Good afternoon, and thanks for joining us. I'll discuss quarterly highlights and the strategic direction of our business, then Amar will go into detail on the financial results. Turning to slide 5, Rackspace Technology benefits from secular tailwinds in a cloud market that continues to grow with no signs of slowing. In the first quarter, our cloud hyperscaler partners all grew year-over-year revenue by 35%-50%. That represents $10 billion of new cloud revenue in the first quarter alone. Cloud revenue continues to accelerate, and the cloud revolution is in the very early stages, with winners still to be determined and plenty of white space to attack. Rackspace Technology remains well-positioned as the leading pure play multi-cloud services company. In the first quarter, our financial results were in line with our guidance and expectations, and we once again delivered solid growth, profitability and.
On the new business front, it was a very productive quarter. We renewed and strengthened our relationship with AWS and closed a major new deal with VMware to support their global edge offerings. We also just launched a new partnership with NVIDIA, which I'll touch on in a moment. We closed the acquisition of Just Analytics and began introducing their products and services to our customers globally. Rackspace Technology was recognized as an industry leader in two major analyst reports that were published in the first quarter, including the ISG Provider Lens AWS Ecosystem Partners report, where we were named a leader in three quadrants, and the ISG Index, where we were named a top stand out in the Breakthrough 15 category for the global Americas and EMEA regions.
Turning to slide 6, revenue growth was solid, with total revenue up 7% and core revenue up 9% compared to last year's first quarter. Non-GAAP operating profit was $112 million, and non-GAAP EPS was $0.22, both at the high end of our guidance range for the first quarter. As noted on the slide, first quarter bookings put us on track to achieve our targeted $1 billion of new sales bookings in 2022. As we discussed with investors last quarter, Rackspace Technology and our board of directors have been carefully examining every area of our business, weighing the company's strategic options to increase shareholder value. I'd like to share with you how we're thinking about this. As slide 7 notes, we operate in two very different multi-cloud operating models, growth trajectories, and investment prospects.
On one hand, public cloud is riding a long-term secular growth wave and is a services-centric, capital-light product line where we can make smart investments to capture additional white space and growth opportunities. On the other hand, private cloud and managed hosting is in a low-growth market where we're focused on optimizing profit and free cash flow. Our strategy to maximize shareholder value is now coming into focus. We are therefore considering reorganizing Rackspace Technology across these two markets. We are also exploring other strategic alternatives, as noted in our press release. Amar will discuss this more in a moment. We will provide shareholders with details as well as the growth drivers, profit dynamics, and long-term financial model at an Analyst Day in September. On slide eight, you can see how development of our partner network is essential and different in each of these two markets.
We have painstakingly built our partner network to add value across the two operations, and we work to strengthen these partnerships every quarter. On the left side of the slide, in public cloud, long-term success starts with a strong relationship with the hyperscalers. We must act as a bridge between the needs of our customers and the hyperscalers as we onboard an ever-growing volume of new clients to the public cloud.
In this vein, in the first quarter, we extended our strategic collaboration agreement with AWS for an additional multi-year period, which serves as a strong validation of the value we add to the ecosystem to date. It is also essential in public cloud to provide customers with up-the-stack functionality once they've migrated to the cloud. Again, as an example, in the first quarter, we achieved Premier partnership level with Snowflake, making us one of their top 30 partners in the U.S.
On the right side of the chart, you see our key partners for private cloud and managed hosting. Here, strategic partnerships have served to provide upside through access to exciting strategic service adjacencies. As an example of the former, in the first quarter, we launched our new private cloud relationship with BT and started onboarding their customers to Rackspace Technology. As a reminder, the BT deal was the largest in Rackspace Technology's history, with the potential for $hundreds of millions of revenue. We are encouraged that even in the early going, we're seeing plenty of opportunity for further expansion of our relationship with BT. Earlier this week, we announced that we are now certified to deploy NVIDIA's AI computing platform, and we've been named an advanced technology partner in the NVIDIA Partner Network.
We are excited about this new partnership with a leading technology company, which we believe will help us grow private cloud and facilitate development of highly compelling services for our customers. Now let's talk about the different ways we support our customers. On slide nine, Carrier Global is a world leader in heating, air conditioning, and refrigeration solutions. After spinning off from its parent company Carrier was looking to modernize their infrastructure and existing applications. We worked with Carrier to transform the IoT technology that powers all their connected thermostats and build a scalable, robust cloud-native platform that they could use as the basis for their entire connected device portfolio. After this modernization effort Carrier reduced technical debt, increased security, sped up infrastructure provisioning time from 35 days to 30 minutes, reduced infrastructure costs by 45%.
On slide 10 Provenir provides artificial intelligence powered software to help the fintech industry manage risk across identity, credit, and fraud. Provenir had multiple microservices deployed in Kubernetes clusters running in AWS but didn't have the capacity to quickly create monitors and dashboards. Rackspace professional services helped Provenir integrate their software with Datadog resulting in an enhanced visibility into their microservices and infrastructure along with increased accuracy and consistency across multiple environments. More importantly, we built automation into the process enabling Provenir to launch additional monitoring and alerts for its applications and infrastructure without having to write a single line of code. Now Amar will take you through the financials. Amar.
Thank you, Kevin, and thank you everyone for joining our call today. Slide 12 recaps our financial results for the first quarter. Revenue was $776 million, a 7% year-over-year increase. Core revenue was $735 million, up 9% compared to the first quarter of 2021. Non-GAAP operating profit was $112 million, which was at the high end of our guidance for the first quarter and was down 6% year-over-year. Primarily due to the impact to gross profit from revenue decline in our legacy OpenStack and mature managed hosting. Non-GAAP operating margin was 14% and non-GAAP earnings per share was $0.22, both at the high end of our guidance for the first quarter. Slide 13 shows the company's revenue mix in the first quarter by segment and by geography.
Multicloud continues to represent the vast majority of our revenue at 83% of the mix, and it grew 10% year-over-year. Apps & Cross Platform at 12% of total revenue was down 3% year-over-year. As we have discussed previously, year-over-year compares in this segment were impacted by the discontinuance of a non-core product line in 2021. We lapped that strategic change in the second quarter. OpenStack declined 17% in line with our expectations. This segment now represents only 5% of total revenue. From a regional perspective, Americas continues to represent 75% of our revenue and had 7% year-over-year growth. APJ grew at 32% while EMEA grew 2% year-over-year. Excluding currency impact, EMEA growth would have been in the mid-single digits.
On slide 14 in the first quarter operating cash flow was $65 million, and free cash flow was $45 million, an increase from $38 million in the fourth quarter. First quarter 2022 operating cash flow included the 2021 annual company bonus payout. Total CapEx was $31 million, and cash CapEx was $19 million, with CapEx intensity of 4% and 2% respectively. We expect total CapEx intensity of 5%-7% and cash CapEx intensity of 3%-5% for the full year in line with our previous guidance. Cash at quarter end was $269 million, up $71 million year-over-year. On slide 15, I want to remind the investors that we have a strong balance sheet with no material debt maturities until 2028.
In addition, all of our debt was refinanced in late 2020 and early 2021 at historically low rates with minimal financial covenants. At quarter end, total debt was $3.4 billion and net debt was $3.1 billion. Our net leverage ratio of 4.3x the adjusted trailing 12-month EBITDA is very manageable for a company with our growth profile. On slide 16, we have a guidance for the second quarter. We expect total revenue in the range of $780 million-$790 million, core revenue in the range of $744 million-$752 million, non-GAAP operating profit of $93 million-$97 million, and non-GAAP EPS of $0.15-$0.17. Now, let me provide you some additional color on our outlook. As I mentioned last quarter, we expect revenue growth to accelerate through the year.
This is due to three main reasons. First, the ramping of BT related revenue in the third and fourth quarter, which will bolster private cloud and managed hosting within the Multicloud segment. Second, continued growth in managed public cloud as we have a growing pipeline of large opportunities in the multimillion-dollar range that we expect to close in the second half of the year. Third, because of the investments we made in go-to-market, we have many new sales professionals that are ramping in the first half and who will become more productive in the second half of the year. Now, with regard to the operating profit and non-GAAP EPS, the second quarter will be impacted by $15 million-$20 million of investments that we are making to support growth acceleration in cloud services and the startup of a BT partnership.
These investments are primarily in cost of revenue and some in operating expenses. They represent most of the divergence between our guidance and the current street estimates. Given the secular growth opportunity in the cloud market, we will prudently invest in long-term profitable growth. On slide 17, in closing, I would like to recap and summarize what Kevin said earlier. We operate across both public and private cloud. We are the only pure-play multi-cloud services company that is addressing both of these markets at scale. That said, the market has evolved rapidly in the last 18-24 months. We have been proactively evaluating all of our strategic options to take advantage of this opportunity. To that end, we have taken a number of actions. First, we completed an in-depth strategic review of the company. Second, we have a clearly defined strategy for the company across public cloud managed hosting.
Third, we are working on aligning our operating model and reorganizing the company to sharpen our focus in these two markets. Fourth, we are also working to align our financial models and plans accordingly. As we complete review and also based on inbound one of our businesses, we concluded that a sum of the parts valuation of Rackspace Technology could be greater than our current enterprise value. This is in part driven by the attractive growth profile of our public cloud offerings. Accordingly, we are evaluating strategic alternatives and options. We plan to share details on our strategy, operating organization, and long-term financial model at an analyst day to be held in September. With that, we'll take your questions. Joe, please go ahead and queue up the audience for Q&A.
Thanks, Amar. As a reminder, to ask a question, please use the Q&A function in the Zoom portal. Our tech team will promote you as a speaker on the webcast when you're up in the queue. Our first question comes from Bryan Keane at Deutsche Bank, and Ramsey El-Assal, you're up next.
Hi, guys. Just wanted to ask about the margin profile. I know we talked about 14%-15% EBIT margins for the year. Just any update on that, Amar? And then on gross margins as well, what's the outlook there?
Thanks, Bryan. Can you hear me?
Yeah, I got you.
Yeah, thanks. You know, Bryan, as noted in last quarter's call, we're going to continue to guide this one quarter at a time. Now, if you look at our Q2 guidance, the midpoint of our guidance implies that the operating margins in Q2 are about 12%. Also keep in mind, as I mentioned in my prepared remarks, within our second quarter, we do have gross investments of about $15 million-$20 million that impacts margins about 200 basis points, which implies that our operating margin, excluding these investments, will be approximately about 14%. Bryan, long term, we do see operating margins in the low to mid-teens. That's what our long-term outlook is.
Got it.
Now, with regard to.
Go ahead, yeah.
Let me also give some color on the gross margin since you asked that question. Now, when you look at our Q2 investments of $15 million-$20 million, Bryan, most of these investments are primarily in cost of revenue to deliver incremental services growth in the second half. These investments are primarily in building out our delivery capability in both professional services and Elastic Engineering. Including these investments, you know, Q2 gross margins will be in the 28%-29% range. If I again exclude these investments, we would still be in the 30% range for Q2.
Got it. Just to follow up on the strategic review, it sounded like there was an inbound inquiry that came in. Which business was that that got that inquiry? Is that a smaller piece of the business, a larger piece? Just trying to get a sense of what that business unit was. Thanks so much.
Hey, Bryan, it's Kevin. I'll take the strategic question. So right now we can't provide specifics, you know, due to the ongoing nature of our conversations both internally and externally. You know, as I mentioned in my prepared remarks, you know, we're addressing two markets that are very attractive, and we're organizing or really organizing around those two markets. But you know, I can assure you in terms of strategic alternatives, everything is on the table, and we're evaluating all options, you know, including this current inbound interest for one of our businesses. We'll provide, you know, further information and, you know, as appropriate in light of developments.
Great. Thanks for taking the questions.
Thanks, Bryan. Ramsey El-Assal from Barclays Capital, you're up, and Frank Louthan, you're on deck.
Okay. Can you guys hear me okay?
Hey, Ram.
Yes. Hi, Ramsey.
Hi. Hi. Thanks for taking my question. I was wondering if you could give us some color on the demand environment. I guess just given the more kind of challenging macro backdrop, are you seeing any impacts out there on client decisioning? Any color there would be helpful.
Yeah, sure thing. Let me take that one, Amar. You know, I'll talk a little bit about you know, the I mean, economic environment in general, and then I'll sort of transition into the demand environment that we're seeing. You know, I would say just kind of upfront, you know, while there are near-term headwinds in the economy, you know, such as supply chain disruption, you know, the war in Ukraine, you know, we do not see any recessionary pressure in this business. You know, if you just think about it, our hyperscaler partners grew cloud revenue by a record amount, you know, over yeah $10 billion in the first quarter. You know, cloud is really only accelerating even in the challenging economic environment we've seen so far this year.
Now, if the economy does, you know, slip into recession, we think that multi-cloud becomes even more of a must-have for customers because it helps customers save money, quickly scale up or scale down, and change their business model. You know, we saw this in early 2020 when the economic slowdown caused by COVID, you know, resulted in acceleration of demand for, you know, digital services and multi-cloud. That's the economic, you know, the broader macroeconomic picture and how it relates to our business. Now, if I just look at the demand environment, let me give you a little bit of color on how I see the demand environment, and I'll start out with the market, and then I'll go through, you know, what we're hearing from customers and partners. Now, the market, you know, Ramsey, really is very strong.
You know, we believe that, at this point, you know, only 10%-15% of workloads have been moved to the cloud. There's many years of growth runway ahead. Our view is that will result in lots of options for migrations and integrations and managed services. That's one piece. Multi-cloud continues to be really the overwhelming choice, you know, for customers that are moving to the cloud. As you know, the hyperscalers continue to innovate, you know, they're innovating at such a pace that choice is now really abundant in the market for customers. Customers need firms like Rackspace Technology to help them make the right decisions for their cloud environment. That's another piece.
Then we see lots of desire for innovation beyond infrastructure, you know, into the apps and data layers of the IT stack in particular. The other thing we're seeing is industry. You know, industry specialization is becoming a trend in a lot of areas. From a geographic perspective, you know, demand for multi-cloud services continues to pick up pace all over the world, particularly in Europe, in the UK and Asia and the South Pacific, Latin America, and of course, the United States. That's the market. Now, from a customer perspective, you know, it's quite interesting. I was just with a large healthcare CEO last week, and they're a big customer for Rackspace Technology and a multi-cloud customer. The CEO told me, you know, "Thank goodness Rackspace handles cloud for us.
You know, the complexity of multicloud really is mind-boggling, and Rackspace takes all that off his plate. The other thing he said, and, you know, I keep hearing this over and over from other customers is data. You know, data is becoming a huge differentiator in healthcare, and customers are, you know, saying we wanna increase the pace of innovation both in cloud-native data and cloud-native apps. We hear this from customers in, you know, a lot of industries now that data and apps innovation is important to them and a focus of, you know, how they're becoming more competitive. Then finally, just to wrap up from a partnership perspective, right? The demand for the hyperscalers' products continues at what I would say is a breathtaking pace.
You know, I was with all three hyperscalers last week, and the demand for cloud continues to be amazing. You know, AWS, Google, Microsoft, they're adding gigantic amounts of sales and revenue every quarter. It's unlike anything I've ever seen in my career. You know, when I talk to my friends at Dell and VMware, there's big demand from customers for private cloud and multi-cloud as well. Our partners all tell me, "We need Rackspace Technology. We need Rackspace to help make sure these customers have the very best services partner to help them on their cloud journey." Overall, Ramsey, you know, I'd say a very strong demand environment. We're extremely encouraged by the opportunity.
Great. Thanks for the detailed answer. I'll hop back in the queue after that one. Thanks for taking my question this evening.
Thanks, Ramsey.
Thank you.
Our next question comes from Frank Louthan with Raymond James and Bradley Clark. You're on deck.
Great. Thank you. Maybe go into a little more detail on the dip that you're forecasting here for the operating income in Q2. What's kind of causing that sequential decline? If you don't end up selling the whole company, give us a little more color on what does the reorg look like. What sort of things will you be adjusting going forward in areas you think need some more help? Thanks.
I'll take the first question and Kevin is gonna address the next one. Ramsey, in terms of the sequential dip in our operating profit, you know, we did about $112 million in Q1. It's going down to about $95 million in Q2. That's the midpoint of our guidance. That's mainly the investments that we are making, Frank, in our business. If you take a look at the investments, and I'll give you some additional color on where we're making those investments. You know, investments are in three areas, right? First, we are making investments, as I mentioned earlier, to expand delivery capacity for professional services and Elastic Engineering across all three cloud platforms.
That includes AWS, GCP, which is Google, as well as Microsoft Azure. Second, we're also making some investments, Frank, in our go-to-market organization. Third, we are making some investments, which are mainly startup investments as we ramp our BT accounts. BT is expected to reach our full run rate revenue by the end of second half. As I mentioned earlier, most of these investments are in cost of revenue in Q2. This is what's basically creating the decline in operating profit going from Q1 to Q2. That's mainly the reason.
Very good. The second question that you had, Frank, around, you know, how are we gonna kinda reorganize and manage the business and the company. Just as a little bit of backdrop, you know, we operate, you know, I would say a very attractive multi-cloud market, right? It spans across both public and private clouds. As we talked about, we're the only pure play multi-cloud services company that's addressing both of these markets at scale. You know, having said that, you know, when you look at the market, you know, the market's evolved, and it's evolved pretty rapidly in the last 18-24 months. We have a public cloud business that is significantly scaled from 18 months ago.
You know, we've been proactively evaluating all of our strategic options to take advantage of this public cloud market opportunity and sharpen our focus. You know, public cloud and private cloud, they've got very different business dynamics, you know, as we talked about on the call. They also require very different skill sets and levels of investment to manage. You know, we're basically developing a plan to best align our resources with these findings. What we're gonna do, Frank, at this, you know, analyst and investor day in September, we'll provide additional details on what this looks like, both from an operational standpoint and a financial standpoint on a go-forward basis. Hopefully that gives you some color.
Great. Thank you.
Thanks, Frank. Bradley Clark from BMO Capital, you're up next, and Matt Roswell after that.
Hi, thank you for taking my question.
You're welcome.
I have two parts here. First, I wanna ask the incremental investments in the June quarter, you know, focused around expanding delivery capability and the BT accounts. You know, more broadly, as you know, you potentially win other large deals. You mentioned the multimillion-dollar opportunities in the pipeline in the second half. How do you think about, you know, the incremental investments that these large deals are going to take? The idea that, you know, with every one of these large deals, there's, you know, more incremental investment that's not already in the model, or are you investing, you know, more so ahead of time so that this, you know, $10 million-$15 million, you know, becomes less and less over time?
Part two of the question, I wanted to ask about pricing and, you know, in an inflationary environment with higher wage inflation, you know, the operating environment may be different than some other services company. But are you having pricing conversations with your customers, you know, to potentially offset some higher wages and expenses? You know, and if so, any comments you can make sort of on the strategy there? Thank you.
Yeah. Let me, let me take the first one. Bradley, thank you very much for asking the question. To give you a little bit of more specifics on investments, so you're absolutely right. We are making investments ahead of the demand that we are seeing, mainly in cloud services. As you know, there's a lot of demand in cloud services. This $15 million-$20 million of investments we're making in Q2 will also carry forward into Q3 and Q4, but it'll be a run rate cost, but it'll be supported by incremental revenue, right? You've got to build ahead of the demand. That's what we are doing.
Now as we see more growth opportunities, we may prudently make additional investments to capture further growth, and these investments will be primarily in cost of revenue to build capability in advance of the services demand that we are seeing in cloud. We will continue to update The Street if there is any change to our investment outlook per se. Right? It's a very dynamic market. We see a lot of demand as Kevin talked about, and it is very prudent for us to continue investing and capturing those demand because as you know, services is a very sticky business, and it has a we have a very high recurring revenue base too. These are kinds of investments we'll make to continue driving profitable growth in the business. Now regarding your second question around pricing, that's a very interesting question.
You know, I will have Kevin jump in here too. You know, we are not having a kind of a pricing pressure, so to speak, from our customers. You know, the markets that we play in cloud services, whether it is application migration or modernizing of those applications or even data migration and DataOps, these are very hot areas of the market today. You know, it is sometimes very difficult to find skills in those markets. So we do not see a lot of pricing pressure. We're also not a very labor-intensive model, so to speak. You know, our key differentiator is, you know, combining labor with automation.
We have talked about it at length in the past that we have driven about 75% of automation on our workflows. That's the reason why we do not see a lot of pressure neither on the pricing side and on the labor cost side because we're not a very labor-intensive model. Kevin, you want to add anything here?
I think you said it really well. Yeah. We don't have nearly as many employees as a lot of firms out there in the market, so we don't have that same exposure to the labor inflation that's happening in the broader economy. Yeah, we definitely don't see any pricing pressure per se, and where it makes sense, you know, if we're delivering more value, it makes sense, you know, for us to reflect that additional value in our pricing, then we certainly are having those conversations. In general it's not as much of a factor in our business, particularly because we're very automated.
We got 75% of our multi-cloud transactions automated. Highest automation in the industry and we're really a technology- and automation-driven business if that makes sense.
Thank you very much.
Thanks, Brad.
Thank you.
Our next question comes from Matt Roswell at RBC Capital Markets. Go ahead, Matt. Matt Roswell, are you there?
Yes. Hello, can you hear me?
Hey, yeah, we can hear you now.
Yep. Sorry about that. I was wondering to follow up on the investments, and I apologize for this. I was wondering if you would be willing to kind of bucket how much of them are going into the three areas, i.e., the cloud investment, the go-to-market, and for BT. I think you just said we should kind of expect the same level into the third and fourth quarter. When would you expect to see kind of the revenue return on the investment?
Yeah. Let me start with the last question first. The revenue return on the investments are typically fast. It's within, you know, 3-12 months or 3-6 months. It's a very fast return on the investments because we need to build a delivery capability ahead of the services so we can deliver the services to our customers. Now, in terms of giving you a little bit additional color on the investments, as I mentioned, most of the investments are in cost of revenue. Okay? When you take a look at our investments, I would say, 75%-80% of those investments are roughly in cost of revenue and the balance is in OpEx.
The 75%-80% of that, the investments are into, you know, hiring professional services, resources, elastic resources for Elastic Engineering, et cetera. That's where our investments are going. OpEx investments are mainly in go-to-market as we continue to expand our go-to-market and some in starting up our BT environment.
Thank you. If I could sneak in a quick one. How should we think about cash conversion in the second quarter?
I will just talk about cash conversion in general. You know.
Okay.
As you know, we had a very strong cash flow year in 2021 with all the improvements we drove and those improvements are very sustainable. In our long term we expect cash flow from operations to track to anywhere between 60%-70% of our operating profit. For example, in Q1 our operating cash flow was quite solid at $65 million which was at about 58% of our operating profit. Also keep in mind the first quarter is typically the seasonal low for cash flow as it is a quarter in which we pay employee bonus. There was a big cash payout from an employee bonus perspective.
I would say, you know, if you're tracking to 60%-70% of our operating profit conversion to cash flow from operations, I would say the quality of earnings is, I consider, a very high-quality earnings. Now our cash CapEx is also going down. Matt, you know our cash CapEx should be anywhere between, say 3%-5% of our revenue and the CapEx intensity continues to go down so which means our free cash flow margin should be bigger.
Okay. Thank you very much.
This is a comment overall for fiscal 2022. Okay?
Okay. Thank you.
Thanks, Matt. We haven't had anyone else queue up so, we'll shut it down there. I wanna thank everyone for joining us. If you have a follow-up, please give me a shout at ir@rackspace.com and we'll talk to you soon.