Rackspace Technology, Inc. (RXT) Earnings Call Transcript & Summary

I'm Joe Crivelli, the new Head of Investor Relations at Rackspace Technology. Joining me on the call today are Kevin Jones, our Chief Executive Officer; and Dustin Semach, our Chief Financial Officer. Before I turn the call over to them, please note that certain comments we make on this call will be forward-looking in nature. These statements are subject to risks and uncertainties, which could 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 10-Q for the quarter ended June 30, 2020, 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. In addition, we will also discuss certain non-GAAP financial measures, which we believe are useful -- is 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 tables included in today's press release, which is available on our website. All growth comparisons we make on the call today relate to the corresponding period of last year unless otherwise noted. After our prepared remarks, both Kevin and Dustin will be available to take your questions. If you'd like to ask a question, please put your name and your question in the Q&A section of the Zoom portal. I'll now turn the call over to Kevin. Kevin?

Very good. Thanks, Joe, and thanks, everyone, for joining us today. Earlier this afternoon, we issued a press release announcing that Amar Maletira is joining Rackspace Technology as President and Chief Financial Officer, replacing Dustin Semach, who will be leaving the company to take a new opportunity after our third quarter earnings. We also provided preliminary details on our upcoming third quarter results. We expect that, once again, we will show strong revenue growth, including double-digit year-over-year pro forma core revenue growth in the third quarter, which is faster than our previous expectations. In addition, we expect third quarter adjusted EBITDA to show continued growth, both quarter-over-quarter and year-over-year. So let me start by thanking Dustin for his outstanding service to our company. I've worked with Dustin previously, and he's been a great partner and sounding board for me. He's given me excellent support and advice and has earned the respect of the Rackspace Technology team. We are all very happy for him, while at the same time, start to see him go. I hope we get the opportunity to work together again in the future. Dustin will remain with us through our third quarter 2020 earnings announcement, which we expect in mid-November. He will be on our third quarter earnings conference call and will certify our third quarter financial results. After that, he will transition the CFO role to Amar. We are not yet at liberty to say where Dustin is going, but his new company will make an announcement at the appropriate time. Now let me tell you about Amar Maletira. We are thrilled to welcome Amar as the incoming President and Chief Financial Officer of Rackspace Technology. Amar is a seasoned public company CFO with 27 years of technology industry experience. Amar and I have great history together. We teamed up previously at Hewlett Packard when I ran the HP Americas Services business, and Amar was our CFO. Together, we led the team to an incredible transformation of the business, including accelerating revenue growth and record profitability. Amar is one of the brightest, most strategic execution focus and skilled executives in the technology industry. Amar and I have the same playbook, and we are incredibly excited about leading this amazing Rackspace Technology team to this next phase of growth. Amar joins us from VIAVI, a $2.8 billion market cap technology company, where he has served as Executive Vice President and Chief Financial Officer since September 2015. Amar's 5 years as a public company CFO at VIAVI have been remarkable. Here are just some of the obvious accomplishments while Amar has been at the helm as CFO. Revenue grew 30%. Non-GAAP EPS and cash flow from operations more than tripled, and the market cap of the company has more than doubled. As a result of his incredible performance, Amar has been named CFO of the Year by Silicon Valley Business Journal. Also, in 2019, Amar was ranked the #1 CFO in TMT Mid-Cap by investors and analysts surveyed by institutional investor magazine. Prior to joining VIAVI, Amar enjoyed a 14-year career at HP. At HP, he most recently served as Vice President and Chief Financial Officer of the Americas Enterprise Services business, a $7 billion P&L entity and held a series of executive positions in HP Finance, including CFO for the Application Services business and Global Head of Financial Planning and Analysis as well as Director of Investor Relations. Prior to HP, Amar also led sales teams at Siemens and HCL. Now switching to our business performance. Our momentum at Rackspace Technology continues to accelerate, and our confidence has never been stronger. When we announced third quarter earnings in mid-November, we expect that. Once again, we will show strong year-over-year revenue growth as well as achieve an exciting new milestone, double-digit core pro forma revenue growth. As I mentioned earlier, third quarter financial results are expected to also show continued year-over-year growth for key profitability metrics, including adjusted EBITDA and adjusted EPS. The third quarter results, which we will share with you in a few weeks, were enabled by our strong positioning to capitalize on the tectonic shift to the cloud that's occurring with businesses around the world. We have the right solutions and services to help businesses globally of all sizes and in all industries as they transition to the cloud. We believe this will continue to add shareholder value and drive strong business momentum in the coming quarters and years. With Amar joining Rackspace Technology, I am more excited than ever about our future, and I cannot wait for him to join. We will continue to relentlessly execute and deliver results in this fantastic multi-cloud market. And with that, we'll take any questions that you may have.

Thanks, Kevin. It looks like our first question is coming from Matt Cabral at Crédit Suisse.

And he's on mute.

Okay. We're trying to bring that in, but he's still muted on his side. I may have to read off the question.

Matt, try unmuting on your side, if not, I'll just read off your question. Okay. Matt asks really strong revenue upside, but looks like that didn't translate into incremental EBITDA in the quarter. Just wondering if you could walk through the puts and takes on margin and what's holding back the incremental drop-through on the revenue be. Okay. Very good. Thanks, Matt, for the question. Hopefully, we'll be able to bring you live here soon. So look, in terms of profitability, we're making good progress here and more opportunity as well. As I mentioned in my opening remarks, our EBITDA is expected to grow quarter-on-quarter and year-over-year in the third quarter. Now please keep in mind, we're continuing to invest in growth, and that's obviously paying off very well. And we're still in the very early innings of our transformation programs, including automation, bestshoring, supply chain and others. So there's a long runway of opportunity here, and we're going to keep executing.

Thanks, Kevin. And our next question is coming from Ramsey El-Assal, Ramsey, hang on, and we'll make your mic live.

Can you hear me?

Hey, Ramsey.

Hey, Ramsey.

All right. All right, fantastic. I just wanted to ask you about the implied sort of beat in Q3, sort of what the key drivers there -- were there that drove that upside? And then also just to follow-on, why not let the beat sort of flow through to a full year guidance raise? Is it just conservatism at this point of the year? Or are there other factors to consider?

Very good. How about Dustin, I kick off and then you kick in?

Absolutely.

Yes. Thanks, Ramsey. Look, we're excited about the beat. As we've been talking about over the last several months, the continued acceleration that we had in sales bookings is translated into top line revenue growth, right? And it continues, Ramsey, to be very broad-based in kind of all 3 of our regions, Americas, EMEA and Asia Pacific and Japan across all customer segments and all the different service offerings we have. So it's quite exciting. I think really, the sales execution strategy that we kicked off is working really, really well. And of course, we're in the middle of this tectonic shift to multi-cloud, which just continues to build momentum. So I think -- and all those things together is where we see lots and lots of momentum in the business. And we're really, really excited about it. Dustin, do you want to cover 2020?

Yes. So great question. And a couple of things. Obviously, we're very excited about the results that we're preannouncing today. And again, it goes back to what drove it, echoing the same comments that Kevin made around the strong performance in sales, right? And we're talking about the strength in this quarter, and we'll give you more updates on the November call. And right now, it's just that we're in the process of still facilitating earnings, and you'll get the update at that point in time during the earnings call in mid-November.

I see. All right. Great.

Yes. More to come, Ramsey, in mid-November.

And our next question is from Dan Perlin at RBC.

Can you guys hear me?

Yes.

Great. So look, this isn't going to be a numbers question. This one may be hard to answer. Dustin, I know you're not able to tell us where you're heading. But what I'd like to know is what are the attributes of the business that you're going to that are making you want to leave this current opportunity?

So Dan, I appreciate the question. There's a couple of things I state by saying first, this experience over the past 1.5 years has been absolutely incredible. I'm very grateful to Kevin and the rest of the team and the Board for giving the opportunity and the experience we've had. And what we've done from the overall business perspective and where the business is headed, we're incredibly excited about. And so right now, when it comes to a new opportunity, something came up, that was just the right fit from myself, my career and my personal goals. And right now, as Kevin mentioned earlier, we're not able to disclose it at this point in time. And I'll give you details before coming when I'm able to disclose it.

Okay. Fair enough...

And Dan, just a little bit more color on that, if I may, from my perspective. Look, we're obviously going to miss Dustin. We took the opportunity to bring on really seasoned public company CFO, Amar, with a great track record. As I mentioned before, Amar and I worked closely together before. I actually first met Amar in 2014 when I was running the HP American Services business. And he was absolutely terrific, right? Great execution capability, but one of the most strategic executives I've ever worked with, incredibly collaborative but also pushes the team, right? So Amar and I really have the same playbook. We think about things the same way and we're aligned. And if you look at what he's done over the past 5 years as a public company CFO, the financial metrics at VIAVI dramatically improved, right, including doubling the market cap of the company. So I'm going to miss Dustin, but thrilled to be back together with Amar, and the future at Rackspace Technology is really, really bright.

Great. Can I just ask one number question real quick?

Of course.

Is there any color on kind of the backlog? I know you didn't disclose it yet, you may not want to give the absolute number, but any contextual kind of evidence that, that number is continuing to grow and maybe the kinds of clients that might be included in that this quarter?

Yes, Dan. Yes, great question. I'll kick off on that one. So look, early indications, Dan, are that our sales results in the third quarter, once again, will be very strong. We signed over 8,000 deals. And we're still in the validation phase of our sales reporting, and we'll have the numbers available during our third quarter earnings call in mid-November. So we'll have more specifics, Dan, but very strong, continued broad-based strength across customer segments, across geographies.

And just to follow-on to that point, again, also from a pipeline perspective, also still continues to be very strong, right? So all leading indicators point to we're going to have continued momentum and continued strength.

And our next question comes from Amit Daryanani at Evercore.

Yes. Best of luck, Dustin. I guess -- I joined a little late. So I apologize if you already talked about this, but any clarity or any sense on how the bookings number tracked in the quarter? And then secondly, the revenue upside that we're seeing, is there any perspective on what geo -- where that upside really came from?

Yes. Very good. So yes, in terms of the bookings, we had talked a little bit about backlog, but similar for the bookings. On the early indications are for the third quarter that our sales results, once again, will be very, very strong. Over 8,000 deals this quarter, it was a very, very busy quarter. We're still kind of in the sales reporting and validation phase of the deal. So we'll have all the information available in mid-November during our third quarter earnings call, very broad-based from the commercial segment to the mid-market, to the enterprise segment continues to be strong. And geographically, all regions growing really fast, which is fantastic.

Got it. Got it. Perfect. And hopefully, you and on running Rackspace will be easier than turning around the enterprise business in Americas back in the day.

You remember that? Yes, absolutely. This is -- luckily, this is a really exciting industry, but secular tailwinds. So this is going to be a lot of fun.

Those are all the questions we have in the queue, gentlemen. Kevin, do you want to make some closing remarks?

Yes. Sure. Well, look, just first of all, thanks, everybody, for joining us today. And I just want to say again, we wish Dustin all the best. He's done a great job for us, and we are excited to welcome a new world-class President and CFO to Rackspace Technology. As I said, Amar and I work closely together before. I'm thrilled to be back together with Amar and the future is really, really exciting for Rackspace Technology. We continue to capitalize on the tectonic shift in our industry to the cloud. We have great business momentum here. In the third quarter, we expect to reach an important milestone well ahead of schedule, double-digit year-over-year revenue growth and, in particular, double-digit year-over-year pro forma core revenue growth. We look forward to sharing more at our third quarter earnings call, and look forward to talking to you again soon. Thank you very much.