Good afternoon, everyone. And welcome to Rackspace Technology’s First Quarter Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please also note, today’s event is being recorded.

At this time, I would like to turn the conference call over to Joe Crivelli, Vice President of Investor Relations. Sir, you may begin..

Good afternoon. And welcome to Rackspace Technology’s first quarter 2021 earnings conference call. Kevin Jones, our Chief Executive Officer; and Amar Maletira, our President and Chief Financial Officer joining us today. The slide deck we will refer to today can be found on our Investor Relations website.

On slide two, 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. These reconciliations are in the tables included in our earnings release and 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 our first quarter financial results. 2021 is off to a great start and we are excited to share the results with you.

Today, I’ll discuss quarterly highlights and provide additional perspective on some recent product launches that we believe positioned Rackspace Technology exactly where the market is moving. As I’ve done in past quarters, I will also touch on some case studies of customers who are doing truly innovative things with cloud technology.

And our President and Chief Financial Officer Amar Maletira will go into detail on the financial results before I make some concluding remarks. Slide five shows the main messages we would like to deliver today.

First quarter was very strong for Rackspace Technology and we exceeded the guidance targets we set in late February with record revenue and very strong earnings growth. The tectonic shift to multicloud as well as the success we had onboarding new logos in 2019 and 2020 are expected to fuel double-digit revenue growth throughout 2021 and beyond.

You’ve heard me say that 2021 is going to be the most exciting year for new product launches in the history of the company and in the first quarter we launched Rackspace Elastic Engineering and Rackspace Services for VMware Cloud, which had been extremely well received by industry analysts and customers. I’ll talk more about this in a moment.

The work that our finance team has done to improve cash flow drove a significant turnaround in the first quarter with strong growth in operating cash flow. Amar will discuss this in his section. It also bears repeating that our first quarter debt refinancing put us in a position of strength from a balance sheet perspective for years to come.

As we have noted previously, we now have no significant debt maturities for the next seven years. And in addition, our debt was booked at historically low interest rates. In fact, the $550 million financing that we completed in February was the best pricing ever for a non-investment grade senior secured notes offering. Turning to slide six.

We posted another record quarter with revenue up 11%, compared to the first quarter of 2020 to $726 million. Core revenue growth was even stronger up 15% year-over-year to $677 million. This strong growth was driven by continued momentum in our multicloud business.

We are winning new customer engagements and expanding share of wallet with the customers we onboarded in late 2019 and throughout 2020. As a result, we believe, we are expanding market share in cloud IT services. Earnings leverage continues to be excellent.

Non-GAAP operating profit was $119 million and non-GAAP earnings per share was $0.23, up 10% and 44%, respectively, compared to last year’s first quarter and we see opportunity for additional earnings leverage. Amar, now in a six month has taken a fresh look at everything we do.

As a result, we have driven a number of changes in our decision making process and management system. To give you a few examples, we revamped the way we analyze deal profitability and decide which deals to pursue. This in turn has informed how we structure our sales force and which product lines we lean into for growth.

We have re-examined our expense structure and uncovered additional efficiencies that we can drive in 2021 and beyond, and identified areas where we can invest these savings to accelerate the trajectory of our topline. Additional discipline in working capital management has led to a significant turnaround in cash flow.

Amar will provide more details in a moment. And we continue to improve our investor reporting and give the investment community more insight into our growth drivers and value creation strategies. New sales bookings in the first quarter were $244 million, up 6% compared to the first quarter of 2020. This was a solid bookings quarter.

The year-over-year bookings growth was lower than in past quarters for a number of reasons. Firstly, we are lapping our own efforts and we’re up against tough compares from a bookings growth standpoint.

This will continue throughout the year as we landed a number of marquee multicloud deals including in the State of Texas deal in the second quarter of last year. So while we expect continued strong bookings in 2021, the year-over-year compares will be more modest.

We remain confident in our revenue guidance for fiscal 2021 and expect double-digit revenue growth for the year. Secondly, we are focused on driving the right mix of business and increasing initial margin we’re willing to accept on new deals.

This is a benefit of the booking success we’ve had as we now have a significant installed base of enterprise accounts that will serve as a foundation for our growth. Thirdly, we adjusted sales incentives and realigned our sales force to prioritize high value deals in line with our land and expand strategy.

As these changes have taken root, we are encouraged that bookings accelerated and grew sequentially each successive month of the year. Slide seven shows how we’re evolving the strategy of the company. We have gotten encouraging signals from customers that they see us as the opposite of the global systems integrators or GSIs.

This is because we bring the benefits of the GSI including size and scale, but unlike the GSIs we are also cloud focused, disruptive, flexible, fast, agile, and we have our fanatical customer experience. So, we are staking our claim as the un-GSI.

We believe this makes a clear statement with customers and prospects about who we are and the competitive advantages we bring to the table. On slide eight, our positioning as the un-GSI, as well as market trends have influenced our product development efforts.

As a result, we recently introduced two new offerings that we believe hit the sweet spot in the market. Many of you participated in our webinar on Rackspace Elastic Engineering in April and that service offering has garnered significant early interest from customers around the world.

Last week we introduced Rackspace Services for VMware Cloud as VMware is in many cases the platform of choice for private cloud workloads. Looking forward we believe VMware is an important fourth cloud platform alongside AWS, Azure and Google Cloud. On slide nine, Rackspace Elastic Engineering is the next iteration of our service blocks.

We are very excited about this new offering and believe it is exactly what the market needs to move cloud adoption to the next level.

Rackspace Elastic Engineering is on demand access to a pod of multidisciplinary cloud specialists who will know the customer’s application, team and desire business objectives, and will be the laser focused on driving their cloud outcomes.

The pod works seamlessly with the customer’s internal dev ops teams essentially becoming a trusted part of their permanent cloud team. The pod is capable of delivering a broad spectrum of outcomes without the constraints of a fixed scope of management. This is a complete opposite of how GSI structures and prices their services.

Rackspace Elastic Engineering is already available and fully supported across AWS, Azure, Google Cloud and VMware. This really cracks the code for customers who are trapped between running their traditional operations and evolving to be more cloud native and modern.

After just a few weeks, Elastic Engineering has been one of the most successful new product launches in Rackspace history. We’ve already closed significant deals in all three regions of the world in the pipeline for this offering is growing very fast.

On slide 10, last week we announced our rebranded private cloud offering Rackspace Services for VMware cloud. In conversations with customers it became clear that they needed a solution that provided a public cloud experience with private cloud security, data sovereignty, low latency and pricing flexibility.

We are excited about this offering and view it as a way to significantly increase growth in private cloud and further extend our lead in multicloud.

In addition, this offering aligns to our CapEx light business model and in the early going, it is clear that customers were hungry for this kind of architecture as we are off to a great early start with this offering as well. As I’ve done in past quarters, I’d like to highlight some customers who are doing truly innovative things in the cloud.

On slide 11, let’s talk about Porsche, which is a signature enterprise cloud customer for Rackspace Technology. As you can imagine, automobile manufacturing is a complex undertaking in a complex industry and it requires best-of-breed systems and tools across a variety of IT environments to execute at the very highest level like Porsche does.

So Porsche is in many ways a textbook case study for multi cloud as the company leverages all three hyperscalers, AWS, Microsoft Azure and Google Cloud for its cloud environment. Accordingly we are very proud to have been selected as Porsche’s cloud partner of choice to help this world renowned automaker harmonize and govern its multicloud platform.

On slide 12, Autodesk subsidiary Innovyze is one of the preeminent software companies for the water industry. The company knew that it needed to be on the technological forefront to continue to lead its industry. They had to modernize their solution, which was a desktop app with on-premise client servers.

While the company had highly skilled SaaS engineers and machine learning and dev ops teams they did not have the resources to meet an aggressive timeline. Pivoting from a desktop-centric product suite to a SaaS solution would require all hands on deck. They needed to bolster their teams with equally skilled engineers.

With Rackspace Technologies help they built and introduced Info360, a SaaS offering based on AWS, which also included advanced IoT analytics using real-time data. The new platform was built with server-less technology and micro services enable their customers to transfer their asset network information to the cloud.

It also leveraged geospatial mapping functionalities which were previously available only with additional third-party software. I am so proud of the Rackers who helped improve meet its aggressive timeline so that it could maintain its lead in the industry.

Now Amar will take you through our financial results in more detail then I’ll make some concluding remarks before we open for Q&A.

Amar?.

Thank you, Kevin, and thank you everyone for joining our call today. Slide 14 recaps our financial results for the quarter. Demand trends across our customer segments and geographical markets continue to remain robust, which coupled with strong execution grow another quarter of double-digit topline and bottomline growth.

In the first quarter of fiscal 2021, we reported revenue of $726 million, an increase of 11% year-over-year. This was ahead of our expectation driven by strong performance in our core business. Our core business revenue at $677 million grew 15% year-over-year.

Non-GAAP gross margin at 34.4% in the first quarter came in within our expected range and was down compared to prior year, reflecting the mix shift from strong growth in our multicloud business, decline in our legacy OpenStack and ongoing investments.

While the mix primarily impacted our gross margins, our operating margin at 16.4% was relatively unchanged year-over-year. Compared to prior years non-GAAP gross profit at $250 million was down 2% due to decline in our legacy OpenStack revenue partially offset by growth in gross profits in our core business.

Our non-GAAP operating profit was above our expectations at $119 million, up 105 year-over-year. This was a result of operating leverage from strong revenue growth in our multicloud business and OpEx efficiencies primarily in G&A. Non-GAAP earnings per share at $0.23, likewise, beat our expectations and was up 44% from last year.

This reflect a strong growth in operating profit and also lower interest expense from debt repayment and our recent debt refinancing. Slide 15 shows the company’s revenue mix in the first quarter by segment and by geography. Multicloud continues to represent the vast majority of revenue at 80% of the mix and it grew 14% year-over-year.

Apps and Cross Platform at 13% of total revenue grew 19% year-over-year, driven by strong performance in application services coupled with strength in our data and security services businesses. OpenStack which is our legacy business declined 23% in line with our expectations. This segment now represents only 7% of total revenue.

From a regional perspective, Americas continues to represent 75% of our revenue and had a solid 11% year-over-year growth. APJ grew at 28%, while EMEA grew 8% year-over-year. Now moving to slide 16. Let me give you more color on a multicloud segment, which represents 80% of our total revenue.

The trending bar chart on this slide shows our successful strategy of driving the significant mix shift to the higher growth markets within this segment. The purple ball represents estimated revenue from our solutions in high growth markets which include all four cloud platforms, AWS, Azure, Google and VMware.

The gray bar represents revenue from our solutions in low growth and mature markets primarily non-VMware private cloud and managed hosting. This chart really shows the business transformation that’s taken place since mid-2019.

We leaned into high growth areas of the market such as managed public cloud by winning new logos, while also proactively transitioning some of our existing customers to newer cloud platforms. This was a purposeful strategy to extend our customer relationship and position as well in an attractive and growing cloud services market.

On a trailing 12 month basis in our fiscal first quarter 2021, our revenue in high growth markets made up approximately 65% to 70% of our multicloud segment revenue and grew roughly between 30% and 40% year-over-year. Within this segment, our managed public cloud revenue grew even faster, outpacing the overall public cloud market growth.

We are targeting the high growth revenue mix within this segment to exceed 80% of total multicloud revenue in the next 12 months to 18 months. We believe our gross margins will stabilize within 12 months to 18 months period for two reasons.

First, this mix shift within the multicloud segment will be largely complete and the majority of our revenue in multi cloud will come from high growth areas. Second, we are confident that our land and expand strategy with the new customers, we have onboarded since early 2020 will work and drive higher margins in the installed base.

I’ll explain why we have this confidence in the next slide. All this bodes well for Rackspace to deliver long-term growth and profit through both revenue growth and operating margin expansion.

On slide 17, you will see some proof points of a land and expand strategy with two very different real customer examples, delivering a solution which includes cloud services and infrastructure is a key value proposition to help customers optimize their costs.

It creates stickiness in the relationship and provides an opportunity for Rackspace to upsell and cross-sell more higher value solutions. In the first case on the left, we show a long-term customer in the financial services industry. In this case, we led with services and as infrastructure mix grew, you can see a modest decrease in sold gross margin.

But as we have cross-sold additional services to this customer, you can see that the margin rebounds and exceeds the starting point. On the right is a relatively new customer in the manufacturing industry. This was one of the new logos we on-boarded in the first quarter of 2020.

Again you can see that initial services led margin is high and as the customer deploys a multicloud solution, which includes cloud infrastructure the margin dips. But then as we expand our relationship with higher value services the margin recovers.

These are the types of customer use cases that we are focused on replicating across our entire customer base and we are having some good success in this regard.

On slide 18 we analyzed the managed public cloud customer cohort from the first quarter of 2020 as you can see our cumulative bookings have increased 21% in the first year and sold gross margins have expanded over 200 basis points.

This is an area that has intense focus in a weekly management system meetings ensuring that we continue to execute our expand strategy. It is also one of the areas for which we elevated the focus of our sales force and account teams and aligned our incentive plans. Slide 19 provides a snapshot of our cash flow and balance sheet.

Cash flow was strong in the first quarter due to improved working capital management. We had operating cash flow at $103 million and free cash flow was $66 million. Total capital expenditures in the first quarter was $59 million and total CapEx intensity was 8% in line with our expectations.

Please note that in the second quarter we are renewing several large multi-year enterprise license agreements or ELAs. The accounting treatment for these renewals requires us to recognize the full amount of these ELAs as CapEx in the period the deal is signed even though the cash payments are spread out over time.

Accordingly, we expect second quarter CapEx intensity in the low-teens, which is in line with our plans but for the full fiscal year of 2021 we expect CapEx intensity to be in the range of 7% to 9%. Our cash CapEx was $37 million and cash CapEx intensity was 5% in the first quarter.

For fiscal year 2021 we expect cash CapEx intensity in the 4% to 6% range. Total cash at quarter end was $198 million and we had $375 million of unused revolving credit facility. On slide 20 we have our a guidance for the second quarter and fiscal 2021.

For the second quarter we expect revenue in the range of $735 million to $745 million, which at the midpoint is 13% year-over-year growth, core revenue of $690 million to $698 million, which at the midpoint is 16% year-over-year growth and non-cash operating profit in the range of $113 million to $117 million.

This guidance reflects continued investments and mix shift to high growth arrears in multicloud. We also expect non-GAAP earnings per share in the second quarter in the range of $0.21 to $0.23. Non-GAAP the other expenses of $52 million to $53 million.

Non-GAAP tax expense rate of 26% and we expect non-GAAP weighted average shares of $214 million to $250 million. We have made no changes to our guidance for the full year except for a minor change to the full year non-GAAP. Other expenses and 2021 weighted average share count.

After six months at Rackspace, I am more convinced than ever that we have a lot of opportunity and runway for continued growth and shareholder value creation. I will now turn the call back to Kevin for closing comments.

Kevin?.

Thanks Amar. Before we open the call for your questions let me say that I am proud of the first quarter results, which we believe were a strong validation of the Rackspace Technology investment thesis. We continue to grow both total and core revenue by double digits.

The earnings leverage inherent in our business model and our cost transformation programs are driving significant improvements in year-over-year profitability. Finally, in the first quarter our discipline with working capital assets resulted in a dramatic increase in both operating and free cash flow.

Most importantly we’re continuing to position the company for consistent ongoing growth and earnings leverage. The new customers we landed in 2019 and 2020 provide a strong growth foundation and the continued tectonic shift of workloads to the cloud will provide secular tailwinds for years to come.

Our new market positioning as the un-GSI, as well as the new service offerings we’ve introduced in 2021 position Rackspace Technology as the clear partner of choice for companies that want to migrate their business to the cloud. We are already seeing significant traction in the market for these initiatives.

Also, we are committed to driving cost efficiencies and making ongoing growth investments to continue our financial momentum. So, I remain excited about our opportunities in 2021 as we continue to see double digit growth in both revenue and earnings per share for the full year. And with that, we will take your questions.

Operator?.

[Operator Instructions] Our first question today comes from Ramsey El-Assal from Barclays. Please go ahead with your question..

Hey, guys. This is Ben on for Ramsey. Thanks so much for taking my question. I wanted to ask about the -- first the pace of bookings growth. I know like some time ago we had talked about kind of like a low double digits, low-teens kind of growth rate over like the next several years. I understand that you laps into comps.

Is that sort of what we should expect as we kind of lap those comps and get into 2022? Is that sort of a reasonable expectation?.

Hey, Ramsey. It’s Kevin here. Thanks for the question. So, I’ll kick off here on bookings and I am sure, Amar, will have a few things to add. So as reminder Ramsey, the figure for bookings that we report is only new business bookings and the $244 million of bookings in the first quarter is very healthy.

New business bookings is just one of the factors in our revenue growth alongside recurring revenue, there is renewals, contract extensions, churn, implementation and revenue realization. That one component of revenue, new business bookings grew a healthy 6% year-on-year.

We’re also more selective in the first quarter about the deals we pursued because we onboarded a significant install base of new customers in 2020 and now can increase our initial margin on new deals. This in addition to our land and expand strategy drove a significant increase and sold gross margins in the first quarter.

So, overall, new bookings were solid. We’re committed to our revenue guidance for the year and double-digit revenue growth in 2021 and beyond. Amar, do you want to add something..

Yeah. Let me add here Ben. So, just stepping back, when you take a look at bookings and revenue growth correlation here. We’ve been executing very well on the sales front.

We have had strong year-on-year bookings growth for the past seven quarters and what this has done is, this has significantly increased the baseline of our bookings, which captures incremental new business as Kevin mentioned earlier.

So at an annualized bookings baseline of roughly $1 billion plus, we will be able to deliver double-digit revenue growth in 2021 and beyond. And having said that, we are focused on continuing to drive bookings performance going forward. Hopefully, that answers your question..

Okay. That’s great. Yeah. Very helpful. Thanks so much. And if I could ask one more, I mean, just in the quarter apps and cross platform, the revenues came in a bit higher than we were expecting which is so great to see.

Is that related to maybe like the timing of the State of Texas deal or is that just kind of a broader outperformance? And is that level of revenue growth kind of indicative of what we should see in that line for the rest of the year or should perhaps moderate a little bit? Thanks so much..

So that’s a great question. So it was very broad based. It was not just application services. So within the applications and cross platform we have three service offerings at a high level. There’s an application services offering, there is data services and security services. And we saw broad based growth across all those three service offerings.

And of course, application services also benefited from the Texas DIR deal. So you should expect that kind of level going forward. Now it will moderate here and there, because some of it is transactional business, but we are confident on this particular portfolio..

Yeah. I would also say, Ben, we’re pretty excited about this area. We’ve got lots of investment that we’re making in cloud native application development, artificial intelligence, machine learning a lot of our IoT and edge computing services here.

So, yeah, broad-based and when you kind of look at the short-term and medium-term future we’re pretty excited..

Yeah. So just wrap there, we will be -- we were at about $97 million in Q1. We should be slightly in that particular range between, say, $98 million to $97 million going forward. There will be some quarters up….

Yeah..

…some quarters will be down based on the seasonality of the business..

Okay. That’s super helpful. Thank you guys so much..

Thanks, Ben..

Our next question comes from Amit Daryanani from Evercore. Please go ahead with your question..

Yeah. Thank you very much for taking my question. I have two as well. I guess, first maybe I’ll just go back to the free cash flow discussion Amar a little bit -- really good excellent performance for sure.

Maybe Just walk me through given some of the comments you had on 2Q, how should we think about free cash flow conversion as we go forward and do we think Q2 is bit negative and then you ramp up in the back half?.

So, overall, I think, as you know, Amit, there is an intense focus in the entire company around free cash flow and they often repeat my cheerful mantra in the company, as I say, revenue is vanity, profit is sanity and cash is reality. The entire company has heard this hundreds of times since I joined the company in November.

I think we’ve made tremendous -- we have a tremendous opportunity to continue to drive improved cash flow.

And we are executing against a transformation program that we talked about, Amit, in the last quarter that addresses the entire lifecycle of cash flow, including forecasting the cash flow, the collections aspect of it, trade terms, the payables, and so on and so forth.

So I would say the -- I would say we will deliver a significant increase in cash flow from operations, as well as free cash flow compared to fiscal 2020. So, fiscal 2021 should be much higher than fiscal 2020. And there’ll be some quarters will be lower, some quarters will be higher.

But I do believe what we are focused on is to driving higher and healthy quality of earnings. And I believe our cash flow from operations should be roughly about 80% to 85% of our operating income in the longer term. So that’s what we are focused on..

Got it. And if I have just go back or kind of have you guys talk a little bit on the gross margin line for the March quarter. Year-over-year I think the performance was sort of notable in terms of drop. I mean you guys have talked about this in the past.

But I’d just love to understand when you look at the gross margin contraction on a year-over-year basis, how much of that do you think was investments Rackspace is making in their business versus mix implications that we’re not going to send those two buckets and then should we comfortable that gross margins have trough for calendar 2021 at this point? Thank you..

So let me start by saying, our gross margins, Amit, are not declining due to any comparative pricing or market pressures. And the decline in gross margin is mainly a result of mix shift in our business driven by three factors very clearly.

First is as you know our open stack business, which is a legacy business is declining as expected and this is a higher margin business. So there’s an unfavorable mix impact. Second, we are onboarding new business with initial low margins due to the higher mix of cloud infrastructure in the solutions such as discussed earlier.

And also the startup costs associated with it. And third is customer migration from older generation private cloud offerings and managed hosting to newer cloud platforms and in many cases we are proactively managing this for our customers.

So all of this has a near-term dilutive impact on the gross margins because the older generation offerings were CapEx intensive and now as we drive -- and it’s also had higher gross margins. While the newer offerings that we’re selling are CapEx light, it has initially low gross margins.

But as we upsilon and higher value services the gross margins improves as I shown in the earnings presentation with the Q1 2020 cohort of customers. So Amit we believe our gross margins will stabilize within the next 12 months to 18 months for two reasons, as I mentioned during the -- during my prepared remarks.

First is this mix shift to high growth areas within the multicloud segment will be largely complete. And second as we discussed we are confident that our land and expand strategy with the new customers that we onboarded will drive higher margins in the installed base.

With that said, I do expect even during this period, our operating margins to remain in the mid-to-high teens in line with other best-in-class U.S.-based IT service providers.

Does it help, Amit?.

Yeah. No. That’s very helpful, Amar. Thank you..

Thanks, Amit..

Our next question comes from Ashwin Shirvaikar from Citi. Please go ahead with your question..

Yeah. Hi..

Hi..

Hello.

Can you hear me?.

Yeah. Hey, Ashwin. We can hear you..

Hey. I guess, Amar, I want to ask about the pipeline that you’re seeing in terms of this split between multicloud apps versus apps and platform? I either see -- are you beginning to see maybe a shift towards more apps and clouds platform.

And then sort of a related question as we introduce Elastic Engineering is that down the road I think impact and I am looking because of the way you talk about that?.

Right. Thanks, Ashwin. Yeah. I will start with that and then Amar you can jump in as well. So let me give you just little bit color on the pipeline as you had asked and then I will talk about apps and cross platform as it relates to the pipeline and then Elastic Engineering and kind of what I see there for the future.

So, Ashwin, pipeline is strong, healthy, continues to build, as I did mention on the earnings call, we are being more selective on the deals we pursue. So I also say, it’s a very high quality pipeline of higher margin deals. So, excited about the pipeline, its growing and I would say its broad based.

There is still a massive opportunity in multicloud but we are seeing a lot of opportunity in apps and cross platform as well. So, I would say really high in both areas.

I am really excited about the early signs of Rackspace Elastic Engineering, right? We’ve really -- we believe reinvented managed services for the cloud with Rackspace Elastic Engineering. And what’s happened here, Ashwin, it’s just really shortened our sales cycles on these deals, which is great for future conversion to revenue.

Rackspace Elastic Engineering, one of the most successful new product launches in history of the company, closed many deals already, closed another one in Europe over the weekend.

So, in three weeks of this offering being released, signed deals in every region, new and existing customers, we’ve got nearly 100 new business opportunities identified for Rackspace Elastic Engineering.

So, excited about that one, excited about Rackspace Services for VMware Cloud that was just released on Thursday of last week, that’s going to be tremendous as well. Pipeline for professional migration services is growing very strong also..

Got it. And then question I guess for Amar. After 4Q you provided a very detailed split across quarters in terms of the cadence that we should expect.

Would you say that anything has changed relative to what you have indicated back then in terms of EBIT revenues and profits?.

I think -- so thanks Ashwin for the question. So our guidance for -- I have not changed the guidance for the full year. And let me give you, let me start with the big picture here and answer your question on the seasonality and authorization of the guidance.

So if you look at the big picture and if you look at the first half profit in total, I am just talking on the operating profit side and then I’ll come to the revenue side too. If you look at the first half operating profit in total, we are on pace with our original guidance, even with the lower expected Q2 operating profit.

And then going forward, let me walk you through four key drivers of improved second half profitability. First as I have indicated earlier, the seasonal expense headwinds such as the U.S. payroll taxes that impacts our first half are weighted more towards the first half and will subside in the second half of the year.

Secondly, we are also making investments, as I mentioned earlier in the business that are going to be sort of moderate in the second half. Third is, we have OpEx efficiency programs that will kick in and generate additional savings in the second half compared to the first half.

And finally, the second half revenue growth will be higher than the first half and will also drive incremental profit. Now this is all baked into our full year guidance. So in summary I feel good about the full year guidance and we expect to be within the guidance range for revenue for operating profit, as well as EPS.

And as you can see, in the first half we are exceeding at least on the revenue side we are exceeding the midpoint of the guidance. And so I think there is, there is a little bit of an upward bias to the revenue compared to the midpoint of the revenue guidance for the full year..

Got it. Thank you..

Our next question comes from Frank Louthan from Raymond James. Please go ahead with your question..

Great. Thank you. Walk us through some of the cost savings initiatives that you’re putting into place and where should we see those show up? And then talk to us a little bit about churn, what has that been running and you expect anything different in churn for the remainder of the year? Thanks..

Sure. So let me, let me start with the question on the cost savings. One of the things that I keep reminding people is, first of all, the cost takeout and OpEx efficiencies are all embedded within our guidance. So we would encourage you to follow the guidance from that perspective.

But we approach cost initiatives although the same way we approach sales. We build a funnel of efficiency programs, which we regularly fill in and that’s how we look at it. And so just specifically on say OpEx side, because I do believe there is immense opportunity on OpEx to continue to drive efficiency. There are four areas that we are focused on.

First is more automation and streamlining processes. Now this is I would say, Frank, this is technology-driven efficiency programs and productivity improvements that have come for automation. That is the first one.

Second is leveraging the G&A as revenue grows and also increasing the leverage of partner R&D, the product development costs that they put in, as well as the market development. So we can leverage that given the relationship we have with our partners.

Third is driving higher offshore mix across the company, I do believe that there’s a huge opportunity there, while we need to continue driving that as we grow.

And the fourth is on the non-labor expense side, there are various ways to optimize our non-labor expenses through supply chain management, we can optimize our real estate footprint, there are legal entities that we’re looking at on the world to see how we optimize those legal entity, the better management on the vendor side.

So these are all the cost savings initiatives that we have in the funnel that will continue thriving as the business model continues to transform. And we will reinvest some of it back into the business as we have done to continue driving the topline growth and also investing in continuous automation and productivity improvements..

Hey, Amar, do you want me to start on that….

Yeah. Please. Please go ahead..

Yeah. Hey, Frank. It’s Kevin. Yeah. It’s a great question on churn. I’ll just give you a little a little color here. I would say, churn particularly for the newer offering is coming up. Now it’s a very favorably certainly compared to my expectations and compared to some of our older offerings.

So that’s really encouraging that the new product offerings that were coming out are not just growing fast but customers are keeping them and keeping them longer and certainly this area of the business has performed better than I had expected. So that’s really I think very, very positive.

This is obviously a revenue lever for us that we continue to spend a lot of time with our management system, with our leaders, with our customer success representatives in the field. We’ve got close feedback mechanism into our new product development.

So I feel like we’ve got a really good kind of system here to drive further benefits for the company..

All right. Great. Thank you very much..

Thanks, Frank..

Our next question comes from James Breen from William Blair. Please go ahead with your question..

Thanks. You talked about bookings early on in the Q&A. I was wondering just, can you just give some color around how the bookings growth sort of translates to revenue growth given some of the land-and-expand as you think about the 6% year-over-year and then sort of the double-digit growth in the revenue side? Thanks..

Yeah. Thanks James..

Thank you..

How about I start on that one Amar and then….

Yeah. Absolutely. Go ahead, please..

Yes. So a little bit more color James on the bookings. First of all, 6,300 deals in the quarter, very diversified bookings, broad-based strengths across geographies, customer segments and industry. We’re pleased with the additional rigor sort of resulting in expansion and sold margins for deals during the quarter. So that’s good.

We see momentum in large deals with more than $1 million recurring revenue those were up double-digits in the year. The other thing James, we signed 25% more new logos than we did in last year’s first quarter, excited to see continued momentum in mid-market and enterprise as well.

Those two customer segments just to name a few wins we talked about Porsche in my prepared remarks. Apria Healthcare was a great win, TSB Bank in the U.K., Aramex in the Middle East. So, again, broad-based in mid-market and enterprise as well. So, pleased with the momentum. Yeah, Amar, do you want to cover kind of the translation question..

Sure. I think this might be the way I would like to answer this question is, we’re very confident about double-digit core revenue growth whether it’s sustainable or not.

And the way I think about this is, as I mentioned earlier, that we had a strong year-on-year bookings growth for the past seven quarters that is really elevated the baseline of our bookings, which captures incremental business as I mentioned earlier.

And when we take a look at our baseline, if you are in the baseline, annual baseline of roughly about $1 billion, I think you should be able to keep this, this is all incremental business that comes from new logos, as well as new business from the existing customers. It should be able to drive double digit growth in revenue.

That is that’s how the model works. And second also we have a high mix of recurring type revenue, which drives good visibility into the future. So we really feel good about the revenue growth sustainability in 2021 and beyond.

And for example, the midpoint of our 2021 revenue guidance indicates that 14% core revenue growth, up from a pro forma growth of about 9% last year. So that shows you that the baseline has gone up and elevated and we can continuously drive double-digit growth into the -- into 2021 and beyond..

Yeah. I would add, Amar, would you agree our confidence in the sustainability of our revenue growth as we have….

Yeah..

… seen just in the last time we reported..

Absolutely..

Great. Thanks..

Our next question comes from Matt Cabral from Credit Suisse. Please go ahead with your question..

Yeah. Thank you. Kevin, you called out some revamped deal profitability metrics in your prepared remarks. You kind of alluded to them a couple of times during the answers as well.

Just why don’t you expand a little bit more on what the changes are that you’ve made and just if that had any impact more on how you think about forming sales quotas and the different metrics that you comp the sales force on?.

Hey, Matt. Great question. So, yeah, absolutely, always looking to continue to raise the bar on sales performance and continue just capitalizes on this. I think once in a generation opportunity here in multicloud.

So, Matt, what we did in the first quarter particularly in the Americas region, we saw realigned the team to kind of ensure our sales professionals or solution architects in all of our customer success team members were aligned particularly on this land-and-expand strategy that we’ve been talking about a lot.

We kind of enhanced our regional structure to increase accountability. We did and also improve our customer sales covers, so we did a lot of work on that. We also adjusted our compensation plans to support all the goals that we had for this year including selling higher margin deals.

So we’re very pleased with kind of the early signs of how those changes have materialized here and the results and in the pipeline and we expect these changes to help us continue both winning new logos and accelerate the success of this land-and-expand strategy..

Got it. And then thanks for all the additional detail you guys gave on the multicloud business. I guess too it’s pretty clear from the charts that the margin on services is higher than infrastructure. But I am curious you can comment on just the magnitude of the spread between the two.

And I guess what I am really trying to get is, if I take a step back, this segment used to do profitability in the low 40s from a gross margin standpoint.

And I am just wondering as the services mix on public cloud matures, do you think you’ll be able to get back to those levels or should we start thinking about maybe rebasing to a different margin structure is -- the mix shifts more toward cloud going forward?.

So, well, listen, I think, I am not going to give you specific guidance here on the margin -- on the gross margins.

But as I mentioned earlier that, if you think about our gross margin profile, today we’re in a transient stage as we are having a major mix shift going on in the business to high growth areas as we are onboarding new customers and also migrating existing customers. So you have both those headwinds from a margin perspective initially.

We do believe that the gross margins will expand as be up-sell and cross-sell more services and you saw, Matt, in one of the charts that I provided, which was taking the Q1 part of customers where we were able to expand the gross margins by about 200 basis points plus, while growing the booking is about 20% plus, right? Now I want you guys to focus on operating margins, which we will continue to operate between the mid-to-high- teens because of the old operating leverage we have in the model, as well as the ongoing OpEx efficiency programs.

So just to give an example of why you should be focused on that and we do believe that the gross margins will stabilize. The -- if you think about gross margins, let’s say, our corporate average is same at 30s today.

When we sell incremental business, even if the gross margins in those incremental business in our current installed base, say, comes in below the corporate average, let’s say, I just make up a number here say 30% or so, we would spend about maybe 5 percentage points to 7 percentage points of that in incremental SG&A.

And you will see at least 20 points to 25 points actually drop to the operating profit line. So which means it is such a high operating leverage in the model, creates an upward bias in our operating margin rate. That’s how you should be seeing this business.

So, currently, not the way I think about it is for the 12 months to 18 months will be in the transient phase, it will stabilize, but ultimately we want to drive operating margins in the mid-to-high-teens and as we start selling, up-selling and cross-selling more services, you should see upwards bias from those operating margins and operating margins have a tendency to start expanding.

So our long-term goal is to grow revenue, grow profit faster than revenue. The only way you do that is by expanding your margins..

Thank you..

Our next question comes from Dan Perlin from RBC Capital Markets. Please go ahead with your question..

Yes. Good evening. It’s actually Matt [ph] on for Dan. Following up on the bookings question, is there any way to kind of frame these sort of amount of deals that you’ve walked away from because of the new focus on corporate profitability? And then I have a follow-up..

Yeah. I’ll start, Dan. In terms of the more selective kind of approach that we took Dan in Q1 it was really as a result of the success that we had onboarding all the new logos in 2019 and 2020. So, as a result of all that success that we had we really have a strong foundation for growth for the next decade.

So we spent quite a bit of time in that land-and-expand strategy as we kind of talked about. And now really our focus is on up leveling the initial margin of the new deals that we run after to drive profitability. So I don’t have a specific figure other than to say, we booked good growth in bookings. We did it at higher margins, our margins grew.

So we’re actually very pleased with that result. And as Amar kind of mentioned our propensity for confidence in revenue growth just continue to increase. I think we did a really nice job balancing here and it was because of the success that we’ve had with all the new logos and the onboarding last year and the year before.

So, we’re in a really good spot here..

Okay.

And then as a follow up, what are you seeing in terms of like employee cost availability, et cetera?.

Yeah. So, it’s an interesting question here, Dan. Employee cost, as Amar mentioned, we’ve got payroll taxes and things like that make that cost heavier in the first half of the year compared to the second half of the year.

One thing to keep in mind about our business is, we are really more of the technology and software driven business than heavy labor business. So, in terms of the availability of resources and people, we’re in a great -- really great situation there. You may remember, Dan, we talked about we select fewer than 2% of our job applicants to the company.

So, very well positioned in terms of labor force availability, we continue to expand our labor force globally. We’ve got a great workforce management systems.

All aided by the fact that the core of this business is very strong because of Rackspace fabric, the software and the IP that automates 75% of multicloud workloads, still we believe the highest automation in the industry. So we’re well-positioned here as well..

I can just add ….

Thanks so much. Go ahead..

…Dan, quickly -- I am sorry. So I just wanted to add to Kevin’s remarks there. At the end of the day, we have a good management system down internally to tightly manage our labor costs and non-labor costs.

We -- and we do that on a very regular basis and also a very good hiring engine as we ramp up, for example, professional services, because we are seeing a lot of opportunity for growth in the migration services and cloud services in general. So I feeling good about how we manage our labor and non-labor across the company..

Excellent. Thank you..

Thanks, Dan..

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

Hey. Thanks. Yeah. I just had a follow-up on the more selective comment you just made there. Just -- is it more your -- I am -- maybe I ask of definitely, the initial pricing, are you just being a little bit more careful with some of the deals or are you just taking a view on finding clients that meet a certain land-and-expand threshold.

Just trying to make sure I understand that as best as possible? Thanks..

Hey, Tien-tsin. Yeah. I’ll start and Amar if you want to jump in. It’s a little bit of both really, we do have land-and-expand strategy. And as you know we’ve got a very rigorous management system when we set off on a program we want to execute on it, right? At Rackspace we get work done and we focus. So that certainly is a big part.

We landed all of these new logos. Amar mentioned you the strategy. If you can’t land then you can’t expand. So we landed and it’s time to expand.

So what that does is that is really quite beneficial for us, because as you add new business to existing customers you don’t have to repeat the cost for new account managers and some of the infrastructure that we put in place and some of that more kind of recurring costs, a lot of that fixed costs is already there.

So the beauty of expanding is that you can expand to higher margin. So that was certainly part of it.

Part of it as well and now I’ll let Amar talk to it is kind of the rigor that he’s brought in and really looking at the margins that we -- that we’re willing to accept on new deals and really kind of raising, we talked about up leveling that margin for initial deals.

So really a combination of both of them is where we saw the lift in the sold margins in the first quarter and we’re pretty proud of that. Having said that, as we mentioned I think we’re doing a nice job of balancing that against just a tremendous opportunity in the market and our confidence in double digit revenue growth.

Amar?.

I think you covered it very well, Kevin. I think I would just summarize by saying, at the end of the day, we are focused on return on investments we are making. There’s a huge demand out there and we can afford to be selective.

And as you mentioned earlier that, if there’s no expansion opportunity, I think, there’s no point of making an initial investment in those accounts. And so we take a look at where there expansion opportunities and where we can make investments whether we can generate a return on those investments by selling higher value services in the future.

And some of this relationship can extend for a decade and we want to make sure that we are focused on selecting those accounts where we have an opportunity for expansion for the -- in the longer term..

Yeah. No. Thanks for that. I am confident you’re being thoughtful about it. Just on that a quick follow-up staying on bookings and in the last quarter or last year second quarter you had a Texas contract, I think that was mid-$30 million, near $40 million number.

So should we -- I think for the second quarter should we think about growth more sequentially from the first quarter basis. I think I heard Kevin you say that bookings were improving month to month to month in the quarter. So this is why I am thinking maybe we should look at it sequentially.

You’re going to the second quarter given the difficult comp?.

Yeah. Great. Great question Tien-tsin. I’ll start and Amar your are feel free to jump in. So I’ll give you some color here. We do not guide on, on bookings, but very confident pipeline. We believe we’ve got a lot of runway to continue grow revenue.

You have more difficult compares given some of the State of Texas deal like you said last quarter well remember. I’ll just say, we continue to see momentum, we did see a sequential momentum monthly so far this year and we’re working hard in May as well.

What I’ll kind of -- just kind of point you back to is our bookings kind of projections internally are incorporating the guidance for revenue and committed to revenue guidance for the year feeling strong about that committed to double-digit revenue growth in 2021 and beyond..

Thank you..

Okay. I would just add very quickly. I mean, as Kevin said, we’re not guiding on bookings, but we are also looking at the quality of the pipeline, as well as quality of the bookings. It’s not just a bookings dollar numbers, but how the revenue will get realized.

What’s the margin profile on those bookings, the length of the contract, so there are multiple metrics that we use to make sure that we have the right mix of bookings and the quality of bookings that we deliver.

And we feel good about it and I think the -- as I mentioned, if you’re operating at a very high baseline of a $1 billion of bookings on an annualized basis since this is all net incremental bookings, it’s not -- we’re not putting renewals in it or any of those things, contract extensions in it.

So since it’s all incremental bookings it really helps to drive a double-digit revenue growth if we are maintaining $1 billion mark or so. So, I feel really confident. I’ve been here now for six months.

I am still a student of the business, but I’ve done a lot of analysis on how bookings should translate to revenue, what kind of bookings mix do we need to make sure that we deliver -- continue to deliver double-digit revenue growth and the right margin profile.

And how we will be able to go and expand our margins in the future, and more importantly, continue to generate increasing free cash flow for the company..

Yeah. No. I appreciate. This is one metric of many that’s important and that new sales but just figured I’d ask understanding that the Texas deal was quite special last year. Thank you..

Yeah. Very true..

Yeah. Very true. Thank you..

And ladies and gentlemen, with that, we will conclude today’s question-and-answer session. I’d like to turn the floor back over to Joe Crivelli for any closing remarks..

Thanks. That’s all the time we have for Q&A. So if you would -- if you have follow-up questions or if you’d like to schedule time with management feel free to reach out to me at ir@rackspace.com. Thanks everyone for joining us today and have a great evening..

And ladies and gentlemen, with that, we will conclude today’s conference. We do thank you for attending. You may now disconnect your lines..