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

[Audio Gap] Telecom conference. I'm Bryan Keane. I'm the payments processors and IT services analyst. We're really excited today to have Rackspace Technology. We have both the CEO, Kevin Jones; and President and CFO, Amar Maletira, here to help us get through and understand the story. And with that, I think what we'll do here is Kevin and team and Amar will go through the slides, some slides they have prepared, and then we'll turn it over to kind of a Q&A fireside chat. So excited to kick it off and turn it over to Kevin.

Excellent. Well, thank you so much, Bryan. Hi, everyone. Before we begin today, just a reminder that any forward-looking statements are covered by the disclosures on Slide 2. So we'll go ahead and start off with some introductions. I'm Kevin Jones with me today, as Bryan mentioned, is Amar Maletira, our President and Chief Financial Officer; I've been in the technology industry for over 30 years at large companies such as EDS, HP and Dell. I've now been with Rackspace Technology for just under 2 years. Amar joined Rackspace Technology in late November 2020 as our President and CFO. Now Amar and I, we work together. We have some history together. We work together at HP when I was running the HP Americas Services business, Amar was our CFO. We are both growth-oriented executives. When we worked together at HP over a 2- year period, we grew both revenue and profit materially during our time at that company. Since then, I think we've both gotten better. We've added to our respective playbooks. Really excited to be back together again at Rackspace Technology. So our agenda is on Slide 4. So I'm going to start by giving you an overview of Rackspace Technology, where we've been, how we've transformed our business and what lies ahead for us. Then Amar will provide an overview of our financials before we open for Q&A, as Bryan talked about. So let's go and get started. On Slide 5, we are a leading end-to-end Multicloud technology services company. We've got 7,200 employees and 2020 revenue of $2.7 billion, which was up 11% year-over-year. We serve 120,000 customers in 120 countries. Now over the past several years, what we've done with the company is we've positioned Rackspace Technology to be the partner of choice for customers of all sizes that want to optimize their Multicloud journey with the people, the partners and the automation to win in the market, all wrapped in the fanatical customer experience for which we're known. In addition, our financial underpinnings are extremely strong with earnings leverage, capital allocation discipline and a sound balance sheet. In 2020, we demonstrated growth across all key financial metrics. So I'm excited to tell you about how we've set the stage for years of incremental revenue growth, earnings growth and enhancement of shareholder value. Now some of you may have known the company in our previous incarnation. So on Slide 6, what I'd like to do is share with you how we've transformed the business since our LBO in 2016. Now over the past several years, we strategically shifted our focus and strategy to capitalize on the tectonic shift to Multicloud. We could really see this trend to Multicloud coming in the industry. And also to kind of note, prior to the LBO, Rackspace Technology completely different, we were really viewed as a competitor to the public cloud. So today, we partner with the hyperscalers like AWS, Google and Microsoft, and other partners like VMware. So just kind of think about that change. That's very profound. So we went from competing against AWS, Google and Microsoft, arguably 3 of the most successful companies in the history of business. So from competing to partnering huge shift from lots of headwinds to secular tailwinds. Since the LBO, the other thing that we've done, we've completed 5 acquisitions that really revolutionized our solutions and position us as a leading pure-play Multicloud solutions provider. Now this transition shows up in the numbers. Revenue from businesses with attractive growth has increased from less than 10% to greater than 90%. Our bookings growth has accelerated. Core pro forma revenue growth has increased significantly and capital intensity has decreased substantially. Now Slide 7 shows metrics that validate the size of our market opportunity. As I talked about, Multicloud Has Really Exploded in the past couple of years, and it's for a number of reasons, right? It's really valuable for customers because Multicloud helps customers save money. That's a timeless goal, right? Customers always want to save money. Customers want to quickly scale up and scale down. Cloud does that, and customers often want to change or invent new business models, and the cloud is the best for that. But customers no longer pick just one cloud platform and build their entire business on it. Customers want to diversify, keeping some of their compute resources on one platform while operating on other platforms for competitive reasons. Some applications may run better on one platform versus another. Still, other data may belong only on private cloud for privacy or security reasons, while legacy applications may be too cumbersome or expensive to move to the cloud. Validating this, on the left-hand side of the slide, 81% of cloud users are working with 2 or more cloud providers according to Gartner. So everyone wants to go to Multicloud, right? That's -- I think that's a given now. But Multicloud is complex, very complicated for customers. The landscape changes daily. There's new rules, new pricing, new service offerings. As a result, even the most sophisticated IT organizations at the world's largest companies need help managing their Multicloud environment. So if you look in the middle of this slide, you see that 75% of customers are using Multicloud managed services. And on the right side of the slide, Gartner is actually forecasting that Multicloud will continue to grow into a $520 billion market opportunity by 2023. Now the great news for our investors is that this is almost entirely whitespace for Rackspace Technology and gives us years of runway for continued growth. Now as shown on Slide 8, Rackspace Technology has built a product portfolio that helps companies from small business to mid-market to enterprise navigate the entire life cycle of their Multicloud journey, including the infrastructure, applications, data and security. We provide an end-to-end stack of services across all these lines of business, including advisory services, design and implementation services as well as managed services, where we operate, and we just continually make these environments better and optimize the environments for the customers. We have these capabilities at scale across private cloud and all the major public cloud hyperscalers. We believe there is no other services provider in the industry that can deliver this breadth or depth of capabilities in Multicloud. Now turn to Slide 9. One of the biggest challenges that customers face in the digital transformation is staffing. IT professionals with cloud expertise and certifications are some of the most sought-after talent in the world today. And by and large, they prefer to work at a technology company. At Rackspace Technology, we're able to attract and train the best it talent across the globe. So as shown on the slide, a key Rackspace Technology asset is the collective value that's represented by our 7,200 rackers and the incredible depth of talent and expertise in Multicloud that they bring to the table for our customers. On the right side of the slide, you'll note that we have certifications and recognition from all of the public cloud hyperscalers and many leading cloud software companies. Now on Slide 10. Rackspace Fabric is the proprietary software that underpins our industry-leading automation. It includes over 200 unique tools and components to deliver our services. Rackspace Fabric represents an investment of more than $1 billion and 12 million hours of highly skilled professionals' time. We believe it gives us a sustainable competitive advantage that would be difficult, if not impossible, for a competitor to replicate. Here's why. Over the course of over 2 decades in the cloud business, we've seen a lot, right? We've seen a lot of workflows. And any time, a Racker sees the same task, multiple times with different customers, we automate that task. We also use advanced machine learning tools to identify work that can be automated. So we have this incredible critical mass of automation based upon institutional knowledge and know-how that we continue to increment every year. Approximately 75% of our workloads are automated today, an industry-leading figure that continues to increase, and we continue to optimize our automation to drive further efficiency gains in our business. Now on Slide 11. Rackspace Technology has been recognized as a leader in the Forrester way for hosted private cloud services in North America and the Forrester way for Multicloud-managed services providers. You can see that Rackspace Technology was the only company identified as a leader in both Forrester studies. In addition, the horizontal axis identifies Rackspace Technology as having the strongest strategy of any of the companies mentioned. We were also named as a leader in the Gartner 2020 Magic Quadrant for public cloud infrastructure, professional managed services worldwide. So with that, I will now turn it over to Amar. Amar, over to you.

Thanks, Kevin, and thank you, everyone, for your interest today. Let me take you through our financials in some more detail here. So on Slide 13, you can see that all of our key metrics were up during the year. Our bookings were up 61% driven by broad-based growth across core segments as well as sales execution and also an overall growth in the Multicloud market. This led to an 11% growth in total revenue, 13% year-over-year in core revenue and 9% growth in pro forma revenue. Our earnings grew faster than revenue. Non-GAAP operating profit was up 14% and non-GAAP EPS was up 118%. And these were driven by revenue growth and the cost transformation programs we executed in fiscal '20 and reduced interest expenses. Now if you move to Slide 14. Slide 14 provides more detail on our revenue breakdown. The Multicloud segment represented 79% of revenue in 2020 and grew 17% year-over-year. Apps & Cross Platform was 13% of revenue and grew 5% year-over-year. Now we have multiple opportunities in this particular business segment as the market continues to evolve. We will selectively and strategically invest in new offerings and expect this segment to accelerate in the next few years. Now our OpenStack Public Cloud business, which we are not actively marketing today, was 8% of total revenue for the full year and declined by 20%. Geographically, the Americas represented 75% of 2020 revenue and grew 13% year-over-year. EMEA represented 22% of revenue and grew 4%, while APJ at 3% of revenue grew 9% year-on-year. Now we believe that we are underpenetrated in Europe and APJ and have a solid runway for growth in these 2 regions. In fact, over the past year, in these 2 regions, we have enhanced our leadership. We have refined our go-to-market strategy and also broadened our sales coverage, and we expect these efforts to drive results in the coming years. Now we have expanded our global presence in 2020. We entered additional countries such as New Zealand, Japan, the UAE, Egypt, Ireland, South Africa. We also entered Malaysia and Bahrain and other places in Southeast Asia. Now turning to Slide 15. You can see the consistent earnings leverage we have driven through our shift to capital-light offerings as well as our cost transformation programs that I mentioned earlier. Over the past 2 years, non-GAAP operating margin has trended up and is 280 basis points higher than it was in early 2019. This was a result of our ongoing OpEx efficiency programs to drive higher productivity across SG&A functions while making targeted investments to increase our market coverage. We also delivered higher net income margins, which further reflect lower interest expense as we optimize our capital structure. We believe non-GAAP operating margin is the best metric to gauge our performance as we continue to shift our business model to capture the secular growth trend in Multicloud market. So moving to Slide 16 and our capital structure. As Kevin mentioned, our past -- over the past several months, we have completely refinanced the liability side of our balance sheet. This generated significant interest savings, and we now have no meaningful debt maturities for the next 7 years. We ended the year with cash and equivalents of $105 million. We have $375 million of undrawn revolving credit facility. And one of our main priorities in the next several years will be to delever the balance sheet. And our goal is to reduce the leverage to about 3 to 3.5x from the current 4.3x. Now moving to Slide 17. You will see our outlook for the coming year for fiscal 2021. We expect revenue to grow 11% year-over-year at the midpoint, which is an acceleration from 6% pro forma revenue growth in fiscal 2020. We expect our core revenue to grow 13% year-over-year at the midpoint, which is also an acceleration from 9% pro forma revenue growth in fiscal 2020. We expect non-GAAP operating profit to grow 9% at the midpoint. We also expect non-GAAP earnings per share to grow 20% at the midpoint. So as you can see, we also provided some additional below the line items as well as the expected quarterly progression of revenue and earnings at the midpoint of the guidance. To help investors more accurately model the year. Now with that, I will turn the call back to Kevin for his closing remarks. Kevin, over to you.

Very good. Thanks, Amar. So in conclusion, on Slide 19, I want to share with you why we are winning. We have 8 specific competitive advantages over our competition. We have the highest automation in the industry, which provides customers with speed, agility and quality, and we're focused on widening the gap year after year. We have standardized operational processes. We have, by far and away, the most standardization of any company in our industry. We lead with our software, Rackspace Fabric, which is supported by nearly a decade of investment. We're famous for our fanatical customer experience, which was built into the DNA of the company 20 years ago. We serve our customers across the entire Multicloud journey, providing end-to-end solutions and a single provider for their entire cloud life cycle. We continuously improve our solutions with our customers, always proposing ways for our customers to save more money and innovate faster. We deliver at scale, serving customers in over 120 countries. And finally, we maintained strong and long-standing relationships with our technology partners, who are deeply integrated into our sales, operations and solution organizations. Our goal is to be the #1 cloud services provider in all 3 hyperscaler ecosystems. So to summarize here, we are materially differentiated and it's showing up in our sales and revenue numbers. We've done the work. We've demonstrated the results and the opportunities are massive. And with that, Bryan, over to you, we're ready for questions.

Awesome. So what I'll do is I'll go through some questions. And if people listening in want to ask questions, they can go to the portal and put in a question, and we'll get to that as well. So I think the first question I had is when you look at Rackspace, it's made significant investments in the business over the past several years post the LBO. The company shifted the business mix towards the multicloud Services and leveraged the partnership model as you described. But the company performance really started to improve, Kevin, when your team -- you and your team joined the firm and I think there was even a couple of CEOs even prior to you. And so I just want to understand that key to the turnaround really started with you joining and what exactly caused that turnaround to drive the accelerated bookings and revenue growth trajectory?

Well, thanks for that, Bryan. Look, when I came to the company a couple of years ago, I knew that this is a great company, right? I had competed against Rackspace for 20 years. And I was really excited to be at Rackspace, best technologists in the world. And then we were really starting to foresee this Multicloud kind of explosion. So when I came in, I really thought we had a ton of potential, and we had started to make the pivot, right, to Multicloud, but the execution maybe wasn't quite there. So the first thing we did really quickly. Bryan, is we decided what are the strategic changes we're going to make in the business. What are the big calls that we're going to make in the big investments. So one was the shift to partnering with the hyperscalers instead of competing. Now we had sort of been in a halfway house there, kind of competing, kind of not. And we went all-in on the partnering, and that paid off big time, right? So like I mentioned, it's a beautiful thing to be in a business that has secular tailwinds. So we're in a world now where we go-to-market with AWS, Google and Microsoft. It's fantastic, and we actually build new products with them, right, and release them together. So that was one enterprise -- one big kind of strategic change. The second strategic change that we made was who are we going to sell to, right? We changed that. We're really known as a company that sold to small customers. And we changed that to -- yes, we're still going to do that but we're going to really double down in mid-market enterprise. That was a massive strategic shift for us. And I think we had even exceeded our expectations in terms of how well we'll be able to sell and be successful there. And then we just continue the acquisitions, right? The company had done 3 acquisitions before I got into the company. We did 2 more. If you add all those up, they really just changed what we sold. And so that was strategically. Now operationally, you're exactly right, Bryan. We did a lot of things tactically different -- differently as well. We enhanced the executive team, right? I brought in people kind of 10x overqualified for their roles. It's part of my playbook. Amar is a great example of that, right? He's a very successful public company CFO, and we've got other people around us that I really invested for the future because I could see the growth potential of this company. Secondly, we implemented a pretty intense kind of metrics-focused management system to really hold ourselves accountable, track progress and success at a pretty detailed level. And then finally, we created a transformation office and 120 transformation projects to really systemically transform the company. I believe in systemic, long-term transformation. And that's kind of what we're right in the middle of. So kind of all those things together really, Bryan, between the strategic changes and operational changes and what's enabled our performance.

Got it. Got it. Amar, I want to ask about -- the most popular topic these days is to talk about the gross margins with Rackspace. And I know they're expected to moderate from 38% in fiscal year '20 to the mid-30s in fiscal year '21. And EBIT margins are expected to be flat to slightly down to mid- to high teens in fiscal year '21. So how much of that pressure in margins is coming from the mix of business shift versus the investments?

Yes. So that's a great question, and you're right. It's a question I get very often. So I'll take some time here, Bryan, to basically give you a little bit more color then the question itself. So first of all, just to be clear, right, gross margins are down for a good reason. The business is growing fast, and it's not for a bad reason like there's a competitive pressure or lower pricing or lower demand. Gross margin trends in our business directly reflect where we are in our growth phase, right? And also, just keep in mind -- I've been in the services industry for more than 25 years, Kevin has been for more than 30 years. When you quickly accelerate the services business, you will see lower gross margins because the early part of our relationship with a new customer is less profitable part of the relationship. But these new customers will then create the foundation of our growth in the next decade or so, okay? So for example, we mentioned that we won about 400 new logos this year and are on the process of onboarding a lot of new customers. So most of our new customers are in the initial phase of the cloud journey, where the spend is more weighted to infrastructure compared to services, and this is the business mix shift that we are talking about. However, for all these customers, margins will expand as the relationship grows, and we upsell and cross-sell additional higher-margin services, such as more migration services, cloud-native application development services. They require a lot of data services because even the data is moving towards cloud, and security services is a very hot area, too. So I just wanted to make sure that these are the reasons why gross margins are sort of under pressure right now. But we guided to mid 30%, plus or minus a couple of points, but I highly encourage investors to start taking a look at the operating margins because operating margins will be mid- to high teens, and there is a big OpEx leverage in the model as we scale up, right? For example, I use this example very often is, let's say, in an installed base, where we landed the installed base, you've got to land first before you can expand. So it's important to land. And we are creating that installed base that we can start expanding into in the next 3 to 5 years or even more. And when you sell higher-value services, and let's -- just for an example, let's say, it's a 35% gross margin service I sell into this installed base, we already made the investment in terms of the account teams and so on and so forth of the installed base. The fixed cost investments are already in the early part of the relationship. So the 35% gross margin services, you might spend about 4 to 5 points on sales commissions and so on and so forth. Maybe another 3 to 4 points on incremental G&A. And let's assume it's about 10 percentage points of incremental OpEx, 25% of that falls to the operating profit line. Now we are in mid- to high teens. So these -- when you start adding these high-value services on top of this installed base, which you already made an investment, it has a very high operating leverage in the model. And that would start creating a nice upward trajectory to our operating margins, and that's how we'll continue to expand our operating margins going forward. We're also making growth investments, and I think you alluded to in your question because we will make investments in areas -- and I can get into the details later, but in 2 areas of new service offerings in operations, so on and so forth. And that's also baked into our model. So when you think about where the gross margin pressures are coming from, it is because we are in the growth phase. We are making investments, but more so, the business is also shifting, and we are capturing all these new accounts and new -- and creating this new installed base, which we can expand into -- in the future.

Got it. And can you specifically talk about that strategy to cross-sell and up-sell higher-margin value-added products over time. How quickly can you scale gross margins typically? And I think the stat you guys gave is about 50% or higher adopt -- of clients adopt 2 solutions. Is that the key to continue to further penetrate that?

Yes. I will start and I'm sure Kevin will jump in here. So let's take a customer who has just signed up with us initial stages. We offered a solution that includes infrastructure services and software, and we have started moving some of the workloads into the cloud platform. Now we can go up-sell because more and more of their workloads will move to the cloud platform. So we have migration services. We also manage and operate that environment for them because it's in a Multicloud environment, and they don't have the skills to do that themselves. So that's another one. Most of these customers are actually lifting and shifting their applications from, say, on-prem or on the VMs today onto a cloud environment, and these applications are not factored. They are just lifting and shifting it, and those applications have to be modernized, right? So there's a lot of opportunities to go and sell application services, application modernization services to modernize their old applications as they move to cloud and also build modern applications that are cloud-native. And I talked about data and security services too. So if you ask some of these industry analysts, they would say, for every dollar of infrastructure and on the cloud side that gets sold, a service provider can sell about $10 of high-margin or higher-value services on top of the $1 of infrastructure or the life of that infrastructure, right? So we went back and we have all these metrics internally that we track on the attach rate and follow-on sale into our installed base. So for the court of customers that we sold at the beginning of fiscal 2020, we looked at those customers, and we said, all right, if we have sold this Multicloud environment to this core of customers, what does the follow-on sale look like? We found that for every incremental dollar of infrastructure that gets sold fall on, as more and more workloads are more into the infrastructure, we were able to sell $2.2 of higher-value services on that $1 incremental dollar of infrastructure. So you can see over a period of time, how these services get stacked up on this current installed base. And that's how it should -- that's the up-sell and cross-sell opportunity. Now that will create definitely an expansion gross margin. But I continue to -- I want investors to focus on operating margins because the example that I gave you earlier on how the OpEx leverage is in the model will help us to expand operating margins as we sell, up-sell and cross-sell more services into these installed base accounts.

I think that's well said. The only other thing I'd add is -- color, Bryan, is that if you just kind of step back and look at our sales force, the strategy to up-sell and cross-sell, it's tremendous. We've got 1,000 customer-facing quota-carrying sales professionals, right, between calling on new logos and growing our business with our installed base. So it's a very powerful large amount of folks considering the size of our company and how we are able to cross-sell and up-sell. We've got a lot of mind share with these customers. We have fantastic offerings. They're everything where the customer is interested in buying because it's the new technologies. It's not the old technologies. It's cloud-native technologies. And then we've got just extreme focus on execution, sales management, health education, the intense management system. So all those things together is kind of why you've seen our revenue and bookings momentum just continue there.

Got it. And since we're on the topic of gross margins, I'm going to go to a question that came in from the investors here. The question just is on what are the gross margins for the public cloud business within the Multicloud segment. Maybe you can just talk about what percentage of revenue that is and then how fast it's growing and the impact it has on gross margins.

Do you want to take that one, Amar?

I'm sorry, I was on mute. So let me start here, and then Kevin, you can join. So Bryan, we don't break down the Multicloud segment, right, which is roughly 80% of our business. And there are reasons why we don't do that, and I've explained that before because customers are buying as Multicloud. To be honest, they are not buying as one platform. They're buying multiple platforms. And if you serve with the customer, 80% of the customers have a Multicloud strategy. They don't say a public cloud or a private cloud strategy. So customers are buying that way. That's the way the market is. And we are also delivering services that where we have a shared services organization that serves public cloud customers, private cloud customers, customers who are in both public and private cloud, so on and so forth. And we're also organized from a Multicloud perspective because when we have a professional services engagement as an example, the engagement is for advisory services that will span across multiple platforms, right? So having said that, I think just to give you some color on what's -- and I'm trying to see how we can unpack that to you guys and give you more color in the future quarters on the growth pieces within that business, so on and so forth. So stay tuned for that. But if you think about just the public cloud workload within that piece, the public cloud workload is growing faster than the hyperscaler growth rates, right? And so we are taking market share. We are creating the installed base that we can grow into. And so I think from that perspective, I think we are doing quite well. So the growth rate of the public cloud workload is much, much faster than -- much faster than the hyperscale growth rate. Anything else, Kevin, you want to add here?

I think you've said it very well.

I was just going to say this -- yes, the strategy, maybe on the outlook on that piece of the business, I'm sure it has to do with the cross-selling as well.

Yes. I think, listen, end of the day, I think we -- our model is very simple, guys. We definitely, right now, as we're going to the growth phase, we want to make sure that we maintain operating margins of mid- to high teens. And as I said earlier, as you go and up-sell and cross-sell more services, that has to -- the margins will go out of the high teens. Now our model -- financial model is to grow revenue and grow profit at a faster than revenue growth rate and grow EPS also at faster positive in the revenue growth rate. Even in fiscal '21, we are -- our revenue growth is 11% at the midpoint. We are growing 9% operating profit. Keep in mind that 11% growth on revenue also has OpenStack, which is the business -- 8% of the business that's declining. We are growing operating profit 9%. We are growing EPS about 20%. So as you go through the -- as the installed base matures, I think you should see expansion in both gross margins but more so on the operating margins.

Got it. One of the popular questions out there is there a risk you guys think that cloud providers like Azure and AWS, they build competing services to go head-to-head with you guys more often?

Yes. I'll take that one, Bryan, and we do get this question every now and then for sure. Look, a few things to consider about this, why we believe this is unlikely, if not impossible, right, type of scenario. First of all, we have great relationships with the hyperscalers, including multiyear contracts with them, right? And in these contracts, we've got revenue goals, and very detailed execution plans on what we're going to do. So we have multiyear contracts with hyperscalers. Secondly, we are already integrated with the hyperscalers go-to-market teams. We sell together, right, all over the world in each of the 3 regions, EMEA, APJ and in the Americas. So we're already kind of teaming with them, selling together with them at an account level, calling on customers together. And then centrally, our research and development teams are pretty intertwined, right? So I'll give you an example, AWS Anthos. We co-launched and developed with them. Same thing with a lot of the VMware VMC releases. We partnered with VMware and AWS. With Google Anthos, we worked on the development with Google and co-launched with them. So we're very embedded already, I guess, is the point. Thirdly, we've signed up to very aggressive revenue goals with all of them. So we're kind of partnering. Fourthly, we've got multiyear services contracts between the customer of Rackspace Technology. So the reality of how this works is typically the contracts are between Rackspace Technology and the customer. And we've got subcontractors, which would include some of the hyperscalers in this instance. Also, just think about the hyperscaler strategy. These are product companies. They're not services companies that could have gotten into this business 20 years ago and they chose not to. Now let's say, for sake of argument that they wanted to, that the hyperscaler wanted to get into the services business, which they don't, but let's say, sake of argument, they did, hyperscalers, by definition, just provide their own platform, right? And customers today want Multicloud. That argument is over, right? So 80% of enterprises use Multicloud net figures growing. So that wouldn't work. You couldn't see a situation where one hyperscaler would be certifying their employees to go sell a platform. It's just not realistic. So hopefully, that puts that question to bed, Bryan.

Got it. Helpful. The revenue guidance for fiscal year '21 was really strong. The surprising piece, I think, to some was the EPS was a little bit below street expectations. And I think that had a lot to do with those incremental investments. Amar, you touched on them, but I'd be curious to know if you could talk about the exact areas of planned investment and maybe quantifying them and giving us some framework thinking about the potential magnitude?

Yes. So first of all, Bryan, the EPS guidance versus Street consensus, there were 2 reasons. One is, of course, our operating profit guidance was slightly lower than the Street was expecting. But more importantly, the Street had also modeled the interest expenses or other income and expense line item as well as tax expenses lower than what the company had guided previously. So it was not all related to the operating profit or operating levers in the model, right? So it was also related to items that are below the operating profit line. I just want to make sure that, that's clear. Now regarding investments, our investments, we are making investments. When you think about investments that we are making, there will be investments in go-to-market as well as our new service offerings, and those investments will be mainly in the OpEx line. And we have made a lot of investments in go-to-market in fiscal year 2020, and we'll make some incremental investments in fiscal 2021. Because go-to-market, fiscal 2020, we had expanded in multiple countries. We had hired a lot of salespeople. Those salespeople will become more productive in fiscal 2021. So that's one aspect of the OpEx line. The second is we are making investments in service offerings. We talked about that on the call. We'll be launching in 2020 new market-leading products and services in the next 6 to 12 months. And for us, it's our most exciting year in the history of the company with new service offerings on Tap in MPC with Service Block 2.0, where we are redefining managed services and public cloud, using what we call as elastic engineering. So stay tuned for that. We're totally also reimagining private cloud with our next-generation offering, which is more capital-light than the previous generations. And we also benefit the customer here because we have multi-tenancy and public cloud, like economics on private cloud. And you will also see us launch a slew of offerings in IoT and security applications, so on and so forth. So we are making investments in those areas, too. So all these are hitting the OpEx line. When it comes to cost of revenue, we are making investments in operational readiness for these new service offerings. You can't just launch a service offering and customer starts buying, and you do not have -- operationally, you're not ready to go sell those customers. So we are making investments in operational readiness to fulfill or to deliver these new services that we will be launching in the market. We also -- we're also making investments on -- in professional services to make sure that for us, professional services at top of the sphere is most -- it's a very differentiated service that we offer. Customers want that service because we lead with solutions and services. And we will also make investment in professional services that also will hit the cost of revenue. So I will not quantify it on how much of investments we are making. It's all part of my guidance that we provided to you. And I've given you a good split of gross margins, EBIT margins, and you can also calculate what the OpEx as a percentage of revenue is to get to that guidance. So it's all part of the guidance.

And I saw you guys issued an 8-K MR a couple of weeks ago. And then I think on Slide 17, it talks a little bit about the cadence of how those expenses and how the margins will look. Can you just talk a little bit about the timing of how that flows into the model for this year?

Sure, sure. Thank you. Thanks for the questions. So we were getting a lot of questions on this time from the investors given the callbacks on how to think about quarterization of our guidance. So we provided some specific guidance on that, and that's included in the slide that I presented, Slide 17. Now in the first quarter of Q1, I think you should see most of our resources are in the U.S. And in the U.S., seasonally, we see a higher payroll costs because the payroll taxes and benefits or fringe benefits start ramping from calendar Q1, and you see that happen every single year. So seasonally, our first quarter is a higher expense quarter. And as you go roll through the year, those expenses, fringe benefits go down and becomes -- it becomes lower towards the second half of the year, right? Because labor cost is a bit -- is also a portion of our total cost of revenue. So that's the reason you see a Q1 will be lower from an EBIT perspective. And as you go through the year, as revenues also start growing, you should also see EBIT and EBIT profit dollars as well as EPS growth through the year, starting from Q1 and then accelerating into Q2, Q3 and Q4. So our second half should be slightly stronger than the first half on both the revenue as well as from a profit perspective.

Got it. Got it. Helpful. And so just kind of thinking about the big picture here, can Rackspace keep those gross margins flat and drive operating expense leverage to expand overall EBIT margins over time? Just thinking about automation investments, revenue and profitability per employee, just how do we think about the kind of the structure of margins as we go forward?

Yes, I think that's a great question. So I think you should -- even if the gross margins are flat, and we'll continue to drive more and more automation. We are at 75% automated. So you might think, okay, how much more can you drive but, as you know, more and more newer workloads and processes get added, and you have to continuously drive automation. We are highest in the industry from an automation perspective. So that's definitely one of the levers that we'll use. So think about the example that I gave you earlier on the OpEx leverage in the model. So there's a big OpEx leverage in the model as you start pouring our revenue on top and mainly into our installed base. And so you should expect our OpEx as a percentage of revenue to decline as the revenue grows. In other words, our OpEx will grow much slower than the growth on the top line as we grow our business. And that's just the nature of the business, that's the nature of the services business. And in my previous company, also, if you go and see my track record, over the 5-year period, we the gross margins were flattish to slightly down, and the operating margins grew from 8% to 21% when I exited the company in 5 years. And how did we do that? By driving more OpEx efficiency as an example. And I'll give you a lot of examples on how we can drive more efficiency in G&A. I think we are not efficient yet in this company in G&A, right? We have driven a lot of automation on the customer side. We have to drive similar automation internally in the company. We have to do more onshoring and offshoring of our G&A and build a shared services organization. That's what I did in my previous company, built a shared services organization at 1/4 the cost of what we had on onshore. But what that does is when you build that kind of shared services organization offshore, when you start driving revenue growth, your unit cost is growing at a much slower pace than the growth in revenue because you have a much lower unit cost as a starting baseline. So that's all ahead of us. I think there's more opportunity in this company to continue driving OpEx efficiency across all the line items, including sales. As I mentioned earlier, we made investments in go-to-market. We are now driving productivity in the organization around -- across the sales organization, and you should see more efficiency even in the sales organization.

Got it. A question coming in from the portal. Kevin, maybe you can address this. It's just who do you guys view as your competition today? Because obviously, that's changed pre-LBO when you were competing versus the LB -- cloud service companies.

Yes. Sure. Absolutely. I'll kind of break it down for you. So we're very laser-focused on Multicloud. So you probably -- a lot of the investors, it's difficult for them to find really a comparable company to us because we are quite unique. But let me just kind of paint the picture of the landscape. So roughly 50% of our engagements are sole source, so no competition. We just go to our customers directly. That's roughly half of our engagements. Customers just overwhelmed by Multicloud and need help. Competing with the systems integration companies is probably the next 20% of our engagements. And systems integrators are the large slow-moving giants. We're very differentiated against those companies, right? We have roughly double the automation that they do. We're end-to-end. We're only focused on cloud. We've got thematical customer experience. We're really a software-enabled business. We're not a labor business. We're kind of the opposite of the SI. So we're very differentiated there and have a lot of success there as well. Now within the SIs, there are some good companies there, like Accenture and Cognizant and Deloitte and some of those type companies. Now those are actually pretty good companies. But again, they're labor-based companies. They don't have the kind of platform that we do. They're not laser-focused just on Multicloud, like we are with the majority of our business. And also, they're usually focused on the front end of a cloud journey. And customers that we talk to want a provider that spans across the entire cloud journey, so not just advisory consulting. We do that. But we also do the migrations, and we do the managed services on the back end. So you see what I mean. That's sort of the entire life cycle. So we're differentiated there. So that's 20% of our engagements. And then the balance, 30% are really against, I would say, niche players and maybe a single country or one platform. Maybe they're just an AWS ecosystem player or Google or whatever. And they just don't have really the scale to compete with us, particularly in the upper end of mid-market and the enterprise market. So hopefully, that helps provide a little bit of flavor on the competitive environment. And like I mentioned, we're just extremely differentiated, and that's why we're winning at the rate we are, and we've got so much momentum.

Got it. And kind of thinking about a typical contract for you guys, how does it get structured? And how do you guys get paid?

Amar, you want to grab that one?

Yes. I can start off on this. So I think this is -- it all depends, Bryan, on what part of engagement we are in. For example, when you go into an advisory service and assessment service, that's how it always starts, it is a professional services engagement, right? Then the customer says, okay, now that you've told us which way the workloads should move and how we should architect it, can you provide us a total solution of bringing infrastructure services, which includes managed services and everything into this picture, then we start having a long-term engagement. So typically, the engagements might run from, say, a few months if it's a professional services engagement or project-based engagement to, say, 3 years. And that's how the contracts get structured. Now once you have the frame contract, then you go up-sell and cross-sell more using the frame contract. Now how do we get paid? We get paid based on if it's -- it depends again on the engagement, right? For example, if it's a managed services engagement, there is -- we are also -- with our service blocks, they buy service blocks. They don't buy the whole package. So that's why we are different than an SI. An SI would go and customize an offering or a solution for a customer. What we do is we say, listen, we understand the complexity in the environment and across -- we have identified all the problems, and we will provide standard solutions for those problems. And those kind of solution comes in what we call a service block. So they will -- they'll pick whatever service blocks they want, and then they pay for their service based on the fixed fees. For example, for elastic engineering, they may buy sort of a basket of ours that they want to pay over a period of 2 months or 3 months. But most of these contracts are long-term contracts as we get into a managed services kind of arrangement. Anything else you want to add here, Kevin?

No. I think that's really well said.

Okay. With that, gentlemen, I know we're up against the clock. Thank you very much, Kevin and Amar, for those insightful comments on Rackspace, and we'll continue to follow with interest but thank you so much for being here and helping us understand the story better.

Thanks, Bryan, for having us, very much.

Thanks. Thank you, Bryan. Bye now.