Rackspace Technology, Inc. Q3 FY2024 earnings call

• Operational turnaround: Made steady progress with growing bookings and pipeline while improving efficiency.
• Strategic priorities: Focused on operational turnaround, positioning as a hybrid cloud and AI solutions company, and improving capital structure.
• Private Cloud: Steady progress on strategic priorities; healthcare Private Cloud revenue projected to grow ~30% YOY in fiscal 2024; a large healthcare deal expected to close soon.
• Public Cloud: Services-led strategy driving performance; record bookings quarter; strengthened partnerships with hyperscalers like AWS.
• AI: Making progress with FAIR initiatives, joined AWS' Generative AI Partner Innovation Alliance, and launched on-demand GPU as a Service on the spot platform.

Private Cloud

• GAAP revenue: $258 million, within guided range, slightly down sequentially. Includes legacy OpenStack revenue of $25 million.
• Non-GAAP gross margin: 38.6%, up 120 basis points sequentially, driven by cost efficiencies despite lower revenue.
• Non-GAAP segment operating margin: 28.9%, up 210 basis points sequentially, due to gross margin expansion and better cost management.
• Pipeline: Up 41% year-over-year. Healthcare Private Cloud revenue for fiscal 2024 projected to increase nearly 30% YOY. A large healthcare deal is expected to close by end of October, setting up strong Q4 bookings.

Public Cloud

• GAAP revenue: $418 million, down 2% sequentially, but above guidance midpoint, driven by services. Record bookings quarter, highest since early 2023, with double-digit sequential and year-over-year growth across all areas.
• Non-GAAP gross margin: 10.4%, up 50 basis points sequentially, due to improved resale margins.
• Non-GAAP segment operating margin: 3.9%, up 110 basis points sequentially, from improved gross margins and operational efficiency.

• Fourth quarter GAAP revenue expected: $668 million to $680 million, slightly down sequentially at midpoint.
• Private cloud revenue expected: $258 million to $264 million, up 1% sequentially at midpoint.
• Public cloud revenue expected: $410 million to $416 million, down 1% sequentially at midpoint due to reduced consumption and lower margin infrastructure resale.
• Non-GAAP operating profit expected: $34 million to $36 million; non-GAAP loss per share expected: $0.03 to $0.05; non-GAAP tax rate expected: 26%; non-GAAP other expense expected: $47 million to $51 million; non-GAAP share count expected: ~240 million shares.

Q: Kevin McVeigh asked about dimensionalizing the size of the healthcare win and private cloud verticals.

A: The healthcare win was in the hundreds of millions of dollars in TCV, with 38,000 concurrent users migrated. Vertically, health care and sovereign were ~5%-10% of revenue in fiscal 2023, expected to be ~15% by fiscal 2024 end and growing.

Q: Ryan asked about specific solutions driving the 22 of 28 deals services attach rate and progression.

A: Pivoted to services-led go-to-market motion, now talking to C-level of organizations, driving high-margin services into accounts and protecting margins on infrastructure resale by having holistic value discussions at the C level, transforming the public cloud business approach.