on the free cash flow. So maybe talk about -- is there any seasonality you think about in the guidance sequentially just relative to kind of where you came in? And then ultimately, if you could spend a minute on the free cash flow conversion as well.

Go ahead, Mark.

Yes, sure. So yes, thanks, Kevin, for the question. Yes, in terms of our Q3 guidance, you're right, overall $660 million to $674 million with the midpoint around $667 million, right? We're seeing things ultimately kind of flat sequentially from a Private Cloud perspective. We are forecasting some uptick on the Public Cloud side, especially on the services, while infra continues to stay sort of flattish to slightly down. And in terms of free cash flow for the year, you saw we called out positive for the second half, positive for the full year. We did have some seasonality in the first half of the year related to some kind of onetime vendor prepayments, and those will not cycle in the second half. So that's driving a lot of our improvement as well as higher adjusted EBITDA and overall working capital performance. So I feel pretty confident about that free cash flow range.

And so Kevin, if I may just give some color on Private Cloud. So as Mark mentioned, we are forecasting a flat revenue in Private Cloud sequentially. Now this will be, Kevin, as you know, this is 3 quarters in a row. As we had mentioned before, we expect the Private Cloud business to start stabilizing, and that's exactly what we are seeing. And we feel good about the bookings performance that we had. The mix of the bookings also came in quite favorable. It was a broad-based bookings performance in the Private Cloud business, and so pretty pleased with the performance there. In fact, just to give you some color here, the mix of the bookings in Private Cloud has actually changed significantly from a deal size perspective. Now if you go back to fiscal '22, roughly about 60% of the deals that we had were about small-sized deals, right, with lower ACV value. And now if you -- and about 40% was midsized to large-sized deals. And that has now actually flipped in 2024 and 2025. First half of '25, 40% of the deals were small deals and 60% was large and midsized deals. So that's the very important dynamics that we are starting to see, and this is on top of us growing a double-digit CAGR in the last 2.5 years. Similarly, the contract length has also gone up. In fact, the contract length, if I have to just go back to '22, we had roughly 25% of our bookings in fiscal '22 where deals were longer than 24 months. Today, in first half of '25 as well as in fiscal '24, that number is now close to 50%. So the deal sizes have gone up. The contract length has gone up, which means we are really building a good book of business here across a lot of -- most of the verticals as well as from a geo perspective. And on Public Cloud, because since you asked about the guidance, in Public Cloud, we feel good about the services performance. This quarter, we saw services revenue in Q2 was flat sequentially. We expect that to -- was actually up sequentially and flat year-on- year. We expect that to -- services revenue to start growing in the second half. In fact, in Q4 of 2025, our fourth quarter, we expect our services business in Public Cloud to grow anywhere from 10% to 20% year-on-year. So which will be a real good turn in the business in the Public Cloud business. So pretty pleased with the performance in the Public Cloud business, too.

And Amar, just remind me, and I know we talked about this a couple of times, but the services on the private side and I guess, what's driving the strength on the public side? And then just any thoughts on the services, I guess, more on the implementation work on the private? Just anything just around services on the private side as well? I know maybe if you have just any thoughts.

Yes, yes. Thank you very much. So let's start with the Public Cloud side, Kevin. Just as a recap, we have 3 types of services that we offer to our customers. On one hand is Professional Services. And then you have managed services on the other end of the spectrum, which is long-term contracts and very sticky. And then right in the middle is Elastic Engineering. And then we offer this across applications, platform as well as data. We are starting to see broad-based strength across all those 3 services, mainly Professional Services. As we go and drive more cloud migration work, we also drive work in AI as an example, which are mainly Professional Services kind of engagement. We are starting to see our data business, for example, I've mentioned that before, our data business this quarter in Q2, I mean, in the second quarter, grew sequentially -- the bookings grew sequentially significantly. So we are starting to see strength in data, strength in applications, strength in platform support across Professional Services, Elastic Engineering and managed services in that quarter. So -- and the attach of our services to infrastructure also went up. About -- when we do an infrastructure sale today, 70% -- we attach 70% of services to it. So for every dollar of infrastructure, we are attaching at least $0.70 of services to this infrastructure resale business. So the services attach motion is working well, good execution on the field. And also, it's -- and the offerings that we have is playing to where the market is heading. More and more work is on the transformational side. Digital transformation is led by cloud and AI, and that really plays to our strength in Public Cloud. So that's -- those are the factors, macro as well as our execution that gives us confidence that we are now turning the corner on services. On the Private Cloud side, we offer managed Private Cloud for our customers. Clearly, health care, we really hit the sweet spot with health care, just strong even in Q2. When I look at just the health care vertical in the first half, it grew 60-plus percent year-on-year compared to first half of last year from a revenue perspective, so really, really good performance there. We have good deals in the funnel, and we also are starting to see traction. We had good traction in the telco sector with some very good deals signed. And if I look at the services component, the main services component in Private Cloud, Kevin, is all managed services, very, very sticky business. Once we get this business, it stays with us for the next 3 to close to 7 years. And that's the -- the average contract length has also gone up significantly in that business. Hopefully, that's helpful.

Our next question comes from Frank Louthan with Raymond James.

Great. You mentioned getting some more traction in mid-market. Kind of what investments do you think you'll need to make there, either on the sales or the support side? And then with regard to the partnership with some of the AI agents, how did that come about? And when can we begin to see some of the benefits of that more broadly across the business?

Yes, yes, absolutely. Thanks, Frank. So in terms of -- so the focus has always been, Frank, in mid-market and enterprise, both -- in both Public Cloud as well as Private Cloud business. And we have made those investments in our fiscal -- end of fiscal '23 and fiscal '24, and now you're starting to see benefit of this. For example, in our Public Cloud business, we have grown in Public Cloud for several quarters in a row from a bookings perspective. So not much of investment -- incremental investments needed now from a go-to-market perspective, Frank. We will be making investments on the edge. For example, our health care vertical has really kicked off very well. We went from being a small player in 2022 to being a really good -- being a very viable, credible player in the health care provider space with our Private Cloud offerings in '24 and '25. So not much of investment. Most of the investments will be -- even the CapEx investments will be success-based. So if you win a customer, then only we making investments in CapEx. Now talking about AI, and we have started to see a lot of traction in AI in both the businesses. In fact, let me start with Private Cloud first. As you know, our offering in Private Cloud is we would -- our goal is to become a private AI infrastructure provider for our customers. So we think about workloads, and we will be focusing mainly on inferencing workloads. That inferencing workload, Frank, will either be run on public environment, Public Cloud, Private Cloud or at the edge. And we like our chances of winning in the private AI as well as at the edge, and we'll partner with the hyperscalers on the Public Cloud side.…

That concludes today's question-and-answer session. I'd like to turn the call back to Sagar Hebbar for closing remarks.

Thank you, Liz. Thank you, everyone, for joining us today. If we did not get to your question or if you have a follow-up, please e-mail us at ir@rackspace.com. Have a great evening, everyone.

This concludes today's conference call. Thank you for participating. You may now disconnect.