Good day, and thank you for standing by. Welcome to the Rackspace Third Quarter 2024 Earnings Webcast. At this time, all participants are in listen-only mode. After the speakers presentation there will be a question-and-answer session.

[Operator Instructions] I would now like to hand the conference over to your first speaker today, Sagar Hebbar, Investor Relations. Please go ahead..

Thank you, and welcome to Rackspace Technology's third quarter 2024 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..

first, enabling customers in their AI journey with services and solutions; second, designing, building and operating hybrid AI infrastructure for inferencing and fine-tuning workloads; and third, transforming Rackspace into an AI-driven company.

We are seeing good progress in AI with our FAIR initiatives with nearly 50 customers and over 250 opportunities at various stages of implementation. We also expanded our AI-related product offerings across both business units.

In public cloud, we joined AWS' new Generative AI Partner Innovation Alliance, a program that will help AWS customers successfully build and deploy generative AI solutions. In private cloud, we have a proof of concept underway with a large international company to run their inferencing workload on our private AI infrastructure.

We also launched on-demand GPU as a Service on our spot platform powered by NVIDIA's H100 Tensor Core GPUs. Customers can harness high-performance GPUs without an upfront investment to achieve both cost efficiency and scalability.

The opportunities in AI are promising, but we are taking a practical balanced approach to helping our customers leverage AI for building impactful, economically sustainable and ethical solutions. Before I wrap up, I'd like to thank our customers, partners and all our actors.

I'm pleased with our performance this quarter and proud of all we have achieved together during this year of change. I will now turn it over to Mark for an overview of our financial results and guidance..

Thank you, Amar. In the third quarter, total company GAAP revenue of $676 million was within our guided range, driven by strength in public cloud. Note, we are no longer presenting non-GAAP net revenue as a stand-alone line item.

To ensure transparency and full disclosure, the impact of the lower-margin infrastructure resale contracts and those pass-through costs for the quarter are found on Slide number 4 in our earnings presentation. For the quarter, non-GAAP gross profit margin was 21.2% of GAAP revenue, up 90 basis points sequentially.

Non-GAAP operating profit was $34 million, exceeding the high end of our guidance. This was primarily driven by better-than-expected performance in both public cloud and private cloud. Non-GAAP operating margin was 5.1% of GAAP revenue, up 180 basis points sequentially.

Non-GAAP loss per share was $0.04 better than our guided range of a $0.06 to $0.08 loss per share, driven by better-than-expected operating profit. Cash flow from operations was $52 million, and free cash flow was $27 million in the third quarter.

We closed the quarter with $157 million in cash and $532 million of total liquidity, including $375 million of undrawn commitments. Turning to our segment results. For private cloud, GAAP revenue for the third quarter was $258 million, within our guided range. This includes legacy OpenStack revenue of $25 million.

Total private cloud revenue was down 1% sequentially, due to customers rolling off older generation private cloud offerings. Private cloud non-GAAP gross margin was 38.6%, up 120 basis points sequentially, due to cost efficiencies, partially offset by lower revenue.

Non-GAAP segment operating margin at 28.9% was up 210 basis points sequentially, driven by gross margin expansion and better cost management. In public cloud, GAAP revenue was $418 million at the high end of our guided range and down 2% sequentially, primarily due to lower cloud infrastructure volumes.

I'm pleased to see services revenue coming in flat sequentially after several quarters of decline, playing a promising foundation for future growth. Non-GAAP gross margin for our public cloud segment was 10.4%, up 50 basis points sequentially, driven by an improvement in resale margins.

Non-GAAP segment operating margin was 3.9%, up 110 basis points sequentially, due to improved gross margins and operational efficiency. Now on to guidance. We expect fourth quarter GAAP revenue to be $668 million to $680 million, slightly down sequentially at the midpoint.

Total non-GAAP operating profit is expected to be $34 million to $36 million, and non-GAAP loss is expected to be from $0.03 to $0.05 per share.

From a segment perspective, we expect private cloud revenue of $258 million to $264 million, up 1% sequentially at the midpoint and public cloud revenue of $410 million to $416 million, down 1% sequentially at the midpoint, due to reduced consumption and lower margin infrastructure resale.

Our non-GAAP tax rate is expected to be 26% and non-GAAP other expense is expected to be $47 million to $51 million. The non-GAAP share count is expected to be approximately 240 million shares. I will now turn the call back over to Sagar..

Thank you, Mark. Let us begin the question-and-answer session. We ask everyone to limit discussion to one question and one follow-up. Please go ahead..

Thank you. At this time, we will conduct the question-and-answer session. [Operator Instructions] The first question comes from the line of Kevin with UBS. Kevin, your line is open..

Great. Thanks so much, and congratulations. And just another quarter, really, really good execution. Amar and Mark, can you help us dimensionalize the size of that health care win? If I heard you right more, it sounds like it's -- it's the largest one you've ever signed.

Is there any way to dimensionalize that as to what just I guess maybe we could start there?.

Yeah. So thanks, Kevin. Thanks for your question. So the -- so the health care win that we talked about was health care when in Q4 of last year, it was in hundreds of millions of dollars in TCV. So it was a sizable win.

And what we did in the last nine months is basically onboard that customer and transition the customer over to our Rackspace Healthcare Cloud. So that was very significant, Kevin. Think about the magnitude here, 38,000 concurrent users, one of the largest Epic system installation in the world.

And I'm very proud of the private cloud delivery team for pulling it off and doing a very smooth and seamless transition. And so that's the real achievement. It's also given us a lot of our reputation in the industry has gone up tenflods based on that transition..

And, Amar, have you seen kind of the network effect? Because it sounds like the other thing was open, can you dimensionalize kind of on the private cloud, like how much today's government versus health care versus other? Is there any way just to think about kind of the vertical in that particular business?.

Yes. I think that's a great question, Kevin. So if you recall, let me just put a context here. If you recall, we were very focused on going by vertical. And we picked specifically three or four verticals, health care, BFSI, which is banking, financial services and insurance, our sovereign and public sector.

Now jointly, these verticals make up, it was roughly about 25% of our total revenue in fiscal 2023. And by the time we end fiscal 2024, it will be about one-third of our total revenue base. When it comes to health care and sovereign, they were roughly between 5% to 10% of our overall revenue, because remember, we just got started about 18 months ago.

And we will be nearly at 15% by the time we exit fiscal 2024, and that will continue growing in fiscal 2025. For example, with health care, we believe that given the deals that we have in the funnel, and the confidence of us closing these deals.

This 30% growth early 30% growth in fiscal 2024 might translate to another high double-digit growth in fiscal 2025..

That makes sense. Congrats again, and thank you for the time..

Thank you..

Please stand by for the next question. The next question comes from Ramsey at Barclays. Ramsey the line is open..

Hi. This is Ryan on for Ramsey. Thanks for taking question today. Last quarter, you mentioned 85% attach rate of services on large infrastructure deals in this quarter, 22 of 28 deals. I just wanted to see what specific solutions are driving that attach rate? And maybe how should we think about it progressing over the next 6 to 12 months? Thank you..

Yes. So I think -- thank you very much. That's a great question. If you recall, we pivoted the whole go-to-market motion from infrastructure led to services led. There was a bold decision we as a company made 18, 19 months ago. We read that the whole go-to-market organization.

We enable the sales organization and today, we have a very good services-led motion where we are penetrating the enterprises selectively expanding into the mid-market. And our commercial motion for the SOVSMB [ph] working with the hyperscaler is also hitting in all cylinders.

So to answer your question specifically, I think you will see us, the services-led motion has resulted in us talking now to the C-level of the organization. So this is a completely different discussion we are having with our customers today.

Unlike an infrastructure-led where we go from a procurement trend motion to the C-level here, we are coming from C-level to the procurement team. So it's adding a lot of value and it is resulting in two things. Number one, we are going to go to continue to drive our high-margin services into those accounts.

And number two, we are also seeing benefits to our infrastructure resale too, where we are able to protect margins on this infrastructure resale.

Because the -- instead of having a discussion with procurement organization, where it's only pricing and discount related, now we are having a discussion at the C level, and we are bringing a holistic value to our customers. So this has completely transformed the way we look at our public cloud business.

Great. Thanks..

Thank you. [Operator Instructions] At this time, I'm showing no further questions. I would now like to turn it back to Sagar Hebbar of Investor Relations for closing remarks..

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

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