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Presentation

Operator: Good afternoon and thank you for standing by. Welcome to Rackspace Technology’s Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the presentation, there will be a question-and-answer session. Please be advised that today’s call is being recorded. I would now like to hand the call over to Robert Watson, Vice President of Corporate Finance. Please go ahead.

Robert Watson: Thank you and good afternoon. I am joined today by Amar Maletira, our Chief Executive Officer and Bobby Molu, our Chief Financial Officer, who recently joined in January. Supplemental materials to today’s earnings announcement as well as a replay of today’s call can be found on our Investor Relations website. As a reminder, certain comments we make on this call will be forward-looking. The statements involve risks and uncertainties which could cause actual results to differ. A discussion of these risks and uncertainties is included in our SEC filings. Rackspace Technology assumes no obligation to update the information presented on the call, except as required by law. Our presentation includes certain non-GAAP financial measures and adjustments to those measures, which we believe provide useful information to our investors.

In accordance with SEC rules, we have provided a reconciliation of these measures to their most directly comparable GAAP measures and the earnings release and presentation, both of which are available on our IR website. I will now turn the call over to Amar for an update on the business.

Amar Maletira : Thank you, Robert. First, I’d like to quickly update you on the Ransomware incident we experienced late in Q4. On December 2, Rackspace detected suspicious activity in our hosted exchange email environment, which triggered our incident response team to act immediately to contain the threat. We quickly engaged industry leading cybersecurity firm CrowdStrike and other experts to assist us with the forensic investigation, which was completed in roughly 30 days. The investigation determined this was the result of a zero day exploit, which means the attack vector was not previously known, and it was a sophisticated attack. Due to a team’s swift action to contain the threat, the impact was limited solely to the hosted exchange email environment, which makes up less than 1% of our total revenue.

No enterprise customers were impacted and no other Rackspace products, platforms, solutions or businesses were affected as a result of this incident. We provided our hosted exchange customers with a path to migrate their email services to Microsoft 365 and assisted many customers with both the email and data transmission. Security is extremely critical for our business and we have the right focus and investments to continue to provide our customers with a secure environment. With that, let me share what else I’ve been doing since taking the helm in September. I’ve been laser focused on transforming Rackspace Technology into a customer first cloud first company and changing the trajectory of our performance. In just the last few months, we have achieved many significant milestones, which include implementing a two business unit operating model, adding new leadership, strengthening a board and introducing new products and services.

We are now poised to drive these changes throughout the company and bring our strategy to life. We are very focused on fixing this business for the long term, even if it requires near term disruption. While the next few quarters may be choppy, our focus is on positioning the company for sustainable growth heading into 2024. I’m pleased to share some of the progress since our last earnings call. First, we delivered fourth quarter revenue and profitability above the high-end of our guidance. This is a positive step as we continue to build a track record of meeting or exceeding our commitments. Second, I’m excited to welcome Bobby Molu, our new CFO, who joined in January and has hit the ground running during his services background and broad operational finance experience.

Third, we have hired Brian Lillie as the President of a Private Cloud Business, and have previously announced DK Sinha as the President of the Public Cloud business unit. Given this, we now have strong leadership for each of these two core segments. Brian’s deep technology experience and focus on strategy and execution will be instrumental in transforming our private cloud business. And finally, Anthony Roberts has joined our board of directors. Anthony’s extensive experience as a Senior Technology Executive will be a tremendous asset that together with the recent elevation of Shashank Samant to lead director will help define and fortify our position as the industry’s leading provider of multi-cloud solutions. While we are only a couple of months into a new operating model, I am encouraged by the early signs of progress.

Although it will take time to fully reflect this progress in our financial results, I strongly believe we are headed in the right direction. As we navigate the challenging macro environment, we are experiencing some of the same trends highlighted by others in our industry. Growth of the product cloud market has slowed as customers are showing a heightened focus on efficiency. We are also experiencing longer sales cycles. The recent economic slowdown has also led many companies to take a more deliberate approach to evaluating whether workloads should operate in public or private cloud to optimize for performance and costs. The demand shifting to the right, we’re taking advantage of current macro conditions to complete our transformation, improve execution, and launch new offerings.

In public cloud, we continue our accelerated pivot from an infrastructure retail led motion to a services-led motion with deeper customer engagement. As we change the mix of the business, we are experiencing some near term disruptions. We are committed to building a services backlog that will yield sustained long-term growth and improved margins. We already taken several steps to accelerate a shift to a higher margin suite of services and expand our existing offerings. Let me highlight a few examples. We recently announced an expanded long-term strategic partnership with Google Cloud. As part of this partnership, Rackspace will build out a Google Cloud Center of Excellence with 250 certified GCP resources. Together with GCP, we will drive joint business development around Rackspace as Google Cloud services focused on areas such as application migration, modernization, data and AI.

We also recently launched Modern Operations which is a new managed service offerings for public cloud that will provide customers across AWS, Azure and GCP, a 24/7 unified support model for a broad range of services. Modern Operations is a good example of the sticky annuity services, we are focused on expanding. Our new operating model will ensure that we emerge from 2023, with the public cloud organizations focused on the high value opportunities in this wide open market space. To grow the public cloud, has also spurred new demand for private cloud solutions. Public cloud is a great place for many new and emerging workloads. Companies are now realizing, however, that many workloads are most efficiently operated in the existing native environment.

Many companies also no longer want to build or operate in-house data centers, and need a safe, reliable partner to run mission critical workloads. All that sums up to a significant opportunity for Rackspace as one of the largest skilled players in private cloud. To address demand across a broad range of private cloud customers, we recently launched software-defined data center offerings, including enterprise, business, and flex options. These enhanced higher value offerings position as well to meet unmet demand in private cloud. As Rackspace moves forward, you should expect a continued focus on higher value innovations in public and private cloud, which underpin our strategy and new operating model. In parallel, we are progressing on industry-specific offerings in both public and private cloud.

We are building focus teams and solutions in verticals such as healthcare, telecom, tech and gaming and public sector to better leverage of core multi-cloud strengths and address the complex challenges facing our customers. As an example, we recently signed an important memorandum of understanding with SDAIA, the Saudi Data and Air Authority, a government agency with a mission to unlock the value of data as a national asset. This MoU will enable Rackspace and SDAIA to collaborate on strategic technology initiatives in support of Saudi Arabia’s Vision 2030 and ambitious blueprint for the kingdom’s digital future. This partnership is an example of Rackspace’s relevance in an exciting multi-cloud market. Before I conclude, I’d like to extend my heartfelt gratitude to each and every one of our talented Racker’s customers and partners around the world.

Over the past five months, we have accomplished a great deal and initiated critical changes within the company. Our two business unit structure is not fully operational, and we have assembled a strong leadership team to execute our strategy and plan. 2023 will be a transformational year for us as we continue to lay the foundation for long-term sustained performance in the future. I will now turn the call over to Bobby for an overview of our Q4 financials.

Bobby Molu : Thank you, Amar. Before I begin, I would like to say that I am extremely excited to join the Rackspace team. I strongly believe in the turnaround and look forward to being a part of the next chapter of the Rackspace story. I’m also looking forward to meeting and talking with our investors in the coming days and weeks. Now, on to the results. In the fourth quarter, both revenue and core revenue exceeded the high-end of the guidance that was provided on the Q3 call in November. Total Revenue was $787 million, which represents 3% year-over-year growth in constant currency and 1% growth on a reported basis. We continue to experience material year-over-year currency headwinds from our Europe business. Core revenue was $752 million, which grew 4% year-over-year in constant currency, and 2% on a reported basis.

Revenue in EMEA grew 7% in constant currency driven in part by the continued ramp of the BT contract, but declined 1% on a reported basis. Americas grew 1% and APJ grew 19% on an as reported basis with minimal FX impact. Non-GAAP operating profit of $74 million also exceeded the high-end of our fourth quarter guidance. This was down 40% year-over-year primarily due to reduce gross profit from the ongoing revenue decline in our legacy OpenStack and private cloud businesses. Non-GAAP operating margin was 9% and non-GAAP earnings per share was $0.06. In the fourth quarter we generated cash flow from operations of $40 million and free cash flow of $25 million. On a full year basis, we generated 259 million of cash flow from operations and $179 million a free cash flow.

We ended the year with $241 million of cash and our $375 million revolver remained undrawn, resulting in over $600 million of total available liquidity. We anticipate cash flow from operations to be negative in Q1, driven by seasonal cash outflows, but expect positive cash flow from operations in the remaining quarters. CapEx in the fourth quarter was in=line with expectations with total capex of $43 million and cash CapEx of $15 million. CapEx intensity was 5% and 2% respectively. For the full year, we ended at 5% total CapEx intensity, which was at the low end of our 5% to 7% guided range. In the fourth quarter, we recorded $217 million of non-cash impairment charges, driven primarily by $129 million of goodwill, and a $75 million asset impairment.

The goodwill impairment was in our apps and cross platform segment and was driven primarily by the decline in market capitalization following the ransomware attack on our hosted exchange email business. The asset impairment was for our San Antonio headquarters office as we prepare for our relocation to a smaller footprint in North San Antonio later in 2023. Additional details of these non-cash expenses can be found in our press release and SEC filings. Now moving on to the Q1 guidance. Our guidance for the first quarter of 2023 reflects continued caution related to an uncertain macroeconomic environment, and includes impacts from the December Ransomware attack. For the first quarter, we expect total revenue in the range of $752 million to $762 million, core revenue in the range of $719 million to $729 million, non-GAAP operating profit of $47 million to $53 million, other income and expense of $55 million to $57 million and non-GAAP loss per share of $0.01 to $0.05.

Before I conclude, I would like to remind everyone that beginning in Q1, we will start reporting revenue and profitability for our new operating segments, public cloud and private cloud. We will also continue to separately report our legacy OpenStack business as we have been doing. We anticipate providing historical financials in the new segmentation prior to our Q1 earnings released in May. And with that, we will take your questions.

Operator: Thank you. At this time, we’ll conduct the question-and-answer session. Our first question comes from the line of Kevin McVeigh of Credit Suisse. Your line is open. Go ahead.

Kevin McVeigh : Great. Thanks so much. And congratulations on the Q4 results. I don’t know if this will be for Amar, but can you give us a sense, as we’re going through the restructuring. Just how we’re thinking about free cash flow? It sounds like a use of cash in Q1, but any sense of how we should think about that holistically for all of 2023? Because it seems like you’ve got the capital to kind of shepherd through this restructuring. But just any thoughts on how free cash flow overall should shape up over 2023?

Amar Maletira : Yeah. Thanks, Kevin. Thanks for the question. So as Bobby mentioned in his prepared remarks, cash flow from operations in Q1 will be negative because of a seasonal impact that we have for two reasons. One is there’s a bonus payment, company bonus payment as well as we have a payment to one of the vendors. So this is typically a low cash flow quarter for us in Q1. For the full year, we do expect free cash flow as well as cash flow from operations for the full year to be positive. And as we roll through the year, you should expect our cash flow from operations to be positive.

Bobby Molu : And I would just add, look, cash flow generation is going to be a major focus for us, a major focus for me. We are working on a number of initiatives to drive these improvements. So let me give you a little bit of color on this, Kevin. Just in terms of our cash conversion cycle, we’re very focused on that, on receivables and payables. We’re focused on our CapEx efficiency and improving that. We continue to look for the cost optimization opportunities. And look, as a CFO of this company, my sole focus is going to be around managing cash and expenses and making sure that we’re making the investments to drive our long-term growth.

Kevin McVeigh : Great. Thanks so much.

Operator: One moment for our next question, which comes from the line of Ashwin Shirvaikar of Barclays. Your line is open, Ashwin.

Ashwin Shirvaikar : Yeah. It’s Ashwin Shirvaikar from Citi. Amar, good to speak with you. Bobby, good to meet. Yeah, my first question is if you can provide maybe more granularity with regards to how the demand environment is evolving. What we’ve heard from other companies is that, obviously, a pretty strong slowdown in December, but by February, things have started picking up just a bit. Is that similar to or different than what you’re seeing? Any color you can provide with regards to visibility that you have in the forward-look would be great.

Amar Maletira : Thank you for the question, Ashwin. Good to hear your voice. So as you rightly said, all companies in the cloud ecosystem, as you know, Ashwin, have been cautious about the demand environment and rightfully so, given the tough macro outlook. We work very closely with the hyperscalers, too. And as you know, hyperscalers have also cautioned that the growth rates are slowing, but still, it’s a double-digit growth. They are still reporting double-digit growth. We believe that the customers will maintain the IT spend, Ashwin, on mission-critical projects but slow spending on lower priority, less critical projects. And this, of course, varies by customer as well as vertical. But broadly, customers will be more focused on cost optimization of existing high usage workloads on projects that have a faster payback.

We’re also seeing customers, Ashwin, as we work with them on transformation projects that they want to accelerate their transformation projects so they can really realize the returns of those projects within the year. So in this kind of environment, Ashwin, we are also seeing it’s not very unusual to expect some changes in the size and scope of the deals that we pursue. We’re also seeing longer sales cycle and also a slowdown in decision-making. So this is — and I’m sure you’ve heard this across the ecosystem. And looking forward, I think the demand will definitely be there, Ashwin. What I’m seeing is after I’ve been talking to a lot of customers, I mean going around, I’ve been spending a lot of time on the road talking to our customers, to our partners.

The demand is still there. I think the demand is just shifting to the right because of the slowdown in decision-making. We are also seeing that as budgets are getting released, this is the first quarter. So it takes time for the budgets to at least show up. So people are a bit cautious. Now given this backdrop, Rackspace is prepared. We will control what we can and manage what we cannot. We will have a very tight control on our expenses, as Bobby mentioned. We’ll continue to execute on our ongoing cost efficiency programs. We have lined up those programs. We’ll also make targeted investments to expand our services and solutions offerings to help customers optimize their costs and also deliver projects with faster payback. Whereas I mentioned, these projects are moving to the — shifting to the right, and we want to go capture those with the right offerings that we can provide to the customers.

So we believe that the demand for multi-cloud will remain as I look into the future. And to be honest, Ashwin, as we go through a transformation here in the company, we are taking advantage of these current macro conditions to complete our transformation, improve our execution and also launch new offerings so that we can continue to meet the customer demand. So that’s what I’m seeing from a demand perspective, what I’ve seen in the last few months and what I expect going forward.

Ashwin Shirvaikar : Thank you. That’s a lot of good detail, Amar. If I can follow up on that last part of what you said. Obviously, from a personnel standpoint, the organization seems complete now. But from the perspective of investors looking to figure out what the key initiatives or deliverables are, that we should hold management accountable for over the course of the year, if you could kind of comment a bit more on those. What goals have you set for your management team and for yourself?

Amar Maletira : Yeah. So let me — I think that’s a great question, Ashwin. I’ve been on the job for the last four and half, five months. As I mentioned in my prepared remarks, the first three four months was making sure that we have the — we formalized the strategy. We created the operating model. We did a lot of heavy lifting, Ashwin, in our December quarter to reorganize across the two business units. We have started operating as the two business units starting Jan 1. As you have seen, we have made the right leadership changes. I’m very pleased with the leaders that we — that have joined Rackspace. And so our execution going — our focus going forward will be all about execution. Now you can imagine that as we do this kind of heavy lifting, we are positioning the company for long-term growth, and it’s 2024 and beyond.

And as we do that, and we are expecting some disruption, it happens when we go — or reorganize the company in a way where we take almost 6,000 people and reorganize across the two business units. So what we expect is the productivity will continue to improve. DK Sinha, Brian Lillie and myself, we are very much engaged with our go-to-market organization to make sure we drive clarity on the field on how we will go execute as a multi-cloud company, although we’ll carry private cloud and public cloud solutions to our customers. So a lot of things going on. I think the key indicator, Ashwin, is we will provide you more granularity and also visibility into the financials of the two business units. So as Bobby mentioned in his prepared remarks, we will be reporting by essentially three segments.

We’ll report by public cloud, private cloud and OpenStack. And how we report externally is how we will continue to manage internally, right? So stay tuned, and you will see — we will also be looking at how we come and give you more color on what is net revenue versus gross revenue. Because as you can see, we are making a real hard pivot from infrastructure retail motion to a services-led motion. And in doing so, I think we are making some really tough, thoughtful decision because we believe for every dollar of infrastructure that on the hyperscale side, we have an opportunity to go and sell anywhere between $3 to $7 or $8 of services on top of that infrastructure over the life of the infrastructure. That’s the kind of opportunity we are looking at.

So there will be a lot of indicators that we will be providing. I think the first one, Ashwin, will be giving you visibility on these segments, both public cloud and private cloud. And that is — I think stay tuned for that, and you will see us come and talk about it. Now in terms of indicators inside the company, we have set up our financial plan. We have an investment thesis that we are working on for the next three years. We are lining up our operating plan so that we can go execute against those operating plans. Every single business unit has their KPIs and OKRs that are getting defined and manage very tightly. So we are getting into an operating rhythm so that we can go execute on our strategy.

Bobby Molu : All right. And Ashwin, I would just add that, look, this is a major pivot, right? And we’re trying to focus more on services. And as you know, services is a longer sales cycle. So it’s going to take a little bit longer for that sales engine to get going. And as Amar mentioned in his prepared remarks, it’s going to be choppy for the next few quarters. So we’ve got to understand that as we make this pivot.

Amar Maletira : Yeah. And if I can just add to that. It’s a great point, Bobby that you bring up, right? So we have two businesses, right? Let’s think about private cloud. It’s an Infrastructure as a Service business. That business has been largely sort of, I would say, not ignored, but it was not sort of deemphasized, although we are seeing a lot of demand in that business coming up, right? So that’s the reason we brought Brian Lillie, who has a great experience in the private cloud space, because that’s the business that we are going to transform and make sure that the business stops declining, stabilize that business. On the public cloud side, Ashwin, it is — we are going to sell cloud services on top of the infrastructure.

And that’s the reason we have DK Sinha, who has a lot of experience in scaling cloud — a lot of experience in scaling digital services business. So stay tuned. We will — this pivot takes time, but we are starting to see some initial — we have — for example, last quarter, we sold one of the largest private cloud deal in the history of the company. So we’re starting to see some traction there. This quarter, we signed a very strategic deal and expanded deal with Google on GCP that impacts the public cloud business. And we also signed a MoU with SDAIA.

Ashwin Shirvaikar : Thank you for all the detail

Operator: Thank you. Our next question comes from the line of Ramsey El-Assal of Barclays. Your line is open.

Unidentified Analyst: Hi, this is Ryan on for Ramsey. Thank you for taking my question today. I was hoping for some additional color on the order book in the quarter and the backlog. As you make the shift to higher-value services and solutions, are you being more selective with the workloads you take on? And what strategy do you have to accelerate the percentage of the order book coming from these higher-value services?

Amar Maletira : Yes. So let me first give you some color on the bookings itself for Q4, and I will give you additional color on what we are doing so that we make this pivot. So that’s a great question. Now in Q4, as we expected, we were seeing a bit of a slowdown in bookings volume, and this was driven by the impact of our reorganization and also the macro trend that we’re seeing in the market. As I mentioned earlier, Ryan, we are seeing sales cycles are getting extended. Companies are reevaluating the IT spend, and there’s a shift of focus to more of a cost optimization, and more critical projects are getting done. So in terms of our performance specific to fourth quarter, we saw good traction in the tip of the spear professional services for critical cloud projects as it relates to cost optimization.

We’ll continue to drive the mix shift to services in our public cloud business. From a regional perspective, Asia-Pacific and Japan, I was very pleased with the performance, although it’s a small base for us, but it did exceptionally well with very high double-digit growth driven by our data business on cloud. And we also had a couple of large deals across both public and private clouds. For example, in public cloud, we signed a fairly good-sized professional services deal for application modernization with a major airline, as an example. In private cloud, we renewed and expanded the contract with a mobile SaaS company to support their data platform in a private cloud environment. So we are starting to see that pivot, Ryan. It does take time when you make that pivot.

And for us, the most important thing, as Bobby mentioned, is to bring this — to build that services backlog. And so in some cases, we will walk away from some of the infrastructure resale deals, specifically, if it is in the commercial side, which is in the small — in the S of the SMB, so to speak, where there’s no opportunity to land and expand. So we’ll walk away from those low-margin deals where we cannot expand with services. So that might impact our bookings, and it might also impact our overall revenue in the short term. But those are the decisions we want to make so that we can shift the DN of the company to more of a high-margin, services-led and high-value sales motion.

Operator: Thank you. Our next question comes from the line of Frank Louthan of Raymond James. Your line is open.

Frank Louthan : Great. Thank you. Two quick questions. What — where can we expect as far as EBITDA margin sort of in Q1 and then kind of going forward and also on the level of capital intensity? And then secondly, you made a lot of changes in the management team. Is that largely behind you? Or are there more hires that you think you need to make the team where it needs to be? Thanks.

Amar Maletira : Yeah. So I will start with the guidance question, and then — and Bobby will definitely jump in here. So let me start with the revenue first. And I will not give you the EBITDA — EBIT margins, but I’ll give you enough color so that you can model it. Because Q1, we already provided you the guidance on that. We continue to be a bit cautious, Frank, with our guidance. We took a conservative approach here to our revenue given the uncertain macro environment. We also expected lower usage in public cloud as companies focus on optimizing the workloads in effort to reduce the overall operational cost. We also had some revenue impact due to hosted exchange Ransomware attack. And as we mentioned in my prepared remarks, we also believe that there’s a potential disruption from our operating model realignment that we are undertaking right now.

So these impacts also flow through to our profit. So essentially, we expect — based on the guidance that we provided, we expect the EBIT margin to be in the 6% to 7% range, so to speak. And our CapEx would be roughly where we landed in Q4 of 2022. So you can calculate what the EBITDA margin is going to be based on that.

Bobby Molu : Yeah. The only thing I’d add there is, on CapEx, look, as we’re focusing on the private cloud business, we will see CapEx increase, particularly if we’re very successful. So that would be a good problem to have. And Amar mentioned the large deal that we had signed in our history of the company, there is a large CapEx associated with that. So you will see a spike in our CapEx in Q1.

Amar Maletira : Yeah. And on the — yes, I think you have the second question — Frank, any follow-up on that? Or should I go to the —

Frank Louthan : Yeah. So on the CapEx, with that deal, are they paying for any of that upfront? How should we think about that? And how will that get booked? And then what’s sort of a long-term run rate for capital intensity of the business?

Amar Maletira : So I think — well, the contract is a long-term contract, Frank. And so we make the initial CapEx investment. It’s no different than what we do in any of our private cloud deals. And we call this as a success-based CapEx, right? Success-based CapEx means CapEx where we only put the CapEx in if we have a firm order and a contract from a customer. So it is — has a good CapEx, so to speak. Then we have maintenance CapEx. So we’re going to make sure we tightly manage the maintenance CapEx, and Bobby is all over it. Even on the success-based CapEx, as we continue to drive innovation, we should see CapEx efficiency in that — in the success-based CapEx, too.

Frank Louthan : Okay. Great. And then on any — yeah. No, that’s great. And any changes — any more changes in the management team? Or do you think you have things where you need to be for now?

Amar Maletira : Yeah. Listen, I think that’s a good point. As noted in my prepared remarks, I feel strongly that we now have the right leadership team in place, Frank, to drive us forward in our transformation. We had — we hired DK a few months ago. We have Brian Lillie managing private cloud. We have Bobby Molu who joined us as CFO. So we now have seasoned leaders across all the functions. So we also made some other leadership changes where necessary. And so I feel confident that a lot of the heavy lifting is behind us.

Frank Louthan : Okay, grat. Thank you very much.

Operator: Thank you. Our next question comes from the line of Tien-Tsin Huang of JPMorgan. Your line is open.

Brendan Biles : Hey, guys. This is Brendan Biles on for Tien-Tsin. Thanks so much for your time. And welcome, Bobby. So first off, congrats on the quarter. Nicely done. Thanks for all the details on the changes. Just from like sort of a personnel and cultural perspective, could you guys opine on like the competitive environment in these new areas, these new incremental areas for the business and services both from competing for talent, any incremental adds like in subject matter experts in private cloud and then also incremental competitive dynamics from winning new business, especially in the challenging macro. Thanks so much.

Amar Maletira : Yeah, sure. So if I got it — but thank you very much for your question. If I got your question right, it’s the competitive environment in a new service offering and also competition for talent, if I got that right. Listen — yeah, thank you very much. Listen, I think the market — and we see this all the time. There’s definitely a lot of demand in the market up there. We have to go capture the demand and then we have to execute against that demand. So when you talk about the market opportunities, there’s definitely competition there, but there’s enough of market for everyone to play. And we are very uniquely positioned, so to speak. We are a pure-play, multi-cloud company. That means we do both public as well as private cloud.

And that’s a very unique position for us. So as we go and talk to our customers, we are very, very neutral on where the workload needs to reside. So it’s all about workloads and where the workloads can be hosted. So in terms of competition, we address all three segments of the market. We address commercial segment of the market, mid-market as well as the enterprise segment, and we face off against different types of competitors in each of these segments. In private cloud — that was on the public cloud side. In the private cloud side, it is a very fragmented market, and we are one of the largest scaled player in private cloud, which means that there is a huge opportunity for us to go redefine the private cloud market itself given the surge in demand that we are seeing on the private cloud side.

A lot of workloads in the regulated industries, as an example, we believe will stay in a hosted private cloud environment. We’ll move out of the data centers. Our customers don’t want to go be in the business of running a data center. We’re also seeing workloads that cannot be refactored, but need a sort of an on-ramp to a public cloud. Private cloud becomes a very good solution for those kind of workloads. So as you can see here, I think we believe that we are very, very well placed from a competitive perspective. Now we need to get the right offerings in. There’s a lot of work to be done. So don’t get me wrong. We have a lot of work to do on the offering side, on the solution side as well as on the operations side. In terms of talent, we are a technology and an automation-driven company.

So unlike large system integrators, we do not have a large staff augmentation business. So you don’t see us reporting attrition numbers or hiring numbers because we think instead of just having a labor plus model, we want to go with an automation and IP-led offering, which we believe is a labor minus model, which is very compelling for our customers. So we will have to go compete for the talent. Don’t get me wrong. We are attracting talent because of our brand as well as a strong customer base that we have and the solutions that we offer. And that’s not an area that we are really concerned about.

Brendan Biles : Thank you very much.

Operator: Thank you. Our next question comes from the line of James Breen of William Blair.

James Breen : Thanks. Thanks for taking the question. Can you talk a little bit about — you touched on the margins a little bit. I think it was Frank’s question. Obviously, operating margin coming down sequentially in the first quarter. Is there seasonality to that? And how do you feel about that as sort of a bottom for the year? And then just looking at your gross margins across the three businesses as you report them now, and I understand this is going to change, but you had a pretty good step-down, obviously, in the third quarter. And then in the — segment again this quarter, are any thoughts around just basically trying to have that attrition be quicker and giving up that revenue, but giving up all the losses that are happening or given how the gross margin continue to decline? Thanks.

Bobby Molu : Let me start. Let me talk to the sequential decline that you see there. So there are several factors causing that sequential decline in Q1. So from a revenue standpoint, there is a seasonality impact, like you mentioned, right? So in Q4 to Q1, we normally do see that. There’s also the impact of the December ransomware attack that’s now fully baked into the forecast for Q1. And then as you’ve seen, there continues to be a decline in private cloud as well as our legacy OpenStack business, as you mentioned. And look, the reality of that is the fact, like Amar mentioned early on, there’s a deemphasis on private cloud. There’s no surprise that, that’s been declining, and that’s something that we’re trying to arrest to decline on with the new focus and the new BU structure.

So a lot of these revenue impacts also flowed down to profit. And then in addition, on the profit side, there is also a seasonality impact from Q4 to Q1 for seasonal payroll taxes and benefits. But look, we’re looking for opportunities to reduce costs and offset some of these revenue impacts and profit impacts. But we’ve got to still remain focused on growth. Amar, do you want to add anything?

Amar Maletira : No, I think you covered it well. On the OpenStack piece, I think that’s another question you had, James, let me just jump. Well, that business is declining. I think the rate of decline has actually lowered in that OpenStack business, which is an OpenStack public cloud business. So I think we had already factored that in our financial plan and financial model that continues to happen. And I think the rate of decline used to be 20% plus. Now it’s in the 15%, 16% range.

James Breen : And do you continue to expect that?

Amar Maletira : Yeah, I think we continue to expect that decline to continue as customers move away from that platform. And that’s why we call it as a legacy because that’s a natural kind of trajectory that we are seeing for the last few years, in fact. And what we do is, as this happens, we continue to take cost out and basically optimize our costs so that we minimize the impact on the profit. So that’s all a part of the plan.

Operator: Thank you. Our next question comes from the line of Bradley Clark of BMO. Your line is open.

Bradley Clark : Hi, thanks for taking my question. I just want to touch on the demand environment a little bit more. And most specifically, are you seeing any difference in behaviors across geographies in terms of demand or focus on certain types of deals? Any more granularity you can provide on geographical demand trends?

Amar Maletira : Yeah. I think — so listen, I think I did mention on my earlier remarks — earlier response. Our demand environment across all the regions, especially in public cloud, on the infrastructure side has slowed down. But again, as I said, most of the hyperscalers are reporting it, but they are still printing double-digit growth. So there still remains a lot of demand there. By verticals, I can give a little bit of more color on verticals, especially retail, in technology vertical as well as in financial services, et cetera. We have — again, we don’t go by vertical in financial services, but we have started seeing some demand slowdown. But there are other verticals, like for example, healthcare. We are seeing demand slow down, but there is a huge opportunity to help transform, especially on the provider side, and help healthcare providers to accelerate their digital transformation.

And so we are seeing a little bit of — we are seeing some demand on that side. We are also — in telco also, we are seeing good demand. So it’s a mixed bag. But generally, the demand has slowed down across the board and across all geographies. In APJ, we did very well. As I mentioned earlier, we have posted double-digit growth, but APJ is a small base for us. It is mainly driven by data services, which is also a focus area. Data migration, modernization and AI continues to remain a focus area across the board.

Robert Watson: Have any other questions?

Operator: That’s all our questions. So I would now like to turn it back to Robert Watson for closing remarks.

Robert Watson: I just want to say thank you, everyone, for joining us. And I think we got to all the questions. But if we didn’t get to your question or you have any follow-ups, please reach out. You can e-mail us at ir@rackspace.com or contact me directly. So thanks, everyone. And have a great evening.

Operator: Thank you for your participation in today’s conference. This does conclude the program. And you may now disconnect.