Welcome to the Rackspace Technology Third Quarter 2020 Earnings Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator instructions] I'd now like to turn the conference over to Joe Crivelli; Vice President, Investor Relations.

Please go ahead..

Good afternoon, everyone. Welcome to Rackspace Technologies third quarter 2020 earnings conference call. I am Joe Crivelli and with me on the call today are Kevin Jones, our Chief Executive Officer; and Dustin Semach, our Chief Financial Officer.

The slide deck we'll refer to during today's prepared remarks can be found on the Investor Relations section of our website. Before I turn the call over to Kevin, on Slide 2, you'll see that certain comments we make on this call will be forward-looking.

These statements are subject to known and unknown risks and uncertainties, which would cause actual results to differ materially from those expressed on the call. A discussion of these risks and uncertainties is included in our S-1 registration statement, our quarterly reports on form 10-Q and other SEC filings.

I'd like to remind our listeners that Rackspace Technology assumes no obligation to update the information presented on the call except as required by law.

Slide two also informs our participants that 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. These reconciliations can be found in the tables included in today’s earnings release and our slide presentation, both of which are available on our website.

We will also provide revenue metrics and constant currency when available as a framework for assessing how our underlying businesses performs, excluding the effect of foreign currency rate fluctuations. All growth comparisons we make on the call today relate to the corresponding period of last year unless otherwise noted.

After our prepared remarks this afternoon, we'll be happy to take your questions. I will now turn the call over to Kevin..

Thank you, Joe and thank you all for joining us this afternoon. Rackspace Technology continues to execute our strategy to capitalize on the incredible multicloud market opportunity. As a result, we are excited to share another quarter of record results. If you turn to Slide Four you can see our agenda.

Similar to last quarter I'll begin with a summary of our Q3 results, how we delivered a record quarter as well as highlights on significant wins and other updates on the overall business and Dustin will cover our financial results. So let's being on Slide Five, we are very pleased with our results for the third quarter.

As you can see, we improved against each of our key performance metrics. The third quarter represented another quarter of record sales bookings, our highest revenue in the history of the company and the strongest quarterly free cash flow since 2017.

We are incredibly proud of this accomplishment, capitalizing on the tectonic shift to multicloud and a relentless execution. Two years ago, we made a number of strategic changes at Rackspace Technology.

We partnered with the hyperscalers AWS, Google and Microsoft, we focused on the enterprise market and we expanded global and through the implementation of our management system and the execution of over 120 transformation programs, we continue to transform the company into a leader in end-to-end multicloud solutions.

The quarter was highlighted by another record quarter for sales bookings, which grew 9% sequentially and 64% over last year. The growth was broad-based across both customer types and geographies.

I'll provide more color on our third quarter sales bookings success in a minute, but I'll state at the top that the breadth of growth further validates our view the Rackspace Technology is uniquely well positioned to capitalize on the secular growth in the cloud market.

As we stated previously, sales bookings growth is a leading indicator of core revenue growth. As a result of our strong bookings performance over the past several quarters, core revenue increased 17% over last year on a constant currency basis, driven by our core multicloud services, applications and cross platform sales.

Consolidated revenues grew 13% over last year on a constant currency basis, core net revenue retention for the quarter also increased to 100% versus 99% last quarter. This demonstrates that our land and expand strategy is working.

Additionally, as you may remember, our revenue is over 95% recurring and gives us great visibility into our revenue trajectory. This allows us to play offense and aggressively pursue growth in the market.

Adjusted EBITDA for the quarter grew to $191 million up $4 million year-over-year and $3 million sequentially and adjusted earnings per share of $0.19 was up 36% year-over-year. Lastly, our capital intensity was 7% and improved 1% versus last quarter due to our continued shift in our capital-light offerings.

This is the key part of our strategy and should continue to improve free cash flow going forward. Turning to Slide Six, you'll see the updated chart of our sales booking trend. This is a great visual of both the significant growth dynamic and multicloud as well as the success we have had implementing a number of initiatives to enable this growth.

Sales bookings were $315 million, an increase of 64% compared to $192 million in last year's third quarter. On a pro forma basis, assuming the Onica acquisition had occurred on January 01, 2019, bookings increased 39% compared to last year's third quarter.

We continue to see momentum in our sales bookings ramp driven by the strategy and initiatives we are implementing and as you can see on the right, core revenue growth continues to accelerate as sales bookings flow through to the top line.

In the third quarter, pro forma core revenue growth was 10% and overall GAAP revenue growth was 18% up from 7% and 13% respectively in the second quarter. We are proud that we hit double-digit pro forma core revenue growth well ahead of our previously discussed timeframe. Slide Seven provides additional perspective on our bookings growth.

Firstly, you can see how much progress we've made in aggregate sales bookings growth over a short period of time. From 2018, we have now grown our trailing 12 month bookings by approximately $500 million or over 80%. Secondly, our bookings growth has been broad-based across new logos and our install base of customers.

New logo bookings are up over 400% since 2018. We are excited by the momentum with these new customers and are optimistic as 29% of our bookings are for new logos in the 12 months ended September 30, 2020. Likewise our install base bookings were up 40% in the 12 months ended September 30, 2020 compared to 2018.

This speaks to the core strengths of Rackspace Technologies go-to-market strategy which I'll detail in a minute. In addition, we are very pleased with the expanding breadth of our bookings growth. We grew across all sizes of customers and across all of our geographies.

Additionally, we continue to expand globally and had our first customer wins in South Africa, Indonesia and Vietnam and even with the record sales quarter our pipeline is up from Q2 2020 and has more than doubled from Q3 of 2019.

In short, we believe our bookings growth momentum will continue as we see additional sales opportunities with both our install base and new logos. As multicloud expands rapidly all over the world, Rackspace Technology will be there to capitalize on the opportunity.

If we turn to Slide Eight, let me spend a minute speaking to our go-to-market strategy in more detail. We think about our sales strategy in three tiers; firstly, is breadth. We deploy separate resources to not only brand new logos but also expand relationships within our existing client base.

This approach allows us to have laser focus when managing customer relationships. Secondly, is debt. Each of our specialty areas now directly back to our core solution segments allowing customers to access focused and specialized experts in a way that they cannot do with their peers.

Our account team can quickly assign solution architect and sales specialist in focus areas such as applications, data, security and multicloud to provide our customers with precisely the expertise they need to solve their unique challenges. And thirdly, is scale.

We leverage functions such as demand marketing and our strategic deal center to increase velocity with new and potential customers, whether that means using marketing to communicate our value proposition more widely or using pattern recognition to pursue large and complex opportunities more effectively.

This strategy has worked incredibly well for us and has enabled a strong, new logo motion and our land and expand model that is driven the record bookings growth we just detailed.

Now to explain how we work with existing customers, let's turn to Slide Nine, which shows how we've organized Rackspace Technology and its offerings to grow with our clients as their business needs become increasingly complex. Our service blocks allow customers to buy offering that fit their particular needs a given point in time.

Our offerings are truly modular and cover the lifecycle of the customer's cloud journey. The result is that we satisfied customers, who see clear return on investment in working with us and ultimately partner with us longer. As we continue to stack service blocks with our customers, we recognize both improving customer retention and scale.

Slide 10 demonstrates how our strategic shift to multicloud solutions is working and has driven double-digit growth across all customer cohorts since 2016. As you can see, the 2016 customer cohort has grown at a compounded annual rate of 13%. The 2017 cohort has grown at a rate of 25% and the 2018 cohort has grown at a rate of 27%.

The numbers show that once customers are on board, our mandates expand by additional service blocks and we grow revenue from the install base. This also shows why investing in growth is so important for Rackspace Technology.

As we sign up new customers, the history shows that we can successfully grow our business with them, which leads to higher future revenue as well as expanding profitability for each customer account.

To illustrate how this plays out for two global customers, slide 11 highlights two recent wins; one with a brand new customer and one within our existing installed base. On the left side of the slide, you'll see that we recently expanded our solution set for Teva to help them broaden their digital health platform.

We now provide cloud-native app development, internet of things, serverless containers and more to help Teva's business. Teva's Digihaler uses data in an entirely new way that will help doctors see exactly when their patients are using inhalers rather than relying on patient memory.

This in turn will enable better medical care and can even save lives by predicting when a patient may have an asthma attack. The entire system is backed by Rackspace Technology.

I love this example of how widespread applications for our multicloud are and how we can grow with our clients, bring cutting-edge solutions to the table and protect even the most sensitive data of patient's medical history. On the right side, Zeotap is a venture funded identity and data platform based in Germany.

The company needed to manage, optimize and innovate faster on Google Cloud to serve their major customers including the Global Fortune 100.

Rackspace Technology won the business by providing a means to stabilize and optimize a large complex Google cloud supported application through platform essentials and service blocks along with advisory guidance for critical areas of security and compliance-best practices.

Using the Rackspace Technology solution Zeotap is able to accelerate time-to-market, enhance their customer's experience, save money with streamline processes and ultimately free their internal IT resources to focus on core business activities. Slide 12 gives a quick review of some new technology initiatives underway at Rackspace Technology.

By no means is this an exhaustive list. We're using insights from customers and partners to develop new services and capabilities around tomorrow's technologies. We're staying ahead of the curve, ultimately enabling our customers to remain at the forefront of technology innovation.

Currently, we are developing new cloud-native security to bring manage security operations center capabilities to cloud native doctors, Service Box 2.0 to simplify and streamline our managed service offerings, native support for Cooper Netease in our private cloud as well as true multicloud Cooper Netease managed services.

Prebuilt production-ready IOT accelerators to help our customers rapidly build and adopt innovative Internet of things solutions and new market-leading private cloud features that deliver enhanced hybrid cloud capabilities, advanced automation and data independence.

Before I turn the call to Dustin, I want to thank him again for his outstanding service to our company. As we announced previously, Dustin will be leaving Rackspace Technology and transitioning the CFO role to a more malaterra. Dustin has been a great partner and we look forward to keeping in touch with him in the future.

We are thrilled to welcome Amar to Rackspace Technology as President and CFO. His first day will be November 23 Amar is a seasoned public company CFO with 27 years of technology industry experience including five years as a successful public company CFO at Viavi.

I am incredibly excited to be back together with Amar and looking forward to working with him to leave Rackspace Technology to the next phase of growth. So turning to slide 13, to close, I want to recap why we believe Rackspace Technology is such a compelling investment.

We're sitting in a unique position in the cloud ecosystem and are offering customers a compelling combination of software enabled multicloud solutions in a way that the market has not seen before.

Our ecosystem is built on our proprietary software, IP and automation, that allows us to differentiator our offerings and positions us well to win time and time again. This drives our double-digit revenue growth profile, improves profitability and results in strong and sustainable free cash flow growth.

What is most amazing about the third quarter sales bookings record is that we beat a second quarter bookings figure that included one very large deal. This makes our achievement in Q3 even more special with broad-based growth across geographies, industry and market segments.

We are at the early stages of a significant secular trend and we're well-positioned to capture and capitalize on this market momentum. As I mentioned earlier, we have never been more confident that the strategic shift we implemented two years ago is driving results.

We know we'll benefit from that decision for years to come, but even in the near-term, each quarter our pipeline continues to grow and we will win in the marketplace due to our unique position as a leading pure play multicloud provider and we believe, we will stack success upon success and that our sales bookings momentum and revenue are sustainable.

We are also focused on continuing to optimize our earnings leverage. To that end, we are intimating our efficiency transformation programs to reduce costs through best shoring and automation. We also continue to evaluate acquisition opportunities to bolster growth.

Our focus is to add either new geographies or new capabilities through strategic bolt on acquisitions. As a result of the strength we're seeing across our business, we are raising our full year 2020 guidance for revenue growth, core revenue growth, adjusted EBITDA and adjusted earnings per share. Dustin will provide more details in a moment.

We are very proud of the results and we're even more excited to see our strategy play out against a huge market opportunity ahead of us. Thank you again for joining us today and with that, I'll turn it over to Dustin to take you through our third-quarter results in more detail..

Thanks Kevin. Good afternoon, everyone. As Kevin just mentioned we are very pleased with our third quarter results as we delivered another record sales bookings quarter and strong core revenue growth. On Slide 15 you'll see highlights of our financial model updated for the third quarter results.

In the 12 months ended September 30, 2020, we generate $2.6 billion in revenue more than 95% of which is recurring. Pro forma core revenue growth accelerated to 10% in the third quarter, which as Kevin mentioned is a milestone that we hit well ahead of schedule. Our capital intensity improved to 7% in line with our shift to capital-light offerings.

For reference, capital intensity was 20% just a few years ago. And finally, we have a robust cash flow profile with annual adjusted EBITDA of over $750 million and adjusted EBITDA margin of 29% in the 12 months ended September 30. Slide 16 summarize our third-quarter results across our four key financial metrics.

In the upper left quadrant, you can see we generated record sales booking of $350 million, which represents growth of 64% year-over-year and on the upper right, we again showed strong double-digit total and core revenue growth reflecting the strong bookings performance we had over the past several quarters.

Adjusted EBITDA of $191 million in third quarter up 2% from $187 million in the last year's third quarter is driven by operating leverage from revenue growth and cost take out through transformation, partially offset by investment in our go to market areas as well as expected mix shift to capital-light offerings would generally come with a lower niche market.

However, this margin also generally increases as customers grow with us and add service blocks. We're also seizing the massive multicloud opportunity available to us and investing in growth. Over time we expect margins will increase as our new customer relationships mature.

Lastly on the bottom right, you can see that capital intensity which is defined as capital expenditures as a percentage of our revenues improve to 7% in the third quarter from 9% last year.

This improvement was the desired end result of the shift I just mentioned to the capital light sales mix and multicloud services that we expect to drive cash flow growth in the years to come. Slide 17 shows our components of revenue.

Our core segments continue to increase as an overall percentage of our revenue and reached 92% of the total in the third quarter. 80% for multicloud services and 12% from asset class platform. OpenStack now generates only 8% of our overall revenue and we expect the segment to continue to decline in coming quarters.

As we may have mentioned, we are no longer actively marketing any services within this segment. On Slide 18 multicloud now accounts for 80% of our overall revenue. In Q3 we grew these revenues by 20% on a cotton currency basis compared to last year's third quarter.

As Kevin noted, the growth was driven by strong performance and the broad-based impact of our bookings growth as well as expansion of existing clients to our land expand strategy. On Slide 19 our Apps and Cross platform revenues accounted for 12% of our Q3 revenues.

In general, these complementary services tend to grow in tandem with our multicloud services, but for Q3 this segment grew 3% on a constant currency basis compared to last year's third quarter due to the State of Texas deal coming online. This contract will continue to ramp in Q4 and drive further acceleration in this segment going forward.

Lastly on Slide 20, you can see our legacy OpenStack revenues now represent 8% of the total. We expect OpenStack to continue to decrease over time as we grow multicloud. Revenues in this segment declined 21% on a constant currency basis compared to Q3 of last year.

Now if we turn to Slide 21 you can see that Rackspace Technology is very well positioned from a balance sheet standpoint.

We have no meaningful debt maturities before 2023 after raising $658 million in net proceeds from our IPO, our leverage now stands at 4.3 times trailing 12-month adjusted EBITDA and as we previously stated, our intention longer-term is to reduce our leverage to the target range of 3 to 3.5 times.

We believe we can lower our funding cost over time given the high recurring nature of our cash flows and our improved leverage profile. We repaid $550 million of our senior notes in September and we will repay an additional $86 million next week on November 16.

We expect these repayments to save approximately $52 million in annual cash interest expense. Finally turning to guidance on Slide 22, as Kevin previously announced, full year 2020 guidance is being raised to the following. For full year 2020, we now expect revenue growth of 10% to 11% up from our previous range of 9% to 10%.

We expect our core revenue growth to be 14% to 15% up from the previous range of 12.5% to 13.5%. We expected adjusted EBITDA in the range of $758 million to $762 million up from $756 million to $760 million previously and we expect adjusted EPS of $0.79 to $0.81 per share up from the previous range of $0.75 to $0.81 per share.

We'll address 2021 guidance during our fourth quarter earnings call. And with that, let's turn to questions. Operator, over to you..

[Operator instructions] And our first question is from the line of Amit Daryanani with Evercore. Please go ahead..

Thank you for taking my question and congrats on a nice sprint guys. I guess the first question I have and I get this a fair amount regarding you guys, which is the lack of operating leverage in the model.

So I am hoping you could speak to the fact that revenues are growing double digits, gross margin I think are down on a year-over-year basis a fair, EBITDA growth is mostly limited. Can you just touch on the dynamics over there and perhaps while just to help us think through the free cash flow metrics and how do you think of the growth there as well..

Hey thanks Amit very much. Yeah we're excited about the quarter. Look I'll make a few points about your question. First of all our key profitability metrics are improving right. We're growing EBIT and EBITDA dollars quarter on quarter and year on year. We also reported 36% year-over-year growth and adjusted earnings per share in the third quarter.

So that's the first point. We are growing our key profitability metrics. Second point is we are as Dustin mentioned in his open remarks, we are intentionally investing to grow right and this is paying off extremely well in our topline. We're very well positioned to capture and capitalize on this tectonic shift in the industry to multicloud.

So Amit, we're absolutely in growth mode, our bookings are up, our pipelines is up year-on-year and quarter-on-quarter and what we're doing here is we're creating an amazing install base of customers where we're going to upsell and we're going to cross-sell higher margin offerings over time using our land and expand strategy.

And then the last thing I'll say about this is we do have a growing funnel of cost transformation programs that we're executing and this cost transmission programs include additional best shoring, automation, supply chain management, workforce strategy and others to improve profitability while we are making the growth investments.

So all in all, I'm very confident that we're going to continue our profit momentum with a focus on growing our revenue, profitability and cash flow..

And follow up on this, if the bookings growth has been really impressive for a couple of quarter or during this quarter 39% organic without any large deals is really notable.

Could you just maybe provide some metrics in the sense of what the underlying drivers are either new logo wins or larger deal sizes? I am just trying to get a sense on what's the sustainability of these metrics look like as we go forward?.

Sure yeah absolutely. So we're very excited about our sales and revenue momentum. Our execution on sales front has been very consistent right. As you probably noticed we've now hosted a fifth quarter in a row of record sales bookings.

So we're booking our own record five quarters in a row and by the way just to also say, in October we exceeded our sales targets again and that's 16 months in a row right, that we've exceeded our sales targets as a company. So that consistency of sales execution and performance is fantastic.

Not only that, in addition to all of the sales success we've had, if you just look at our pipeline, our pipeline is double what it was at this time last year and it's also up from last quarter. So we're very excited about our sales execution.

On top of all that, we're in the early innings of a $400 billion market opportunity with the tectonic shift in the industry to multicloud, so we're feeling good about our sales momentum and absolutely believe it is sustainable..

And our next question is from the line of Dan Perlin with RBC Capital Markets. Please go ahead..

I wanted to follow up a little bit on what Amit was poking out there in terms of the churn in the quarter, any insight around what's happening there? You are able to improve upon that and then the second part of that really is when we think about the size, the absolute dollar size of new bookings relative to maybe what's embedded in the churn like when should we start to hit this kind of inflection point, where we start to get a little bit of a better connection between bookings and revenue growth? I know it's improving, but I suspect there is going to be a point in time in the not-too-distant future where that becomes a lot more meaningful..

Maybe I'll kick off with that one and then Dustin you can jump in as well. Do Dan thanks for the question, it's a good one, really how we think about your install base of customers is through the net revenue retention metric and as we indicated on the call, we're really quite excited about the moment there right.

If you probably remember in Q1, we had roughly 98% net revenue retention for our core business, that increased in Q2 to 99% and we're delighted that we've got into the 100% net revenue retention mark in the third quarter.

So it's really proof that the go-to-market strategy that we've implemented and the strategic changes along with the transformation programs are driving significant momentum in net revenue retention, which we expect to continue.

Dustin any other color to add there?.

Just a couple of points to that. First up the 100% Dan is to put a pen on it really implies that the install base now that we're doing on offsetting churn at this point, which again as Kevin said is a huge milestone. We're really, really excited about it.

What I will say is that we've seen that acceleration already step up as you think about Q2 to Q3 and then we'll guide for Q4 again you're going to continue to see bookings materialize in revenue, net revenue retention improve and overall growth accelerate..

Our next question comes from the line of Bryan Keane with Deutsche Bank. Please go ahead..

Hi guys, congrats on these results.

Want to ask the popular question about the impact from COVID and is there been a pull forward of demand and as we think about, I know you're not giving '21 guidance, but the question that a lot of companies are facing especially ones with strong demand is, does this create tough comps and grow over issues for you guys when we get into '21..

Hey Bryan thanks a lot for the question. So let me just talk a little bit about the pandemic and kind of how it's impacted our business.

As you know Bryan we had a really good agile response to pandemic, we moved the Rackers to work from home environment and we seamlessly transitioned our 120,000 customers to this environment we've been working in since then and really what we saw with the pandemic was customers really accelerating their journey to multicloud but keep in mind that there's a lot of momentum with multicloud migrations before the pandemic right.

So that momentum did accelerate a bit, but we certainly do not see it as something that was temporary by any means and what we really see now is we see continued acceleration for the customers go to multicloud because customers want to save money that's kind of timeless objectives and the cloud is great from that.

Customers want to be able to scale up and scale down and also customers in a lot of cases want to pivot to new business models. So we absolutely do not believe this is a temporary phenomenon.

This is something that is here to stay and whether or not our customers are working from home or everyone's back in the office, we're in a great spot Bryan because there's this tectonic shift in the industry to multicloud. It's a $400 billion market opportunity.

Multicloud again was already accelerating before COVID and was accelerating all around the world before COVID. We strongly believe this momentum only build as the world emerges out of the COVID situation..

Got it and the one follow-up I wanted to ask is on the margins, when we think about the margins going forward and especially in multicloud, one of the comments you guys made on the call is as these businesses mature, or as it matures and people add more business on top the margin should increase.

So I just want to make sure I understand that point and how long of a period does that take before you see a client at maturity and really expanding the margin?.

Yeah that's a great question maybe I'll start with that Dustin and you can jump. Yeah we're pretty excited about how we're executing the strategy there Bryan. We provide a little bit of detail in our presentation today with our customer cohorts.

You probably remember that analysis and really what it demonstrated is that once a customer is on board with Rackspace Technology that they grow with us at consistent double-digit rates and now with our transformation, we've got roughly 71% of our new bookings from install base and 29% from new logos.

So basically dynamic is they're growing faster and faster right and as we add new logos to our install base, really what happens with our customers is their needs become more and more complex and we're very well positioned to sell additional service blocks with them which increase both our revenue and our margins with each customer and that's really the reason that we invented service blocks, that's why we invested in growth right, invest in growth is the key theme here because you can see how it's paying off for us in the very short-term in terms of our revenue growth and over the little longer term as we add more and more service blocks, more and more workloads are going to move to the cloud right, this is what's happening in the market than Rackspace Technology profitability will also just continue to improve..

And just to follow with that point Bryan is to question just keep in mind on the margin point particularly as it relates to Q3.

We thought of making a number of investments for growth and excluding those divestments as it goes without saying that the adjusted EBITDA was already up quarter-on-quarter, year-over-year, but it would have been even higher right and so it's part of what you're seeing right now.

So we want to make sure there we're well-positioned to capitalize on the momentum going into fiscal year '21..

And our next question is from the line of Matt Cabral with Credit Suisse. Please go ahead..

Looks like and a strong pickup in multicar revenue during the quarter.

I'm just wondered if you could dig a little bit deeper into that portfolio and talk about what's driving that acceleration and even in particular if there is any way to sort of dimensionalize or think about the contribution between growth in the public cloud versus private cloud or more traditional on prem underneath there?.

Hey thanks Matt. So I'll start and then Dustin you can jump in as well. First of all, yeah we're pleased with our third quarter as we mentioned fifth record sales quarter in a row. Bookings up over 60% year-over-year, 9% since last quarter, even though the last quarter included the large State of Texas deal.

So just a little bit more color about the bookings as you asked even with this record sales quarter, our pipeline is up right and more than doubled since Q3 last year. And as in terms of the multicloud segment, as multicloud continues to kind of accelerate all over the world, we're there right to capitalize on the momentum.

So I would say in terms of where we're seeing the growth very broad-based, we're seeing it across all of our service offerings, we're seeing it across different customer segments as well as the different geographies where we compete. We see movement from private cloud to public cloud.

We see movement from public cloud to private cloud and really the way that we approach our customers now is we approach them on a workload by workload basis. So it's not really a question of going private or public cloud and that's why you can organize the company around multicloud.

It's really workload by workload and the good news is we're seeing broad-based growth in our bookings in across our service offerings.

Dustin, anything else to add there?.

I think you said it well. So again just to hit it on the head right there is broad-based across the board, again all service offerings geographies etcetera..

And where we see opportunity Matt, going forward for a lot of that kind of what you would consider traditional, more traditional private cloud business is in the public sector, business which is growing for us, healthcare, of course financial services and also technology companies that we do a lot of business with technology companies particularly because they require low latency and fast response times.

And then of course the public cloud environments just continue to gain more and more steam and more and more momentum and were having great luck partnering with the hyperscalers as we go to market and by the way, we're going to market with our hyperscalers not just in public cloud but in private cloud too with the release of some of the private cloud products by the hyperscalers.

So multicloud is how customers are buying today with over 80% of enterprises considering some sort of multicloud strategy today and that's really how we're seeing the market play out..

Got it and then Kevin you mentioned M&A during your prepared remarks. I am wondering if you can talk a little bit more about where you see the biggest pockets of opportunity to acquire and just how you guys are thinking about the trade-off between M&A versus maybe debt repayment going forward..

Yeah absolutely love to Matt. Thanks for the question. So look, this is an important topic because if you kind of look at how Rackspace Technology is now really a completely transformed company versus where we were before the take private. A lot of that is because of the M&A that we've done in the company right.

We've done four acquisitions since the LBO, TriCore, date type relations and most recently Onica that was a fantastic acquisition.

So our M&A strategy has been very successful because it has gotten up since the enterprise part of the market where we're having great success and it's also really revolutionized our service offerings and now that that's happening we're on our way to becoming the leading pure-play multi-cloud provider in our industry and all of that happening in such short period of time is pretty exciting.

In terms of future M&A so our approach here is to acquire businesses that are going to enhance our multicloud capabilities, our growth in our geographic presence right. So we're going to continue to focus in multicloud as well as applications data and security. So we're really quite enthusiastic about that.

We'll be very thoughtful as we do additional acquisitions because we do have some important deleveraging targets, but given the extraordinary cash flow that this company produces, it’s very straightforward for us to both delever the company and do acquisitions.

Just an example, you may have seen, we announced today that we acquired Brightskies, which is a company in Germany as part of our strategy to expand geographically and this is a great opportunity particularly with multicloud as it accelerates rapidly all over the world.

So gives us 55 fantastic folks in the Central European and German market that will help us kind expand our presence not just in Europe, but also in the multicloud ecosystem in a whole where we continue to work on increase our innovation and increasing our customer penetration there.

So very keen on M&A going to do it thoughtfully particularly over the next couple of years but it's a key part of our growth strategy and by the way a little more on this color for your Matt, our philosophy when integrating companies like we do with Onica is to make sure we do it with extreme quality.

We protect the assets that we acquire and we integrate the business seamlessly into Rackspace Technology. We had a fantastic, fantastic integration with Onica. It's been spectacular asset that we've acquired and we're going to continue to do that with the other assets.

We've got the Integration Center of Excellence as well as a team an integration team ready to go with future acquisitions..

And our next question comes from the line of Tien-tsin Huang with JPMorgan. Please go ahead..

I heard this wrong, sales bookings I know a lot of questions been asked about it, but I wanted to ask about your sales targets.

You mentioned Kevin pipeline is up 2X, how much have you raised your sales targets just want to better gauge your confidence in re-punishing the backlog here given the string of good sales bookings results?.

So yeah we're really quite excited about the sales bookings momentum we've had and while we don't publish the exact sales targets that we have each month, we do track them monthly right and that's different than a lot of companies.

That's the level of rigor and execution orientation that we have in our sales organization and over time, the sales targets certainly are increasing.

The targets that Dustin and I set for the team certainly are increasing and what that really helps the organization do is continue to reach higher and higher for the results and what we've done to enable that 16 months in a row of sales execution is first of all you probably remember we increased our sales force, we implemented several transformation programs that have enabled this execution and those transformation programs include revised incentives for the sales force, additional account planning, we've got an entire subject of sales education program called Race to Win, we've upgraded the sales leadership across the company, our offerings are completely different even than there were several years ago because of the acquisitions that we've done.

So all those things together in addition to right now we're in the middle of this tectonic shift in the industry to multicloud. All of those things together are really what has helped contribute to about the consistency of our sales execution.

So the good news here Tien-tsin is we've got -- we do have good execution, but we are also in a market with absolutely fantastic secular tailwinds and both of those things together is what is causing the revenue momentum..

So my quick follow-up just on the back on gross margin, I know that you're investing but I'm curious as the impact of the sales bookings and the implementations of that's also having the impact on gross margin here.

I don’t know if there is the classic inverse correlation or not, but is that worth calling out in terms of implementation impact to gross margin?.

Yeah absolutely.

So if you look back to my prepared remarks around gross margins in general and about some of the growth that we're experiencing, what we mentioned is that some of these builds particularly as we're doing so many and so quickly, come in initially a little bit lower margin and some of that's associated with implementing them as well and then over time as we add service blocks as margin will go up.

So as you're experiencing that accelerated growth like that, so now you have that dip in the beginning coupled with investing that we did to overall growth in setting up expectations for next year. Those two coupled together did drive an impact to overall gross margin and adjusted EBITDA together.

With that said, Tien-tsin as you look at the bottom line, keep in mind that with all that investment in some of hypergrowth you're still getting to quarter to quarter growth adjusted EBITDA, you're getting to year-over-year growth in adjusted EBITDA as you look at guidance for Q4, you'll see an even more material step up in the last point I'll put a fire point on as when you look at it from a cash flow perspective as you knockout capital intensity, look at overall free cash flow margin is still very, very strong at that level..

Yes we're very confident we can provide strategy here. I think we're doing a nice job of balancing the investment and the revenue growth and with continued profit improvement right. We're doing both. So I think we've got it balanced out pretty well and we're balancing the mix shift as well.

The capital light offerings having capital light offerings while they do have lower gross margins, lower operating expenses, lower capital intensity, we really think that's a winning combination. So we're very optimistic, we've got a long runway of not just revenue improvement but profitability improvement ahead of us..

And our next question is from the line as Keith Bachman with Bank of Montréal. Please go ahead..

I wanted to start out with the apps and cross platform, if you could just 3% growth in the quarter and 3% growth year to date, so it's underperforming your growth of the weighted average.

How should investors be thinking about this not only in the near-term precious present, but as we look longer-term over call it the next 12 to 15 months?.

So we've actually got pretty significant momentum here Keith. It's a great question and you may remember the State of Texas deal that we signed in Q2, so a large part of that deal is related to applications and some of our cross-platform services. So we anticipate very, very strong momentum picking up in apps and cross platform services going forward.

We're also seeing an increased pipeline. This is a very key area for us strategically.

If you just kind of think about acquisition with Onica, Keith this really helped us get into cloud native application development, all the cross-platform services that you mentioned before; artificial intelligence, machine learning, everything around our data business and our security business.

So definitely an area of current investment, an area of significant sales momentum with the State of Texas deal that we talked about before and more to come here, but we're super optimistic about this very key to our strategy of continue to move up the stack with our customers.

Dustin, anything else to add?.

Just to say that again when we talk about broad-based strength across offerings beyond just State of Texas within Q3 we had an incredibly strong quarter in application sales as well in Q3 and so the acceleration you'll see pick up pretty materially Keith that will drive a pretty significant momentum exiting this year and a material step up from Q3 to Q4..

And then also just to say Keith, this applications cross-platform point, we are very focused on staying in the hypergrowth areas. So where we're going to focus is in cloud native application development, Internet of things, artificial intelligence machine learning, containers and then app modernization.

So that's kind of our current and future focus and really that's where we see the next generation of economic value being created for our customers. So we're really super pumped about our strategy here..

Okay.

Then my follow-up go back to bookings for a second just trying to understand the convergence between 39% and 10% which is about your pro forma growth and ask it a different way, was there any changes in duration of the signings that might lead to less convergence so to speak over time and/or is there anything more broadly you can say about how you anticipate pro forma revenue growth to start to mirror the bookings growth or get the benefit from that over time?.

Dustin, you want to start with that one and then I'll….

Sure so there's a couple of things. Yeah there is nothing different about the duration. On average our contract length is about three years and I think what you're seeing is it is actually stepping up.

So if you go back to Q1, Q2, Q3, you're talking about net revenue retention on a quarterly basis stepping up from 98, 99 or 100, where we showcased during our earnings call, the presentation a little up in the logos as well as the next in that install base.

And so you’ve seen and you're able to pick guidance for Q4 as well, you’ve seen this kind of pretty material step up from a revenue bases quarter to quarter to quarter and some of the underlying metrics, operational metrics and further up and you'll see that momentum continue to accelerate.

But I'll tell you is that obviously you're continuing to emerge now and once we get to Q4, we'll give a better indication about just what '21 holds..

Thanks Keith, thank you for that. We're excited about the momentum, and I do believe our revenue momentum is sustainable. You are seeing that revenue accretion that we've been talking about because of kind of the high record sales bookings in a row.

The other thing just to say just to finish off on this, just remember Keith, our revenue model is 95% recurring. So that's the other dynamic here as we got 95% recurring revenue that drive strong visibility in the future and that really allows us to play offense, which is exactly what we're doing in this fantastic market..

And our next question is from the line of Ramsey El-Assal with Barclays. Please go ahead..

I wanted to actually just make sure I understood a prior comment from the question before mine regarding the university Government of Texas win and when that starts to feather and we also had a little work with acceleration and apps and cross platform this quarter that I think was printed and so I am just curious if you could just reiterate how much was in of that Government of Texas win? How much was in this quarter and what's the kind of path that that should, is it more of a gradual ramp of should we just see one quarter where it really just sort of spikes up just based on 101?.

Yeah so a couple things, you’ve see it again a feather in just a very little bit in Q2. You’ve see a more gradual step up in Q3 and you'll see much more of a full ramp in Q4. So that acceleration will be materially in there almost a 100% in Q4 going forward..

And then my follow-up is just about commentary in general from IT service providers that are talking about vendor consolidation.

I am just wondering if that's a trend you see in your business and if you do see it, how does it impact you guys dread an opportunity? How do you look at that?.

Yeah a great question Ramsey, look we do see it as an opportunity. We see what customers want is they want a partner that can handle their multi-cloud environment. So what's really been occurring is because a hyper competition within public cloud providers and extreme specialization now occurring within the customer's environment.

They're very particular in which types of cloud environments that they want. So these niche providers that maybe provide services in one particular geography or one particular platform, maybe it's just Google or just AWS or etcetera, etcetera, those types of firms in my view are not as advantaged as Rackspace Technology.

We essentially aren't end-to-end multi-cloud provider and we're a pure play. So we just focus on the cloud. So the dynamic in the market like we talked about $400 billion market, growing fast, terrific opportunity and what customers want is they want one provider to be able to handle all those environments.

It's way too complex, the complexity is mind-boggling for customers. It's not -- cloud is not a data center.

It requires new skills, new methodologies, new technologies and it's virtually impossible for customers to do that at scale in a world-class way and so what's happening is we're seeing lots of demand from first of all customers who are trying to do it themselves that the complexity is now too much for them and also customers that were maybe trying to do it with a provider that handle just one part of their journey or just one platform and all that opportunity is there for us as a pure play multicloud provider.

So we really see the trends in the IT market as very, very favorable to Rackspace Technology..

And there are no further questions at this time. I will now turn the call back in Kevin Jones for closing remarks..

Great, well thanks Jennifer and thanks everyone so much for joining us tonight and for the questions. So in conclusion, I'd like to make just a few points. I am the most optimistic I've ever been about Rackspace Technology right now and I'd like to thank the Rackspace Technology team and our partners for an outstanding performance.

We reached the milestone of double-digit pro forma core revenue growth much faster than our expectations. In the third quarter, we recorded the largest sales bookings in the history of the company and the highest revenue in history of the company and the strongest free cash flow since 2017. Also our adjusted earnings per share grew 36% year-on-year.

Looking forward I'm excited about the future for Rackspace Technology. As we've discussed previously, we're right in the middle of a tectonic shift in the industry to multi-cloud. We're in a $400 billion market, which is growing fast and has secular tailwinds.

Because of our strong execution in this attractive market, we've raised our guidance for full-year 2020 with a strong revenue, profit and cash flow momentum we have in our business. We're off to a great start as a public company. So thank you all for your support of Rackspace Technology and we look forward to talking with you again soon. Thank you..

That does conclude your conference call for today. We thank you for your participation and ask that you please disconnect your lines..